ESI Group Annual Report 2019

Plain-text annual report

2019 UNIVERSAL REGISTRATION DOCUMENT including the annual financial report PERFORMANCE PARTNER to unleash your future Contents 1 THE GROUP 1.1. Activities, strategy and markets 1.2. History of the Group 1.3. Group organization 1.4. Selected Financial Information 1.5. Major investments during the past three financial years 2 REPORT ON CORPORATE GOVERNANCE 2.1. Governance Code 2.2. Functioning of the general management 2.3. Board of Directors 2.4. Compensation paid to the Directors and the management 2.5. Additional information in respect of corporate governance 2.6. Statutory Auditors’ report on regulated agreements and commitments RISKS AND RISK MANAGEMENT 3.1. Risk factors and opportunities 3.2. Internal control and risk management procedures STATEMENT ON EXTRA-FINANCIAL PERFORMANCE 4.1. ESI – The product Performance LifecycleTM company 4.2. ESI – A committed Group 4.3. Being a committed employer 4.4. Being an outstanding partner 4.5. Being an ethical and committed Company 4.6. Being an environmentally friendly player 4.7. Reporting 3 4 13 14 20 21 23 25 27 28 29 31 41 56 60 61 62 65 69 70 71 76 82 84 87 91 This Universal Registration Document was filed on April 23, 2020 with the Autorité des Marchés Financiers (AMF), as competent authority under Regulation (EU) 2017/1129, without prior approval pursuant to Article 9 of said regulation. The Universal Registration Document may be used for the purposes of an offer to the public of securities or admission of securities to trading on a regulated market if completed by a securities note and, if applicable, a summary and any amendments to the Universal Registration Document. The whole is approved by the AMF in accordance with Regulation (EU) 2017/1129. This document is a non-binding “free” translation from French into English and has no legal value other than an informative one. Should there be any difference between the French and the English version, only the text in French language shall be deemed authentic and considered as expressing the exact information published by ESI Group. 5 6 7 8 9 MANAGEMENT REPORT 5.1. Business activities during the 2019 financial year 5.2. Outlook 5.3. Table summarizing the results of past five financial years FINANCIAL STATEMENTS 6.1. Consolidated financial statements 6.2. ESI Group annual financial statements RESOLUTIONS SUBMITTED TO THE GENERAL MEETING 7.1. Decisions falling within the competence of the Ordinary General Meeting 7.2. Decisions falling within the competence of the Extraordinary General Meeting 7.3. Joint decisions INFORMATION ON THE COMPANY AND SHARE CAPITAL 8.1. Information on the Company 8.2. Information on the Company’s capital 8.3. ESI shares – market ADDITIONAL INFORMATION 9.1. Persons responsible for the Universal Registration Document 9.2. Statutory Auditors 9.3. Documents available to the public CROSS-REFERENCE TABLES 95 96 101 102 103 104 143 171 173 177 180 181 182 184 189 191 192 192 193 194 KEYWORDS OF THE 2019 UNIVERSAL REGISTRATION DOCUMENT 200 French and English copies of the Universal 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). 2019 UNIVERSAL REGISTRATION DOCUMENT INVESTOR’S NOTEBOOK 1 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTCONTENTS CRISTEL DE ROUVRAY’S MESSAGE, CEO ESI GROUP, EMPOWERING INDUSTRY PLAYERS TO COMMIT TO OUTCOMES All industries are facing increased These secular changes, combined of experience, bringing complexity, as manufacturers are with the exponential rate of technological empowerment challenged to meet the evolving technological progress, have led to innovate efficiently and needs of consumers in terms the industry leaders to embrace with confidence. Leveraging the of quality, reliability, safety, and innovation and engage physics of materials, we support on-time delivery. Furthermore, on a multi-decade steady industries to validate the design, industrial actors are increasingly methodological “digital manufacturing, and behavior held to an “outcome”: the service transformation” of their practices, of the product in different that their product offers, such as gradually replacing the real tests environments, early and mobility, hours of flight or number required for design evaluation throughout the whole product life, of landing events. This entails being by “realistic” numerical simulations. while minimizing their costs able to understand the way their product operates in numerous and uncertain use-conditions, a difficult challenge! Overall success is now measured by performance rather than the product itself. Several years ago, ESI embarked on its own transformation to anticipate and be ready for these deep changes among our customers. The Group offers solutions, built from 45 years and time to market, without sacrificing safety and quality. To reach these objectives, ESI accompanies its customers in a journey towards Zero Tests, Zero Prototypes and Zero Downtime. The Group offers solutions, built from 45 years of experience, bringing technological empowerment to innovate efficiently and with confidence. 2 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupESI GROUP, EMPOWERING INDUSTRY PLAYERS TO COMMIT TO OUTCOMES CONTENTS MINI-INTERVIEW WITH... Olfa Zorgati, Chief Financial Officer In 2019, we implemented our plan for sales focus and operational excellence, resulting in growth, in both Services and Licenses. Throughout the year, global industry leaders solicited us to equip them with outcome solutions to anticipate and manage virtually the performance of products or assets as used in-service, much beyond the traditional PLM, opening the new era of the Product Performance LifecycleTM. ESI has the credibility to act at this transformational level, as evidenced by the growing scientific and industrial accolades and customer testimonials welcoming our new Hybrid TwinTM approach. We are actively leveraging their influence to grow and attract the next wave of top accounts, and we expect our performance to keep increasing steadily. Thanks to the expertise and energy of the teams, we are setting up “Best-in-class” tools and methodologies that are essential for mastering the key elements of our business model. ESI Group announced solid results in 2019. Any thoughts about this? The year 2019 was marked by a dynamic business environment illustrating the continuous trust of the world’s industrial leaders as well as our strategic partners. These are the first concrete results of our operational excellence and commercial focus plan, representing a global approach focused on industrial productivity and product performance. Confident Being at the heart of the Group’s strategic change, how are the Finance & Administration (F&A) teams navigating through this transformation journey? Our transformation is above all an evolution in the way we collaborate, as a Group and not as a local entity. The new implemented practices, systems and tools, particularly financial ones, enabled our teams to carry out their mission as “business partners” and to facilitate performance management. in the robustness of its Cristel’s impetus has positioned business model, the Group F&A as a genuine agent We thank you for your confidence remains positive about its of change. Thanks to this and and support, as we are all committed to make it right. Cristel de Rouvray, Chief Executive Officer ambition for sustainable to the expertise and energy growth over the of the teams, we are setting up medium-to-long term. “Best-in-class” tools and methodologies that are essential for mastering the key elements of our business model. €146.2 M Revenues* €12.3 M EBITDA* (before IFRS 16) * 12-month proforma (January 1, 2019 – December 31, 2019). ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 3 CONTENTS KEY FIGURES ESI GROUP IN FIGURES A GLOBAL COMPANY PRÉSENT DANS PLUS DE Covering more than 40 PAYS +40 COUNTRIES A unique expertise +1,200 EMPLOYEES mainly engineers & scientists, many with PhDs 15.3% AMERICAS UNE EXPERTISE UNIQUE + de 1 200 PRINCIPALEMENT INGÉNIEURS & DOCTEURS 48.5% EUROPE, MIDDLE EAST & AFRICA 36.2% ASIA-PACIFIC €22.3 M(1) +5.8% +0.9% cer €71.0 M(1) +8.7% +8.6% cer €53.0 M(1) +7.4% +3.5% cer €146.2 M REVENUE (1) +7.8% REVENUES GROWTH €12.3 M EBITDA (1)(2) €8.3 M EBIT (1)(2) (1) 12-month proforma (January 1, 2019 – December 31, 2019). (2) Before IFRS 16. 4 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS AN INNOVATIVE AND MULTISECTORAL OFFER Industrial diversification (% of booking orders) 59% GROUND TRANSPORTATION & AUTOMOTIVE 12% AERONAUTICS & AEROSPACE 11% HEAVY INDUSTRY 6% ENERGY 12% OTHERS INNOVATION IN THE THICK OF THE ESI GROUP STRATEGY ÉNERGIE 31.4% R&D Investments/ Licenses revenues 59 % 8% Group’s headcount dedicated to R&D TRANSPORTS TERRESTRES / AUTOMOBILE 90 19 Scientific publications R&D centers R&D INVESTMENTS €31.7 M (1) 12 % Scientific innovation is at the heart of ESI’s DNA. With the emergence of new technologies, we rely on the hybrid model-data paradigm, materialized in the Hybrid Twin™ concept. AÉRONAUTIQUE ET AÉROSPATIALE 12 % AUTRES Pr. Francisco Chinesta Director of ESI Group’s Scientific department INDUSTRIES MANUFACTURIÈRES & President of its Scientific Committee 11 % 13 % 6 % ÉNERGIE (1) 12-month proforma (January 1, 2019 – December 31, 2019). 5 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT CONTENTS VALUE CREATION A PERFORMANCE-ORIENTED VISION VS. Coupled with the latest generation technologies, ESI Group’s solutions, addressing a complete industrial product development and manufacturing process, are radically transforming the traditional Product Lifecycle Management (PLM) market by anchoring in the wider Design and manufacture the product itself Predict the performance of the product design, manufacture and ageing concept of the Product Performance Lifecycle™, which addresses the operational performance of Product Lifecycle Management Product Performance Lifecycle ™ a product during its entire lifecycle, from launch to disposal. A GUARANTEED PERFORMANCE THROUGHOUT THE ENTIRE PRODUCT LIFECYCLE Product Performance Lifecycle ™ Unleash & Secure INNOVATION Sustain PRODUCTIVITY Next generation asset Real results, virtually Design Manufacturing Production Operation Real life performance ZERO REAL TESTS ZERO REAL PROTOTYPES ZERO DOWNTIME EMPOWERING MANUFACTURERS, WITH POWERFUL & RESULT-ORIENTED SOLUTIONS In order to adapt to the various industrial challenges and to better respond to the increased demands of its customers, ESI Group has organized its value proposition around 4 specific outcomes for customers, reflecting the value brought to its main markets: Ground Transportation & Automotive Aeronautics & Aerospace PRE-CERTIFICATION SMART MANUFACTURING Improving performance and productivity through predictive models and process automation Establishing the right manufacturing processes to meet performance indicators for industrial products and processes Energy HUMAN CENTRIC PRE-EXPERIENCE Heavy Industry Implementing an operator-centric approach to ensure efficient assembly and maintenance operations Enabling customers to “experience” a product, component, subsystem or system under numerous use conditions 6 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS RISKS AND OPPORTUNITIES RISKS AND RISK MANAGEMENT RISK FACTORS The Group has reviewed the major risks and opportunities that could have a significant effect on its business, financial position or results. The data presented below represent the main strategic and operational risks for the Group. These risks are presented in descending order of importance: Risks Impact Competition (competitive edge) A strong consolidation of the sector (Virtual Prototyping) or a reduction in the Group's scientific leadership could lead to a loss of market share. HIGH IMPACT Management of key personnel Intellectual property The non-access or disappearance of certain internal knowledge on specific areas may represent a challenge to maintain the necessary pace of innovation demanded by the market. The loss of intellectual property of software and solutions would result in an automatic loss of turnover and the impossibility to guarantee and meet financial obligations towards stakeholders. International economic and political environment The global economic, commercial, and social as well as geo-political context may impact the Group's growth and even slow down the deployment of the Company's solutions. However, the Group has historically demonstrated great resilience when it comes to the various global crises it had faced. IMPORTANT IMPACT Dependence on a single client or sector Most of the group's subsidiaries are confronted with the reality of managing a "major customer" with a significant weight in terms of sales and growth. Information security Failure to comply with client requirements concerning the confidentiality, integrity and availability of information entrusted to the Group, may have negative consequences on long-term relationships with customers and on ESI’s reputation. In addition to these strategic and operational risks, the Group has identified some financial and market-related risks with a high level of exposure, including: country risk, foreign exchange risk, interest rate risk, liquidity risk and equity risk. RISK CONTROL Several approaches have been put in place by the Group to control all its strategic, operational and financial risks. For more information, please refer to the 2019 Universal Registration Document, available on ESI Group’s website: www.esi-group.com. RISK CONTROL RISK MANAGEMENT Technological developments and ability to respond rapidly to customer needs Acquisitions of businesses and/or companies and the creation of new joint ventures or partnerships Strategic investments in research and development of new technologies Continuous reinforcement of ISO 9001 certification (since 2000), representing an additional asset to strengthen process-based management and facilitate the implementation of risk management Insurance and risk coverage: existence of an insurance policy covering specific risks (e.g. property damage, civil liability of managers, etc.). 7 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTCONTENTS GOVERNANCE A WELL-BALANCED CORPORATE GOVERNANCE A BOARD OF DIRECTION MADE UP OF 8 MEMBERS including: 3 WOMEN and 5 INDEPENDENT MEMBERS GROUP EXECUTIVE COMMITTEE (GEC) Independent Non-independent 5 SPECIALIZED COMMITTEES 1 Scientific Committee 2 Audit Committee 3 Nomination and Governance Committee 4 Compensation Committee 5 Technology and Marketing Committee From left to right: Christopher ST JOHN, Corinne ROMEFORT-RÉGNIER, Mike SALARI, Cristel de ROUVRAY, Vincent CHAILLOU, Olfa ZORGATI, Dominique LEFEBVRE. 8 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS KEY EVENTS 2019 IN REVIEW – A DYNAMIC YEAR FULL OF ACHIEVEMENTS › JUNE 11, 2019 École Polytechnique, Palaiseau – ESI wins two “L’Usine Digitale” Awards for the Hybrid TwinTM At the 2019 edition of the “L’Usine Digitale” Simulation and Digital Technologies Trophies, ESI won the Innovation Award and the “Grand Prix du Public” for its Hybrid TwinTM concept. › NOVEMBER 21, 2019 Paris – Pr. Francisco Chinesta Receives CNRS Silver Medal Pr. Francisco Chinesta, professor-researcher at Arts et Métiers (ENSAM) and Director of the Scientific Department and Chairman of the Scientific Committee of ESI Group, was awarded the silver medal of the National Center for Scientific Research (CNRS). › JUNE 17-23, 2019 Paris – ESI at the 53rd International Paris Air Show ESI presented, through demonstrators, to its customers and partners, the essential role of simulation in helping to aeronautics and aerospace players in their quest for performance, productivity and sustainability. › NOVEMBER 6-7, 2019 Berlin – ESI Forum – The Group Celebrated its 40th Anniversary in Germany with Customers This edition of the Group’s German Forum marked ESI’s 40th year of presence in Germany, the Group’s second market and the cradle of many industries that benefit from Virtual Prototyping. › NOVEMBER 2019 Renault Relies on ESI’s Virtual Prototyping Technologies for the design of its Clio 5 Thanks to close collaboration with ESI and a pool of partners, the Renault group obtained 5-star certification (maximum score) in Euro NCAP safety tests for its new Clio 5, without any intermediate physical test and prototype. › DECEMBER 2-13, 2019 Madrid – ESI Group, a Strategic Partner of French start-ups Gazelle Tech, a manufacturer of sustainable vehicles made entirely of composite materials, wins the Sustainable Innovation Prize awarded by “Climate Action” at COP 25, validating, thanks to virtual prototyping, its business model. › JANUARY 8-11, 2019 Las Vegas – ESI Group Participation at the CES 2019 At the CES, ESI presented how Virtual Prototyping helps industrialists to design and industrialize breakthrough innovations and to accelerate developments in mobility, reducing or eliminating physical prototypes. › FEBRUARY 1, 2019 Cristel de Rouvray appointed Group CEO The Group has announced the nomination of Cristel de Rouvray as Chief Executive Officer, as of February 1, 2019, by succeeding Alain de Rouvray, founder of the company, who remains Chairman. › FEBRUARY 6-8, 2019 Tokyo – ESI Group at the Manufacturing World Japan 2019 ESI presented its Virtual Reality solution, used to validate assembly and maintenance processes upstream of production, thus minimizing design errors, reduce risk and increase productivity. 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTCONTENTS CSR ESI, A COMMITTED GROUP Aware of its responsibility in each of the pillars of sustainable development, ESI Group has gradually devised a CSR policy that contributes to shared economic and social development and the preservation of human equilibrium. Divided into 4 axes and cascaded in 11 commitments, ESI’s CSR strategy aims at providing sustainable solutions for CUSTOMERS, while being committed to its EMPLOYEES, acting ethically and responsibly with CIVIL SOCIETY and limiting its environmental footprint and the one of its customers on the PLANET. The Group’s CSR challenges and commitments are linked to 10 Sustainable Development Goals of the UN Global Compact. ESI GROUP’S MATERIALITY MATRIX ESI Group has developed its first materiality matrix in 2019: a key tool in the execution of the company’s CSR strategy, making it possible to define its priorities according to their importance for the Group’s stakeholders, as well as their impact on ESI’s performance. S R E D L O H E K A T S L A N R E T X E N O T C A P M I 4 3 2 1 0 4 3 S R E D L O H E K A T S L A N R E T X E N O T C A P M 2 I 1 0 EMPLOYEES EMPLOYEES CUSTOMERS CUSTOMERS CIVIL SOCIETY CIVIL SOCIETY PLANET PLANET 10 CRITICAL IMPACT Customer satisfaction CRITICAL IMPACT Develop solutions that reduce the customer’s environmental footprint Develop solutions that reduce the customer’s environmental footprint Develop high value-added solutions Customer satisfaction Develop talents and encourage leadership Develop talents and encourage leadership Ensure long-lasting relations Ensure long-lasting relations Develop high value-added solutions Ethics and compliance Ethics and compliance IMPORTANT IMPACT Quality IMPORTANT of work life IMPACT Corporate Quality governance of work life Corporate governance Promote diversity Reduce the environmental impact of the Group Promote diversity Reduce the environmental impact of the Group Interact with civil sociéty (give-back) Interact with civil sociéty (give-back) MODERATE IMPACT 1 2 IMPACT ON ESI’S PERFORMANCE MODERATE IMPACT 3 1 2 IMPACT ON ESI’S PERFORMANCE 4 3 4 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS PERFORMANCE 2019 EMPLOYEES BEING A COMMITTED EMPLOYER CUSTOMERS BEING AN OUTSTANDING PARTNER CIVIL SOCIETY BEING AN ETHICAL AND COMMITTED COMPANY > Develop talents and encourage leadership and collaborative management > Provide innovative solutions that meet customers’ requirements > Promote diversity and multicultural exchanges > Contribute to the well-being of employees > Ensure customer satisfaction and meet quality and safety requirements > Maintain long term, trust-based relationships with stakeholders and ecosystem > Guarantee solid and diversified governance > Act ethically and responsibly > Set up initiatives to interact with civil society (give-back) PLANET BEING AN ENVIRONMENTALLY FRIENDLY PLAYER > Develop sustainable solutions > Reduce the environmental impact of the Group +1,200 EMPLOYEES, SERVING OUR CUSTOMERS WORLDWIDE WE ARE CURRENTLY WORKING ON 20 R&D PROJECTS WE HAVE ORGANIZED +250 EVENTS FOR OUR CUSTOMERS WE’RE INSTALLING ECO-RESPONSIBLE EQUIPMENT TO LIMIT OUR ENERGY CONSUMPTION 3 “WELCOME DAYS” ORGANIZED AROUND THE WORLD TO INTEGRATE NEW EMPLOYEES WE HAVE DEDICATED 31.4% OF OUR LICENSES REVENUE TO OUR RESEARCH EFFORTS WE HAVE CONDUCTED 5 ANALYSES FOLLOWING CUSTOMERS’ COMPLAINTS LOCAL AND ON-DEMAND DOCUMENTS PRINTING ENABLED US TO AVOID DELIVERY DISTANCES OF 1,954,376 KM (1) WE DEVOTED 8,125 HOURS TO PROFESSIONAL TRAININGS WE RELY ON 2 LOCAL SCIENTIFIC COMMITTEES AND 1 SCIENTIFIC COMMITTEE AT GROUP LEVEL WE MANAGED 1 INCIDENT RELATED TO OUR DATA SECURITY PAPER CONSUMPTION PER EMPLOYEE DECREASED BY 15% (2) WE HAVE SUCCESSFULLY MANAGED 1 ALERT LINKED TO DISCRIMINATORY PRACTICES 1 ALERT HAS BEEN HANDED TO OUR ETHICS COMMITTEE (1) Since the adoption of the Gelato printing solution in May 2018. (2) 2019 internal data, including all the countries of the environmental study’s scope, representing 99% of the Group’s total workforce. ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 11 CONTENTS STOCK MARKET INFORMATION SELECTED FINANCIAL INFORMATION EVOLUTION OF THE SHARE PRICE From February 2017 to March 2020 (basis 100) SHARE CAPITAL BREAKDOWN (in %) 150 125 100 4,794.58 75 11,880.7 €47.5 50 25 0 march-17 may-17 july-17 aug.-17 nov.-17 jan.-18 march-18 may-18 july-18 aug.-18 nov.-18 jan.-19 march-19 may-19 july-19 aug.-19 nov.-19 jan.-20 march-20 ESI Group CAC 40 CAC Mid & Small DATA AS OF MARCH 31, 2019 €28.20 Stock price €167.93 M Market capitalization NEXT EVENTS Q1 REVENUES FY20 May 12, 2020 GENERAL MEETING June 25, 2020 H1 RESULTS FY20 September 10, 2020 Q3 REVENUES FY20 October 27, 2020 CONTACT US (Basis 100) 4,396.12 9,485.83 €28.2 56.6% Public 6.3% Treasury stock 37.1% Founders and Board OUR ANALYSTS • Berenberg • CIC Market Solutions • IDMidCaps • Invest Securities • Louis Capital Market • LPE Research IDENTITY INFORMATION Listed on Euronext Paris Compartment B Sector: Software ISIN: FR0004110310 Bloomberg: ESI FP INVESTOR RELATIONS Corinne ROMEFORT-RÉGNIER +33 1 41 73 58 44 Florence BARRÉ +33 1 49 78 28 28 ESI Group Headquarters 100 – 102 avenue de Suffren 75015 Paris, France +33 1 53 65 14 14 investors@esi-group.com FOLLOW US ON SOCIAL MEDIA facebook.com/ESIGroup @ESIGroup youtube.com/user/ESIGroup linkedin.com/company/ESI-Group Visit our website www.esi-group.com “Investors” section 12 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 1 THE GROUP 1.1. ACTIVITIES, STRATEGY AND MARKETS 1.1.1. Main activities 1.1.2. Strategic vision 1.1.3. Main markets 1.1.4. Ecosystem 1.2. HISTORY OF THE GROUP 1.3. GROUP ORGANIZATION 1.3.1. Operational flowchart 1.3.2. Legal flowchart 1.4. SELECTED FINANCIAL INFORMATION 1.4.1. Revenue 1.4.2. Strategic business alignment 1.4.3. Breakdown of revenue by geographic area 1.4.4. Profitability 1.5. MAJOR INVESTMENTS DURING THE PAST THREE FINANCIAL YEARS 1.5.1. The Group’s current investments 1.5.2. The Group’s non-current investments 1.5.3. Future investments 14 14 15 16 19 20 21 21 22 23 23 23 23 24 25 25 25 25 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 13 13 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT1 THE Group Activities, strategy and markets CONTENTS In this Universal Registration Document, ESI Group is hereinafter referred to as “ESI Group”, the “Company” or the “Parent Company”. The Company and all its affiliated companies are hereinafter referred to as the “Group”, “ESI Group” or “ESI”. ESI Group is one of the world’s leading innovator companies in Virtual Prototyping software and services. Specialist in physics of materials, ESI has developed a unique proficiency in helping industrial manufacturers replace physical tests and prototypes by virtual replicas. Coupled with the latest technologies, Virtual Prototyping is now anchored in the wider concept of the Product Performance LifecycleTM, which addresses the operational performance of a product during its entire lifecycle, from creation to its market withdrawal. The creation of Hybrid TwinTM, leveraging simulation, physics and data analysis, enables manufacturers and operators to deliver and pre-certify smarter and connected products, to predict product performance and to anticipate maintenance needs. In 2019, the Group changed its annual closing date from the end of January to the end of December. In the following pages, when a figure is mentioned in reference to 2019, it implies the new closing period of January to December. 1.1. ACTIVITIES, STrATEGY AND MArKETS 1.1.1. MAIN ACTIVITIES ESI Group has developed a suite of coherent industry-oriented applications to realistically simulate a product’s behavior, fine-tune fabrication and assembly processes in view of desired product performance, and evaluate the impact of the environment on the use of these products. These applications enable the gradual elimination of tests and physical components and subassembly prototypes during the product conception and manufacturing phases. The virtual prototype of the industrial product thus designed accelerates its certification and allows the monitoring and control of its operational performance, helping industry players to achieve their performance and productivity objectives. Innovative visualization technologies such as ESI IC.IDO and the availability of the Virtual Prototyping chain in Cloud/SaaS mode considerably enhance the collaborative potential of ESI Group solutions while drastically reducing acquisition and ownership costs for companies. Most importantly, the use of technologies such as Big Data, System Modeling, Machine Learning, and the Internet of Things (IoT) adds to ESI Group’s solutions an interactive space and enables real-time decision-making in an immersive virtual environment. This enhanced offer provides complete control over the lifecycle of an industrial product, from product commissioning to its operational withdrawal including modeling of potential evolutions during its useful life: accounting for flaws, wear and tear, maintenance procedures, and running in of assisted operation. The Hybrid TwinTM concept is the representation of this enhanced offer. It is about being able to follow the evolution of your product from the conception to the end-of-life in a digital interface that facilitates informed decision making for both maintenance and improvement of future versions of the product. The virtual prototype can now become agile and intelligent to support industrial manufacturers in the age of smart factories and smart digital products. The Group has two main activities: the edition and distribution of software, and the delivery of consulting services related to its software solutions. 1.1.1.1. Software Editor/Distributor (Licensing activity) Licenses Edition/Distribution is the Group’s main activity, accounting for 79% of revenue in 2019. Software 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. The significant added value provided by ESI Group’s solutions requires major research and development work by highly qualified research engineers. Software solutions are distributed worldwide. In 2019, distribution subsidiaries directly managed 91.8% of license sales, the rest being entrusted to a network of third-party distributors and agents. The two distribution networks – direct and indirect – are complementary. The Licensing activity may be broken down in two ways: ◗ By contract type: • Rental license – user license contract renewable annually and including maintenance services this type of contract is predominant; • Paid-up license – long term license contract (paid-up licenses for the duration of legal protection) including maintenance services for renewable one-year periods (also named Perpetual); • Maintenance contract – maintenance includes updates 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 purchases: • “Repeat Business” includes contracts renewed by customers with no modification from one year to the next, as well as additional features purchased for software already installed in the system of an existing client; • “New Business” comprises new customers and new products purchased by existing clients. 14 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS THE Group Activities, strategy and markets Licenses Repeat Business New Business Renewal products Add-on New customers New products 1.1.1.2. Consulting services (Services activity) In addition to its main business activity of software publishing and distribution, the Group also provides consulting services directly related to Virtual Prototyping. The Services activity, which accounted for 21% of 2019 revenue, includes Consulting and other services. Consulting covers the following four fields: ◗ Engineering studies: 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 validate 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 developed or modified; ◗ Field Services: support services in conjunction with Licenses activity (on- and off-site training and technical assistance); ◗ Contracting: specific studies, in particular application tests (design verification and virtual performance testing of industrial products). These services are generally invoiced based on the time worked (lump sum or actual time spent) except for online 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: 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 corporate R&D departments. The Group treats these projects as research and development or technology intelligence activities. In some cases, they lead to government-type co-financing arrangements in Europe and the United States. They allow the Group to become involved at a very early stage, as a scientific partner in a wide variety of innovative high-tech projects. Rental licenses Licenses Paid-up licenses REVENUES Services Maintenance Consulting Others Engineering studies Field services Contracting Special projects 1.1.2. STrATEGIC VISIoN 1.1.2.1. Performance-oriented vision for industrial products The industrial market is deeply changing while new challenges appear for its players. Draconian regulations, disruptive technologies (Artificial Intelligence, Big Data, Internet of Things…), competition, shorten time to market, constrain industrial players to be more demanding in terms of quality, reliability, safety and production deadlines. This constitutes the very essence of the “Outcome Economy” concept – referring to a results-based economy that focuses on the final benefit for a customer or an operator, the KPIs more difficult to achieve, as success is measured by performance rather than by the product itself. Well-aware of these challenges, ESI’s commitment is to provide and help industrials to implement technological solutions that empower them to innovate efficiently and with confidence. As a specialist in physics of materials, the Group has developed a unique expertise, enabling global industrials to digitally experience and validate the fabrication, assembly and behavior of their products in different environments – early and throughout the whole product lifecycle. The Group’s vision is simple yet powerful: toward real tests, zero real prototypes and zero downtime. The benefits are palpable: faster time to market, increased product performance, and reduced costs, while enabling customers to commit to outcome. The advantages of this approach are concrete: shorter time-to-market, improved product performance including during use and reduced costs. 1 2 3 4 5 6 7 8 9 15 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT11 THE Group Activities, strategy and markets CONTENTS 1.1.2.2. Guaranteed performance – early and throughout the whole product lifecycle Coupled with latest-generation technologies, ESI Group’s end-to-end solution, which currently offers a comprehensive development and manufacturing process for industrial products, is revolutionizing the traditional Product Lifecycle Management (PLM) market. In fact, Virtual Prototyping is part of an overarching and targeted approach known as Product Performance LifecycleTM (PPL), which addresses products’ operating performance throughout their complete lifecycle, from launch to withdrawal. Nowadays, the ever-growing number of possibilities offered by Big Data and the Internet of Things make it possible to monitor the life of products after launch, creating a new outlook for hybrid virtual representations, i.e. representations that allow for updating of Virtual Prototypes using data measured in real-time and enhanced by Artificial Intelligence. The creation of Hybrid TwinTM incorporating simulation, physics, and data analytics makes it possible to create smart products, particularly using connected objects, as well as to predict their performance and anticipate their maintenance requirements. This Hybrid TwinTM provide an essential response to the fundamental economic issues of the Industry of the Future. This unique value proposition, incorporating numerous disruptive innovations, is the fruit of the Group’s longstanding technological differentiation strategy based on multiple international 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 life in-service. 1.1.2.3. Powerful and outcome solutions for industrials As part of its strategic transformation plan, and to adapt to the various industrial challenges and to better respond to the increased demands of its customers, ESI has organized its value proposition around 4 specific outcomes for customers, based on the same technological platform, and related to its main industrial markets (Ground Transportation/Automotive, Aeronautics/Aerospace, Heavy Industry and Energy): ◗ Pre-Certification: enables gains in performance and productivity. Thanks to predictive models and process automation industrialists can meet certification requirements and other validation needs without relying on physical tests. ◗ Smart Manufacturing: establishes the right manufacturing processes to meet performance indicators for both industrial products (for instance reducing weight) and for associated processes (for example controlling distortions or reducing waste). ◗ Human Centric: allows customers to implement an operator- centric approach to ensure the efficiency of assembly and maintenance operations, while facilitating the early identification of human safety or related problems and ways to improve production processes. ◗ Pre-Experience: this is the most advanced solution to support industrial leaders who are the most mature in their transformation towards the Outcome Economy. ESI enables them, as well as their future customers and asset operators, to experience a product, component, subsystem or system as it ages as part of an operational in-service solution and under numerous use conditions. 1.1.3. MAIN MArKETS 1.1.3.1. The Virtual Prototyping market / Market characteristics ESI Group’s business model seeks to take advantage of major industry trends moving toward 100% digital and comprehensive 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 materials 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 complete control over the lifecycle of products and product performance, by offering a disruptive approach to virtual performance modeling of connected or unconnected products in operation, as well as predictive maintenance right up to the end of the product’s life in-service (Product Performance LifecycleTM). The highly specialized nature of ESI Group’s operations and its unique role in the field of Virtual Prototyping make it difficult to delineate ESI’s market with any precision. The Group thus has little information that would shed light on the specific characteristics or short-term outlook of this market, especially 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 $47.8 billion) in June 2019, which included Virtual Prototyping under the category of “Simulation & Analysis Suppliers” (activity estimated at $6.46 billion in 2019). 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 solutions offered by ESI Group. 16 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS THE Group Activities, strategy and markets Given the high barriers 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 simulation product line as rich as the one offered by ESI Group, and one that features the same prediction capabilities valued by the Group’s major clients. In this constantly changing competitive context, ESI stands out for its practical know-how, driven by its service activity. This industrial expertise ensures that ESI Group’s customers can rapidly implement and reap the expected benefits of digitization, securing the loyalty of a growing number of world leaders to the ESI-led ecosystem. / The need for a methodology disruption 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 require 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. The use of technologies such as massive data (Big Data), system modeling, machine learning or the interconnection of objects (Internet of Things – IoT), pushes for the acceleration of the implementation of the methodological change that is driving the massive growth of Virtual Prototyping, especially in industries such as aeronautics, energy or heavy industry. This adds to the ESI Group’s solutions an interactive decision-making space, in an immersive and real-time virtual environment. The Product Performance LifecycleTM approach, which enables manufacturers to develop a Hybrid TwinTM of the physical version of their product on day to day basis, brings ESI to target the wider market of professional users such as maintenance workers and certified technicians who interact with both the products and consumers. / High barriers to entry The complexity of the problems addressed by the Group, its longstanding experience working closely with major industrial 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 compete 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 CFAO/CIAO, 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, whose specialized expertise and reputation in the field of physical simulation are known; ◗ licensing agreements signed in a wide range of complex or highly specialized fields. All these partnerships are the result of the exceptional expertise gained since ESI’s founding in 1973. The Group has a solid reputation as a complex problem-solver for major corporations worldwide in a variety of disciplines and industrial sectors (i.e. automotive, defense, aerospace, aeronautic, nuclear power, transportation, energy, electronics, consumer goods, biomedical, etc.). Nowadays, we cannot rule out the possibility that new and larger competitors with greater resources could emerge in ESI Group’s field of activity. However, especially regarding key CFAO players, major automakers seem neither to anticipate nor to want such a development, preferring to do business with companies specialized in the area of physics-based simulation, distinct from their other technology vendors. Nevertheless, it should be mentioned that Dassault Systèmes’ 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 computational data within the CAD/ CAM world and ensuring compatibility with resource management systems. It is also worth noting the presence of Siemens/UGS in the technical data management field with its Team Center solutions, the de facto standard in the automotive market. In 2012, Siemens complemented its Simulation offering by acquiring the Belgian company LMS, followed by CD Adapco, a leader in digital and mechanical fluid simulation, in January 2016. In April 2017, MSC Software, a software publisher specializing in design tools (CAE) was taken over by Hexagon AB. In September 2017, Dassault Systèmes announced the acquisition of EXA, a fluid flow simulation specialized company. In January 2019, Hexagon announced the acquisition of Etalon in order to strengthen its solutions and offers to address the issues of the Industry 4.0 of their customers. In September 2019, Ansys announced the acquisition of Livermore Software Technology Corporation (LSTC), a provider of finite element analysis technology, known by its LS-DYNA software package, for a price equivalent to more than 12 times the company’s turnover. 1 2 3 4 5 6 7 8 9 17 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT11 THE Group Activities, strategy and markets CONTENTS 1.1.3.2. Geographic areas Markets are segmented both by geographic area and industry. Geographic areas are based on the economic breakdown of the Company: ◗ Americas = United States and Brazil; ◗ Asia-Pacific = China, South Korea, India, Japan, Malaysia and Vietnam; ◗ Europe, Middle East and Africa = Czech Republic, England, France, Germany, Italy, Netherlands, Russia, Spain, Sweden, Switzerland and Tunisia. Revenues Europe, Middle East and Africa Asia-Pacific Americas TOTAL 2019, 12-month proforma (Jan. 1 – Dec. 31) 2018 (Feb. 1 – Jan. 31) 2017 (Feb. 1 – Jan. 31) (in € thousands) (in % of the total) (in € thousands) (in % of the total) (in € thousands) (in % of the total) 70,957 52,264 22,302 146,223 48.5% 36.2% 15.3% 100% 68,837 49,768 20,802 139,407 49% 36% 15% 100% 63,821 49,941 21,511 47% 37% 16% 135,274 100% As in previous years, the Group maintained a strong international presence, with 86% of revenue generated outside France. 1.1.3.3. Industrial sectors / Energy offering ESI offers various solutions to the energy industry, aiming to guarantee the skills and expertise required for a safe and competitive nuclear industry; to structure the supply chain and the innovation process within the sector; and to define the nuclear reactor of tomorrow and the tools of the future. ESI also offers solutions in the field of renewable energy. Main customers: EDF, Farasis, Framatome, GDF, General Electric, Japan Atomic Energy Agency, Samsung, Siemens. ESI is also present in other industrial sectors, such as the “Government and Defense” sector (main customers: CEA, CEE, U.S. Department of Energy, etc.) and the “Electronics” offering (main customers: CEA, CEE, U.S. Department of Energy, etc.). In 2019, orders in the main industrial sectors represented 88% of total revenues, and broke down as follows: 59% Ground Transportation & Automotive 12% Aeronautics & Aerospace 11% Heavy Industry 6% Energy 12% Others ESI Group’s product and service offering is organized by product lines and industrial solutions according to four main industrial sectors: / Ground Transportation & Automotive offering ESI Group offers a wide variety of industry-leading Virtual Prototyping solutions for components and sub-assemblies used in the transportation industry. Main customers: Alstom Transport, Daimler, FAW Group Corporation, Fiat Chrysler Automobiles, Ford Motor Company, General Motors, Gestamp Group, Honda, Hyundai, Mercedes-Benz, Renault-Nissan, Shanghai Automotive Industry Corporation, Toyota, TRW Automotive, Volkswagen Group. / Aeronautics and Aerospace offering For this sector, ESI Group offers tailor-made solutions that allow: to reduce lead times and costs; to increase productivity and performance in manufacturing processes while increasing the production rate and enabling the implementation of innovative methods and materials needed to comply with new regulations, particularly environmental regulations; to validate the design and assembly of processes and products at the earliest stage through a human-centric approach; to evaluate and predict the behavior and in-service performance of products; and to test and prototype new concepts to accelerate the development of a new aerospace industry. Main customers: Airbus Group, Alcoa, AVIC, Boeing, Bombardier, Embraer, Honeywell, General Electric, Honda, Lockheed Martin, NASA, PCC Corporate, Rolls-Royce, Safran, Sikorsky, UTC Aerospace Systems. / Heavy Industry offering ESI Group’s solutions are also designed for companies working in Heavy Industry and raw materials processing. Main customers: Alcoa, Arcelor Mittal, AVIC, Caterpillar, General Electric, Hitachi, John Deere, Joyson Safety Systems, Mahindra, Whirlpool. 18 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS THE Group Activities, strategy and markets 1.1.4. ECoSYSTEM ESI Group is particularly aware of the richness and development of its ecosystem, which is considered as the cornerstone of its success. From year to 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 ESI network, composed of partners, customers, suppliers and all the Group’s other stakeholders, makes it possible to accelerate and spread innovation and to support the sale of software and services. 1.1.4.1. Distribution network and local expertise / Distribution network In 2019, some 488 employees actively supported ESI Group’s sales cycle: Software sales, Services production and Customer support. The Group’s proprietary distribution network accounted for 91.8% of sales. Remaining sales were carried out indirectly via a network of third-party distributors and agents, complementing and enhancing our direct network. / 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 customer, anywhere in the world. 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 alliances are deeply rooted in its corporate strategy to develop and facilitate the adoption of Virtual Prototyping and the emergence of the Hybrid TwinTM. / Corporate partnerships ESI Group has always aimed to establish mutually beneficial strategic corporate partnerships with international companies, working together to promote innovation. For instance, since July 2018, ESI Group and Diota, a leading publisher of 4.0 solutions integrating advanced augmented reality and control technologies, have joined forces to develop automated solutions for the embedded systems that bring together product engineering processes and of previously disparate maintenance. / Strategic “partner-customers” The success of ESI Group’s solutions is also the fruit of remarkable collaborations and a co-creation approach with world leaders such as Renault-Nissan, Volkswagen, or Honda in the Automotive, or Boeing or Safran for the Aeronautics. The Group’s approach is based on building close and long-lasting relationships which meet the specific needs of customers looking to successfully incorporate Virtual Prototyping into various industrial sectors. / Strategic and academic partnerships To ensure constant innovation, ESI Group enters into partnerships with many first-rate universities, technological institutes 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, encouraging young people to work in the industrial sector, training the finest employees of tomorrow, and foster innovation in education. In 2019, Professor Francisco Chinesta, Professor and Researcher at les Arts et Métiers (ENSAM) and Director of the Scientific Department and Chairman of the Scientific Committee of ESI Group, received the Silver Medal of the French National Centre for Scientific Research (CNRS) for his contribution to the Centre’s outreach and the advancement of research. 1 2 3 4 5 6 7 8 9 19 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT11 THE Group History of the Group CONTENTS 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 Farhoomand and Eberhard Haug, created ESI (Engineering System International). The Company initially 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. ■ 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 Framasoft (digital and mechanical simulation for the nuclear industry), followed by Dynamic Software (stamping simulation) in 1999. ■ In July 2000, ESI Group launched an IPO, raising some €30 million. 1991 to 1999 2000 to 2010 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. (sector 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. 2011 to 2018 ■ 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 ownership 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 technology assets of Ciespace (Cloud/SaaS offering), and the Presto software platform (electronics cooling market). In 2016, ESI Group continued to extend its strategic positioning by acquiring ITI GmbH (realistic simulation 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 worldwide 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 solution portfolio, putting forth a comprehensive offering suited to the needs of industrial companies working in the Industry 4.0. In the course of the year 2017, ESI Group strengthened its presence with the opening of new offices in Toulouse (France) and San Jose, California (United-States). 2019 ■ The Group has been through a major change in its governance on February 1, 2019 with the nomination of Cristel de Rouvray as Chief Executive Officer of the Group. Alain de Rouvray, founder, remains Chairman of the Board of Directors. ESI Group continues its transformation journey with, in particular, its commercial focus and resource alloca- tion plan, announced in April 2019, aiming to develop specific industrial strategies by close cooperation with customers. 20 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS THE Group Group organization 1.3. Group orGANIZATIoN 1.3.1. opErATIoNAL FLoWCHArT By December 31, 2019, the Group’s operational flowchart was as follows: ESI Group CEO Strategy Industry Solutions Innovation, Discovery & Services Outcome and Product Operations Regional Sales F&A, Operations Human Resources Corporate Governance 1 2 3 4 5 6 7 8 9 21 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT11 THE Group Group organization CONTENTS 1.3.2. LEGAL FLoWCHArT By December 31, 2019, the Group’s legal flowchart was as follows: ESI GROUP SA AMERICAS EMEA ASIA-PACIFIC ESI North America, Inc. United States (100%) 100% Engineering System International SAS France (99.95%) 99.95 % 100% ESI Software Germany GmbH Germany (100%) ESI Japan, Ltd. Japan (97%) 97 % 100% ESI Group Beijing Co., Ltd. China (100%) 9.5% ESI US Holdings, Inc. United States (100%) 100% ESI Services Tunisia SARL Tunisia (95%) 85.5% Engineering System International GmbH Germany (100%) 51% ESI US R&D, Inc. United States (100%) Mineset, Inc. United States (100%) ESI South America Comercio E Servicos De Informatica Ltda Brazil (95%) 49% 100% 95% STRACO SA France (98%) 98% 100% ESI ITI GmbH Germany (100%) CIVITEC SARL France (80%) 80% ITI Southern Europe SARL France (100%) Scilab Enterprises SAS France (100%) 100% 95% Mecas ESI s.r.o. Czech Republic (95%) ESI Group Hispania s.l. Spain (100%) 100% 99% Calcom ESI SA Switzerland (99%) ESI Italia s.r.l. Italy (100%) 100% 100% ESI Nordics AB Sweden (100%) 100% 100% ESI UK Ltd. United Kingdom (100%) OpenCFD Ltd. United Kingdom (100%) 100% 100% Hankook ESI Co., Ltd. South Korea (98.8%) 98.8% 45% AECC-ESI (Beijing) Technology Co., Ltd. China (45%) ESI Services Vietnam Co., Ltd. Vietnam (100%) 100% 100% ESI Software (India) Private Ltd. India (100%) 100% 100% Hong Kong ESI CO., Ltd. Hong Kong (100%) ESI-ATE Holdings Ltd. Hong Kong (100%) 100% ESI-ATE Technology (China), Ltd. China (100%) % of holding ( ) % of control Note: the percentages of equity and voting rights are identical. For more information, see note F.8 “Table of controlled entities and affiliates” (at December 31, 2019) in the notes to the consolidated financial statements. 22 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS THE Group Selected Financial Information 1.4. SELECTED FINANCIAL INForMATIoN This information are extracted from the consolidated financial statements. ESI Group releases its results for the financial year starting on February 1, 2019 and ending on December 31, 2019 (11 months), approved by the Board of Directors on March 19, 2020. In compli- ance with the decision of the General Meeting of July 18, 2019, the Group now closes the fiscal year on December 31 of each year, and therefore also presents its new twelve months proforma results. 1.4.1. rEVENuE ESI Group demonstrated a solid growth in 2019, in a context of continuing operational and commercial transformation. Over a 12-month proforma period, ESI generated sales of €146.2 million, up +7.8% vs. €135.7 million (January-December 2018). Excluding an exchange rate impact of €3 million, resulting mainly from fluctuations in the Dollar and the Japanese Yen, sales increased by +5.6%. Proforma full-year growth was driven by the Licenses business (€115.9 million, +8.4%, +6.0% cer), which is the main pillar of the Group’s business model (79% of sales, compared with 79% in the previous year). total). This progress illustrates the continued confidence of global industrial leaders. In fact, the world’s top 10 largest clients account for 35% of total order intake (+14% vs. 2018). Among them, we find strategic partners and key industry leaders who are advanced in the digital transformation of their business model. Revenue evolution (in € millions) 135.7 28.8 146.2 30.3 +7.8% 106.9 115.9 2018 (1) 2019 (2) Licenses Services (1) 12-month proforma (January 1, 2018 - December 31, 2018). (2) 12-month proforma (January 1, 2019 – December 31, 2019). 1.4.2. STrATEGIC BuSINESS ALIGNMENT Proforma full-year (12 months) growth was driven by the Licenses business: ◗ 16% of sales were from New business (new customers or new solutions for existing customers), up 10.6% (€18.1 million). ◗ 84% of sales were driven by Repeat business (renewal and additional volume), +7.9% (€97.8 million), which, by nature, generates strong commercial recurrence (91.4%); Services grew year on year (€30.3 million, +5.4%, +3.8% cer) to represent 21% of total revenues. 1.4.3. BrEAKDoWN oF rEVENuE BY GEoGrApHIC ArEA Geographical breakdown 48.5% (vs. 49.4%) Europe, Middle East and Africa 15.3% (vs. 14.9%) Americas 36.2% (vs. 35.7%) Asia-Paciﬁc 1 2 3 4 5 6 7 8 9 23 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT11 THE Group Selected Financial Information CONTENTS 1.4.4. proFITABILITY The Group’s profitability is presented through the evolution of gross margin and EBITDA, before and after taking into account the impact of IFRS 16. These aggregates used for financial communication, which are common to the Group’s business sector, provide specific information to facilitate understanding of the real value created by the Group for its customers and partners. EBITDA is an Alternative Performance Indicator (API) corresponding to Operating Income before net depreciation, amortization and provisions and including the net impact of the capitalization of development costs (see note 6.1.2 to the consolidated financial statements in Chapter 6.1) and net depreciation of account receivables. As IFRS 16 standard is applicable starting 2019 with significant impact on EBITDA, we present this aggregate before IFRS 16 impact to ensure comparability with 2018 EBITDA. In addition, following the change of closing date, 2019 financial year ran for 11 months. In order to ensure comparability, proforma financial statements for January-December 2019 and 2018 have been prepared, in accordance with the methodology described in note 2 to the consolidated financial statements (Chapter 6.1). The aggregates presented below are thus proforma data. Improved profitability EBITDA (before IFRS 16) increased to €12.3 million (vs. €8.1 million), now 8.4% of total sales (vs. 6.0%). EBIT (before IFRS 16) rose to €8.3 million (vs. €3.6 million), now 5.7% of total sales. Lower growth in other operational costs (excluding gross margin) The Group maintained its efforts to control other operational expenses (+5.6%, +€5.2 million) to support overall revenue increase and long-term development. Note that €1.5 million of the €5.2 million cost increase is linked to exchange rate (4.0% cer). Gross margin EBIT (before IFRS 16) EBITDA (before IFRS 16) (in € millions and % of revenue) (in € millions and % of revenue) (in € millions and % of revenue) 107.4 97.5 71.9% 73.4% +10.1% 8.3 12.3 3.6 5.7% 2.7% +126.6% 8.1 6% 8.4% +52.2% 2018 (Jan.-Dec.) 2019 (Jan.-Dec.) 2018 (Jan.-Dec.) 2019 (Jan.-Dec.) 2018 (Jan.-Dec.) 2019 (Jan.-Dec.) 24 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS THE Group Major investments during the past three financial years 1.5. MAJor INVESTMENTS DurING THE pAST THrEE FINANCIAL YEArS 1.5.1. THE Group’S CurrENT INVESTMENTS The Group’s current capital expenditures represent approximately 2% of its revenue. Over the past three financial years, these invest- ments amounted to €3.6 million in 2017, and €4.2 million in 2018 and €2.6 million in 2019 (proforma 12-month). 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 primarily financed using the Group’s equity. Development costs ESI Group capitalizes the development costs that meet the six criteria set forth under IAS 38. Information on research and development costs is presented in note 6.1.2. to the consolidated financial statements. The net carrying amount of capitalized development costs stood at €45.4 million at December 31, 2019 and corresponds to approximately 14.9 months of research and development. 1.5.2. THE Group’S NoN-CurrENT INVESTMENTS a) Acquisition of intangibles 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, which are not amortized but reviewed through an impairment test, include goodwill and intangible assets with an indefinite useful life. These intangible assets are subject to an impairment test such as described in note 3.1 to the consolidated financial statements. The change in the net carrying amount of these intangible assets between January 31, 2019 and December 31, 2019 is presented in the table below. See notes 3.2.1 and 6.1.1 to the consolidated financial statements for further information. (in € millions) Goodwill Intangible assets with an indefinite useful life TOTAL b) Financial investments January 31, 2019 41.0 12.0 53.4 Decrease (0.1) Foreign exchange gain/(loss) December 31, 2019 0.1 0.1 41.4 12.0 53.4 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 is willing to continue investing in order to update and improve 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 order to evaluate any investment opportunities that could potentially improve its solutions, the Group has set up a special committee (Venture Board) that helps the Group Executive Committee (GEC) to make investment decisions based on market priorities and expected outcomes. 1 2 3 4 5 6 7 8 9 25 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT1CONTENTS 26 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 2 REPORT ON CORPORATE GOVERNANCE 2.1. GOVERNANCE CODE 2.2. FUNCTIONING OF THE GENERAL MANAGEMENT 2.2.1. Dissociation of the functions of Chairman of the Board of Directors and Chief Executive Officer as from February 1, 2019 2.2.2. Chief Operating Officers 2.2.3. Limits on the powers of the Chief Executive Officer and Chief Operating Officers 2.2.4. Group Executive Committee (“GEC”) 2.3. BOARD OF DIRECTORS 2.3.1. Composition of the Board of Directors 2.3.2. Offices of directors 2.3.3. Operation of the Board of Directors 2.3.4. Specialized committees 2.3.5. Relationships with shareholders 2.4. COMPENSATION PAID TO THE DIRECTORS AND THE MANAGEMENT 2.4.1. Compensation of the Board of Directors 2.4.2. Compensation to the Executive corporate officers 2.5. ADDITIONAL INFORMATION IN RESPECT OF CORPORATE GOVERNANCE 2.5.1. Regulated agreements and commitments and related party transactions 2.5.2. Delegations of authority 2.5.3. Provisions of the articles of association concerning 28 29 29 29 29 30 31 31 34 36 39 40 41 41 43 56 56 56 the participation of shareholders in General Meetings 58 2.5.4. Factors that may have an impact in the event of a public offering 2.6. STATUTORY AUDITORS’ REPORT ON REGULATED AGREEMENTS AND COMMITMENTS 59 60 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 27 27 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT2 REPORT ON CORPORATE gOvERNANCE Governance Code CONTENTS This section constitutes the report of the Board of Directors on corporate governance pursuant to Article L. 225-37 of the French Commercial Code. This report notably sets out the conditions of preparation and organization of the work of the Board of Directors and its Committees, the powers of the corporate officers, the principles and rules adopted to define their remuneration and benefits of any kind granted to them, as well as other information to be included under Articles L. 225-37 et seq. of the French Commercial Code. This report has been prepared on the basis of work carried out by various departments of the Company, in particular, the Legal Department and Finance and Administration Department. This report was approved by the Board of Directors on March 19, 2020, after review by the Board Committees of the sections under their respective responsibilities and sent to the Statutory Auditors. It will be presented to the Combined General Meeting of June 25, 2020. 2.1. gOvERNANCE CODE The Company is a limited company (société anonyme) with a Board of Directors. The Directors, the Chairman of the Board, the Chief Executive Officer (“CEO”) and the Chief Operating Officers are referred to collectively in this Universal Registration Document by the term “corporate officers”. granted to them, apart from the regulated agreements as set out under section 2.6 of this Universal Registration Document. In addition, to the Company’s knowledge on the date of this Universal Registration Document, no corporate officers has been in the last five years: On the date of publication of this Universal Registration Document and to the Company’s knowledge, there are: ◗ no family ties among the Company’s corporate officers, with the exception of parentage between Alain de Rouvray, Chairman of the Board of Directors and Cristel de Rouvray, Director and CEO since February 1, 2019; ◗ no conflicts of interest between the private interests of each corporate officers and their duties with regard to the Company; ◗ no arrangement or agreement concluded with the principal shareholders or with clients, suppliers or others, as a result of which any of the corporate officers would have been appointed in such position; ◗ no restriction on the sale by corporate officers of their shareholdings in the Company’s capital except the shareholders’ agreement as described under section 8.2.4 of this Universal Registration Document; ◗ no service agreement binding the corporate officers to the Company or any of its subsidiaries that provides benefits to be ◗ convicted of fraudulent offences; ◗ associated with any bankruptcies, receiverships or liquidations; ◗ subject to any official public incrimination and/or sanctions by statutory or regulatory authorities; ◗ disqualified by a court from acting as a member of the administrative, management or supervisory bodies of an issuer or from acting in the management or conduct of the affairs of any issuer. During its meeting of February 12, 2020, the Company confirmed it voluntarily referred to the Middlenext Code, which is available on the website www.middlenext.com as revised in September 2016. As every year, the Board of Directors reviewed its compliance with the recommendations, in particular the points of vigilance of the Code. As part of the “Comply or Explain” rule provided for in Article L. 225-37-4 of the French Commercial Code, the Company considers that its practices comply with recommendations of the Code with the exception of the following recommendations for the reasons given below: Exceptions to the Middlenext Code Explanations R.10: Presence condition for directors’ remuneration R.18: Stock-options: absence of performance condition This criterion is applied to independent directors but is not relevant for non-independent directors, who are almost always present because of their executive role within the Company (Chief Executive Officer and Chief Operating Officer) or because of the reinforced role performed by the Chairman of the Board of Directors. The Company has generally always conditioned its stock option grants on performance conditions. This was particularly the case for the allocation dated February 1, 2019 for the benefit of the CEO, Cristel de Rouvray. However, in the midst of the Company's transformation, relevant performance criteria could not be defined during the allocation of stock options made on December 18, 2019. Consequently, the Company only proceeded to the allocation of the portion of shares usually subject to the exclusive presence condition, and did not proceed to the allocation of the usually larger portion of shares, linked to performance conditions. 28 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Functioning of the general management 2.2. FUNCTIONINg OF THE gENERAL MANAgEMENT In accordance with the legal provisions and articles of association, the Board of Directors entrusts the general management either to the Chairman of the Board of Directors or to another individual, whether Director or not, bearing the title of Chief Executive Officer (“CEO”). The choice between these two methods of exercise of the general management is made by the Board of Directors by decision of the majority of the Directors present or represented. The choice of the Board is brought to the attention of Shareholders and third parties in accordance with the regulations in force. No one can be appointed CEO if he is over 80 years old. If the current CEO exceeds this age, he is deemed to have resigned from office. The CEO is vested with the broadest powers to act in all circumstances on behalf of the Company. The powers of the CEO are however limited by the Board of Directors (see section 2.2.3.1 below). 2.2.1. DISSOCIATION OF THE FUNCTIONS OF CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIvE OFFICER AS FROM FEBRUARY 1, 2019 At its meeting of September 18, 2018, the Board of Directors decided to modify the monist corporate governance structure of the Company and to adopt a dissociated structure, in order to fully integrate into the Company’s transformation context. Thus, as of February 1, 2019, the Board of Directors decided to separate the functions of Chairman of the Board of Directors and CEO, while maintaining Alain de Rouvray as Chairman of the Board of Directors and secondly to appoint Cristel de Rouvray as Chief Executive Officer for the remaining term of their respective directorships. In accordance with Article L. 225-54-1 of the French Commercial Code, Cristel de Rouvray does not hold any other position as Chief Executive Officer in a public limited company with its registered office in France. With due regard for the separation of the functions of the Chairman of the Board of Directors and CEO, the Chairman is given extended powers so that he remains involved full-time in the Company’s business life, without assuming executive responsibility. The objective is to ensure a peaceful and gradual transition phase estimated at two years. For more details, please refer to the internal regulations of the Board of Directors (https:// www.esi-group.com/company/investors/corporate-governance/ governance-documents). 2.2.2. CHIEF OPERATINg OFFICERS At the CEO’s proposal, the Board of Directors may appoint one or more individuals as Chief Operating Officer to assist the CEO. 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 CEO’s agreement and sets their compensation. With respect to third parties, the Chief Operating Officer has the same powers as the CEO. If the CEO resigns or is no longer able to carry out his duties, the Chief Operating Officers will retain their responsibilities and duties until the appointment of a new CEO unless the Board of Directors decides otherwise. Chief Operating Officers may be dismissed at any time upon proposal of the CEO and by decision of the Board of Directors. If Chief Operating Officers are dismissed without just cause, such dismissal may be grounds for compensation. At its December 19, 2018 meeting, the Board of Directors decided to reappoint Vincent Chaillou and Christopher St John as Chief Operating Officers for a term of four years, expiring in 2021, in alignment with Cristel de Rouvray’s mandate. 2.2.3. LIMITS ON THE POWERS OF THE CHIEF EXECUTIvE OFFICER AND CHIEF OPERATINg OFFICERS 2.2.3.1. Limits to the CEO’s powers The CEO represents the Company in its dealings with third parties. He is vested with the broadest powers to act in all circumstances on behalf of the Company, provided that the act he performs is part of the corporate object and is not expressly reserved to Shareholders’ Meetings or to the Board of Directors. Without prejudice to the legal provisions relating to authorizations to be granted by the Board of Directors (regulated agreements, sureties, endorsements and guarantees, transfers of participations or real estate, etc.), the Chief Executive Officer must obtain the prior authorization of the Board of Directors for the following operations that are outside the scope of day-to-day management, in accordance with its internal rules: ◗ Purchase or acquire, sell or dispose of, or mortgage any real estate, pledge any movable property and claim, where the transaction exceeds the amount of €100,000; ◗ Operations intended to consent to or contract any loans, credits or advances, where these exceed an amount of €2,000,000; 29 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Functioning of the general management CONTENTS ◗ Direct operations or equity investments that may affect the Group’s strategy and substantially modify its financial structure or scope of business; ◗ Settle any dispute and take legal action, with the exception of debt recovery actions or any day to day operations and urgent actions such as provisional or conservatory measures; ◗ The issue of pledges, guarantees, endorsements or sureties where these exceed an annual amount of €100,000; ◗ The issue of securities, whatever their nature, which may lead to a change in the share capital, regardless of the amount. 2.2.3.2. Limits to the Chief Operating Officers’ powers The powers of the Chief Operating Officers to act as legal representatives of the Company have been delegated by the Board of Directors. The following powers have thus been delegated to the Chief Operating Officers: 1. To represent the Company, in general, in all ongoing business affairs of ESI Group with respect to third parties and in compliance with the Group procedures; 2. To enter into commercial contracts or agreements on behalf of the Company within its commercial territory and authority; 3. To hire or terminate any employee, executive, consultant, sales representative, distributor or agent and to determine the scope of their powers and their title (with the exception of managers and directors) and to establish or increase any compensation, commission or pension for all such individuals or legal entities. Annual compensation shall not exceed €100,000. In all cases, the Chief Operating Officers require the Company’s prior written consent to carry out solely the following transactions on behalf of the Company: ◗ 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); ◗ To create or acquire stakes in other companies, to perform any other type of similar undertaking, to accept management positions in other companies, to establish or dissolve subsidiaries and to divest ownership interest; ◗ To propose mergers; ◗ To grant loans; ◗ To bind the Company as a guarantor or in any other debt-related situation with respect to third parties; ◗ To settle any disputes and to take legal action, with the exception of debt recovery actions that form part of the Company’s ongoing operations and urgent actions such as provisional or conservatory measures that cannot be postponed in the interests of the Company; ◗ 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 the Chief Operating Officers 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 transaction involving other Group companies, clients or partners falling outside the Company’s commercial territory or authority. 2.2.4. gROUP EXECUTIvE COMMITTEE (“gEC”) The CEO is assisted by the GEC for the Company’s daily management pertaining to growth strategy in the following areas: ◗ Research; ◗ Innovation; ◗ Service activity; ◗ Production of products and solutions; ◗ Sales and marketing; ◗ Regional directions; ◗ Human resources; ◗ Quality; ◗ IT; ◗ Finance et administration; ◗ Legal and Governance; ◗ Communication. The GEC meets at least once a month and as often as the interest of the Company requires, to report on the activities of the Company to the CEO. The GEC prepares, with the support of the specialized committees, all matters submitted to the prior authorization of the Board of Directors for the execution and/or implementation of strategic operations. 30 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Board of Directors As at the date of this Universal Registration Document, the GEC comprises the following members: 1 2 3 4 5 6 7 8 9 From the left to the right: Corinne Romefort-Régnier Corporate governance director Cristel de Rouvray Chief Executive Officer and Board Member Olfa Zorgati Chief Financial Officer Christopher St John Chief Operating Officer – Asia-Pacific Regional Director Mike Salari Executive Vice President Innovation, Value Discovery and Services – Regional Director, The Americas Vincent Chaillou Chief Operating Officer and Board Member– Group Strategy and EMEA Regional Director Dominique Lefebvre Executive Vice President Products Operations 2.3. BOARD OF DIRECTORS 2.3.1. COMPOSITION OF THE BOARD OF DIRECTORS In accordance with Article 10 of the articles of association, the Company is administered by a Board of Directors composed 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. Directors are appointed by the annual Ordinary General Meeting, on proposal of the Board of Directors, for a term of four years, in accordance with the recommendations of the Middlenext Code (R.9). Directors may be re-elected. They may be dismissed at any time by the Ordinary 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 will automatically be deemed to have resigned. He will nonetheless retain his seat until the first Board meeting following the date at which the Director in question exceeded the age limit. In accordance with the Group’s policy to promote diversity (see section 4.3.2 of this Universal Registration Document for more details), the Board of Directors, based on the recommendations of the Nomination and Governance Committee, seeks to promote diversity in its composition with regard to criteria such as age, gender or qualifications and professional experience. The renewal in 2018 of the terms of office of Véronique Jacq and Rajani Ramanathan, bringing their respective skills in terms of financing or technologies, are an illustration of this. In the event of a change in the composition of the Board, these diversity criteria will be decisive in the choice of candidates for appointment. 31 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Board of Directors CONTENTS Overview of the Board of Directors as at the date of this Universal Registration Document Members of the Board of Directors Age Gender Nationality Strategic Committee Audit Committee Compensation Committee Nomination and Governance Committee Technology and Marketing Commitee Start of first term Start of current term End of current Term Expertise, experiences Members considered non-independent by the Board of Directors (see section 2.3.1.2) 76 M French •* •* • 1991 2015 SM 2023 Members considered independent by the Board of Directors (see section 2.3.1.2) 70 M French • 2004 2016 SM 2020(1) Alain de Rouvray Vincent Chaillou • • Cristel de Rouvray 43 F French, American Charles-Helen des Isnards Éric d’Hotelans 74 M French 69 M French Véronique Jacq 52 F French Rajani Ramanathan 53 F American, Indian Yves de Balmann 73 M French, American •* • • • • • • • Industries, Technologies, Commerce, Leadership, M&A Industries, Technologies, Commerce, Leadership, M&A • •* • • • 1999 2017 SM 2021 Technologies, Leadership, CSR 2008 2017 SM 2021 Finance, M&A, Listed company 2008 2015 SM 2023 Technologies, Finance, Leadership, Listed company • 2014 2018 SM 2022 Finance, M&A, Listed company • • •* 2014 2018 SM 2022 Technologies, Commerce, Leadership, CSR 2016 2016 SM 2020(1) Finance, Leadership, M&A, Listed company SM: Shareholders’ Meeting * Chairman • Member (1) Mandates proposed to be renewed at the Shareholders’ Meeting of June 25, 2020. 2.3.1.1. Changes in the composition Changes in the composition of the Board of Directors in 2019 and until the date of this Universal Registration Document Date of effect July 18, 2019 July 18, 2019 Departure Appointment Renewal - - - - Alain de Rouvray Éric d’Hotelans 32 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Board of Directors Changes in the composition of the Committees in 2019 and until the date of this Universal Registration Document Date of effect Departure Appointment Renewal Strategic Committee Audit Committee - - - - Compensation Committee (1) January 31, 2019 Cristel de Rouvray - - - February 1, 2019 - Éric d’Hotelans( 2) Nomination and Governance Committee (1) January 31, 2019 Cristel de Rouvray - Technology and Marketing Committee February 1, 2019 - - - Alain de Rouvray (2) - - - - - - - - (1) The Compensation Committee and the Nomination and Governance Committee were dissociated by decision of the Board of Directors on December 19, 2018 with effect from February 1, 2019. (2) Appointment as Chairman. 2.3.1.2. Independence In accordance with the recommendations of the Middlenext Code (R.3), following the opinion of the Nomination and Governance Committee, the Board of Directors analyzed and determined at a meeting of February 12, 2020, the proportion of independent directors within the Board. In particular, it examined each of the directors’ situations in light of the five criteria presuming independence defined by the Code, namely: Criterion 1 Criterion 2 Not to be and not to have been during the course of the previous five years, an employee or corporate officer of the Company or an entity of the Group Not to have been during the course of the previous two years and not to be in a significant business relationship with the Company or its Group (customer, supplier, competitor, service provider, creditor, banker) Criterion 3 Not to be majority shareholder or not holding a significant percentage of the Company’s voting right Criterion 4 Not being related by close family ties to a corporate officer or a majority shareholder Criterion 5 Not having been an Auditor of the Company during the course of the previous six years The table below shows each director’s situation in light of the independence criteria as stated above, and the classification chosen by the Board of Directors. The Board identified five independent director out of eight, representing 62.5% of independence, largely above the one-third of independence recommended by the Middlenext Code for a controlled company. Director Criterion 1 Criterion 2 Criterion 3 Criterion 4 Criterion 5 Alain de Rouvray Vincent Chaillou Cristel de Rouvray Charles-Helen des Isnards Éric d’Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann X : Not compliant. ✓ : Compliant. X X X ✓ ✓ ✓ ✓ ✓ ✓ ✓ X ✓ ✓ ✓ ✓ ✓ ✓ ✓ X ✓ ✓ ✓ ✓ ✓ X X X ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ ✓ Classification chosen by the Board of Directors Non-independent Non-independent Non-independent Independent Independent Independent Independent Independent 2.3.1.3. Balanced gender representation on the Board At the date of this Universal Registration Document, the Board of Directors is composed of three women and five men. In accordance with Article L. 225-18-1 of the French Commercial Code, the difference between the two genders is not greater than two and consequently the Board of Directors has a balanced representation. 1 2 3 4 5 6 7 8 9 33 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT2CONTENTS 2 REPORT ON CORPORATE gOvERNANCE Board of Directors 2.3.2. OFFICES OF DIRECTORS The number of directorships held by directors is in accordance with the limits set forth in Article L. 225-21 of the French Commercial Code. This is an important guarantee of their commitment and availability to the Group. Alain de Rouvray Chairman of the Board of Directors Date of birth: 10/08/1943 French Vincent Chaillou Board member and Chief Operating Officer Date of birth: 03/24/1950 French Founder of ESI Group, Alain de Rouvray is the Chairman of the Board of Directors since February 1, 2019, as from the date of dissociation of governance functions. He had been Chairman and Chief Executive officer since the Company’s creation in 1991 and until January 31, 2019. He holds an engineering degree from École centrale de Paris (1967), a degree from the Sorbonne in Economic sciences (1967), and a Ph.D. in civil engineering from the University of Berkeley (1971). Alain started his career as Research Engineer at École polytechnique (Solid Mechanics Laboratory) in 1972. He then became Director of the Advanced Mechanics Department for the international software subsidiary of CISI Group from 1972 to 1976. In 1973, he founded ESI SA and was the CEO and Commercial Director from 1973 to 1990. Current offices held outside the group: None Expired offices held over the past five years: None Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris Vincent Chaillou is Chief Operating Officer–Group Strategy and EMEA Regional Director. Vincent Chaillou holds an engineering degree from École polytechnique (1971) and a PhD in civil engineering from the École des Ponts et Chaussées (1973). 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 President for the American territory within ESI Group and CEO of ESI Software. Current offices held outside the group: Member of the Board of Directors of the association “Alliance Industrie du Futur” Member of the Board of the association ASTech and Vice-President International Relations Chairman of the association ID4CAR Member of the Board of the Railenium Technological Research Institute Member of the Board of Nuclear Valley Member of the Board of the French Mechanics association Member of the Excelcar collaborative innovation platform Expired offices held over the past five years: Member of the Board of the association TECH’IN France Member of the Board of the company CADEMCE SAS Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris, France 34 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Board of Directors Cristel de Rouvray Board member and Chief Executive Officer Date of birth: 10/15/1976 French, American Charles-Helen des Isnards Independent Board member Date of birth: 01/01/1945 French Cristel de Rouvray is Chief Executive Officer since February 1, 2019. Cristel de Rouvray was Chairman of the Compensation, Nomination and Governance Committee from 2007 to 2019 and Board Leader from 2015 she is graduated from Stanford University and the London School of Economics, where she obtained a Ph.D. in economics. She has 14 years of experience as a Director at College Track, a US non-profit organization. Charles-Helen des Isnards is a graduate of the Paris Institute of Political Studies and holds a degree in law. After an international career within BUE, UBAF and CIC Group in France and in Italy, Charles-Helen des Isnards contributed 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. Current offices held outside the group: Director of Open Foam Foundation Expired offices held over the past five years: None Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris, France Current offices held outside the group: Member of the Board of the Day-Solvay Foundation Expired offices held over the past five years: Member of the Board of the association Les Arts Florissants Member of the Supervisory Board of the company Nature & Découvertes Autres fonctions en cours : Senior Advisor of CAP M – New York, independent consulting firm on strategy and M&A Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris, France Éric d’Hotelans Independent Board member Date of birth: 07/03/1950 French Véronique Jacq Independent Board member Date of birth: 01/02/1968 French 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 1997, 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. President of the Group’s online sales since 2009, he retired in July 2017. Current offices held outside the group: Chair of the M6 Group Corporate Foundation Expired offices held over the past five years: President of the company Home Shopping Services SA President of the company T-Commerce SAS Member of the Board of the company Société Nouvelle de Distribution SA Member of the Board of the company Métropole Production SA Managing Director of the company Home Shopping Services SA Member of the Board of the M6 Group Corporate Foundation Member of the Board of the company M6 Films Member of the Board of the company M6 Diffusion SA Business address: M6 – 89, avenue Charles-de-Gaulle – 92575 Neuilly-sur-Seine Cedex, France A Civil Engineer and graduate of the École 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 BPI France) as Director of Business Development. In 2003, she joined the 2nd Chamber of the French Court of Auditors, where she was responsible for auditing financial statements and management reports of companies and government agencies as well as international organizations. In 2007, she joined CDC Entreprises, a CDC subsidiary company specializing in private equity, and in 2010 became Deputy General Manager in charge of Business Development. In 2012, she took responsibility for the investment activity in digital startups first at CDC Entreprises and then at Bpifrance as of 2013. The Digital Venture activity she is piloting in Bpifrance covers seed and venture capital operations (€650 million under management). Current offices held outside the group: Member of the Board of the company Evaneos Member of the Board of the company OpenClassrooms Member of the Board of the company Scality Member of Board of the company Klaxoon Member of Board of the company Famoco Expired offices held over the past five years: Member of the Board of the company Netatmo Censor of the company DelfMEMS Censor of the company Bonitasoft Censor of the company Teads Business address: Bpifrance – 6-8, boulevard Haussmann, 75009 Paris, France 35 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Board of Directors CONTENTS Rajani Ramanathan Independent Board member Date of birth: 03/25/1967 American, Indian Yves de Balmann Independent Board member Date of birth: 05/28/1946 French, American Rajani Ramanathan has held a variety of positions, from running her own companies to scaling a multi-billion company from a startup to a fully operational business. Currently she serves as an independent Board member at CloudCherry and serves as either a Board member/advisor/investor in several technology startups including Vayu Technology corp., Invicara, Fitbliss, Boon VR, Feathercap and has previously advised companies such as Medium, Pipefy, Growbot, Lifograph, Traction Labs, Relatas, Realine TechnologyWizcal, SaferMobility and Trendbrew to name a few. She joined Salesforce.com in 2000, when it was a very small startup, and she helped built it into a high growth Fortune 500 company during her tenure of 14 years. In her most recent role as COO (EVP) of Technology & Products, her responsibilities spanned from delivering highly innovative products, while ensuring every employee can do the best work in their careers. In 2014, she was awarded the YWCA TWIN (Tribute to Women and Industry) Award, which has long been considered one of Silicon Valley’s most prestigious awards honoring women who exemplify leadership excellence in executive-level positions. Current offices held outside the group: Member of the Board of the company CloudCherry Member of the Board of the company Vavu Expired offices held over the past five years: None Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris, France A graduate of Stanford University in the United States and École Polytechnique in France, Yves de Balmann began his career at Citibank where he served as North American Executive Director for the Rates and Currency Derivatives Division, as well as his own Trading Department. He joined Bankers Trust in 1988. After the 1999 merger of this company 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 activities. He held these positions until 2001. He also served on the Board of the Global Corporates and Institutions Division (GCI). In 2002, he created the company Bregal Investments, a first-rate international player in the field of private equity, which he co-managed until 2012. Current offices held outside the group: Member of the Board of the company Exelon Corporation Member of the Board of the company Finalsite Member of the Board of the non-profit organization Sweetwater Spectrum Expired 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 Education Business address: ESI Group – 100-102, avenue de Suffren, 75015 Paris, France 2.3.3. OPERATION OF THE BOARD OF DIRECTORS 2.3.3.1. Internal rules of the Board of Directors The Board of Directors adopted internal rules which set out the operational procedures of the Board and its Committees, as well as the rules of professional ethics applicable to all Directors. These internal rules were reviewed by the Board of Directors on March 19, 2020 and were not subject to any amendment. They can be consulted on the Company’s website (www.esi-group. com). Each member receives a copy of these internal rules upon being appointed. In accordance with recommendations of the Middlenext Code (R.7), these internal rules specify in particular the following points: ◗ the role of the Board and, as the case may be, operations subject to the prior authorization of the Board; ◗ composition of the Board / independence criteria of the members; ◗ definition of the missions of any specialized committees set up; ◗ duties of the members (deontology: loyalty, non-competition, disclosure of conflicts of interest and duty of abstention, ethics, confidentiality, etc.); ◗ operation of the Board (frequency, convening, information of the members, self-assessment, use of videoconferencing and telecommunication facilities...); ◗ protection of corporate officers: liability insurance for corporate officers; ◗ rules for determining the remuneration of directors; ◗ the question of succession plan of the management and key people. 2.3.3.2. Professional ethics of Board members and prevention of conflicts of interest Regarding professional ethics, the Board members refer to the Director Charter set forth by the French Institute of Corporate Directors (IFA) and appended to the internal rules of the Board of Directors. Concerning prevention and management of conflicts of interest, the internal rules recommend that each Director strive to avoid any potential conflict between his moral and material interests and those of the Company. Each Director is bound to inform the Board of any potential conflict of interest. Should the Director be unable to avoid a conflict of interest, he must abstain from taking part in the debates as well as any decision on the subjects concerned. 36 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Board of Directors In addition to comply with the procedure of regulated agreements which are subject to prior authorization by the Board of Directors in accordance with Article L 225-38 of the French Commercial Code, the Board examines each year in accordance with Article L 225-40-1 of the French Commercial Code, the regulated agreements concluded and authorized during previous financial years. During this annual review, the management informs the Board, if necessary, of any significant new agreements between the Company and a subsidiary relating to current operations concluded under normal conditions, thus allowing the Board to assess if these conditions are actually met. It is specified that the persons directly or indirectly interested in one of these agreements do not participate in this assessment. To the Company’s knowledge and as at the date of this Universal Registration Document, there is no conflict of interest between the duties of the individual Board members with respect to the Company and their private interest and other duties. 2.3.3.3. 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 the Company’s corporate interests under any and all circumstances. The Board of Directors determines the guidelines for the Company’s operations and oversees their implementation. Subject to the powers expressly given, under the law, to General Meetings, the Chairman and Chief Executive Officer and the Chief Operating Officers and within the limit of the corporate object, the Board of Directors may handle any matter relevant to the Company’s operations and decides on all matters within its responsibility. The Board of Directors is entrusted with the following responsibilities in accordance with the law: ◗ preparing for and convening Annual General Meetings; ◗ preparing 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 statements, the annual management report and the interim financial report, as well as approval of these documents; ◗ approving the report of the Board of Directors on corporate governance; ◗ 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, the Chief Executive Officer and the Chief Operating Officers, and supervising their management of the Company; ◗ allocating Directors’ compensation; ◗ creating committees within the Board of Directors, defining their responsibilities and operational procedures, appointing and determining the compensation of the members of these committees; ◗ establishing and updating the internal rules of the Board of Directors. Certain transactions considered to be outside the scope of day-to-day management of business are subject to the prior authorization of the Board of Directors, as defined by the internal rules (section 2.2.3.1 of this Universal Registration Document). 2.3.3.4. Organization of the Board of Directors’ work In accordance with the internal rules, the Directors shall each receive, within a reasonable time before each meeting of the Board, a file containing the agenda of the meeting, the draft minutes of the previous meeting and any relevant documentation relating to each of the items on the agenda. The Chairman answers to requests from Directors for additional information. The Directors consider as at this date, that they receive a complete and sufficient information to fulfill their mission. In addition, each issue raised during the session is thoroughly discussed and debated among members before being put to the vote at the end of the discussion. Lastly, the Directors are regularly informed between meetings whenever the Company’s situation requires, in accordance with Recommendation R.4 of the Middlenext Code. The Board meets as often as required for the interests of the Company. The frequency and length of the Board of Directors’ 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 internal rules state that the Board of Directors meets at least four times per year. The Board systematically meets 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 program. 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 sale; ◗ significant operations outside the Group’s established strategy; ◗ organic growth or restructuring operations. The draft minutes of each Board of Directors meeting are formally approved and signed by the Board members during the subsequent meeting. The minutes set out the discussions, specify the decisions made and mention the questions and reservations raised. Furthermore, during each meeting any major facts or events pertaining to the Company’s operations or its general 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 decisions are made by majority vote among the members present or represented. In the event of a tie, the Chairman of the meeting has a casting vote. In accordance with the provisions of the articles of association, Board members who attend the Board meeting via videoconference or teleconference are considered present as for the quorum. This provision does not apply to decisions for which the French Commercial Code expressly excludes the use of this process. An attendance sheet is drawn up and signed by the Board members attending the Board of Directors’ meeting. 1 2 3 4 5 6 7 8 9 37 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Board of Directors CONTENTS 2.3.3.5. Works of the Board of Directors in 2019 In 2019, the Board of Directors held eight meetings including the Board retreat. The attendance rate was 91%. Attendance of Directors at Board meetings in 2019 02/01/2019 03/06/2019 Board retreat 07/25 & 26/2019 04/12/2019 07/18/2019 09/18/2019 12/06/2019 12/18/2019                                                                 Dates of Board of Directors’ meetings Alain de Rouvray Vincent Chaillou Cristel de Rouvray Charles-Helen des Isnards Éric d’Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann OVERALL ATTENDANCE % of attendance (Board retreat excluded) % of overall attendance 86 100 100 100 100 57 86 86 89 88 100 100 100 100 63 88 88 91 Strategic Committee Audit Committee Nomination and Governance Committee Compensation Committee Technology and Marketing Committee Attendance rate Number of meetings Attendance rate Number of meetings Attendance rate Number of meetings Attendance rate Number of meetings Attendance rate Number of meetings 100% 100% 100% 100% 50% 100% 100% 50% 2/2 2/2 2/2 2/2 1/2 2/2 2/2 1/2 - - - 100% 100% 60% - - 88% - 87% - - - 5/5 5/5 3/5 - - - 100% 3/3 - - 100% 100% - 100% - 100% - - 3/3 3/3 - 3/3 - - - - - 100% 100% - - - 3/3 3/3 100% 3/3 - 100% - - 100% 100% 100% - - 50% 100% - 90% 4/4 4/4 4/4 - - 2/4 4/4 - - Director Alain de Rouvray Vincent Chaillou Cristel de Rouvray Charles-Helen des Isnards Éric d’Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann OVERALL ATTENDANCE RATE 38 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Board of Directors In 2019, the Board of Directors deliberated on the following items: Meeting date Agenda 02/01/2019 03/06/2019 04/12/2019 ◆ Compensation of corporate officers ◆ Capital increase following exercise of options during financial year ended on January 31, 2019 ◆ Transition Update ◆ Budget approval for financial year 2018 ◆ Closing of accounts for financial year ended on January 31, 2019 ◆ Review of regulated agreements ◆ Situation of the Directors (reports of the Nomination and Governance Committee and the Compensation Committee) ◆ Update of the Board of Directors' internal rules ◆ Update on delegations ◆ Convening of the Combined Shareholders’ Meeting ◆ Strategic orientations 07/18/2019 ◆ Implementation of the share buyback program authorized by the Combined Shareholders’ Meeting of July 18, 2019 ◆ Allocation of free shares ◆ Composition of committees following the renewal of directors voted by the combined general meeting of July 18, 2019 ◆ Compensation of corporate officers Board Retreat 07/25 & 26/2019 ◆ Review of committees’ objectives ◆ Review of governance, succession plan and financing 09/18/2019 12/06/2019 12/18/2019 ◆ Review and approval of 2019 first-half year results ◆ Update on activity and the budget process ◆ Report on Board Retreat and 2019/2020 planning for the Committees ◆ Stock Option Plan ◆ Evolution of the Joint Venture in China ◆ Approval of 2020 budget ◆ Stock option and free share plan ◆ Corporate Policy on Equal Employment Opportunity and Equal Salary 2.3.3.6. Board assessment In accordance with Middlenext Code Recommendation R.11 the Board of Directors carried out during 2019 financial year, a yearly internal self-assessment of its composition, organization and mode of operation. This assessment was performed using a questionnaire addressed to each Director. The results of the self-assessment were shared during the Board Retreat. During the ensuing debate, reflections were raised on the development of governance and the implementation of performance indicators linked to the new monitoring tools. 2.3.4. SPECIALIZED COMMITTEES The Board of Directors may decide on the creation within its Board of committees of which it determines the composition (see section 2.3.1 above) and defines the missions in the internal rules. The Committees carry out their activities under the Board’s sole responsibility. The Board of Directors remains the decision- making body. The purpose of the committees is to optimize the discussions of the Board of Directors and to ensure it 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 Committee; ◗ the Nomination and Governance Committee; ◗ the Technology and Marketing Committee. The attendance of the Directors at the committees’ meetings during financial year ended on December 31, 2019 is presented under section 2.3.3.5 above. 2.3.4.1. Strategic Committee 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 orientations and financing as well as examining the evolution of the Group’s business portfolio. 2.3.4.2. Audit Committee In accordance with regulations in force, Board members having executive roles within the Company are not allowed to serve as members of the Audit Committee, and all members are independent. In addition, the majority of its members have expertise in the area of finance or accounting. The CEO, the Chief Operating Officers and the Chief Financial Officer of the Company attend the meetings of the Audit Committee as guests. According to the regulation in force, the Audit Committee monitors issues relating to the preparation and control of accounting and financial information. 1 2 3 4 5 6 7 8 9 39 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Board of Directors CONTENTS Without prejudice to the powers of the bodies responsible for administration, management and supervision, the Audit Committee is responsible, in particular, for the following tasks: ◗ the Company’s policy on equal pay and equal wages for all employees and between women and men (Article L. 225-37-1 of the French Commercial Code). ◗ monitoring the process of drawing up financial documents and, if necessary, making recommendations to ensure their integrity; ◗ monitoring the effectiveness of internal control and risk manage- ment 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 Committee’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 regarding on its activities and the results of certification of financial statements, how said certification has contributed to the integrity of financial information, and the role that the Committee played in the process. The Committee immediately reports any problems that may arise. 2.3.4.3. Compensation Committee The mission of the Compensation Committee is to prepare the decisions of the Board of Directors concerning: ◗ the compensation policy of the Group, in particular for key directors and corporate officers, based on information provided by the Finance and Human Resources Departments; ◗ the general policy to grant options to subscribe or purchase shares or free shares, reported in the annual report and the special report dedicated to the shareholders at the General Meeting, and the frequency of allocations; ◗ the allocation of stock options or purchase of shares in favor of employees and/or corporate officers, as well as any pattern of ownership of Employees (profit sharing...), to issue an opinion on the legal and financial conditions of these plans, and the list of beneficiaries related to strategic goals; 2.3.4.4. Nomination and Governance Committee The mission of the Nomination and Governance Committee is to prepare the decisions of the Board of Directors concerning: ◗ the composition of the Board in view of the composition and evolution of the shareholding of the Company, research and evaluation of potential candidates, the opportunity of reappointments; ◗ the procedure for selecting future independent Directors; ◗ the succession plan for corporate officers in case of unexpected vacancy, hiring, nomination or dismissal of officers; ◗ the criteria of independence of Directors and assessment of independence; ◗ the assessment procedures of the functioning of the Board and its Committees; ◗ the recruitment of executives for key activities and functions of the Company including members of the GEC; ◗ the implementation of a new organization of the Group’s activities that may have an impact on the responsibilities of the members of the GEC. 2.3.4.5. Technology and Marketing Committee The Technology and Marketing Committee is in charge of advising the Board on aspects of product strategy, organizing the publishing company (in particular, the methodologies of product management and R&D), and evaluating potential partnerships or acquisitions related to technology and marketing. The Committee also advises the Board of Directors on all aspects of commercializing solutions. 2.3.5. RELATIONSHIPS WITH SHAREHOLDERS 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 invited to attend the General Meeting and analyze the results of the vote on each resolution. They pay special attention to negative votes so as to draw the appropriate conclusions before the following General Meeting. Moreover, in addition to the General Meeting, the Chief Executive Officer, Chief Operating Officers and Chief Financial Officer regularly meet with shareholders and investors at individual meetings and during roadshows and conferences, provided that such events do not take place during blackout periods. 40 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management 2.4. COMPENSATION PAID TO THE DIRECTORS AND THE MANAgEMENT 2.4.1. COMPENSATION OF THE BOARD OF DIRECTORS 2.4.1.1. Compensation due to Directors for financial year ended on December 31, 2019 / Summary table of compensation and other components of compensation due to Directors (Table 3 of AMF nomenclature) Compensation Executive corporate officers Cristel de Rouvray(1) ◆ Compensation as director ◆ Other compensation Vincent Chaillou ◆ Compensation as director ◆ Other compensation Non-executive corporate officers Alain de Rouvray(5) ◆ Compensation as director ◆ Other compensation Charles-Helen des Isnards ◆ Compensation as director ◆ Other compensation Éric d’Hotelans ◆ Compensation as director ◆ Other compensation Véronique Jacq ◆ Compensation as director ◆ Other compensation Rajani Ramanathan ◆ Compensation as director ◆ Other compensation Yves de Balmann ◆ Compensation as director ◆ Other compensation TOTAL ◆ Compensation as director ◆ Other compensation 2019 financial year (11 months) 2018 financial year 10,000 349,410(2) 6,000 266,496(4) 100,000 433,600(6) 42,000 N/A 30,000 N/A 12,325 N/A 31,650 N/A 16,650 N/A 248,625 1,049,506 28,000 114 ,894(3) 6,000 269,391(4) 10,000 529,544(6) 42,000 N/A 26,471 N/A 16,471 N/A 30,200 N/A 19,000 N/A 178,142 913,829 (1) Cristel de Rouvray was appointed CEO from February 1, 2019 and she also holds an office as Director. (2) The other compensation due to Cristel de Rouvray for 2019 financial year for the other mandates exercised within the Group are presented in detail under section 2.4.2 of this Universal Registration Document. (3) Other compensation of Cristel de Rouvray was paid under the related party agreements as presented under sections 2.5.1 and 2.6 of the 2018 Registration Document. It is specified as necessary that at the General Meeting of July 18, 2018, Cristel de Rouvray did not take part in the vote in the fourth resolution on the approval of the regulated agreement of which she is a party. (4) Other compensation due to Vincent Chaillou for 2018 and 2019 financial year for the other mandates exercised within the Group are presented in detail under section 2.4.2 of this Universal Registration Document. (5) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). (6) Other compensation due to Alain de Rouvray for 2018 and 2019 financial year for the other mandates exercised within the Group are presented in detail under section 2.4.2 of this Universal Registration Document. 41 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS 2.4.1.2. Compensation policy applicable to Directors for 2020 financial year As part of their mandate, the independent Directors receive compensation, the total amount of which is set by the General Meeting. Their distribution is made, on proposal of the Compensation Committee to the Board of Directors, according to the following criteria: ◗ frequency of meetings and participation; ◗ chairmanship of specialized Committees; ◗ special missions or strategic meetings (Board Retreat). Non-independent Directors, including the Chairman of the Board of Directors, receive fixed compensation without being subject to presence condition. The debates on the commercial strategy take place in particular during the annual meeting of the Board called Board Retreat, which gives rise to a specific compensation. On this occasion, some directors are entrusted with specific missions which are part of the commercial strategy of the Company or contribute to the sustainability of the Company (for example on governance or financing of the company). For these specific assignments, the Directors receive additional compensation. Concerning in particular the remuneration policy for the Chairman of the Board of Directors, it is made up of a fixed remuneration reflecting the reinforced role he plays in the context of the transformation of the Company and the Group and changes in governance (see section 2.2.1 of this Universal Registration Document). His fixed remuneration includes the compensation received for the mandate as Chairman of the Board of Directors of the Company as well as for other mandates exercised within the Group. The draft resolutions (No. 7 and 8) approving the remuneration policy attributable to the members and to the Chairman of the Board of Directors and submitted to the General Meeting of June 25, 2020, are presented under section 2.4.2.3 below. Below is a summary of the compensation policy attributable to the Directors and the Chairman of the Board of Directors for the 2020 financial year. Allocation of compensation for directors (per year, in €) (1) Strategic Committee, Audit Committee, Technology and Marketing Committee(3) Compensation Committee, Nomination and Governance Committee(3) Board of Directors Board Retreat Committee chairmanship(3) Specific mission(4) Independent director(2) 2,500 2,500 4,000 2,000 5,000 Director – Chief Operating Officer(5) Director – CEO(5) Chairman of the Board of Directors(5) 6,000 N/A 10,000 100,000 N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A N/A On a case by case basis, depending on the nature and importance of the mission N/A N/A N/A TOTAL COMPENSATION APPROVED BY THE SHAREHOLDERS’ MEETING OF JULY 19, 2019: €280,000(6) (1) It should be noted that the table above presents exclusively the compensation attributable to the mandates as directors. It does not include any compensation that may be awarded for other mandates exercised within the Group. (2) Payment subject to an annual presence at 100%, failing which the amount is calculated in proportion to the annual presence. (3) For each committee. (4) For each mission. (5) Fixed payment not subject to presence condition. (6) It will be proposed to the General Meeting of June 25, 2020 in its 15th resolution to increase the total amount of attendance fees attributable to the Directors for the 2020 financial year from €280,000 to €350,000. 42 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management 2.4.2. COMPENSATION TO THE EXECUTIvE CORPORATE OFFICERS 2.4.2.1. Compensations paid to the Chairman of the Board, the Chief Executive Officer and Chief Operating Officers for financial year ended on December 31, 2019 The following tables are prepared in accordance with the recommendation No. 2009-16 of the French Stock Market Authority (Autorité des Marchés Financiers – AMF). They detail the amounts of remuneration and benefits paid, as well as the amounts due for the financial year ended December 31, 2019. / 2.4.2.1.1. Summary table of compensation and stock options granted to each executive corporate officer (Table 1 of AMF nomenclature) (in €) Alain de Rouvray Chairman of the Board of Directors since February 1, 2019(3) FY 2019(1) (Feb.-Dec.) FY 2018(2) (Feb.-Jan.) Compensation due for the year (detailed in 2.4.2.1.2 below) 533,600 539,544 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 Cristel de Rouvray CEO since February 1, 2019 Compensation due for the year (detailed in 2.4.2.1.2 below) 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 Chief Operating Officer Compensation due for the year (detailed in 2.4.2.1.2 below) 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 Chief Operating Officer None None None None 359,410 None 41,975 None None 272,496 None None 15,606 74,456 None None None None None None None None None 269,391 None None 81,260 74,456 Compensation due for the year (detailed in 2.4.2.1.2 below) 234,292 243,064 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 None None 15,606 22,206 None None 81,260 22,206 (1) February 1, 2019 - December 31, 2019. (2) February 1, 2018 - Janvier 31, 2019. (3) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). 1 2 3 4 5 6 7 8 9 43 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS / 2.4.2.1.2. Summary table of compensation to each executive corporate officer (Table 2 of AMF nomenclature) Alain de Rouvray Chairman of the Board of Directors since February 1, 2019* (in €) Fixed compensation Annual variable compensation Multi-annual variable compensation Exceptional compensation Compensation as Director Benefits in kind TOTAL 2019(1) (Feb.-Dec.) 2018(2) (Feb.-Jan.) Amount due Amount paid Amount due Amount paid 433,600 433,600 None None None 100,000 None 533,600 None None None 91,663 None 525,263 340,444 49,996 None None 10,000 148,093 548,533 340,444 49,996 None None 10,000 148,093 539,544 (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). Cristel de Rouvray CEO since February 1, 2019 (in €) Fixed compensation Annual variable compensation Multi-annual variable compensation Exceptional compensation Compensation as Director Benefits in kind TOTAL Vincent Chaillou Chief Operating Officer (in €) Fixed compensation Annual variable compensation Multi-annual variable compensation Exceptional compensation Compensation as Director Benefits in kind TOTAL Christopher St John Chief Operating Officer (in €) Fixed compensation Annual variable compensation Multi-annual variable compensation Exceptional compensation Compensation as Director Benefits in kind TOTAL (1) February 1, 2019 - Decembre 31, 2019. (2) February 1, 2018 - January 31, 2019. 44 2019(1) (Feb.-Dec.) 2018(2) (Feb.-Jan.) Amount due Amount paid Amount due Amount paid 290,210 49,357 - - 10,000 9,843 290,210 0 - - 0 9,843 359,410 300,053 None None None None 28,000 None 28,000 None None None None 28,000 None 28,000 2019(1) (Feb.-Dec.) 2018(2) (Feb.-Jan.) Amount due Amount paid Amount due Amount paid 182,004 37,800 None 40,000 6,000 6,692 272,496 182,004 0 None 0 0 6,692 188,696 198,550 16,983 None 40,000 6,000 7,858 198,550 16,983 None None 6,000 7,858 269,391 229,391 2019(1) (Feb.-Dec.) 2018(2) (Feb.-Jan.) Amount due Amount paid Amount due Amount paid 162,846 34,650 None 33,616 None 3,180 162,846 0 None 0 None 3,180 177,650 27,460 None 33,616 None 4,338 177,650 27,460 None 33,616 None 4,338 234,292 166,026 243,064 243,064 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management / 2.4.2.1.3. Summary table of compensation and other components of compensation due to Directors (Table 3 of AMF nomenclature) Please refer to section 2.4.1.1 above of the Universal Registration Document. / 2.4.2.1.4. Share subscription or purchase options granted to each executive corporate officer by the Company and any Group company during financial year ended on January 31, 2019 (Table 4 of AMF nomenclature) Share subscription or purchase options granted during the year to each executive corporate officer by the Company and any Group company Value of options on the method used for the consolidated financial statements Number of options granted during the year Exercise price (in €) Exercise period Plan No. and date Type of options (purchase or subscription) None 19 bis Subscription 41,975 20,000 27.04 February 1, 2022 – February 1, 2027 None None Name of the executive corporate officer Alain de Rouvray Chairman of the Board of Directors since February 1, 2019(1) Cristel de Rouvray CEO since February 1, 2019 Vincent Chaillou Chief Operating Officer Christopher St John Chief Operating Officer TOTAL (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). / 2.4.2.1.5. Share subscription or purchase options exercised to each executive corporate officer by the Company and any Group company during financial year ended on December 31, 2019 (Table 5 of AMF nomenclature) Share subscription or purchase options exercised during the year to each executive corporate officer by the Company and any Group company Name of the executive corporate officer Alain de Rouvray Chairman of the Board of Directors since February 1, 2019(1) Cristel de Rouvray CEO since February 1, 2019 Vincent Chaillou Chief Operating Officer Christopher St John Chief Operating Officer TOTAL Number of options exercised during the year Plan No. and date Exercise price None (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). 1 2 3 4 5 6 7 8 9 45 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS / 2.4.2.1.6. Free shares allocated to each executive corporate officer during financial year ended on December 31, 2019 (Table 6 of AMF nomenclature) Free shares allocated by the Shareholders’ Meeting during the year to each executive corporate officer by the Company and any Group company Alain de Rouvray Chairman of the Board of Directors since February 1, 2019(1) Cristel de Rouvray CEO since February 1, 2019 Vincent Chaillou Chief Operating Officer Christopher St John Chief Operating Officer TOTAL Free shares allocated to each executive corporate officer Number of shares allocated during the year Value of shares on the method used for the consolidated financial statements Plan No. and date Acquisition date Availability date Performance conditions None None None None None None None None None None None None No. 9 quinquies & 9 sexies 12/18/2019 No. 9 quinquies & 9 sexies 12/18/2019 500 10 500 10 1,020 31 31 31 31 12/18/2022 12/18/2021 12/18/2022 12/18/2021 2022 2023 2022 2023 No No No No (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). At the meeting of December 18, 2019, the Board of Directors proceeded, on the proposal of the Compensation Committee, to the free allocation of a maximum total number of 8,858 common shares of the Company at a nominal value of €3 each, for the benefit of beneficiaries, managers of the Company and its related companies, of which 6,712 free shares under Plan 9 quinquies, 2,521 free shares under Plan 9 sexies. In accordance with the terms of Plan 9 quinquies, the allocation of bonus shares to the beneficiaries will become final at the end of a 36-month vesting period. The definitive allocation of free shares to the beneficiaries is subject to compliance with conditions of presence by them, throughout the vesting period. The Board will have the option to opt for the delivery of existing shares or to be issued. In accordance with the terms of Plan 9 sexies, the allocation of free shares to the beneficiaries will become final after a vesting period of 24 months. The definitive allocation of the free shares to the beneficiaries is subject to compliance with conditions of presence by them, throughout the vesting period. The Board will have the option to opt for the delivery of existing shares or to be issued. As of the definitive allocation, the beneficiaries will have to keep these shares, without being able to sell them, during a retention period of 24 months. / 2.4.2.1.7. Free shares vested to each executive corporate officer during financial year ended on December 31, 2019 (Table 7 of AMF nomenclature) Free shares allocated vested to each executive corporate officers Alain de Rouvray Chairman of the Board of Directors since February 1, 2019(1) Plan No. and date Number of shares vested available during the year Acquisition conditions Cristel de Rouvray CEO since February 1, 2019 Vincent Chaillou Chief Operating Officer Christopher St John Chief Operating Officer TOTAL None (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). 46 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management / 2.4.2.1.8. History of share subscription or purchase option allocations (Table 8 of AMF nomenclature) Date of Shareholders’ Meeting Date of the Board of Directors’ meeting(s) Number of options allocated Of which: ◆ Alain de Rouvray, Chairman of the Board of Directors(1) ◆ Cristel de Rouvray, CEO ◆ Vincent Chaillou, Chief Operating Officer ◆ Christopher St John, Chief Operating Officer Start date of exercise period Expiration date Exercise price (in €) Type of option Option exercised Subscription or purchase options cancelled or exercised Subscription or purchase options as at end of financial year Plan No. 10: 06/26/2012 Plan No. 17: 07/24/2014 Plan No. 19: 06/29/2017 (2) 12/19/2012 02/07/2014 03/26/2015 07/22/2015 07/22/2015 03/11/2016 05/05/2017 07/18/2018 02/01/2019 12/18/2019 180,000 37,400 88,610 N/A N/A 3,500 2,975 N/A N/A 0 0 N/A 20,000 0 0 2016 to 2019 2017 to 2021 2021 to 2022 2020 to 2025 2023 to 2026 2026 to 2027 27.82; 24.42; 21.66; 27.17 27.17; 23.35; 50.92 42.97; 27.04; 29.12 Subscription Subscription Subscription 29,500 109,325 41,175 2,000 14,200 21,200 0 5,850 82,760 (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). (2) All plans, with the exception of Plan 19 ter, are subject to performance conditions (see also the table under section 2.1 of this Universal Registration Document for further explanations on this exception). Allocation of share subscription options At the meeting of February 1, 2019, the Board of Directors proceeded, pursuant to the authorization granted by the Combined General Meeting of June 29, 2017, and on the proposal of the Compensation Committee, to the allocation of a maximum of 20,000 share subscription options to the benefit of Cristel de Rouvray, CEO, under Plan 19 bis. The vesting of options granted under Plan 19 bis is subject to two conditions: ◗ 25% of the options granted will vest subject to the condition of continuous and effective presence of the beneficiaries as employees of the Group since the grant date; ◗ 75% of the options granted will vest subject to the achievement of Group performance conditions. The options may be exercised from February 1, 2022 and for a period of five years until February 1, 2027. The maximum potential capital increase will be an overall nominal amount of €60,000, corresponding to 20,000 new shares with a par value of €3 each. At the meeting of December 18, 2019, the Board of Directors proceeded, pursuant to the authorization granted by the Combined General Meeting of June 29, 2017, and on the proposal of the Compensation Committee, to the allocation of 24,660 share subscription options in total, under Plan 19 ter to be confirmed depending on the choice given to beneficiaries to transform this allowance into free shares. The vesting of options granted under Plan 19 ter is subject to one condition: ◗ 100% based on continuous and effective presence of the beneficiaries as employees of the Group since the grant date. The options may be exercised from December 18, 2022 and for a period of five years December 18, 2027. The maximum potential capital increase will be an overall nominal amount of €73,980, corresponding to 24,660 new shares with a par value of €3 each. Exercise of share subscription options The Board of Directors has noted that the number of new shares issued as a result of the exercise of options during 2019 financial year amounted to 600 shares with a nominal value of €3 representing an increase in the share capital of the Company of an amount of €1,800, which increased from €18,053,676 to €18,055,476. Allocation of share purchase options No grant of share purchase options was made during 2019 financial year. 1 2 3 4 5 6 7 8 9 47 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS Summary table of share subscription and purchase option plans to employees and corporate officers Options to be granted(1) as at December 31, 2019 In share capital (%) Options granted(2) as at December 31, 2019 Exercise price (in €) In share capital (%) Options exercised as at December 31, 2019 In share capital (%) Subscription and purchase option plans No. 9 (SM 06/29/2006) No. 10 (SM 06/26/2012) No. 15 (SM 07/23/2013) No. 17 (SM 07/24/2014) 142,600 No. 18 (SM 07/21/2017) No. 19 (SM 07/18/2018) TOTAL 297,753 91,390 531,743 0 0 0 0 0 0 2.37 4.95 1.52 8.84 0 38,700 375 2,100 Total: 41,175 0 4,900 0 16,300 Total: 21,200 0 82,760 145,135 N/A 27.82 24.42 27.17 N/A 27.17 23.35 50.92 N/A 42.97 - 0 0.64 0.01 0.03 0 0.08 0.27 0 1.37 2.4 0 18,750 750 10,000 0 0.31 0.01 0.17 0 0 2,000 0.03 0 0 31,500 0 0.52 SM: Shareholders’ Meeting. (1) Options to be granted represent the difference between the number of stock-options authorized by the Shareholders’ Meeting and the number of stock-options granted by the Board of Directors as at December 31, 2019. (2) Options expired or cancelled resulting from an employee’s departure are deducted from the options granted as at December 31, 2019. / 2.4.2.1.9. Share subscription or purchase options granted to the top 10 non-corporate officers beneficiary employees and options exercised by them during financial year ended on December 31, 2019 (Table 9 of AMF nomenclature) Share subscription or purchase options granted to the top 10 non-corporate officers beneficiary employees and options exercised by them Options granted during the year to the ten employees of the Company and its Group which represent the largest number of options allocated Options held and exercised during the year by the ten employees of the Company and its Group which represent the largest number of options purchased or subscribed Total number of options granted: shares subscribed or purchased Weighted average price (in €) Plan No. 9,260 29.12 19Ter 600 27.82 10 48 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management / 2.4.2.1.10. History of free shares allocations (Table 10 of AMF nomenclature) Date of Shareholders’ Meeting Plan No. 6: 07/21/2016 Plan No. 7: 07/21/2016 Plan No. 8: 07/21/2016 Date of the Board of Directors’ meeting 07/21/2016 12/23/2016 08/01/2017 Number of shares allocated 25,000 2,275 9,000 Of which ◆ Alain de Rouvray, Chairman of the Board of Directors since February 1, 2019(1) ◆ Cristel de Rouvray, CEO ◆ Vincent Chaillou, Chief Operating Officer ◆ Christopher St John, Chief Operating Officer Date of delivery Term of vesting period Number of shares delivered Number of shares cancelled or expired Remaining shares as at January 31, 2019 N/A N/A 5,000 5,000 From 07/21/2018 From 07/21/2020 20,836 0 4,164 N/A N/A 0 0 12/23/2018 12/23/2020 1,962 313 0 N/A N/A 0 0 From 08/01/2019 From 08/01/2021 6,499 0 2,501 Plans No. 9, 9 bis, 9 ter, 9 qua, 9 quin, 9 sexies: 07/18/2018 07/18/2018 07/18/2019 12/18/2019 54,043 N/A N/A 2,520 2,520 From 07/18/2020 From 07/19/2022 0 507 53,534 (1) Following the dissociation of the functions of Chairman of the Board of Directors and CEO, Alain de Rouvray acts exclusively as Chairman of the Board of Directors as from February 1, 2019 (see section 2.2.1 of the Universal Registration Document). / 2.4.2.1.11. Summary table of benefits or advantages to executive corporate officers (Table 11 of AMF nomenclature) Executive corporate officers Alain de Rouvray Chairman of the Board of Directors Cristel de Rouvray CEO Vincent Chaillou Chief Operating Officer Christopher St John Chief Operating Officer Employment contract Supplemental pension plan Compensation or benefits due or likely to be due following termination or position change Yes No Yes No Yes No X X Suspended Suspended X X X X X X X X 49 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS / 2.4.2.1.12. Equity Ratio between the level of compensation of corporate officers and the average and median compensation of employees of the Company (Article L. 225-37-3 (6) and (7) of the French Commercial Code) Alain de Rouvray, Chairman and CEO until January 31, 2019 Compensation ratio compared to average compensation of employees Compensation ratio compared to the median compensation of employees Cristel de Rouvray, CEO since February 1, 2019 Compensation ratio compared to average compensation of employees Compensation ratio compared to the median compensation of employees Vincent Chaillou, Chief Operating Officer Compensation ratio compared to average compensation of employees Compensation ratio compared to the median compensation of employees Christopher St John, Chief Operating Officer Compensation ratio compared to average compensation of employees Compensation ratio compared to the median compensation of employees Evolution of sales (€M) 2019(1) 2018(2) 2017(2) 2016(2) 2015(3) 9.59 9.06 9.04 11.1 10.66 10.33 6.47 7.49 4.85 5.61 N/A N/A 3.79 4.46 4.18 4.02 4.83 146.2* 4.72 139.4 N/A N/A 3.97 4.53 3.99 4.56 135.3 9.92 11.72 N/A N/A 4.31 5.1 4.37 5.16 140.6 6.48 7.89 N/A N/A 3.56 4.33 3.09 3.76 124.7 (1) For 2019, calculation based on total fixed compensation and benefits in kind – due to the 11-month fiscal year, reconstitution of a prorata temporis over 12 months to maintain the comparability of the ratios presented. (2) For 2016 to 2018, calculation based on total fixed compensation and benefits in kind. (3) For 2015, calculation based on fixed compensation. The average and median compensation of employees was determined on the basis of the workforce of French entities. * 2019 sales proforma 12 months (January to December) to ensure data comparability. 50 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management / 2.4.2.1.13. Summary table of compensation to executive corporate officers The General Meeting to be held on June 25, 20120 will be called upon to approve the fixed, variable and exceptional components constituting the total compensation and benefits of all kinds paid or granted with respect to the financial year ended on December 31, 2019 to the corporate officers of ESI Group pursuant to Article L. 225-100 of the French Commercial Code. Compensation payable or granted for 2019 financial year to Alain de Rouvray, Chairman of the Board of Directors Components of the compensation Fixed compensation as for the mandate as director and Chairman of the Board of Directors Amount or accounting valuation submitted for approval (in €) 100,000 Other fixed compensation 433,600 Variable annual compensation Long term or deferred compensation Exceptional compensation N/A N/A N/A Stock-options and performance shares N/A Benefits in kind Severance pay Retirement compensation Non-compete compensation Supplementary retirement plan 0 N/A N/A N/A N/A Description Alain de Rouvray was paid €100,000 for his mandate as director and Chairman of the Board of Directors (vs. €10,000 in 2018). This increase was presented in the compensation policy approved by the general meeting of July 18, 2019 in accordance with the description under section 2.4.1.2 of the Company's 2018 registration document. This increase is explained by the reinforced role which contributes to the transformation of the Company and the evolution of governance. Alain de Rouvray’s fixed compensation due for his other mandates within the Group for 2019 financial year was 433,600 euros. No variable annual compensation payable to Alain de Rouvray for his mandate as Chairman of the Board of Directors and his other mandates exercised within the Group. No long term of deferred compensation was granted by the Board of Directors. No exceptional compensation was granted by the Board of Directors. No stock-options nor performance shares were granted by the Board of Directors. Alain de Rouvray does not receive an allowance for a company vehicle or accommodation. Alain de Rouvray is not a beneficiary of any severance pay. Alain de Rouvray is not a beneficiary of any retirement compensation. Alain de Rouvray is not a beneficiary any non-compete compensation. Alain de Rouvray is not a beneficiary of any supplementary retirement plan. 1 2 3 4 5 6 7 8 9 51 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS Compensation payable or granted for 2019 financial year to Cristel de Rouvray, Chief Executive Officer Components of the compensation Fixed compensation Amount or accounting valuation submitted for approval (in €) 290,210 Variable annual compensation 49,357 Description The fixed compensation payable to Cristel de Rouvray as Chief Executive Officer and for her other mandates exercised within the Group in respect of 2019 financial year amounts to €290,210. The amount of the variable annual compensation payable to Cristel de Rouvray is limited to 50% of his fixed compensation. It is subject to an assessment based exclusively on quantitative criteria related to the profitability of the Group. These objectives are set at the beginning of the year by the Board of Directors on the recommendation of the Compensation Committee. The variable compensation is assessed by the Board of Directors following the recommendation of the Compensation Committee at the end of the year. The variable compensation payable to Cristel de Rouvray as Chief Executive Officer with respect to 2019 financial year amounts to €49,367 which equals 31.5% of the maximum compensation. Long term or deferred compensation Exceptional compensation N/A N/A No long term of differed compensation was granted by the Board of Directors. No exceptional compensation was granted by the Board of Directors. Compensation for director’s mandate 10,000 Stock-options and performance shares 20,000 The compensation for her director’s mandate amounts to €10,000 for 2019 financial year. It amounted to €28,000 for 2018 financial year. At the meeting of February 1, 2019, the Board of Directors decided to allocate a maximum of 20,000 share subscription options subject to presence and performance conditions. Benefits in kind Severance pay Retirement compensation Non-compete compensation Supplementary retirement plan 9,843 The benefits in kind include an allowance for vehicle of €9,843. N/A N/A N/A N/A Cristel de Rouvray is not a beneficiary of any severance pay. Cristel de Rouvray is not a beneficiary of any retirement compensation. Cristel de Rouvray is not a beneficiary any non-compete compensation. Cristel de Rouvray is not a beneficiary of any supplementary retirement plan. 52 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management Compensation payable or granted for 2019 financial year to Vincent Chaillou, Chief Operating Officer Components of the compensation Fixed compensation Amount or accounting valuation submitted for approval (in €) 182,004 Variable annual compensation 37,800 Long term or deferred compensation N/A Exceptional compensation 40,000 Compensation for director’s mandate 6,000 Stock-options and performance shares 510 Description The fixed compensation payable to Vincent Chaillou as Chief Operating Officer in respect of 2019 financial year amounts to €182,004 (unchanged compared to 2018). The amount of the variable annual compensation payable to Vincent Chaillou is limited to 60% of his fixed compensation. It is subject to an assessment based exclusively on quantitative criteria related to the profitability of the Group. These objectives are set at the beginning of the year by the Board of Directors on the recommendation of the Compensation Committee. The variable compensation is assessed by the Board of Directors following the recommendation of the Compensation Committee at the end of the year. The variable compensation payable to Vincent Chaillou as Chief Operating Officer with respect to 2019 financial year amounts to €37,800 which equals 31.5% of the maximum compensation. No long term of differed compensation was granted by the Board of Directors. At the meeting of March 19, 2020, the Board of Directors decided to allocate an exceptional compensation of €40,000 for 2019 financial year. At the meeting of July 18, 2019, the Board of Directors decided to allocate an exceptional compensation of €40,000 for 2018 financial year. The compensation for his director’s mandate amounts to €6,000, this amount is unchanged compared to the 2018 financial year. At the meeting of December 18, 2019, the Board of Directors decided to allocate 510 free shares, subject exceptionally to a presence condition only. Benefits in kind Severance pay Retirement compensation Non-compete compensation Supplementary retirement plan 6,692 The benefits in kind include an allowance for vehicle of €6,692. N/A N/A N/A N/A Vincent Chaillou is not a beneficiary of any severance pay. Vincent Chaillou is not a beneficiary of any retirement compensation. Vincent Chaillou is not a beneficiary any non-compete compensation. Vincent Chaillou is not a beneficiary of any supplementary retirement plan . 1 2 3 4 5 6 7 8 9 53 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management CONTENTS Compensation payable or granted for 2019 financial year to Christopher St John, Chief Operating Officer Components of the compensation Fixed compensation Amount or accounting valuation submitted for approval (in €) 162,846 Variable annual compensation 34,650 Long term or deferred compensation N/A Exceptional compensation Compensation for director’s mandate Stock-options and performance shares Benefits in kind Severance pay Retirement plan Non-compete compensation Supplementary retirement plan 33,616 N/A 510 3,180 N/A N/A N/A N/A Description The fixed compensation payable to Christopher St John as Chief Operating Officer in respect of 2019 financial year amounts to €162,846 (unchanged compared to 2018). The amount of the variable annual compensation payable to Christopher St John is limited to 60% of his fixed compensation. It is subject to an assessment based exclusively on quantitative criteria related to the profitability of the Group. These objectives are set at the beginning of the year by the Board of Directors on the recommendation of the Compensation Committee. The variable compensation is assessed by the Board of Directors following the recommendation of the Compensation Committee at the end of the year. The variable compensation payable to Christopher St John as Chief Operating Officer with respect to 2019 financial year amounts to €34,650 which equals 31.5% of the maximum compensation. No long term of differed compensation was granted by the Board of Directors. An exceptional compensation was granted by the Board of Directors on March 19, 2020. Christopher St John is not a member of the Board of Directors. At the meeting of December 18, 2019, the Board of Directors decided to allocate 510 free shares, subject exceptionally to a presence condition only. The benefits in kind include a housing allowance of €3,180. Christopher St John is not a beneficiary of any severance pay. Christopher St John is not a beneficiary of any retirement compensation. Christopher St John is not a beneficiary any non-compete compensation. Christopher St John is not a beneficiary of any supplementary retirement plan. 2.4.2.2. Chief Executive Officer and Chief Operating Officers’ remuneration policy applicable in 2020 financial year In accordance with Article L. 225-37-2 of the French Commercial Code, the principles and criteria of definition and allocation of the fixed, variable, exceptional components of the total remuneration as well as benefits in kind payable to the Chief Executive Officer and the Chief Operating Officers (the “executive corporate officer(s)” ) for 2020 financial year are presented below and will be subject to the approval of the Shareholders’ Meeting to be held on June 25, 2020 (see section 2.4.2.3 below for the draft resolutions). The remuneration policy applicable to the Chairman of the Board of Directors is presented under section 2.4.1.2 above. / Principles of remuneration policy The principles and criteria governing the remuneration policy of the executive corporate officers and amounts were determined by the Board of Directors upon the recommendation of the Compensation Committee during its meeting dated March 18, 2020. This remuneration policy has been established in accordance with the principles of completeness, balance between the elements of remuneration, benchmark, consistency, readability of the rules, measurement and transparency (R.13) such as defined in the Middlenext Code. Lastly, this remuneration policy must remain consistent with the Company’s performance, while ensuring that the objectives of the executives are aligned with the Company’s medium-term strategy and take into account the interests of Shareholders. 54 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Compensation paid to the Directors and the management / Remuneration structure The Chief Executive Officer’s remuneration is structured as follows: ◗ a fixed annual part determined based on the level and complexity of responsibilities, experience in the position and length of service in the Group, as well as practices observed in groups or companies of similar size; ◗ a variable annual part representing a target ratio of 50% of the fixed remuneration: it is subject to an assessment based exclusively on quantitative criteria related to the profitability of the Group. These objectives are set at the beginning of the year by the Board of Directors on the recommendation of the Compensation Committee. The variable compensation is assessed by the Board of Directors following the recommendation of the Compensation Committee at the end of the year. In accordance with Article L. 225-100 of the French Commercial Code, the payment of variable or exceptional remuneration is subject to the prior approval of this remuneration by the Shareholders’ Meeting. The compensation structure for the Chief Operating Officers consists of: ◗ a fixed annual part determined by taking into account the level and difficulty of responsibilities, experience in the function, seniority in the Group, and practices in groups or companies of comparable size; ◗ a variable annual part representing a target ratio of 60% of the fixed remuneration: it is subject to an evaluation based exclusively on quantitative criteria related to the profitability of the Group. These objectives are set at the beginning of the year by the Board of Directors on the recommendation of the Compensation Committee. The variable compensation is assessed by the Board of Directors following the recommendation of the Compensation Committee at the end of the year. In accordance with Article L. 225-100 of the French Commercial Code, the payment of variable or exceptional remuneration is subject to the prior approval of this remuneration by the Shareholders’ Meeting. Long term share-based compensation The Group has defined its long-term compensation policy in a global competitive strategy of loyalty and motivation of its managers and employees with regard to market practices. Each long-term compensation plan is subject to the decision of the Board of Directors acting in accordance with the authorization of the Shareholders’ Meeting. Executive corporate officers can benefit from stock option plans and free share plans offered as part of the Group’s loyalty and motivation policy. The conditions for acquiring and holding these plans apply in the same way to all beneficiaries, whether corporate officers or not. For stock option plans and free shares for the benefit of the Chief Operating Officers, please refer to the tables in section 2.4.2.1.4 onwards. Benefits in kind Benefits in kind include a Company car or equivalent allowance. Exceptional compensation Very specific circumstances (for example because of their importance for the Company, the involvement they require and the difficulties they represent) could give rise to exceptional remuneration granted to executive corporate officers. The award of such remuneration would be exceptional, motivated and justified by the Board. Its payment would be subject to the approval of the Shareholders’ Meeting. Other components of the executive corporate officers’ compensation Severance pay No executive corporate officer of the Company receives severance pay. Non-compete clause No executive corporate officer has a non-compete clause in his corporate office. Supplementary pension plan No executive corporate officer has a supplementary pension plan other than mandatory pension plans. Health benefits and reimbursement scheme The executive corporate officers of the Company benefit from the pension plan and reimbursement of health expenses applicable to all employees. Non-combination of employment contract and corporate office At the time of appointment to the position of executive corporate officer, it is decided to suspend any existing employment contract with the Company for the duration of the office. As of the date of this Universal Registration Document, there is no employment contract between the Chief Executive Officer and the Company and the employment contracts of the Chief Operating Officers with the Company have been suspended for the duration of their terms of office. 2.4.2.3. Draft resolutions of the Board of Directors pursuant to Article L. 225-37-2 of the French Commercial Code submitted to the approval of the Combined Shareholders’ Meeting of June 25, 2020 Pursuant to Article L. 225-37-2 of the French Commercial Code, the Board of Directors submits for the approval of the Combined General Meeting of June 25, 2020, the principles and criteria for the determination, distribution and allocation of the fixed, variable and exceptional components of total compensation and benefits of any kind attributable to executive corporate officers, see below draft resolutions No. 7, 8, 9 and 10: / Resolution No. 7 The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to members of the Board of Directors for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.1.2 of the 2019 Universal Registration Document. 1 2 3 4 5 6 7 8 9 55 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Additional information in respect of corporate governance CONTENTS / Resolution No. 8 / Resolution No. 10 The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chairman of the Board of Directors for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.1.2 of the 2019 Universal Registration Document. The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chief Operating Officers for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.2.2 of the 2019 Universal Registration Document. / Resolution No. 9 The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chief Executive Officer for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.2.2 of the 2019 Universal Registration Document. 2.5. ADDITIONAL INFORMATION IN RESPECT OF CORPORATE gOvERNANCE 2.5.1. REgULATED AgREEMENTS AND COMMITMENTS AND RELATED PARTY TRANSACTIONS 2.5.1.1. Regulated agreements and commitments The Statutory Auditors’ special report on the regulated agreements and commitments referred to in Articles L. 225-38 et seq. of the French Commercial Code for 2019 financial year is set out under section 2.6 below. To the best of the Company’s knowledge, there are no other agreements and regulated commitments. 2.5.2. DELEgATIONS OF AUTHORITY At the date of this Universal Registration Document, the Company’s share capital amounted to €18,055,476. It was divided into 6,018,492 shares with a nominal value of €3 each, all of the same class, fully paid up. 2.5.1.2. Transactions with related parties Details of transactions with related parties can be found in note 11 to the consolidated financial statements in Chapter 6 of this Universal Registration Document. Apart from the share subscription or purchase option plans and the allocation of bonus shares described in section 2.4.2.1.8, there is no financial instrument to access the Company’s share capital. 56 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Additional information in respect of corporate governance Table summarizing currently valid delegations granted to the Board of Directors and use of such delegations during 2019 financial year Resolution number Purpose Term Expiration date Maximum Combined General Meeting of June 29, 2017 Resolution 10 Grant of stock subscription options(1) 38 months August 2020 Resolution 11 Grant of stock purchase options(1) 38 months August 2020 Not to exceed 3% of the Company’s share capital at the date of the Combined General Meeting, i.e. 180,000 shares Not to exceed 5% of the Company’s share capital at the date of the Combined General Meeting, i.e. 299,600 shares Used in 2019 and available as at December 31, 2019 Options granted at the date of this Universal Registration Document: 88,610 Options remaining: 91,390 Options granted at the date of this Universal Registration Document: 0 Options remaining: 299,600 Combined General Meeting of July 18, 2018 Resolution 13 Resolution 14 Share capital reduction by canceling shares purchased by the Company under Article L. 225-209 of the French Commercial Code(1) Grant of free shares to eligible employees and executive corporate officers of the Company and affiliated companies(1) 26 months September 2020 Not to exceed 10% of the Company’s share capital per 24-month period None 38 months September 2021 Not to exceed 60,000 shares representing 1% of the share capital as of the date of the Combined General Meeting Free shares granted during the year 2019: 54,043 Free shares to be allocated: 5,957 Combined General Meeting of July 18, 2019 Resolution 14 Company’s purchase of its own shares(1) 18 months January 2021 Resolution 15 Resolution 16 Resolution 17 Increase of the share capital via the issue of shares of common stock or any securities convertible into equity with maintenance of the shareholders’ preferential subscription rights Increase of the share 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 Increase of the issue amount in the event of over-demand 26 months September 2021 26 months September 2021 None None None Not to exceed 10% of the Company’s share capital Global amount of capital increases: less than €20,000,000 Nominal amount of the debt securities: less than €300,000,000 Global amount of capital increases: less than €20,000,000 Nominal amount of the debt securities: less than €300,000,000 26 months September 2021 Not to exceed 15% of the value of the original issue (referred to in resolutions 15 and 16), and the total ceiling of €20,000,000 None 57 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Additional information in respect of corporate governance CONTENTS Resolution number Resolution 18 Purpose Increase of the share capital by the capitalization of premiums, reserves, profits and other amounts Term 26 months Expiration date September 2021 Used in 2019 and available as at December 31, 2019 None None Maximum Not to exceed the total amount of reserves, premiums and profits existing at the time of the capital increase or a ceiling of €100,000 (that might be reduced to the amount of capital increases undertaken pursuant to resolutions 15 to 20) Not to exceed 10% of the Company’s share capital, and the total ceiling of €20,000,000 26 months September 2021 Resolution 19 Resolution 20 Resolution 21 Issue of shares without preferential subscription rights as compensation for contributions of shares equivalents granted to the Company as part of a contribution in kind Increase of the share capital without preferential subscription rights through private placement Increase of the share capital by issuing shares reserved for employees enrolled in the employee savings plan 26 months September 2021 Not to exceed 20% of the Company’s share capital, and the total ceiling of €20,000,000 None 26 months September 2021 Not to exceed 2% of the Company’s share capital None (1) Renewal of the delegation submitted to the vote of the Shareholders’ Meeting on June 25, 2020. 2.5.3. PROvISIONS OF THE ARTICLES OF ASSOCIATION CONCERNINg THE PARTICIPATION OF SHAREHOLDERS IN gENERAL MEETINgS 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 Ordinary or Extraordinary General Meetings. The procedures for convening and holding General Meetings are governed by French law. Meetings are held at the head office or at any other location indicated in the Meeting notice. Ordinary General Meetings are convened to make all decisions that do not require amendments to the articles of association. They occur at least once a year, within six months from the end of the previous financial year. Only Extraordinary General Meetings have the power to amend any provision set forth in the articles of association. However, such Meetings may not increase the obligations of shareholders, except in the event of transactions stemming from any valid consolidation of shares. If there are multiple categories of shares, the rights attached to the shares of a certain category may not be changed without the approval of an Extraordinary General 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 telecom- munication or transmission, or by returning the mail-in ballot or designating a proxy. The right to attend or be represented at the General Meeting is subject to shares being recorded for accounting purposes 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 authorized intermediary. A participation certificate must be established by the authorized 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 shareholder. In accordance with the conditions set forth above, the legal representatives of shareholders deemed legally incompetent and individuals representing legal persons that hold shares in the Company may take part in General Meetings, regardless of whether or not they are shareholders 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 attendance sheet must be duly signed by the shareholders present and by the proxies and must be certified as accurate by the officers of the Meeting. 58 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS REPORT ON CORPORATE gOvERNANCE Additional information in respect of corporate governance 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 represent the largest number of shares, either on their own behalf or as proxies, are appointed to serve as scrutineers, provided that they accept the responsibility. The officers of the Meeting, thus designated, are responsible for appointing a secretary who need not be a shareholder. 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 conduct business unless the shareholders present or represented account for at least one-fourth of shares with voting rights when first convened, and one-fifth 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 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 convened, 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. 2.5.4. FACTORS THAT MAY HAvE AN IMPACT IN THE EvENT OF A PUBLIC OFFERINg Pursuant to Article L. 225-37-5 of the French Commercial Code, the following points are likely to have an impact on the public offering: ◗ voting rights attached to ESI shares with regard to the employee savings plan are exercised by the ESI FCPE; ◗ the structure of the share capital as well as direct or indirect investments of which the Company is aware and all such informa- tion is included in section 8.2.4 of this Universal Registration Document under the heading “Change in the breakdown of the Company’s share capital over the past three financial years”; ◗ there are no statutory restrictions on the exercise of voting ◗ 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, current authorizations are described in the table summarizing powers delegated with regard to share redemption and capital increases in section 2.5.2 of this Universal Registration Document; 1 2 3 4 rights and share transfers; ◗ to the Company’s knowledge, there are no agreements or other commitments signed by the shareholders other than those mentioned in section 8.2.4 of this Universal Registration Document under the heading “Shareholders’ agreements”; ◗ 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 section 8.1.2 of this Universal Registration Document under the heading “Double voting rights (Article 9 of the articles of association)”; ◗ there are no restrictions in the bylaws on the exercise of voting rights and the transfer of shares; ◗ any amendments to ESI Group’s articles of association are made in accordance with legal requirements and regulations; 5 ◗ there are no agreements entered into by the Company that are modified or terminated in the event of a change of control of the Company other than the syndicated loan agreement presented in Chapter 6, notes 7.1.2 and 7.4 of this Universal Registration Document; ◗ there are no agreements providing for compensation in the event of the departure of members of the Board of Directors. 6 7 8 9 59 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT22 REPORT ON CORPORATE gOvERNANCE Statutory Auditors’ report on regulated agreements and commitments CONTENTS 2.6. STATUTORY AUDITORS’ REPORT ON REgULATED AgREEMENTS AND COMMITMENTS 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 accordance with, French law and professional auditing standards applicable in France. (Annual General Meeting for the approval of the financial statements for the year ended December 31, 2019) To the shareholders, In our capacity as Statutory Auditors of your Company, 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 imple- mentation during the past fiscal year of any agreements and commitments previously approved by the Shareholders’ General Meeting. We conducted the procedures we deemed necessary in accordance with the professional guidelines of the French National 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 documents. AgREEMENTS AND COMMITMENTS SUBMITTED FOR THE APPROvAL OF THE SHAREHOLDERS’ MEETINg Agreements and commitments authorized and agreed during the fiscal year Pursuant to Article L. 225-28 of the French Commercial Code, we have not been advised of any agreement authorized and concluded during the fiscal year to submit for approval to the Shareholders’ Meeting. AgREEMENTS AND COMMITMENTS ALREADY APPROvED BY THE SHAREHOLDERS’ MEETINg Agreements and commitments authorized during previous fiscal year We have been informed of the execution during the fiscal year of the following agreement and commitment, already approved by the Shareholders’ Meeting of July 18, 2019 pursuant to the special report of the statutory accounts dated May 22, 2019: / Pledge agreements among which in particular a pledge of all the shares that the Company holds or will hold in the share capital of ESI ITI GmbH Terms and conditions The Board of Directors in its meeting dated December 19, 2018, authorized the signing by the Company of pledge agreements, among which in particular the pledge of all the shares that the Company holds or will hold in the share capital of ESI ITI GmbH, to guarantee its obligations of reimbursement and payment under the syndicated loan agreed on December 20, 2018 under which the Company obtained (i) a facility of up to a maximum amount of €30,000,000 (ii) a revolving credit facility with a maximum principal amount of €10,000,000, and (iii) to authorize the establishment of an unconfirmed revolving credit facility of a maximum principal amount of €5,000,000. Persons concerned ◗ Vincent Chaillou, ESI Group Director and COO and Managing Director of ESI ITI GmbH; and ◗ Christopher St John, ESI Group Director and COO and Managing Director of ESI ITI GmbH, a Company’s subsidiary. Reason justifying the Company’s interest These security agreements condition the signing of the syndicated loan agreement as described above and thus allow the Company to finance itself. Neuilly-sur-Seine and Paris-La Défense, April 23, 2020 The Statutory Auditors PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau 60 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 3 RISKS AND RISK MANAGEMENT 3.1. RISK FACTORS AND OPPORTUNITIES 3.1.1. Risk analysis and evaluation method 3.1.2. Strategic and operational risks 3.1.3. Opportunities 3.2. INTERNAL CONTROL AND RISK MANAGEMENT PROCEDURES 3.2.1. Control environment 3.2.2. Internal control organization 3.2.3. Risk management 62 62 62 64 65 65 67 68 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 61 61 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT3 Risks and Risk management Risk factors and opportunities CONTENTS 3.1. Risk FaCtORs and OPPORtUnities The Group has reviewed the major risks and opportunities that could have a significant effect on its business, financial position or results. The data presented below constitute the main strategic and operational risks for the Group. Non-specific risks are not detailed in this document. 3.1.1. Risk anaLYsis and eVaLUatiOn metHOd ESI’s risk management system is organized in 5 stages, according to the methodology described below: STAGE 1 Context & Risk Identiﬁcation STAGE 5 Risk Monitoring & lifecycle control STAGE 2 Risk Analysis STAGE 4 Risk Mitigation STAGE 3 Risk Assessment The risks listed on the following pages have been assessed (Stage 2 and 3) in relation to their occurrence and their impact on ESI’s activity. The combination of these two criteria makes it possible to identify what is known as the “exposure level”, which then implies the implementation of measures to control these risks (Stage 4). In each category, risk factors are ranked in descending order of importance, considering the probability of their materialization and the estimated magnitude of their impact and after taking into account the mitigation measures already implemented by ESI. 3.1.2. stRategiC and OPeRatiOnaL Risks 3.1.2.1. Competition (competitive edge) 3.1.2.2. Management of key personnel Recent movements in the Virtual Prototyping market with acquisitions and concentration of competitors could be perceived as a risk given the economic and/or technological power of large groups. Impact: a strong consolidation of the sector or a reduction in the Group’s scientific leadership could lead to a loss of market share. Exposure level: high. Mitigation actions: the specific nature of ESI Group’s business and its unique positioning in the Virtual Prototyping field make it very difficult to attempt to precisely define its market. The complexity of the problems on which the Group focuses, the long experience it has acquired by working in close partnership with the largest industrial, its significant investments in research and development, the wide range of solutions it offers and the many acquisitions it has made over the years are all barriers for any newcomer who would like to enter its market. The capacity for innovation is one of the major pillars of the ESI Group’s competitiveness, particularly through the launch of high added-value solutions for customers, based on a special ecosystem allowing the active participation of all R&D players, in coordination with the Scientific Department and its Committee. Also, ESI has implemented steering and governance systems to take advantage of our sources of innovation (ecosystem) in order to ensure a better market launch. The expertise and experience of key personnel are currently being 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 attract, retain, and motivate quality employees, with a constant focus on aligning skills with the Group’s needs and challenges. The ever-increasing volatility of skills in the technology sector, particularly due to the changing expectations of the new generation of candidates, poses a risk of a lack of key skills for the concerned business areas. Impact: the non-access or disappearance of certain internal knowledge on specific areas could represent a challenge to maintain the necessary pace of innovation demanded by the market. Exposure level: high. Mitigation actions: ESI has implemented a retention and loyalty policy, by setting up employee shareholding plans (stock options and free shares) and talent development plans. No employee is the sole owner of a code or know-how that is not shared with its teams. The ecosystem created by ESI Group enables it to have access to human resources requirements to ensure the continuity of the knowledge required to manage future innovations. 62 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS Risks and Risk management Risk factors and opportunities 3.1.2.3. Intellectual property Due to the nature of the high added-value activities resulting from ESI’s ecosystem experience, the company is completely dependent on its software, which is its main asset to guarantee a source of income and continuous growth. Despite the implementation of protection systems (patents, trademarks, copyrights, etc.), the company may be exposed to risks such as counterfeiting/piracy of specific products by individuals or companies, claims to intellectual property rights, fraudulent use of our technologies, etc. Impact: the loss of intellectual property of software and solutions would result in an automatic loss of turnover and the impossibility to guarantee and meet financial obligations towards stakeholders. Exposure level: high. Mitigation actions: below are the two main aspects of this risk category: / Counterfeiting of products marketed by the Group The passwords used to access the Group’s products are gener- ated by ESI Group regardless of how the software is distributed (distributors and agents) and are linked to the FlexNet Publisher software (formerly known as Flexlm), which represents the world standard for secure computer codes. In the event that a way around the FlexNet Publisher password is found, ESI Group also uses, for several products, a counterfeit detection tool together with a legal assistance service to prosecute counterfeiters. / 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 software products are, broadly speaking, either developed within the Group or acquired through mergers or acquisitions. In rare cases, they are the result of development contracts signed with third parties. As for the codes developed in-house, the Group’s subsidiaries retain ownership of the intellectual property under the employment 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. For software code acquired through an external growth operation, an intellectual property audit is conducted beforehand starting with the analysis of local intellectual property laws. Furthermore, acquisition agreements always include warranties of title. This particularly allows the Company to avoid buying an empty shell or software code with too many strings 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 transfer is not used. 3.1.2.4. International economic and political environment The global economic, commercial, and social as well as geo-political context may influence the Group’s results and revenue growth. In particular, the economic context and limited visibility may have an impact on customer investments and lead to lengthened sales cycles. Impact: global economic tensions, including those between the USA and China, could impact the Group’s growth. This could lead to the implementation of protection policies in certain areas that would slow down the deployment of the Company’s solutions. Exposure level: important. Mitigation action: the Group’s presence in many countries protects it from the adverse effects of unfavorable local economic conditions. Special point related to the coronavirus (COVID-19) outbreak: In the short-term, the disastrous coronavirus pandemic is expected to somewhat impact our 2020 Fiscal year. However, the resilience of ESI’s business model largely anchored on renewable and mission critical software licenses will help the Company to manage risks. 3.1.2.5. Dependence on a single client or sector Most of ESI subsidiaries are confronted with the reality of managing a “major customer” with a significant weight in terms of turnover and growth. These customers are generally part of the Ground Transportation sector. Impact: the Ground Transportation sector alone accounts for 59% of order intake. Exposure level: important. Mitigation actions: the Group’s intention is to be totally independent, both geographically and by sector. To this end, the Group has defined 4 main business sectors to reduce the impact of dependence on a single industrial sector, which are the subject of a dedicated strategic plan combined with a business development plan. 3.1.2.6. Information security ESI Group’s value chain, which includes R&D, Design, Development, Validation, Services and Delivery of our software and solutions, relies heavily on an IT infrastructure that is of paramount importance in the processing, transmission and storage of data related to internal and external operations. Every day, the company processes a significant amount of sensitive data transmitted by our customers for the realization of projects and the improvement of solutions. Given that “zero risk” does not exist, the company is aware that it is continuously exposed to computer attacks of all kinds (viruses, fraudulent e-mails, phishing, financial fraud, industrial espionage, etc.). 1 2 3 4 5 6 7 8 9 63 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT33 Risks and Risk management Risk factors and opportunities CONTENTS The General Data Protection Regulation (GDPR) adds to the landscape of legal requirements in this area. Impact: failure to comply with client requirements concerning the confidentiality, integrity and availability of information entrusted to the group could have negative consequences on long-term relationships with customers and on ESI’s reputation. Exposure level: important. Mitigation action: ESI is committed to implementing the requirements of the international standard ISO 27001 to set up an Information Security Management System (ISMS), based on appropriate risk management of its “assets”, to guarantee the Confidentiality, Integrity and Availability of information. In the same approach, and in order to take into account the specific requirements of the Automotive sector, ESI Group obtained TISAX (Trusted Information Security Assessment Exchange) certification in 2019 for ESI MECAS (Czech Republic) and ESI GmbH (Germany) and will be extended to ESI Hispania (Spain) in 2020. Based on an Information Security Management System (ISMS) close to ISO 27001, this certification is adapted to the requirements of the Automotive sector in order to secure the creation and exchanges between the different stakeholders. The Global Quality Management System (ISO 9001), which reached a coverage rate of 95.31% of employees in 2019, takes into account these requirements (TISAX, ISMS, GDPR) in order to integrate them into operational processes. Finally, to reduce this risk, the Company has set up a comprehensive cyber insurance coverage. 3.1.3. OPPORtUnities Technological changes and the ability to respond rapidly to clients’ needs ESI Group’s business is based on a wide knowledge and customer proximity that aims to meet clients’ innovation needs in the different industrial sectors suitable for implementing Virtual Prototyping. Nevertheless, to protect against the risk of disruptive technological 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-creation with the Group; Acquisitions and strategic investments / Acquisitions of assets and/or companies, and creations of joint-ventures or partnerships Since its creation, the Group has acquired companies or assets to complete its offer and to create business synergies. These acquisitions and strategic collaborations (joint venture with BIAM, Beijing Institute of Aeronautical Materials) enable the Group to have a unique positioning and to be at the cutting edge of technology. Established partnerships with industrial leaders and the best universities and technological institutes reinforce this positioning. ◗ academic partnerships providing access to the latest technological / Strategic investments information; ◗ distribution partnerships with key hardware and Cloud companies that offer advance access to the latest technologies. In addition, the Group takes part in innovation projects co-financed by European Union bodies, competitiveness clusters in France, and American research projects. Brought together, these projects enable ESI to produce increasingly innovative solutions in a timely manner. Research and development investments are the Group’s technological pillar. These investments are maintained at a high level since several years (approximately 31.4% of the Licenses revenues in 2019) to innovate, in particular with the development of new technologies such as Big Data or Artificial Intelligence. Also, these investments support the “PPL” (Product Performance LifecycleTM approach. Founded on the shift from the Virtual Prototype to the connected Hybrid TwinTM, the new solutions of the Group enable, for example, the predictive maintenance as well as the manufacturing and the assisted or autonomous driving. These solutions meet the challenges of the Industry 4.0 with a complete control of the product lifecycle, from its launch to its withdrawal, passing through the manufacturing of the new product and the operational monitoring of the used product which integrates the in-service damages and potential repairs. 64 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS Risks and Risk management Internal control and risk management procedures 3.2. inteRnaL COntROL and Risk management PROCedURes 3.2.1. COntROL enViROnment General organization Board Retreat ESI Group is a multinational corporation that includes 31 subsidiaries (the “subsidiaries”), 26 of which are based outside of France (December 2019). To ensure that business operations and management activities run efficiently, that objectives are met and that the Group’s control system is effective, executives are determined to harmonize the operational rules of the subsidiaries. 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 activities 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 regulations 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 sharing 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 following 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 various 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 finance; ◗ verifying that the accounting, financial and management information reported to corporate bodies, shareholders and third parties accurately reflects the Company’s position and the business situation. Internal control bodies / 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 initiatives to monitor the effectiveness of this system. This policy features a system of checks and procedures regarding financial management, as well as operational and compliance monitoring. group executive Committee The Group Executive Committee oversees the internal control policy. The Committee generally meets once a month. The Board Retreat takes place once a year to bring together 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 during 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 corporate governance bodies. The 2019 Board Retreat took place in July, and the 2020 meeting is also planned in July. Operational departments These departments primarily supervise business processes and manage projects. Their role is to oversee the implementation of procedures to guarantee: ◗ effective business processes: identification of business opportunities, distribution network, partnerships, responsiveness, assessment of potential economic benefits, negotiation and signing of contracts, profitability monitoring; ◗ effective project management: evaluation of technical feasibility, team management and leadership, compliance with specifications, customer satisfaction tracking and customer service. Functional departments The functional departments are responsible for formalizing internal control procedures in their respective areas and coordinating and applying these procedures. a) administration and Finance department The Administration and Finance Department handles the imple- mentation of the internal control policy on its financial level by: ◗ establishing the operating procedures for the internal financial control system; ◗ organizing financial control operations on different group activities, and their accurate transcription in group accounts, ensuring regulatory compliance. The Administration and Finance Department comprises the following units: ◗ Accounting and Consolidation, in charge of: • daily recording of transactions, • establishing periodic financial statements of each entity, • drawing up the Group’s consolidated financial statements, • ensuring compliance with legal, tax and labor obligations; ◗ Financial Control, in charge of: • preparing and monitoring the budget, • issuing periodic reports, • internal control on both operational and financial level; ◗ Cash management, in charge of: • managing cash flows, • project financing, • hedging currency and interest rate risks; ◗ Information Systems Department (ISD). 65 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT33 Risks and Risk management Internal control and risk management procedures CONTENTS b) Legal affairs department The Legal Affairs Department is divided into two branches: ◗ the Corporate Legal Affairs branch which is responsible for monitoring and streamlining procedures, as well as corporate legal intelligence and coordinating the legal aspects of the operations of Group subsidiaries; ◗ the Intellectual Property branch, which reviews, drafts and negotiates various contracts with clients and partners in the industry, government bodies and academic institutions to ensure that the Group’s intellectual 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 mergers and acquisitions (e.g. corporate audits, intellectual property audits, participation in acquisition agreement negotiations). c) Quality Control department Under the supervision of Executive Management, the Quality Control Department is responsible for implementing the quality control policy and the corresponding system, in keeping with Group strategy and the following four pillars: ◗ Organization and learning: with the global amplification of competencies of employees to develop talents, encourage leadership and collaborative management and with the promotion of ESI core values to leverage the “OneESI” culture; ◗ Internal processes: with a global Quality management to facilitate harmonization, develop a global risk management framework and ensure simplification of processes, that improve performance and effectiveness; ◗ Clients: meeting the business challenges of customer as they address the expectations of the Outcome Economy and the Industry 4.0, focusing on the Product Performance LifecycleTM through an account management policy and a value selling approach of our solutions; ◗ Profitability: an internal organization that reinforces the alignment between departments for continuous improvement in growth, profitability and sustainability (ROI). 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 considerations. ESI Group’s Human Resources policy has four main components: ◗ personnel management; ◗ performance management; ◗ compensation management; Performance management entails attracting, integrating, retaining and developing the highest level of performance for each employee and ensuring adherence to the Company’s strategy: ◗ recruitment: employment management, anticipating skill needs both qualitatively and quantitatively; ◗ performance evaluation: employee reviews, personal development plans, identifying potential, career planning and promotions; ◗ training: identifying needs, preparing a training plan and implementing in-house and external training courses; ◗ development: possibility of promoting employees internally, in management positions or in recognition of other skills, and possible mobility to positions in different departments or countries. 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 variable compensation; ◗ overseeing stock option, free share awards and company 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 reported by subsidiaries using HR-IS. Advising operational staff: fostering independence 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 implementation of these objectives in collaboration with a team of HR operating managers located in each country, and with support from the central HR Department. / Third-parties to the Company statutory auditors 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 include in their audit opinions recommendations regarding the internal control system used to prepare financial information. ◗ an advisory function for operational staff. Legal counsel Personnel management includes the following activities and initiatives: ◗ ensure compliance with all legal and regulatory requirements; The Company calls on renowned law firms for dispute management, as well as a tax advisory firm. The Company also calls on specialists from time to time to review the legal aspects of complex mergers and acquisitions. ◗ administer payroll and personnel files; ◗ oversee and manage labor relations; ◗ ensure that employment reporting is carried out and produce performance indicators; ◗ ensure that employees are kept properly informed; ◗ ensure that information is relayed to senior management; ◗ develop Group HR procedures. 66 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS Risks and Risk management Internal control and risk management procedures 3.2.2. inteRnaL COntROL ORganiZatiOn The increasingly international nature of the Group’s business and the cross-organizational character of its projects, involving international interactions of ever-greater complexity and speed, have highlighted the need for more rapid and efficient methods and operational management tools, both centrally and in the subsidiaries. In order to achieve this objective, the organization of the Administration and Finance Department has been structured to ensure a high-level of quality control and operations monitoring, meeting the level of requirements to support operational staff in the development of the activity, and to allow a reactivity adequate to the changes in the market in which the Group operates. The organization of the Administration and Finance Department is based on the following three pillars: ◗ a network of financial controllers located both centrally in group headquarters and locally in most of the Group’s subsidiaries; ◗ centralized tools and databases; ◗ processes to organize reporting and control of financial information. A network of financial controllers This network covers the monitoring and control of all financial operations within the Group, according to a dual organization: central financial controllers are dedicated to the functional monitoring of activities on a worldwide basis (e.g. monitoring of research and development activities, monitoring of commercial activities, etc.), while local financial controllers are dedicated to monitoring the scope of their subsidiaries and geographic coverage, by providing statutory financial information and reporting to central teams. All financial controllers report hierarchically and functionally to the Group Administration and Financial Department and to the Group Chief Financial Officer. Each local financial controller also reports operationally to his/her local manager (local entity manager), giving him/her access to information as close as possible to the operations. Interactions between the teams of local and central controllers enable information to be disseminated to ensure a good understanding of operations, and analyses to be carried out at several levels for better anticipation and more efficient piloting. The size of local financial teams depends on the size of the concerned entities. In large countries, controlling and accounting functions are performed by separate teams in charge of monitoring all subsidiaries in the country. In the case of smaller entities, local external accounting firms ensure the bookkeeping of transactions under the supervision of a financial controller dedicated to the geographic area. The management information system Financial control is based on a management IT system consisting of the following centralized tools and databases: ◗ a single sales database (SalesForce) serves as the backbone of the organization and internal control system for sales. This data flows into a single financial database (NCA) to determine monthly revenues and the backlog; ◗ an HR data management tool called HR-Information System (HR-IS base) allows for Group-level consolidation of data relating to salaries and headcount. This tool makes it possible to monitor the different steps in the hiring process and provide managers with any information necessary to optimize management of their teams. HR-IS data is included in the source information used for financial reporting regarding employees; ◗ a financial planning and analysis tool, Anaplan, that centralizes data for the entire group from sales ad HR single databases, as well as from management systems for research, development and consulting activities, in order to ensure complete reporting of all activities, and which also is a basis for the budget process; ◗ a financial consolidation tool, Talentia CPM, which enables the Company to centralize financial flows from the various accounting systems used in subsidiaries. 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. Main accounting and financial information monitoring processes The Group prepares consolidated financial statements on a quarterly basis. Its revenue is published on a quarterly basis, whereas full financial statements are published twice a year. A Group-wide budget is established at the beginning of each financial year and monitored monthly. / Consolidation process The process of preparing the consolidated financial statements follows procedures to centralize the accounting and financial data provided by each entity within the Group. These procedures include: ◗ a reporting schedule and calendar of tasks to be carried out by the persons involved; ◗ use of a specialized consolidation software; ◗ a distinction between preparation of consolidated financial information, performed by the consolidation team, and control activities performed by the central financial controllers and the Chief Financial Officer; ◗ assistance from accounting experts for some technical issues; ◗ a review of the half-year and yearly financial statements 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 financial year in accordance with the assumptions laid out the preceding year for the three-year business plan, and the five-year strategic objectives reviewed annually by senior management. Throughout the year, a monthly reporting serves to: ◗ monitor the budget to track the amount, nature and allocation of expenses compared to the current year’s budget; ◗ set out monthly forecasts used to predict results, initially for the first half year, and subsequently for the second half of the year. 1 2 3 4 5 6 7 8 9 67 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT33 Risks and Risk management Internal control and risk management procedures CONTENTS Financial Control thus provides key management indicators used to monitor the Company’s performance. These indicators, reported to executives, provide the information necessary for the piloting of the Company. They include, among other indicators: ◗ backlog in the Licensing and Service activities; ◗ production of the Services activity; ◗ evolution of headcount and average personnel costs; ◗ the cash position and cash forecast until the end of the current year and for next year at year-end. In conjunction with the budgeting and reporting process, the Company has implemented a structure based on Performance Units, each with a manager in charge of overseeing the unit based on key performance indicators (KPI) in a balanced scorecard format. These indicators cover four areas: financial, sales, internal processes, organization and learning. / Revenue recognition process The Finance Department is responsible for recognizing revenues and ensuring: ◗ downstream, through a periodic follow-up procedure suited to each client in order to reduce outstanding debt. Regular monitoring of average payment periods makes it possible to assess how effectively accounts receivable are managed across the various subsidiaries. / Cash management process The Chief 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 ongoing business needs while tracking inflows and outflows; ◗ profitability and the risk level of various cash surplus investments; ◗ foreign exchange risks, to take any necessary preventive action; ◗ implementation of loans necessary for growth of the Company. The cash position of each entity is centralized, when it is possible according to local regulations, and a consolidated monthly forecast is drawn up each month. ◗ the consistency between actual revenues and contractual data / Payroll management process about the Licensing revenue; ◗ the accuracy of billing information; ◗ the completeness of the services invoiced, primarily for the Services revenue. / Client risk management process The payroll process falls under the responsibility of the Human Resources Direction and involves: ◗ processing the various items involved in calculating salaries; ◗ entering payroll information in the accounting system; ◗ provisioning for paid vacation to distribute the expense over the full year; Client risk is managed at two different levels: ◗ ensuring compliance with labor-related reporting obligations. ◗ upstream, by assessing client risk before processing orders; 3.2.3. Risk management Process management and ISO 9001:2015 certification ESI Group has been ISO 9001-certified since the 2000’s and has always oriented its Quality approach to develop a worldwide certification for the entire Group, thereby aiming to align its business activities under the same operational criteria for all its subsidiaries. This approach has recently been supplemented by the transition to the 2015 version, which is an additional asset to strengthen process management and facilitate the implementation of risk management, thereby ensuring long term and effective prevention. Insurance and risk coverage – general information The Company has taken out an insurance policy that covers the cost of information recovery, additional operating costs and operating losses (loss of profit resulting from the decrease in revenues caused by the interruption or decline 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 liability” and/or “workers’ compensation” policies and automobile-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 accordance 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 and also a Group-wide international insurance policy to cover all employees who travel abroad. 68 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 4 STATEMENT ON EXTRA-FINANCIAL PERFORMANCE 4.1. ESI – THE PRODUCT PERFORMANCE LIFECYCLETM COMPANY 70 70 70 4.1.1. Value creation 4.1.2. ESI Group Values 4.2. ESI – A COMMITTED GROUP 71 4.2.1. Setting priorities: CSR framework 71 4.2.2. Evaluating sustainability challenges: materiality assessment 74 75 4.2.3. CSR distinctions 4.3. BEING A COMMITTED EMPLOYER 4.3.1. Developing talents and encouraging leadership and collaborative management 4.3.2. Promoting diversity and reducing inequalities 4.3.3. Contributing to the well-being of employees and ensuring the quality of working life 4.4. BEING AN OUTSTANDING PARTNER 4.4.1. Provide innovative solutions that meet our customers’ requirements 4.4.2. Ensure customer satisfaction and meet quality and safety requirements 4.4.3. Maintain long term, trust-based relationships with stakeholders and ecosystem 4.5. BEING AN ETHICAL AND COMMITTED COMPANY 4.5.1. Guarantee solid and diversified governance 4.5.2. Act ethically and responsibly – Ethics Charter 4.5.3. Set up initiatives to interact with civil society (give-back) 4.6. BEING AN ENVIRONMENTALLY FRIENDLY PLAYER 4.6.1. Develop sustainable solutions 4.6.2. Reduce the environmental impact of the Group 4.7. REPORTING 4.7.1. Reporting methodology 4.7.2. Report of the inspecting organization 76 76 78 80 82 82 83 84 84 84 84 86 87 87 88 91 91 92 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 69 69 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT4 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – The Product Performance LifecycleTM Company CONTENTS 4.1. ESI – THE pRODUCT pERFORMANCE LIFECYCLETM COMpANY This enriched software offer enables complete control of the lifecycle of an industrial product from its commissioning to its operational withdrawal. It also offers the possibility of anticipating possible developments during the lifecycle of the products while considering various contingencies such as defects, wear and tear maintenance operations, running-in of assisted piloting, etc. Henceforth, agile, smart and autonomous, virtual prototyping accompanies manufacturers in the era of the factory of the future and smart digital products. ESI designs, develops and distributes Virtual Prototyping software on the one hand, and, on the other hand, offers its customers access to consulting services associated with this software. The Group primarily targets customers operating in four sectors: Ground Transportation & Automotive, Aeronautics & Aerospace, Heavy Industry and Energy (for more details, see section 1.1.3 “Principal markets” of this document). Thus, the sustainability of the Group’s business model depends on its ability to understand the industrial and technical challenges of its customers, to simulate them thanks to the new possibilities offered by technology and, to do so, to rely on the talent of its employees and the confidence of its stakeholders. 4.1.1. VALUE CREATION The development of certain products requires significant testing phases to ensure their safety and integrity. Traditionally, companies have used physical prototypes to test these products and assess their ability to meet technical requirements. The production of these prototypes can be time-consuming and can require significant amounts of materials and energy. Furthermore, it is difficult to assess the effects of time on a physical prototype, since we cannot abstract from the physical constraints. The added value of ESI’s solutions make it possible to meet these challenges: by dematerializing the innovation process, these solutions allow customers to accurately assess and evaluate the performance of their prototypes, virtually. In addition, ESI’s solutions make it possible to simulate the consequences of time on their products, while making it possible to estimate the evolution of their performance during development and throughout their lifecycle. Hence, by means of ESI’s offer, customers have the information they need to develop products that meet exacting standards more quickly, in a more efficient way and with a lower environmental impact. 4.1.2. ESI GROUp VALUES ESI's values infuse this 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 45 years. These values – Passion, Global, Change, Trust, Social Responsibility and Energy – anchor the Group’s identity and fit logically together, as can be seen in the Corporate Social Responsibility actions defined as follows: 70 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – A committed Group 4.2. ESI – A COMMITTED GROUp 4.2.1. SETTING pRIORITIES: CSR FRAMEWORK Aware of its responsibility in each of the three pillars of sustainable development, ESI Group has gradually developed a Corporate Social Responsibility (CSR) policy that contributes to shared economic and social development and the preservation of human balance. ESI Group’s ambition is to become the leader in Virtual Prototyping, through a responsible innovation approach towards zero real tests, zero real prototypes and zero downtime. The Group thus intends to be its customers’ preferred development partner, capable of understanding and supporting them in their efforts to bring innovative, quality, sustainable, ethical and highly resource-efficient products to market. The Group has carried out a review of major risks and opportunities, including the main CSR and sustainability challenges that could have a significant impact on its business, financial position or results. In addition, ESI has developed its first materiality matrix to visualize its various priority challenges and their impact on the Company and its main stakeholders. For more details, please refer to Chapter 3 “Risks and Risk Management” and the following section of this chapter. ESI’s CSR strategy, which is divided into four axes and cascaded into eleven (11) commitments, aims to continue ensuring harmonious working conditions for its employees, to provide its customers with innovative solutions enabling them to become long-term partners, and to limit the environmental footprint of the Group and its customers while acting ethically and responsibly within civil society. Through its activities, ESI Group has a very limited impact on the fight against food waste, food insecurity, respect for animal welfare, and the promotion of responsible, fair and sustainable food. 1 2 3 4 5 6 7 8 9 71 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – A committed Group CONTENTS ESI GROUp’S CSR AppROACH Our CSR approach is aligned with our business strategy and contributes to the achievement of our strategic objectives. It enables us to create social and economic value for our key stakeholders: employees, customers, society and planet. SUSTAINABILITY CHALLENGES The Group’s success is highly related to its commitment, talents and the ingenuity of its employees who design, develop and market solutions that aim to constantly meet customers’ needs. Our customers need to manage many parameters, efficiently and more quickly, in order to optimize the performance of their operations and products. Facing this growing complexity, we provide them with solutions enhancing their competitive advantage. The social acceptability of our operations is essential. Therefore, the Group ensures the integrity of its ethics and the robustness of its corporate governance. This enables us to ensure the sustainability of our business model. COMMITMENTS BEING A COMMITTED EMPLOYER Develop talents and encourage leadership and collaborative management Promote diversity and multicultural exchanges Contribute to the well-being of employees BEING AN OUTSTANDING PARTNER Provide innovative solutions that meet customers’ requirements Ensure customer satisfaction and meet quality and safety requirements Maintain long term, trust-based relationships with stakeholders and ecosystem BEING AN ETHICAL AND COMMITTED COMPANY Guarantee solid and diversified governance Act ethically and responsibly Set up initiatives to interact with civil society (give-back) While our business sector has an impact on the environment, our services help to reduce the environmental footprint of our customers’ business. Therefore, to increase the positive impact of our business, we’re committed to limiting the impact of our operations as much as possible. BEING AN ENVIRONMENTALLY FRIENDLY PLAYER Develop sustainable solutions Reduce the environmental impact of the Group EMPLOYEES CUSTOMERS CIVIL SOCIETY PLANET 72 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – A committed Group 2019 PERFORMANCE +1,200 EMPLOYEES, SERVING OUR CUSTOMERS WORLDWIDE 3 “WELCOME DAYS” ORGANIZED AROUND THE WORLD TO INTEGRATE NEW EMPLOYEES WE DEVOTED 8,125 HOURS TO PROFESSIONAL TRAININGS WE HAVE SUCCESSFULLY MANAGED 1 ALERT LINKED TO DISCRIMINATORY PRACTICES BEING AN ETHICAL AND COMMITTED COMPANY WE ARE CURRENTLY WORKING ON 20 R&D PROJECTS WE HAVE DEDICATED 31.4% OF OUR LICENSES REVENUE TO OUR RESEARCH EFFORTS WE RELY ON 2 LOCAL SCIENTIFIC COMMITTEES AND 1 SCIENTIFIC COMMITTEE AT GROUP LEVEL WE HAVE ORGANIZED +250 EVENTS FOR OUR CUSTOMERS WE HAVE CONDUCTED 5 ANALYSES FOLLOWING CUSTOMERS’ COMPLAINTS WE MANAGED 1 INCIDENT RELATED TO OUR DATA SECURITY 1 ALERT HAS BEEN HANDED TO OUR ETHICS COMMITTEE WE’RE INSTALLING ECO-RESPONSIBLE EQUIPMENT TO LIMIT OUR ENERGY CONSUMPTION LOCAL AND ON-DEMAND DOCUMENTS PRINTING ENABLED US TO AVOID DELIVERY DISTANCES OF 1,954,376 KM (1) PAPER CONSUMPTION PER EMPLOYEE DECREASED BY 15% (2) (1) Since the adoption of the Gelato printing solution in May 2018. (2) 2019 internal data, including all the countries of the environmental study’s scope, representing 99% of the Group's total workforce. 73 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – A committed Group CONTENTS 4.2.2. EVALUATING SUSTAINABILITY CHALLENGES: MATERIALITY ASSESSMENT In line with ESI’s commitment to ensuring responsible and sustainable business, while giving priority to issues that have the greatest impact on the economy, society, planet and governance, and that most influence stakeholders’ decision-making, a first version of ESI’s materiality matrix has been developed in 2019. This matrix represents a key tool in the execution of the corporate strategy. It enables priorities to be defined according to their importance for internal and external stakeholders and their impact on ESI’s performance. Materiality methodology / 1. Identification The preparation of this matrix first involves the identification and preliminary assessment of various risk and opportunity factors for ESI in terms of sustainable development. In addition to a consultation of existing documentation and a benchmark of other companies operating in the same sector, the assessment is essentially based on key parameters of reporting frameworks (SASB standards, GRI standards, the European directive on extra-financial reporting), in perspective with the Sustainable Development Goals (SDGs) defined by the United Nations Global Compact, to which ESI contributes through its activities and its CSR approach. / 2. Evaluation and prioritization The objective of this step is to rank and assess the various challenges identified in the first step according to their potential impact on the business and their importance to stakeholders. For the preparation of this first materiality matrix, a workshop was organized with an internal staff representing the following departments: Executive Committee (GEC), Finance & Administration, Human Resources, Corporate Communication, Research & Innovation, Quality, Sales and IT. The latter are directly and/or indirectly concerned by the examinated challenges and are in interaction with all ESI’s stakeholders. Eleven (11) key issues have been identified and confronted with the concerns of ESI’s internal and external stakeholders on a scale of 0 to 4, by answering the following questions: ◗ What is the issue’s potential level of impact on ESI Group (economic, social and environmental impact)? ◗ What is the level of influence of the issue on the decisions of external stakeholders? These challenges were then positioned in a matrix, the axes of which are represented by the two questions above. / 3. Validation This step aims to verify that the results are well aligned with the Company’s strategy and values. The matrix is therefore adjusted and validated by the members of the Company’s general management. Finally, the matrix followed an internal validation process and was reviewed by an external consultant. The Sustainable Development Goals of the United Nations Global Compact, which are important for ESI and to which the Group contributes As will be detailed below, the Group’s CSR challenges and commitments are strongly linked to the following Sustainable Development Goals. 74 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE ESI – A committed Group ESI Group’s materiality matrix EMPLOYEES CUSTOMERS CIVIL SOCIETY PLANET S R E D L O H E K A T S L A N R E T X E N O T C A P M I 4 3 2 1 0 CRITICAL IMPACT Customer satisfaction Develop talents and encourage leadership Ensure long-lasting relations Develop solutions that reduce the customer’s environmental footprint Develop high value-added solutions Ethics and compliance IMPORTANT IMPACT Quality of work life Corporate governance Promote diversity Reduce the environmental impact of the Group Interact with civil sociéty (give-back) MODERATE IMPACT 1 2 IMPACT ON ESI’S PERFORMANCE 3 4 Understanding the materiality results In the materiality matrix above, ESI’s sustainable issues are divided into three distinct sections/areas, allowing a better understanding of the impact of each challenge and its importance to ESI’s stakeholders, both internally and externally. ◗ The “Critical Impact” section contains ESI’s six (6) priority issues, which are closely linked to the evolution of the Company’s business model and its positioning regarding its external stakeholders. Thus, these issues reflect the Company’s strategic priorities, in particular the development of innovative and responsible solutions to deal with technological change and meet customer requirements, while maintaining long-term and trusted relationships with customers, while relying on the experience-talent of employees and acting ethically and responsibly towards civil society. ◗ The “Important Impact” section includes four (4) major issues, mainly related to the quality of working life, ESI’s corporate governance and the Group’s environmental impact. In fact, ESI considers that the well-being of its employees has a significant impact on their efficiency and on the Company’s performance, both internally and externally. In addition, being a committed company also means ensuring solid and diversified governance, which has a direct impact on the Company’s performance and internal management. Finally, one of the Group’s main challenges is related to its commitment to limit its environmental footprint, which is mainly linked to the impact of its international implementations. 4.2.3. CSR DISTINCTIONS Gaïa Index Between 2016 and 2018, and for three consecutive years, ESI Group has been awarded first prize of the Gaïa campaign in the category of mid-cap companies with revenue of less than €150 million and keeps its place in the index which singles out the 70 top-rated companies in the CSR domain. Ranked 4th in 2019, ESI remains in the Gaïa index, which singles out the 70 top-rated companies in the CSR domain, out of a panel of 230. ◗ The “Moderate Impact” section contains one (1) issue related to the Group’s commitment to implement and continue to promote initiatives and partnerships within civil society. Compared to other issues, and despite its importance, this commitment has a limited impact on the Group and its stakeholders. Above and beyond, it’s important to note that the identified challenges are interconnected and interdependent. They must be considered in their entirety. For example, ethics and employee well-being can have a direct or indirect impact on the performance of the Company and its relationship with its stakeholders. Exploiting the materiality results The materiality matrix is communicated and shared internally as part of ESI’s commitment to ensuring a responsible and sustainable activity. These challenges will also be relayed at the level of the various departments and at the level of the sites on an international scale for a better implementation of CSR commitments. This materiality analysis has made it possible to identify the priority challenges with the greatest impact on the Company and its environment, in particular their impact on internal and external stakeholders. These sustainability challenges will be analyzed and presented in detail in this chapter. 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 medium-sized companies based on their non-financial performance. 75 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT4 4 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer CONTENTS Grands Prix de la Transparence Global Compact Since 2008, the “Grands Prix de la Transparence” are evaluating and awarding SBF120 companies under French law for the quality of the regulated information provided on their Registration Documents. The aim of these Grands Prix is to enable companies to measure their transparency performance each year and to identify best practices in the sector. Among the outstanding innovations for the 2019 edition is a Grand Prix for Transparency of Registration Document for companies outside the SBF 120, of which ESI Group is a member. In this first edition, the Group was ranked 4th for the “Transparency” and quality of its 2018 Registration Document, out of a list of 20 non-SBF120 companies. For more information, visit: www.grandsprixtransparence.com Since 2018, ESI Group signed the Global Compact (United Nations Global Compact) and thus undertakes to align its CSR strategy on the 10 United Nations principles, relating to human rights, international labor standards, the environment and the fight against corruption. The Group also undertakes to yearly communicate its progress to its stakeholders through the release of a Communication on Progress (COP). For more information, visit: www.unglobalcompact.org 4.3. BEING A COMMITTED EMpLOYER ESI Group aims to be a leading employer among all software and service providers on the market and plans to stay that way on a long term. ◗ promote diversity and multicultural exchanges; ◗ contribute to the well-being of employees. ESI Group’s employees consist primarily of highly trained engineers and PhDs from prestigious universities and institutes worldwide. In addition to the close relationship that the Group has always had with these schools, there are a number of other factors that exemplify ESI’s commitment to value employees’ experience and foster highly qualified recruitment and internal development. These factors include ESI’s positioning in the field of virtual simulation that takes into account the physics of materials, the Group’s prominence as a publicly listed company on the Paris stock exchange, the Group’s continuing education programs, and its focus on internal promotion at an international level. ESI Group’s policy is based on the following axes: ◗ develop talents and encourage leadership and collaborative management; This policy draws on various tools, including the Human Resources Information System (HR-IS) to consolidate the HR reporting process worldwide, and lends greater flexibility to the organization. It also promotes better use of resources by focusing on skills, to encourage a more involved, multi-disciplinary managerial culture. The platform provides an ongoing view of changes in employment indicators and makes it possible to drive our resource needs more easily. A selection of HR KPI 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. 4.3.1. DEVELOpING TALENTS AND ENCOURAGING LEADERSHIp AND COLLABORATIVE MANAGEMENT Human resources are the greatest value of ESI and are part of the two sustainable development objectives: “Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all” and “Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”. Talents development is thus a key issue for the Group’s sustainability. Indeed, in order to respond to the increasingly complex issues facing manufacturers and remain at the forefront of technological innovation, the Group must retain its resources and continually improve their know-how. Moreover, the Group’s size and distribution across many countries require a cross-functional management of numerous projects involving various entities and cultures. Leadership, expertise and collaborative management are therefore essential qualities for the success of our missions. Also, the Group’s transformation and its new solutions oriented towards the Hybrid Twin™, in line with ESI’s core business, are an opportunity to develop and enrich the professions and skills of existing teams, and to recruit new talent directly related to these new concepts. / Policies: In this way, ESI Group is committed to: ◗ ensure the integration of new talents through “Welcome days” sessions (2 to 3 days, organized in each region); ◗ to make the annual interviews more dynamic by promoting one to one interview in order to collect training needs and to develop competencies and to encourage the construction of plans of relevant and responsive local and/or global training to support business and strategy of ESI; 76 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer ◗ deploy training programs enabling employees to develop their expertise in terms of knowledge available in the portfolio of solutions and to strengthen their professional (technical, sales) and managerial skills; ◗ develop partnership agreements with universities and engineering schools in order to participate actively in the training of junior population; ◗ to promote the dissemination of information to all employees of the Group. / Results: Recruiting and retaining talents The Group pays particular attention to the integration of new talents through a locally managed induction program. In order to be more standard and global, an Intranet portal has been set up to guide the arrival of newcomers and guarantee that everyone has access to a single level of information to support them during their first days, weeks and months at ESI Group. Since 2018, a corporate integration program is organized internally, called “Welcome Days”. The aim of this program is to enable all new joiners to have a better understanding of ESI, its business and its strategy. Organized at the regional level, it allows also to meet the top management and to exchange with colleagues from different countries. The Group has also defined an internal mobility system integrated into the performance assessment tool that allows each employee to make his or her motivations known and thus highlighting its skills and know-how by applying to open opportunities within the Group in connection with the customer needs and projects. Career development and management The Group has a process for evaluating the performance and development of each employee, which aims to organize at least once a year with his or her direct supervisor an evaluation of the past year’s performance in relation to previously assigned objectives and to define the objectives for the coming year. Since 2017, online annual interviews have been implemented for the entire Group. During the 2019 feedback campaign, 97% of employees have formalized their annual interviews on the new online tool. This new step in the performance evaluation process is designed to make annual interviews more dynamic by encouraging the feedbacks, monitoring and archiving of data, particularly for international teams. It also provides easier access to data relating to the performance achieved, the level of employee satisfaction and the professional and training objectives that will contribute to proactive and advanced management of competencies. These assessment interviews are our first source for collecting the training and development needs of teams and encourage the construction of local and/or global training plans that are relevant and meet the needs of the business’ development. They also provide an opportunity to detect the Company’s high potentials and thus implement development actions useful for their internal mobility. In addition, this system makes it possible to support some employees more specifically through an individual plan to improve their skills. Training plan At the same time, training programs are being rolled out in the Group’s various subsidiaries. The training plans are aligned with ESI Group’s strategy and market developments. They enable employees to develop their expertise in terms of knowledge of the solutions portfolio and to strengthen their professional (technical, sales) and managerial skills. Since 2017, a Virtual Campus has been set up via the Company’s Intranet: “ESI Campus”. It allows the Group’s employees to access training in various topics. The objective is to give access to training to all employees and to support them in getting new skills and developing the Group’s skills through a common language. In terms of technical skills, the Group has put in place a partnership with the e-learning platform Pluralsight, with 200 licenses that allowed employees to train on several hundred online technical training courses. ◗ In India, for example, 107 employees have received training on leadership themes or technical training related to C++ and Advanced C++, Python, VPS/VCP, GIT and ISTQB. Actions to promote trainee apprenticeship Numerous partnership agreements with universities and engineering schools enable ESI Group to participate actively in the training of students: in Europe, the École Centrale of Paris, the Technical University of Dresden (Germany), the University of West Bohemia (Czech Republic), and the ENIT (National Engineering School of Tunis) in Tunisia, with which ESI Group benefits from partnership. The Universities of Alabama, Shanghai, Beijing, as well as the Indian Institute of Science, among others, work closely with ESI in the Americas and Asia-Pacific. Following the successful partnerships with the EC Nantes and a partner in Japan from 2017, ESI Group is continuing these international student exchanges, which will strengthen the links between the academic ecosystem and the Group’s projects. This type of collaboration, supported by ESI Group’s Scientific Department, is further illustrated by the establishment of the ESI Chair at ENSAM in September 2018, and a new five-year contract signed with the University of Zaragoza on Augmented Reality and Model Reduction. On these themes, a student post-thesis of Zaragoza is currently on a mission in Seattle, at the University of Washington. Also, in collaboration with ESI’s Scientific Department, the Group announced in February 2018 the launch of a five-year research program with the CE Cardenal Herrera University (CEU-UCH) in Valencia, Spain. In 2019, the Group has welcomed a total of 29 trainees from different universities and business school (interns and apprentices). Internal communication In order to efficiently communicate internally, ESI Group has set up several tools to address its messages to teams in more than 20 countries. A welcome portal has been set up on the Group’s Intranet website. It allows each new employee to discover the Group, its organization and its values and to easily access all the information that will be useful for a smooth integration. In addition, the Group’s internal social network, Chatter, enables everyone to group employees to exchange, share, inform or learn about numerous subjects in different fields. A new focus group was set up during the first quarter 2019, around environmental issues. Each employee of the Group can share his/her eco-responsible actions set up in their professional or personal life. 1 2 3 4 5 6 7 8 9 77 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer CONTENTS Also, multiple communication actions are proposed in order to strengthen information sharing and cohesion within the Group, such as global presentations, monthly newsletters, Flash Corporate News and webinars (corporate or product). Q&A (Question & Answer) sessions have also been initiated in 2018 to allow a more fluid and transparent exchange between the Management Team and the employees of the Group. Since October 2019, the Group has implemented Microsoft "Teams" tool, which replaces “Skype for Business”, enabling employees to exchange and plan online meetings easily and more efficiently. Corporate events are also organized to allow different departments to exchange and meet on strategic issues. Two management meetings are organized each year, as well as one Kick Off Meeting more focused on sales and marketing of products. The Product Operations team organizes once a year an Engineering Management Meeting, a one-week seminar where the key managers of the organization as well as certain experts can meet. In addition, and as mentioned earlier in this chapter, a new approach to change management has been put in place in 2020, at the initiative of the Communication Direction, and in collaboration with some departments concerned, in order to develop and optimize the employee experience. This also applies to the development of ESI's communication and evaluation of their effectiveness. 4.3.2. pROMOTING DIVERSITY AND REDUCING INEQUALITIES Through its “Global” value, diversity is one of the six values promoted by the Group as it enhances the organization of the company. The Group's highly innovative solutions enable ESI to successfully develop its business throughout the world. As an international company, ESI Group is proud to be able to have a multicultural and diversified workforce. The Group has always valued differences and encouraged its employees to share their ideas across borders in order to create a modern and efficient work environment, able to better support its international customers. ESI Group strives to daily develop its know-how and expertise in recruiting the best talent from around the world. These challenges are in line with the following Sustainable Development Goals: “Ensure availability and sustainable management of water and sanitation for all” and “Reduce inequality within and among countries”. / Policies: In order to promote diversity and reduce inequalities within the Group, ESI is committed to: ◗ promote diversity and multicultural exchanges; ◗ increase the proportion of female employees with permanent contracts; ◗ respect the laws in favor of the accession and retention of employees regardless of age; ◗ comply with laws and regulations prohibiting any discrimination based on age, race, sex, ethnic origin, nationality, religion, health, disability, marital status, sexual orientation, political or philosophical opinions, union membership or other characteristics protected by locally applicable law; ◗ not tolerate any form of sexual, physical or moral harassment, coercion or persecution. / Results: The following tables present the distribution of staff by geographical area and country: Distribution of staff by geographical area Europe, Middle East and Africa Asia-Pacific Americas 2018 (1) (Jan.-Dec.) 2019 (2) (Jan.-Dec.) 57.1% 33.0% 10.0% 56.7% 33.4% 9.9% Note: Of the 56.7% of employees located in the Europe, Middle East and Africa zone, 54.9% are located in Europe. Distribution of staff in the main countries 2018 (1) (Jan.-Dec.) 2019 (2) (Jan.-Dec.) 26.1% 20.1% 15.7% 9.2% 6.2% 22.6% 26.3% 19.9% 15.6% 9.1% 6.9% 22.2% France India Germany United-Sates Japan Others (1) January 1, 2018 – December 31, 2018. (2) January 1, 2019 – December 31, 2019. 78 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group 1 2 3 CONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer Gender distribution and equality (in %) 78.0 77.9 84.7 73.4 84.5 75.0 78.5 77.5 22.1 22.0 26.6 15.3 25.0 15.5 21.5 22.5 Americas Europe, Middle East and Africa Asia-Paciﬁc TOTAL Men 2018 (1) Men 2019 (2) Women 2018 (1) Women 2019 (2) The proportion of female employees with open-ended contracts, at 22.5%, is relatively low and stable compared to previous years. This low representativeness can be explained in particular by the low number of women in engineering schools that are the main source of recruitment for the Group, as well as by socio- geographical disparities that sometimes involve a relatively low female workforce participation rate. Nonetheless, HR professionals are sensitive to the feminization of local teams as well as considering female candidates when recruiting for the Group. Already mentionned in non-discimination policy Age pyramid (2019)(2) >60 years old 56 to 60 years 5 8 31 64 51 to 55 years 22 80 46 to 50 years 41 to 45 years 31 36 36 to 40 years 52 31 to 35 years 47 26 to 30 years 61 117 125 132 179 179 21 to 25 years <21 years 14 51 2 2 80 40 0 40 80 120 160 200 Women Men The average age of the Group’s employees is 39.7 years (female employees: 38 years and male employees: 40.2 years). ESI Group respects the laws in favor of the accession and retention of employees, regardless of their age. Thus, 17% of employees are over 50 years, i.e. 210 employees worldwide. 64.7% of the population aged over 50 is located in Europe, compared to 19.5% in the Americas and 15.8% in Asia. In addition, 44% of employees hired on permanent contracts are under 30 years of age, making a significant contribution to the employment of young people at the global level. (1) January 1, 2018 – December 31, 2018. (2) January 1, 2019 – December 31, 2019. Breakdown of workforce by seniority (2019)(2) >26 years 6 35 21 to 25 years 16 to 20 years 19 12 54 97 11 to 15 years 35 6 to 10 years 55 1 to 5 years 115 165 183 341 4 < 1 year 36 85 150 100 50 0 50 100 150 200 250 300 350 Women Men The average seniority in the Group is 8.5 years. This seniority is relatively high in the dynamic technology and IT sector (source: Society for Human Resource Management study, 2015). The average length of service is 11.67 years for employees over 35 years. Non-discrimination policy In order to have access to more detailed information, in particular on gender equality and the principles of non-discrimination, the Group has supplemented its HR social database by introducing the concept of manager for persons supervising one or more employees. Thus, we can note a 17.7% increase in the number of women managers compared to 2018 (15.5%). The Ethics Committee (composed of two women and one man) also ensures that none of the above-mentioned discriminations is used within the Group (see 4.5.2). The Group is also committed to improve the gender balance of the Group. “Gender equality” is an integral part of the Group’s strategy, aiming to increase both the percentage of women managers and the percentage of women engineers. In 2019, 45 women joined the Group, representing 31% of new hires. Some countries have set regulatory obligations in order to serve the same purpose. France is one of them. “Equal pay for equal work” has been a principle of labor law enshrined in law for several decades. In this sense, the Avenir act aims to eliminate the pay gap between women and men. In accordance with these regulations, 5 6 7 8 9 79 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer CONTENTS ESI Group, in France, has calculated its Gender Equality Index, the results of which are as follows: of a chairperson and eight members. Local information sessions have been organized on the subject. ◗ The gender pay gap: 33/40; ◗ The gap in individual rates of pay increase: 20/20; ◗ The number of employees of the under-represented sex among the 10 highest paid employees: 5/10; ◗ The rate of employees having benefited from a salary in the year following their return from maternity leave: 15/15; In addition, in 2018, the Group raised the awareness of 87 people on the subject of interculturality. These awareness-raising sessions took place in small groups in the form of virtual classes. Employees from different countries of the Group were able to discuss cultural differences and intercultural communication. ◗ The gap in promotion rates between women and men: 15/15; Integration of disabled workers ◗ TOTAL: 88/100, i.e. a 5-point improvement compared with the previous year and 13 points above the legal minimum. India launched an Anti-Sexual Harassment Charter in July 2019 and established an Anti-Sexual Harassment Committee composed Since the beginning of 2016, the Group has been collaborating with Elise for the Lyon and Rungis site in France to ensure selec- tive sorting. Elise is a company called “adapted” which create open-ended contracts for the persons with disabilities. 4.3.3. CONTRIBUTING TO THE WELL-BEING OF EMpLOYEES AND ENSURING THE QUALITY OF WORKING LIFE Ensuring decent employment and contributing to the well-being of employees Every company is responsible for providing decent working conditions for all its employees. Promoting decent work with a decent wage and ensuring the well-being of employees are major global challenges, for which ESI Group is focused on. This challenge contributes to the following Sustainable Development Goal: “Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”. / Policies: As an employer ESI strives to: ◗ control its workforce in connection with the growth of the activity; ◗ offer its employees the benefit of flexible management of their schedules; ◗ improve working conditions, which has a direct impact on the well-being, efficiency and motivation of employees; ◗ to create a favorable social climate. / Results: Headcount data is calculated on the basis of the number of employees present at December 31, 2019. Total Group headcount includes employees on permanent and fixed-term contracts, as well as student contracts such as work-study contracts and interns. They do not include temporary employees, consultants and networks of external distributions. At December 31, 2019, ESI Group’s workforce stood at 1,238 employees. 1,232 at January 31, 2019. The average number of employees in 2018 was 1,222 employees, a very slight increase compared with the previous year 2017 (1,201). 92.5% of the Group’s workforce is hired on open-ended contracts. Precarious contracts such as internships, apprenticeship contracts, etc., are not covered by the Group’s employment contract. and fixed-term contracts represent 7.5% of the workforce. total, compared to 7% in 2018. In 2019, ESI continued to pursue its ambitions to control its workforce in line with business growth. Employee turnover Recruitments Europe, Middle East and Africa Apprenticeship/internship Short-term contracts Open-ended contracts Americas Apprenticeship/internship Open-ended contracts Asia-Pacific Apprenticeship/internship Short-term contracts Open-ended contracts TOTAL (1) January 1, 2017 – December 31, 2017. (2) January 1, 2018 – December 31, 2018. (3) January 1, 2019 – December 31, 2019. 80 2017(1) (Jan.-Dec.) 2018(2) (Jan.-Dec.) 2019(3) (Jan.-Dec.) 144 28 24 92 17 6 11 48 12 3 33 209 107 25 25 57 17 6 11 53 13 11 29 177 88 20 22 46 24 15 9 37 8 6 23 149 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being a committed employer 2017(1) (Jan.-Dec.) 2018(2) (Jan.-Dec.) 2019(3) (Jan.-Dec.) 112 30 10 72 22 10 1 11 33 2 6 25 167 101 28 13 60 23 5 0 18 48 3 10 35 172 94 18 8 68 28 10 0 18 28 4 4 20 150 Departures Europe, Middle East and Africa Apprenticeship/internship Short-term contracts Open-ended contracts Americas Apprenticeship/internship Short-term contracts Open-ended contracts Asia-pacific Apprenticeship/internship Short-term contracts Open-ended contracts TOTAL (1) January 1, 2017 – December 31, 2017. (2) January 1, 2018 – December 31, 2018. (3) January 1, 2019 – December 31, 2019. In 2019, ESI Group recruited 78 employees on open-ended contracts, i.e. 52% of total hirings. The departure rate of employees on open-ended contracts is 9.2% in 2019. (number of departures under open-ended contracts/total headcount under open-ended contracts at the beginning of the period) x 100] compared to 10% in 2018. The turnover rate on open-ended contracts is 8.1% in 2019 [(Number of open-ended contract departures during year N + number of open-ended contract arrivals in year N*100/2/staff at the beginning of the period] against 9.6% for the year 2018. Working time Staff representative institutions shall be designated in accordance with the laws in force in the countries. Thus, we can count six institutions in France, one in Vietnam and one in Brazil. These institutions involve 26 employees who have actively participated in meetings during 2019. Review of agreements: ◗ review of general agreements: the French subsidiary has signed various agreements with its social partners, such as the agreement on the reduction of work, the participation agreement and the agreement on employee savings; ◗ review of agreements related to health and safety: no company has signed a specific agreement. The duration of the working time shall be set in accordance with the local legislation in force. Workplace Well-being In the vast majority of its establishments, ESI Group offers its employees the benefit of flexible management of their schedules. In some countries, such as Japan, the timetables are set to meet the expectations of the business but are limited to eight hours a day. In France, the organization of working time is based on working time measured in fixed days or according to a set schedule. An employee with a fixed daily rate works a defined number of days in the year and an employee with an hourly rate works the number of hours defined in the agreements: ◗ Full-time managers working on a fixed number of days per year work 217 days per year, plus one day for the solidarity day; ◗ For other employees, the average working week is set at 37 hours, with 10 days of reduced working hours per year for full-time employees. In 2019, part-time work accounted for 6% of the total workforce; moreover, most part-time contracts are set up to meet the needs of employees who request them in order to arrange for parental leave, retirement or the resumption of their studies. Social dialogue The quality of the social climate is a determining factor for the quality of working life and the Company's productivity. The social dialogue, over and above strict regulatory compliance, constitutes a source of progress in this area. The value of social dialogue is based on the many exchanges between the Group’s management and employees and their representatives. In the different countries, various initiatives have been launched to promote the well-being of employees, under the responsibility of the Human Resources Departments and in collaboration with local and representative bodies such as the CSE (Social and Economic Committee) in France. Since 2017, sophrology relaxation sessions carried out by employees were set up on the Rungis site. In 2019, two other activities have been made available to employees at Rungis, including pilates classes and seated massage sessions. The benefits of these practices include better stress management, improved productivity and the development of positive thinking. 10% of the staff at the Rungis site have already completed a session in 2019. At the Lyon site, 15 sophrology sessions were organized in 2019, with an average of 15 participants, representing more than 14% of the workforce at the site in question. South Korea, for example, also offers training courses on happiness and work-life balance. Most of the projects carried out for our customers are carried out in-house, our engineers have few needs of developing on customer’s site, which limits travels and improve work-life balance. Moreover, in many countries, ESI enables its employees to work remotely from home. France, for example, is currently working on the development of a Charter on home office and the right to disconnect. 81 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an outstanding partner CONTENTS Ensuring employee health and safety in the workplace and employee benefits The Group’s approach is also in line with the implementation of social measures and benefits for our employees worldwide, especially, by ensuring the health of employees on their daily professional life. This contributes to the following two Sustainable Development Goals: “Ensure healthy lives and promote well-being for all at all ages” and “Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”. / Policies: As the health and safety of employees in the workplace and social benefits are necessary for the smooth running of activities, ESI has set itself the objective of: ◗ providing a quality social security coverage for all its employees worldwide; ◗ offering an attractive compensation and social benefits package. Health, Safety and Benefits ESI Group has set itself the objective of providing coverage for to all of its employees worldwide, both in terms of with regard to health and old age but also the coverage of incapacity, disability and death. 13 out of 19 countries offer their employees the opportunity to finance a local health insurance in compliance with regulations and the well-being of employees. Some countries, such as India, now offer a free medical check-up to employees once a year, and Tunisia now offers five days of holidays since February 2017 and has set up a mutual insurance company that has been offered to its employees from the beginning of 2020. Wage policy To attract and retain the best talents on the market, ESI Group has set up an attractive compensation package and various benefits for its employees. This policy is intended to recognize talent by rewarding both individual and collective performance. Employee compensation is made up of direct and indirect remuneration; the latter includes cash or in-kind supplements deferred from the monthly remuneration (bonuses, commissions, savings plan, fringe benefits, etc.). All the countries included in the scope of social reporting offer indirect compensation to their employees. In Europe and the Americas, six subsidiaries have set up a system of indirect compensation for their employees. Within this framework, an employee shareholding mutual funds ("FCPE") was created in France in 2013 in order to collect future flows of participation and payments, housed in the Group Savings Plan. This "FCPE" makes it possible to acquire shares of the Company and to benefit from a 100% matching contribution, up to an annual ceiling of €400. Beyond that, ESI subscribes to up to 20% of the payments within a range of between €401 and €2,000 maximum. At December 31, 2019, the FCPE held 29,500 shares of the Company, i.e. 0.49% of the capital. Special point about Coronavirus (COVID-19) In order to maintain the well-being of the employees during the period of the COVID-19 epidemic, the Group has put in place several measures to protect its teams and ensure the continuity of its activities. The situation is managed globally and adapted to each local situation. Having a global presence, the Group’s adaptability and reactivity are of paramount importance for all its stakeholders. Among the measures implemented by the Group: ◗ The launch of the Group’s Business Continuity Plan (BCP); ◗ The creation of a special COVID-19 crisis management team; ◗ The adoption of home office for all positions; ◗ The ban on travel at Group level, in a more restrictive way according to the local situations; ◗ The use of digital tools and the organization of conferences and 100% digital events; ◗ The development of a communication plan to inform the employees on the preventive measures to be adopted in accordance with official recommendations, by email and via the Company’s internal social network; ◗ The organization of internal activities (stress management tips, photo contest, drawing contest for children, etc.) and the creation of an online group for sharing advice, recipes, etc. during the confinement period. 4.4. 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: ◗ ensure customer satisfaction and meet quality and safety requirements; ◗ maintain long term, trust-based relationships with stakeholders ◗ provide innovative solutions that meet our customers’ requirements; and ecosystem. 4.4.1. pROVIDE INNOVATIVE SOLUTIONS THAT MEET OUR CUSTOMERS’ REQUIREMENTS How can an organization bring innova- tive products to market while keeping costs and deadlines reasonable? How can an organization integrate new materials and processes 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 requirements are met? The products developed by ESI Group are used to bring to market innovative products at a lower cost and with greater 82 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an outstanding partner reliability and contributes through this section to 2 Sustainable Development Goals: ◗ Goal 8: “Promote sustained, inclusive and sustainable economic growth, full and productive employment and decent work for all”; ◗ Goal 9: “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”. / Policies: In its approach, ESI strives to: ◗ meet its customers’ demand for ever more innovative products; ◗ engage itself in a process toward zero real tests, zero real prototypes and zero downtime; ◗ guarantee the quality of its products and services and ensure client satisfaction; ◗ acquire a full global certification by 2021. / Outcomes: Innovative solutions towards the zero real tests, zero real prototypes and zero downtime To meet its customers’ demand for ever more innovative products, the Group offers Virtual Prototyping solutions that save manufacturers and their subcontractors significant 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 virtual simulations as of the preliminary design phase, during 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 the first time. Virtual Prototyping makes it possible to prepare physical tests under the best conditions, going as far as pre-certification or eliminating the need to carry out physical tests until final validation. Following the acquisitions of innovative companies in the last years, in new technologies such as Artificial Intelligence, Big Data, or Internet of Things, ESI Group is now able to represent the connected product as used in its operational environment, meaning after its launch on the market. This Hybrid TwinTM targets product predictive performance and maintenance, to optimize repairs, facilitate certification update, and minimize recalls. Once the brand-new product is “right the first time” thanks to its pre- certified Virtual Prototype, it must be kept right when in-Service, and perform right in real life, connected and operationally assisted in its digital version. 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, Fiat Chrysler and Volkswagen in the Automotive industry, Boeing and Airbus in the Aeronautic industry, as well as EDF and Framatome in the Energy industry. By building strong relations with large industrial 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. For example, using Virtual Prototyping to design airbags or carrying out an in-depth study of advanced driver assistance systems (ADAS) increases the safety of vehicles for consumers. ESI Group solutions give consumers greater safety and comfort. 4.4.2. ENSURE CUSTOMER SATISFACTION AND MEET QUALITY AND SAFETY REQUIREMENTS In 2000, ESI Group obtained its first ISO 9001 certification, followed by the independent certification of its subsidiaries, so as to guarantee the quality of its products and services and ensure client satisfac- tion. 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 continues to evaluate and improve its processes. Within the Company, certification calls on employees to actively engage in an overall consistent management system. Since 2010, ESI Group has extended the scope of its certification using a global 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 solutions 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. ESI Group’s objective is to have full global certification by 2021. 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 as-associated risks and opportunities. In 2019, the global certification applied to 95.31% of the workforce. 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 GmbH, ESI ITI (in Germany), ESI NA in the United States, ESI Mecas in the Czech Republic, ESI Service Tunisia, ESI Korea (South Korea), ESI China, ESI Italia and ESI Hispania, ESI UK (in the United Kingdom), ESI Open CFD (in the United Kingdom) and ESI Nordics AB (in Sweden). In addition, since their creation in 2018, the “Welcome Days” have included a session on Quality in the agenda in order to understand the meaning of evolving under a Quality Management System and the approach to process improvement. ESI Group is also involved in an ISO 27001 certification project, and is implementing an information security management system that, through appropriate risk management, guarantees the confidentiality, integrity and availability of information. This project considers specific demands of clients, particularly those from the automotive sector as of TISAX. The TISAX (Trusted Information Security Assessment Exchange) certification was created on the initiative of the VDA (Association of the German Automotive Industry). This standard is based on the requirements of ISO 27001 and adapted to the specificities of the automotive sector to secure exchanges between various players. In 2019, ESI Group got the TISAX certification for, ESI MECAS (Czech Republic) and ESI GmbH (Germany) and will be extended to ESI Hispania (Spain) in 2020. 1 2 3 4 5 6 7 8 9 83 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an ethical and committed Company CONTENTS 4.4.3. MAINTAIN LONG TERM, TRUST-BASED RELATIONSHIpS WITH STAKEHOLDERS AND ECOSYSTEM By developing the partnership ecosystem that respects the Group’s values its commitments, ESI contributes to the Sustainable Development Goal 12: “Ensure sustainable consumption and production patterns”, as well as goal 17: “Strengthen the means of implementation and revitalize the global partnership for sustainable development”. 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 one. However, when it is necessary to mobilize resources outside its usual scope of business, or when specific expertise is recommended, ESI Group may occasionally use external contractors. / Policies: Develop a partnership ecosystem that respects the Group’s values and commitments. / Outcomes: ESI Group remains fully responsible for all outside subcontractors. 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 influencing quality through a questionnaire completed in-house to assess the supplier based on the service provided. A list of approved suppliers is made available for this purpose on the intranet and updated periodically. The Company now includes an environmental criterion (energy consumption for operation, local purchasing, possibility of recycling the product, etc.) in the purchasing procedure of its suppliers and subcontractors. Training on responsible purchasing have been planned for the most important buyers. To date, one person has completed this training. ESI Group also takes care not to create a situation of dependence on suppliers and subcontractors. 4.5. BEING AN ETHICAL AND COMMITTED COMpANY Partnerships are an integral part of the Group’s strategy to facilitate and promote Virtual Prototyping while acting sustainably. To remain at the leading edge of innovation, the Group invested 31.4% of its revenues in R&D in 2019. The Group considers its main stakeholders to be its employees, customers, suppliers, and industry and academic partners, but also its investors and shareholders. Innovation, which is at the core of ESI Group’s business, is also a key issue of CSR. Innovation continually improves production processes and shortens the design period and the time it takes to develop more efficient and more reliable new products. Innovation makes it possible to resolve the multiple constraints and pressures that weigh on all manufacturers – to develop a safer, more efficient and more environmentally friendly product, faster and at a lower cost. The innovative 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 key drivers for sustainable growth. 4.5.1. GUARANTEE SOLID AND DIVERSIFIED GOVERNANCE Nowadays, as the world has become more complex and companies must be able to constantly adapt, strong and effective governance has become a real necessity. ESI Group attaches particular importance to governance issues. It ensures the coherence and sustainability of the Company’s strategy, ensuring the best framework to serve the interests of investors. The Group strives to maintain a mixed governance, represented by independent and competent directors who are fully involved in the Company’s projects, while ensuring compliance with the laws on remuneration and transparency rules. 4.5.2. ACT ETHICALLY AND RESpONSIBLY – ETHICS CHARTER The Ethics Charter applied across the Group is in line with the principles of Sustainable Development Goal 16: “Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels”. A three-member Ethics Committee is responsible for creating an environment where employees can adhere to the Ethics Charter and ensure that its principles are upheld by everyone, every day. The Committee listens to and assists employees so that they can discuss any issue involving the implementation 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 regularly, at least once a year, to discuss ethics issues and come up with corrective measures, if necessary. 84 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an ethical and committed Company 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 applied 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 ethical rules promoted by the conventions of the International Labor Organization. The Ethics Charter was disseminated to all employees and is available in six languages on the Group’s internal and external websites. A new version of the Charter has been communicated to all employees in 2018. This version strengthens the Group’s position on corruption, facilitation payment and other frauds, in the context of the French law “Sapin II”. The Ethics Charter contains the policies and procedures inherent in the following business conduct: Whistle-blowing policy Any person employed within ESI, or any client, supplier, partner or third party who suspects or is informed of a possible breach of this charter or a violation of the law by the Company, or one of its employees, has a duty to report it. While it is natural to be reluctant to report abuse, everyone is strongly encouraged to do so, as silence can have highly detrimental consequences for the Company. The use of the whistleblowing procedure described below is neither mandatory nor exclusive. The procedure for reporting abuse is as follows: ◗ the first contact is the local/regional HR correspondent or the direct manager; ◗ in the event of a conflict of interest involving the HR correspondent or the direct manager, contact the HR Director of the division or group or the N+2 manager; ◗ otherwise, contact the Ethics Committee directly at the following ◗ Relations with our business partners: address: ethics@esi-group.com. • establish transparent and loyal business dealings with clients, • deal honestly and fairly with all clients no matter the size of their company, • provide quality products and services that meet the needs of its customers; ◗ Actions taken to prevent corruption: • prohibition of any form of corruption in its relations with its business and institutional 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, • if an employee makes facilitation payments or influence- peddling in the course of their professional activities, he is likely to be subject to criminal penalties and its contract of employment will be terminated, • prohibition to receive, give, promise or solicitate facilitation payments or influence-peddling undue benefits with a view to granting, obtaining or maintaining a contract or any other advantage; ◗ Fraud and money laundering: • comply with laws on fraud and money laundering, • conduct business only with reputable partners, • be vigilant regarding any payments made, in order to detect any irregularities, especially concerning partners whose business conduct may raise suspicion, • ensure that the accounting and tax declarations sent to the authorities are complete and reflect the reality of each subsidiary; ◗ Compliance with antitrust laws: • prohibition of 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, • prohibition of abusing a dominant 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. The Company is committed to handling requests, quickly and genuinely, in a confidential and ethical manner. This procedure is secure and guarantee the strict confidentiality of the whistle-blower, the facts that are the subject of the report and the persons concerned. The use of this procedure in good faith, even if the facts subsequently turn out to be inaccurate, shall not expose the author of an alert to sanctions. On the other hand, any abusive denunciation may lead to disciplinary sanctions and/or legal proceedings. General Data Protection Regulation (GDPR) Regarding the European Union data protection regulations, which are supervised in France by the CNIL (Commission nationale informatique et libertés), ESI Group, as a French company, must comply with them. In 2016, ESI Group launched an GDPR project and since then, several measures have been put in place: ◗ a regularly updated treatment register; ◗ a public privacy policy available on the Group’s digital platforms (websites, applications, etc.); ◗ internal procedures to respect the rights of individuals and to manage incidents; ◗ policies to guarantee data security “Implementation of ISO 27001 certification: ongoing”; ◗ a contract to guarantee and control intergroup transfers; ◗ an impact analysis relating to data protection; ◗ employee awareness via an E-Learning platform: https://www. iitr.de/; ◗ “Candidatus” recruitment platform to control compliance in the processing of applications. “Implementation in France”. As part of its continuous improvement approach, at the end of 2019, the Group has been equipped with a “Metacompliance” tool that allows the following: ◗ E-Learning: to set up training dedicated to cybersecurity; ◗ Phishing: to simulate phishing attacks and raise awareness among our users; ◗ Privacy: to improve monitoring of GDPR compliance through a complete, visual and interactive interface. 1 2 3 4 5 6 7 8 9 85 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an ethical and committed Company CONTENTS 4.5.3. SET Up INITIATIVES TO INTERACT WITH CIVIL SOCIETY (GIVE-BACK) By developing partner- ships with the various digital players, ESI Group is once again contributing to the following Sustainable Development Goals (4, 5 & 17, respectively): “Ensure inclusive and equitable quality education and promote lifelong learning opportunities for all”, “Achieve gender equality and empower all women and girls” as well as “Strengthen the means of implementation and revitalize the global partnership for sustainable development”. ESI Group is convinced that it is by investing with various players in the digital community that the Group will strengthen its position as a leading player in digital transformation and leader in virtual engineering. / Policies: In order to facilitate collaboration and encourage industrial innovation, the Group makes sure to create and maintain quality relationships with various players in the digital community, at the industrial, academic and associative levels. / Outcomes: The Company is an active member of TECH IN France (formerly AFDEL, the French association of software publishers), which helps promote the software publishing industry and develop digital simulation, and which currently represents over 400 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. ESI Group participates in several competitiveness clusters, principally in France. These clusters provide the proximity needed for collaborative work with major industrial players and research and development organizations in order to bring highly innovative products to market. Located all over France, these organizations are as follows: Aerospace Valley (Toulouse), ASTech Paris Région (Île-de-France), Nuclear Valley (Burgundy), Mov’eo (Normandy and Île-de-France), I-Trans (Nord-Pas-de-Calais and Picardy), iD4CAR (Nouvelle Aquitaine, Bretagne et Pays de la Loire), Systematic (Île-de-France), Minalogic (Grenoble and Rhône-Alpes), Pôle SAFE (Provence-Alpes-Côte d’Azur) and Pôle ViaMeca (Auvergne-Rhône-Alpes). Since 2013, ESI Group is present on the campus and the Board of Directors of Ter@tec, Europe’s largest intensive computing center, based 20 km outside Paris at the Saclay platform in Île-de-France, alongside the CEA (the atomic and alternative energy commission), a major player in research, development and innovation. Today, ESI Group is involved in several collaborative projects under the leadership of the System X IRT (Institute for Technological Research). ESI Group is also a member of the Executive Committee of the Systematic Paris Region Competitiveness Cluster and of AS Tech Paris Region, two local competitiveness clusters with a global influence, which anime the collaborative research in the Île-de-France ecosystem, respectively in the digital sector and the aerospace industry. As a pioneer in innovation in the automotive sector, the ID4CAR cluster has appointed Vincent Chaillou, Chief Operating Officer of ESI Group, as the new President of ID4CAR in February 2018, after a regular attendance to its Board of Directors since 2012. The aim of this cluster is to increase the competitiveness of the sustainable vehicles and transportation sector in western France through innovation. Through this presidency, ESI Group contributed to the development of the strategic plan for the automotive industry. These plans are developed at the initiative of the CNI so that each CSF (strategic committee of the sector) develops its own transformation plan towards the Industry of the Future in general and particularly digitalization, by involving the entire value chain contributing to the sector. ESI is also one of the founding members of the Excelcar association. Created in 2014, the aim of this structure is to revitalize and create jobs around a FabLab technical platform of R&D excellence in Bretagne (France) dedicated to the automotive industry under the impetus of PSA. This initiative is supported by The Union des Industries et des Métiers la Métallurgie of Ille-et-Vilaine and Morbihan (UIMM 35-56), for the purpose of stimulating the automotive industry in Brittany around PSA Rennes, which has announced its strategic plan for the coming years. ESI participates in the AM2 innovation platform specifically for developing a digital simulation and Virtual Prototyping channel for new multi-material and composite architectures, with priority given to the automotive industry. Again, in the transportation sector, ESI is an active member of IRT Railenium whose main mission is to lengthen the lifecycle of railways infrastructure and capitalize on the rapid international development of its new products. Involving a broad consortium of manufacturers and research organizations, in 2011, ESI Group was selected by the Investissements d’Avenir (Grand Emprunt) Program. ESI also assists the mechanical engineering field and promotes its activities. The Company is a member of the Board of Directors of the Association Française de Mécanique (AFM), a body for information, dialogue and discussion for the mechanical engineering community (industry professionals and technology transfer organizations, teachers and researchers) and representing French mechanical engineering to its foreign counterparts. When it comes to the aeronautics sector, ESI actively participates in initiatives from the Council for Civil Aeronautics Research (CORAC) undertaken as part of the Plan d’Investissement d’Avenir. In 2014, ESI was invited by the seven top French aeronautics companies, which are members of GIFAS, to join the Usine Aéronautique du Futur (Aeronautics Factory of the Future) platform as an associate member. This major initiative was launched to transform production facilities in the fast-moving aeronautics 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 manufacturing of large composite materials. 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 helicopter transmissions boxes. 86 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an environmentally friendly player ESI Group is also an active member of the Nuclear Valley cluster, which helps to restore the competitiveness of the nuclear industry on the international market by providing its expertise in virtual reality to facilitate the replacement of existing equipment or its maintenance. Since 2013, several initiatives have emerged to design 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 Industrielle, a national initiative, and contributes, on this basis, to the work of the "Alliance Industrie du Futur". Thereby, ESI contributes to several working groups that focus, in particular, on developing and promoting key technologies of the Industry 4.0. ESI Group has coordinated the “Promotion of Existing Technological Supply” group since its creation. In this regard, the Group is working with its peers to structure and circulate the French supply, in particular by jointly creating with the French Chamber of Commerce and Industry the first national directory of Suppliers of Solutions for the Industry of the Future (Offreurs de Solutions Industrie du Futur – OIF). This tool will boost the technological supply and its deployment within the industry both in France and internationally. Through its action in this working group, ESI Group has also contributed to launching the Créative Industrie trademark in partnership with Business France. ESI’s IC.IDO virtual reality solution was selected to illustrate the Value Chain Digitalization Technologies trademark when it was launched by the current President of the Republic of France, Emmanuel Macron, at the “Salon de Hanovre” in April 2016. ESI is also a player of the "Alliance Industrie du Futur" for the development of key technologies for the industrial transformation. Thus, ESI is the top-tier partner of the SOFIA program aiming to develop the additive manufacturing sector in France (Solutions pour la Fabrication Industrielle Additive Métallique). The additive manufacturing, a numerical process, gives an essential role to Virtual Prototyping, which positions naturally ESI as a key player of this sector. Regionally, ESI Group is part of the Aerocampus Aquitaine Cluster which is the first European expert’s network that answers the training needs of companies in the aeronautic and aerospace sectors. The Aerocampus training center uses ESI IC.IDO, ESI’s virtual reality solution, together with the Institute of Aeronautic Maintenance (IMA). ESI Group has worked with the Nouvelle-Aquitaine Regional Council to create the “SMART 4D” simulation community within the Digital Aquitaine cluster. 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 community dedicated to simulation, HPC, virtual prototyping and immersive experience to support industries and future applications. At the international level, ESI Group is involved in promoting French know-how in the technological field of the Industry of the Future. 4.6. BEING AN ENVIRONMENTALLY FRIENDLY pLAYER Considering the nature of its activity – distribution of software and sales of 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. The main environmental challenges identified by the Group are: ◗ to reduce energy consumption in its buildings and data centers; ◗ to limit emissions of greenhouse gases associated with travel by Group employees; ◗ to limit the impact related to waste electrical and electronic equipment (WEEE). Scope: France, Germany, Czech Republic, Switzerland, Spain, United Kingdom, Italy, Tunisia, United States, Brazil, China, India, Japan and South Korea. 4.6.1. DEVELOp SUSTAINABLE SOLUTIONS From the outset, by developing innova- tive Virtual Prototyping products, ESI Group has sought to measure the impact of its solutions on society. Indeed, ESI’s solutions enable 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. ESI Group contributes to through this challenge to the Sustainable Development Goal 9 of the United Nations “Build resilient infrastructure, promote inclusive and sustainable industrialization and foster innovation”, as well as goal 12: “Ensure sustainable consumption and production patterns”. / Policies: ESI is committed through its solutions to helping its customers to: ◗ reduce time-to-market; ◗ reduce total product weight; ◗ reduce waste associated with prototyping and manufacturing; ◗ improve useful life of products; ◗ reduce the environmental footprint of products; ◗ improve the safety of the products. 1 2 3 4 5 6 7 8 9 87 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT4 4 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an environmentally friendly player CONTENTS / Outcomes: Tighter regulations on greenhouse gas emissions and recycling 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 innovation. All the sectors where ESI Group operates are working to improve their environmental performance by manufacturing more environmentally friendly products, developing more ecological manufacturing processes, and reducing or eliminating physical prototypes. By successfully combining advanced manufacturing processes with the most innovative materials, such as composites, ESI’s solutions bring customers the following advantages: ◗ Reduced time-to-market: with ESI ProCAST, Nissin Kogyo, who develops, manufactures, and sells brake equipment for two- and four- wheeled, could successfully cast complex shapes after an analysis using precise finite element technology. All possible defects were predicted with the highest accuracy. By introducing ESI ProCAST on a full-scale basis, Nissin Kogyo reduced their development time and trial production, allowing them to reach the market faster. ◗ Reduced total product weight: using ESI’s Virtual Seat Solution, the company Expliseat has developed the lightest seat ever certified by the European Aviation 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% reduction in fuel us-age, saving $300,000 to $500,000 per aircraft per year. ◗ Likewise, the use of Virtual Performance Solution by ESI experts helps to design lighter vehicles to help vehicle manufacturers in their weight reduction challenge. This challenge is even more present today with the acceleration towards the electric vehicle, whose weight, and particularly the weight of the battery, becomes a central issue. ◗ Reduced waste associated with prototyping and manufacturing: Students from the Czech Technical University in Prague (ČVUT), Czech Republic, were able to avoid physical crash tests of their race car thanks to ESI Virtual Performance Solution (VPS), using only virtual tests of the material to validate the model. This enabled them to move swiftly to the design optimization of the crash absorber structure. The capability of VPS to complete multiple simulations on a single core model allowed the team to thoroughly examine various measurements. The End to End solution supported the project goals, which were met entirely within the allotted time and budget. ◗ Improved useful life of products: the creation of a Hybrid TwinTM based on the virtual prototype to recreate the behavior of a windmill in operation and in its environment helps to ensure the maintenance and to reduce its cost (-47%). The predictive maintenance and the repairs optimization allow an increased reliability of windmills. ◗ Reduced gas emissions: Thanks to ESI PAM-STAMP solution, Kirchhoff Automotive was able to integrate ultra-high strength steel, which caused a spring back issue, into the conception and forming process of its components more quickly. This new material offers a lightweight option to traditional steels and can thereby contribute to reduced CO2 emissions. As such, ESI Group’s digital prototypes can significantly reduce consumption of raw materials and energy and help achieve compliance with environmental standards for new products as shown in these examples. Furthermore, the new Hybrid TwinTM concept of the Group targets product predictive performance and maintenance, to optimize repairs, facilitate certification update, and minimize re-calls. 4.6.2. REDUCE THE ENVIRONMENTAL IMpACT OF THE GROUp Reduce greenhouse gas emissions / Outcomes: As ESI Group operates both in France and internation- ally, and as its activity is within the tertiary sector, transport is the main source of its greenhouse gas emissions. ESI Group’s actions meet the Sustainable Development Goal 13 “Take urgent action to combat climate change and its impacts”. / Policies: In order to reduce its carbon footprint, ESI Group is committed to a process of: ◗ limit emissions resulting from business travel by train and by plane; ◗ limit CO2 emissions from company car travel; ◗ develop the use of web conferencing tools. To limit travels, the Group updated its travel policy. This policy is global in scope and adapts to local specificities. 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). A car policy is also defined in the German site of Neu-Isenberg. 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 but should be extended to all ESI sites. During the first quarter of 2019, a new tool was implemented to centralize travel requests and employee expenses throughout the Group. This tool will facilitate administrative procedures and, above all, will allow a better monitoring of travel across the whole ESI Group. 88 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an environmentally friendly player In 2019, emissions resulting from business travel by French, American and German employees by train and by air totaled 986 kg per employee, an increase of 15% compared 2018. It should be noted that two out of seven members of the Executive Committee are based outside France. Also, data are provided by the travel agencies responsible for booking the trips. Any bookings made directly by employees are not accounted as information are not available. In 2019, 45 employees in France had a company car, 46 in Germany, 33 in the Czech Republic, five in Spain, five in Italy and two in Switzerland. In Japan, India and China, only one person had a company car. There were no company cars in the United States, in Tunisia or Brazil in 2019. The granting rate of company cars is higher in Germany due 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 146,637.7 kg or 3,258.6 kg per company car, with a 5.4% decrease compared to last year. Overall, business travel by French employees generated 436.8 tons of CO2 in 2019, a decrease of 11.5% per employee. As for company cars in the Czech Republic, the estimated emissions in 2018 were 98 tons of CO2, with an average of 2,970 kg per car, a decrease of 7% compared to 2018. Finally, for Germany, the estimate of emissions related to trains and airplanes amounts to approximately 165 tons of CO2 (for the three entities), down 13% compared to 2018 (two entities). Vehicle-related consumption amounts to 1,766 kg of CO2 per vehicle, a slight decrease of 5%. Among the measures taken over the past several years, the adoption of Gelato, a service allowing subsidiaries to locally order documents they need, has allowed the Group to save paper thanks to this print-on-demand plantroom. From the adoption of this solution in May 2018 and until the beginning of March 2020, Gelato helped the Company to avoid 1,954,376 km of delivery distances, representing a decrease of 70% of the distances previously made to deliver brochures and other documents. This is equivalent to a saving of 2,625 kg of paper and 11,019 kg of CO2 emissions. In order to limit the transportation footprint, the Group also provides employees with web conferencing tools to encourage digital collaboration between employees in different sites, without having to travel. Some meeting rooms are also equipped with audio and/or videoconferencing systems to facilitate remote meetings. Also, from October 2019, all workstations have been equipped with the "Teams", a Microsoft software (which replaces "Skype Enterprise" internally), enabling more efficient online meetings (audio + video) for up to 250 people. On average in 2019, around 300 audioconferences via “Teams” and “Skype Enterprise” were organized per day within the Group (which is almost doubled from last year), with an average duration of 115 minutes per call. Ensure a more sustainable consumption ESI Group believes that environmental responsibility should be a priority for all companies and strives to reduce its environmental impact and to manage its resources in a more sustainable way and contributes to the same Sustainable Development Goal as the previous section (13): “Take urgent action to combat climate change and its impacts”. / Policies: The main environmental issues in which ESI is involved are: ◗ limiting energy consumption; ◗ limiting paper consumption and transitioning to the use of recycled paper; ◗ limiting water consumption; ◗ develop a waste recycling process all over the sites; ◗ constantly raise its employees’ awareness of measures taken to avoid wasting energy, and thereby to reduce its environmental impact. / Outcomes: Energy consumption In 2019, electricity consumption at the Rungis site totaled 452,027 kWh, an average of 1,412.6 kWh per employee, a decrease of 3% Thus, a better energy consumption management can be possible. On the Ter@tec campus where ESI has been involved since 2012, the installation of the PoD in 2016 (Point of Delivery – a high density mobile data center that can house up to 3,500 server nodes) increased the energy consumption (+24.24% in 2017 and +10.45% in 2018). For the Lyon site, consumption amounted to 50,678.09 kWh in 2019. For the other French sites, electricity consumption is not available, as it is either included in the rental or collective charges. Average electricity consumption per employee came to 3,247.15 kWh for the sites in France (Rungis site only), the Czech Republic, Tunisia, China, South Korea and the UK, representing a slight decrease of 3% compared to 2018. In Germany, electricity consumption came to 392,234 kWh in 2019 and has doubled compared to last year, in view of the inclusion of a third German site in the analysis scope. Moreover, energy consumption in the United States is not measurable as the facilities are leased. Energy usage is included in the utility fees, which include factors other than electricity, and is re-evaluated annually. Within the 2019 reporting scope, ESI Group uses renewable energy production at its Swiss site, where hydropower is used for electricity and thermic energy for heat. The Swiss office is located in a Minergie-certified building. Minergie is a Swiss association whose objective is to reduce energy consumption in buildings by proposing rational energy consumption and the use of renewable energies. 1 2 3 4 5 6 7 8 9 89 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Being an environmentally friendly player CONTENTS 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 upgrades of certain workspaces in France, the Group has given preference to lighting with low power consumption, removed hot water tanks from restrooms, and refurbished air conditioning systems. Motion sensors have been installed for lighting systems in Tunisia, in San Jose in the USA, and also in ESI Software in Germany. In Japan, the lights automatically turn off after a while. Furthermore, an energy audit has been realized in 2017 on the three German sites of the Group, in Neu-Isenburg, Stuttgart and Dresden. The result shows that the sites are good energy quality. It should be also noted that the Spanish office in Madrid is part of a LEED (Leadership in Energy and Environmental Design) certification project, led by the owner of the main building. paper consumption Everyday use by employees is the main source of paper consumption. Evolution of annual paper consumption per employee (in number of reams of 500 sheets) 1.1 1.4 3.2 1.4 1.9 4.4 -15% 1.05 2.9 2.9 1.4 3.5 3.9 Others China South Korea Switzerland France Japan Average 2018 Average 2019 2 reams /person 1.7 reams /person Paper consumption per employee (in number of reams of 500 sheets) 4.4 3.9 2.1 1.6 3.5 1.9 1.22 1.0 1.4 1.2 1.4 1.4 0.7 0.4 0.7 0.4 3.2 2.9 2.9 1.9 1.3 1.1 1.0 1.4 0.98 0.85 1.0 0.9 United States Japan Czech Republic France Germany Switzer- land United Kingdom Italy India Tunisia South Korea Spain China Brazil 2018 2019 All over the study perimeter average paper consumption in 2019 was a relatively low with about 1.7 reams of paper used per employee, with a decrease of 15% compared to 2018. This average could have been lower in 2019; it is partially explained by the inclusion of all French sites in the analysis, unlike last year. Thus, paper consumption in France went from 1.9 in 2018 (Rungis only) to 3.5 reams (all French sites). a Cloud-based service for electronic document archiving and storage, was installed 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 evaluations were also performed electronically in 2018 using the Loopline Systems tool. Paper consumption is higher in Japan, with a decrease of 11% in 2019. In China, paper consumption increased by 11.2% in 2019, in view of the large and exceptional number of tenders and local projects that required paper printing. However, Japan made 100% of its prints with recycled paper, followed by Spain on 50% of its prints and China on 35%. More than 70% of the countries included in the scope have automatically set up black and white and double-sided printing. ESI Group also continues its electronic documents 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. The invoices and purchase order processing is done via a tool called Yooz. In addition, SharePoint, ESI also offers its employees in France the possibility to create a safe on Digiposte to dematerialize HR documents such as pay slips. In addition, the use of a new local printing and delivery tool, called Gelato, allows subsidiaries to locally order the necessary quantity of documents they need. Ultimately, this tool saves paper by printing on demand, which allows ordering only what is needed and on a local basis. Finally, the Group has decided to stop printing its Universal Registration Document in paper format, reflecting ESI’s desire to continue reducing paper consumption and avoid unnecessary use and waste of paper. As indicated in Chapter 9 of this document, the Universal Registration Document will be available in electronic version on the Company’s website and will be available for consultation at headquarters upon request. 90 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Reporting Water consumption The Company’s business is not very water intensive as it does 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 information (Rungis site in France, ESI Mecas in the Czech Republic, the Spanish and Chinese sites), the average water consumption in 2019 was of 7.46 m3 per employee, a decrease of 7.23% compared to last year. For the Rungis site in France, water consumption rose from 132 m3 in 2018 to 1,182 m3 this year – this increase is mainly due to the move to a new building in 2019, with different equipment (more toilets, cafeteria, etc.). Water consumption is not measurable in other sites, as it is either included in the annual rental or collective charges, where parameters other than water consumption are taken into account. Waste disposal and recycling Due to its activity, ESI Group mainly produces non-hazardous waste, as well as paper, cardboard and plastic. To the best of its knowledge, the Group does not generate any hazardous waste, except waste electrical and electronic equipment (WEEE). 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 workforce is aware of this action in the daily life. In France, at the Rungis and Lyon sites, ESI is working with Elise, a waste collection and recycling company that provides stable employment for people with integration difficulties, particularly due to disability. In 2019, Elise recovered 868.5 kg of waste, including 653.5 kg of paper. Recycling this waste saved 16,375.5 liters of water, 4,932.8 kWh of energy and 13.3 trees. All the German, American, Czech, Japanese, Spanish, Italian and Swiss sites are also equipped with bins for sorting waste. It is planned to extend this measure to all European sites in the future. When it comes to other specific waste, notably waste of electrical 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. In France and the United States, end-of-life or obsolete hardware is collected by an authorized provider that manages the processing of electronic waste. In Germany, the Cleaning and Facilities Management Department, in coordination with the IT Departments, is tasked with collecting used electronic equipment. Waste management is then passed on to the local authority of each city. In Spain, an instruction explains where obsolete electronic equipment must be taken in order to be recycled. Furthermore, on request to our supplier in France, printer cartridges are collected and recycled via a completely ecological chain. Lastly, in the entire environmental scope, except Tunisia, ink cartridges, batteries, defective light bulbs and fluorescent tubes are recovered by our various suppliers. Containers are available to staff for this purpose in offices. Raising employee awareness During summer 2018, ESI produced a short video clip for all employees on simple ecofriendly actions to adopt at work (https:// www.youtube.com/watch?v=nUIdRRLDgRk). In 2019, a new online discussion group has been created on our internal communication platform “Chatter”, regarding environmental issues. This has enabled employees to share eco-responsible actions carried out in their professional and/or personal environment, all over the world. 4.7. REpORTING 4.7.1. REpORTING METHODOLOGY Data collection and consolidation Scope The Company has implemented a differentiated data collection and consolidation process according to the themes. Social reporting is covered by an HR officer who works with local HR representatives. The corporate communication 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 available data are sorted into three geographic areas corresponding to the Company’s business divisions: The Group’s ambition is to gradually expand the scope of coverage until it achieves full and reliable coverage of its subsidiaries. In line with its commitments, in 2019, ESI Group continued its actions to increase the collection and analysis of indicators internationally. ◗ Scope of social reporting: Since 2012, ESI’s Human Resources Information System has been upgraded to Sales Force for all countries, with local manage- ment of all payroll systems in order to take into account local specificities. Social data thus represents 100% of the workforce. ◗ Americas = Brazil and United States; ◗ Scope of environmental reporting: ◗ Asia-Pacific = China, India, Japan, Malaysia, South Korea, Thailand and Vietnam; ◗ Europe, Middle East and Africa = Czech Republic, England, France, Germany, Italy, Netherlands, Russia, Spain, Sweden, Switzerland and Tunisia. Since 2018, the Company has integrated Italy and Brazil to broaden the scope of environmental data reporting. As a result, environmental data are now provided by France, Germany, the Czech Republic, Japan, the United States, Tunisia, India, Switzerland, China, Spain, the United Kingdom, South Korea, Italy and Brazil, representing 99% of the workforce. ◗ Scope of societal reporting: Societal information is provided at a global level. Hence, the reporting scope represents 100% of ESI’s headcount since 2016. 1 2 3 4 5 6 7 8 9 91 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT44 STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Reporting CONTENTS 4.7.2. REpORT OF THE INSpECTING ORGANIZATION Period from February 1, 2019 to December 31, 2019 To shareholders, Following the request received from ESI Group (referred to hereinafter as “the entity”) and in our capacity as an independent third-party body with an accreditation granted by the COFRAC under registration No. 3-1081 (available on www.cofrac.fr), we hereby present our report on the consolidated statement on non-financial performance for the period from February 1, 2019 to January 31, 2019 (referred to hereinafter as the “Statement”), presented in the Group’s management report in accordance with the statutory and regulatory provisions of Articles L. 225-102-1, R. 225-105 and R. 225-105-1 of the [French] Code of Commerce. Entity’s duty The Board of Directors has a duty to draw up a Statement that complies with statutory and regulatory provisions, including a presentation of the business model, a description of the main non-financial risks, a presentation of the policies applied in view of these risks together with the results of those policies, including key performance indicators. The Statement has been drawn up according to the authoritative accounting pronouncements used, (referred to hereinafter as the “Pronouncements”) by the entity whose significant elements available upon request from the Company’s head office. Independence and quality control Our independence is defined in the provisions of L. 822-11-3 of the [French] Code of Commerce and the profession’s Code of Conduct. Moreover, we have set up a quality control system that includes documented policies and procedures aiming to ensure that rules of conduct, professional ethics and the applicable statutory and regulatory provisions are complied with. Duty of the independent third-party body We have a duty, on the basis of our work, to formulate a reasoned opinion expressing a conclusion of a moderate level of assurance as to: ◗ the Statement’s compliance with the provisions set out in Article R. 225-105 of the [French] Code of Commerce; ◗ the sincerity of the information furnished in application of 3° of I and of II of Article R. 225-105 of the [French] Code of Commerce, namely the results of the policies, including key performance indicators and actions relating to the main risks, referred to hereinafter as the “Information”. However, we have no duty to give an opinion on: ◗ whether the entity has complied with other applicable statutory and regulatory provisions, including, matters relating to the vigilance plan and the fight against corruption and tax evasion; ◗ compliance of products and services with applicable regulations. Nature and scope of the work We carried out the work in accordance with standards that apply in France and that determine the ways in which the independent third-party body carries out its mission, and with international standard ISAE 3000. We carried out our work between March 30, 2020 and April 17, 2020 for a period of approximately eight days/person. We held three interviews with people in charge of the Statement. We carried out the work enabling us to evaluate the extent to which the Statement complies with the regulatory provisions and the sincerity of the Information: ◗ we informed ourselves of the activity of all of the companies falling within the scope of the consolidation, of the exposure to the main corporate and environmental risks linked to this activity, and of its effects on human rights and the fight against corruption and tax evasion together with the policies that ensue and their results; ◗ we looked into the appropriateness of the Pronouncements with a view to their relevance, exhaustiveness, reliability, neutrality and comprehensive nature, taking into account, where necessary, the sector’s good practices; ◗ we checked that the Statement covered each category of information provided under III of Article L. 225-102 1 on corporate and environmental matters and whether human rights were being complied with and the fight against corruption and tax evasion; ◗ we checked that the Statement presents the business model and the main risks linked to the activity of all of the companies falling within the scope of the consolidation, including, where relevant and proportionate, the risks created by business relations, products or services as well as policies, actions and results along with key performance indicators; ◗ we checked, where relevant in view of the main risks or policies presented, that the Statement presents information set out in II of Article R. 225-105; 92 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS STATEMENT ON EXTRA-FINANCIAL pERFORMANCE Reporting ◗ we looked into the selection and validation process of the main risks; ◗ we enquired about the existence of internal verification and risk management procedures set up by the entity; ◗ we looked into the coherence of results and of key performance indicators used in view of the main risks and policies presented; ◗ we checked that the Statement covers the consolidated scope, namely all of the companies falling within the scope of consolidation in accordance with Article L. 233-16 with the limits set out in the paragraph 3.1 The methodology and 3.4.3 Being an environmentally friendly player; ◗ we studied the information-gathering process set up by the entity aiming to obtain information that is exhaustive and sincere; ◗ with regard to key performance indicators and other quantitative results that we consider to be the most important, we implemented: • analytical procedures consisting of checks to ensure that the data collected was consolidated correctly and that its evolution was coherent; • detailed tests on the basis of surveys, consisting of checks to ensure definition and procedures were applied correctly and of checks linking data to supporting documentation. This work was carried out with a selection of contributing entities(3) and covered between 14% and 100% of the consolidated data of the key performance indicators and results selected for these tests(4); ◗ we consulted documentary sources and held interviews to corroborate what we considered to be the most important qualitative information (actions and results); ◗ we looked into the overall coherence of the Statement with reference to our knowledge of the companies as a whole falling within in the scope of the consolidation. We consider that the work carried out and, exercising our professional judgment, enables us to formulate a conclusion of a moderate level of assurance; a higher level of assurance would have required more extensive verification work. In view of the fact that sampling techniques were used and that there are other limits inherent to the functioning of any system of information and internal control, we cannot rule out totally the risk that a significative anomaly in the Statement has not been detected. Conclusion On the basis of our work, we did not note any significant anomaly of such a nature as to cast any doubt on the fact that the statement of non-financial performance complies with the applicable regulatory provisions and that that Information, as a whole, has been presented with sincerity, in accordance with the Pronouncements. Lyon, on April 23, 2020 FINEXFI Isabelle Lhoste Partner 1 2 3 4 5 6 7 8 9 (3) Social indicators: ESI Group. Environmental indicators: ESI site in Lyon, Rungis, Tunisia and Czech Republic. (4) Developing talent and encouraging leadership and collaborative management, Promoting diversity and reducing inequalities, Contributing to the well-being of employees and ensuring the quality of life in the workplace, Limiting the impact of the Group’s locations. 93 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT4CONTENTS 94 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS MANAGEMENT REPORT Financial year 2019 (ended December 31, 2019) 5 5.1. BUSINESS ACTIVITIES DURING THE 2019 FINANCIAL YEAR 96 96 96 98 5.1.1. Highlights of the 2019 financial year 5.1.2. Results from the consolidated financial statements 5.1.3. Research and development 5.1.4. ESI Group annual financial statements and allocation of net result 5.2. OUTLOOK 5.2.1. Launch of a new Piloting Framework 5.2.2. Business trends 5.3. TABLE SUMMARIZING THE RESULTS OF PAST FIVE FINANCIAL YEARS 99 101 101 101 102 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 95 95 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT5 MANAGEMENT rEporT Business activities during the 2019 financial year CONTENTS As a reminder, in accordance with the decision of the General Meeting held on July 18, 2019 the Group’s fiscal year new closing date is December 31. In accordance with Article L. 451-1-2 of the French Monetary and Financial Code, this Chapter includes the Management Report to the General Meeting validated by the Board of Directors on March 19, 2020. This report accounts for the Company’s activities during the 2019 financial year (ended December 31, 2019), including the result of these activities and the Company’s outlook, and presents the Company’s accounts and balance sheets for the financial year. Information on various risk factors is included in Chapter 3 “Risks and risks management.” The Extra-Financial Performance Statement is reproduced in full in Chapter 4 of this document. Information on the Company’s share capital, stock options and free shares grant plans, and the transactions on the Company’s shares are included in Chapter 8 of this document. 5.1. BUSINESS ACTIVITIES DUrING THE 2019 FINANCIAL YEAr 5.1.1. HIGHLIGHTS oF THE 2019 FINANCIAL YEAr Financial position As anticipated, ESI Group has strengthened its growth in 2019, in a context of ongoing business and operational transformation. Evolution of Group Governance As announced in September 2018, the Board of Directors nominated Cristel de Rouvray as Chief Executive Officer starting February 1, 2019, Alain de Rouvray remaining Chairman of the Board of Directors. The Group set up a new Piloting Framework, aiming to reach performance in a more efficient way (refer to section 5.2.1). Set up of an operational excellence and strategic focus plan Aware of the potential offered to it but also of the initiatives to be implemented to achieve its objectives, the Company has launched an ambitious short- and medium-term action plan based on two fundamental axes: 1. Operational excellence ◗ optimize operational performance by clarifying the Group’s organization, ◗ measure, energize and control performance, ◗ improve internal/external readability by implementing “Best- in-class” management tools; 2. Focus: increase commercial efficiency and maximize the ROI of innovation ◗ capitalize on acquired technologies (M&A) and their complete integration into the Group’s solutions, ◗ align commercial/R&D resources with a channel (Engineering, Manufacturing, In-Service) and industry approach, ◗ develop a differentiated strategy for each of our four key industries, representing 88% of sales in 2019, and by customer type (large accounts and others). 5.1.2. rESULTS FroM THE CoNSoLIDATED FINANCIAL STATEMENTS 5.1.2.1. Review of financial performance Further to General Meeting decision on July 18, 2019, the closing date of the fiscal year has been shifted from January 31 (Y+1) to December 31 (Y). As a consequence, 2019 fiscal year ran for 11 months, from February 1, 2019 to December 31, 2019. To ensure comparability of presented information, proforma figures have been recalculated on main aggregates of financial statements, from January to December, for 2019 and also for 2018. Change in proforma results represents evolution of Group financial performance. In accordance with AMF Recommendation 2013-08, proforma information has been produced on 12 months at new closing date. 96 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS MANAGEMENT rEporT Business activities during the 2019 financial year The consolidated financial information presented below is compliant with IFRS standards. (in € millions) Total sales Licenses Services Gross margin % of sales EBITDA (before IFRS 16) % of sales Operating result (before IFRS 16) % of sales IFRS 16 standard impacts ◆ on EBITDA ◆ on operational result 2019 proforma January to December 2018 proforma January to December Variation at actual currency rate Variation at constant currency rate 7.8% 8.4% 5.4% 10.1% 5.6% 6.0% 3.8% 7.6% 52.2% 39.9% 126.6% 100% 146.2 115.9 30.3 107.4 73.4% 12.3 8.4% 8.3 5.7% 5.4 0.2 135.7 106.9 28.8 97.5 72.3% 8.1 6.0% 3.6 2.7% N/A N/A Improved financial results Full year sales increased +7.8% to €146.2 million (+5.6% at constant exchange rate), driven by an 8.4% growth in software license activity yielding stronger business recurrence. This topline growth has a positive impact on financial performance as the Group maintained control of the costs. Gross margin improvement Gross margin rose to €107.4 million (up 10.1% improving by +1.5 points to 73.4% vs. 71.9%). This increase was driven by the rise in licensing gross margin to 86.2% (vs. 84.5% in 2018 proforma) and the increasing proportion of license sales in the revenue mix. Lower growth in other operational costs The Group maintained its efforts to control other operational expenses (+5.6%, +€5.2 million) to support overall revenue increase and long-term development. Note that €1.5 million of the €5.2 million cost increase is linked to exchange rate (+4.0% at constant exchange rate). Improved profitability EBITDA (before IFRS 16) increased to reach €12.3 million (vs. €8.1 million), now 8.4% of total sales (vs. 6.0%). EBIT (before IFRS 16) rose to €8.3 million (vs. €3.6 million), now 5.7% of total sales. Sharpened value proposition on a handful of priority industries and solutions 2019 was a year of dynamic business development worldwide, driven by engagements with global industry leaders, whether long-term customers or accounts that have recently surfaced as strategic partners. These industrial actors are increasingly held to a result, an “outcome”: the service that their machine/car/part etc., offers, such as mobility, hours of maintenance-free flight or number of landing events, making them accountable for environmental and societal impact and for the experience “in service”. This entails being able to anticipate the way their industrial product or asset operates in numerous and uncertain use-conditions, thus shifting the standards of success to performance in use rather than standard product development efficacy. ESI’s mission is to enable industrialists to commit to these outcomes, in a handful of major industries – Automotive & Ground Transportation, Aeronautics & Aerospace, Energy and Heavy Industry. The Group has now organized its value proposition around specific outcomes for our customers: ◗ Pre-certification ◗ Smart Manufacturing ◗ Human Centric ◗ Pre-experience. 5.1.2.2. Financial position – consolidated balance sheet As at December 31, 2019, the Group’s cash position was €20.2 million, compared to €12.4 million at December 31, 2018. Financial debt amounted to €49.6 million (vs. €51.6 million). The Group’s net debt stood at €29.4 million (vs. €39.2 million at end December 2018). Gearing (net debt to equity) improved to reach 34.4%. At December 31, 2019, ESI Group held 6.3% of its share capital in treasury shares. 1 2 3 4 5 6 7 8 9 97 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT55 MANAGEMENT rEporT Business activities during the 2019 financial year CONTENTS 5.1.2.3. Cash flows and financing Cash position at December 31, 2019 amounted to €20.2 million compared to €12.4 million at December 31, 2018. The €7.8 million increase over financial year 2019 can be explained by: ◗ an operating cash-flow of +€5.7 million; ◗ a change in working capital requirements (WCR) of +€4.9 million; ◗ current capital expenditures paid by the Company of -€2.6 million, which represent a significant decrease compared to the two previous years (offices location moves); ◗ other financing and investing operations representing a net outflow of -€0.2 million, mainly corresponding to the yearly installment of the syndicated loan for -€2 million, to a new financing facility signed with BPI France for +€2.2 million, and -€1 million spent to purchase minority interests for several Group’s subsidiaries. 5.1.3. rESEArCH AND DEVELopMENT 5.1.3.1. Research and development costs The Products Direction also maintains a technology watch in support of all products. Research and development investments are recorded as soon as they are incurred. These costs amounted to €36.4 million in 2019 proforma accounts, an increase of 1.1% compared to 2018 proforma accounts. The capitalization of development costs had a +€2.1 million impact on the 2019 proforma income statement (vs. +€2.4 million in 2018 proforma). A breakdown of the expenses is provided in the note 6.1.2. to the consolidated financial statements. / Research and development (R&D) policy Not only the Outcome & Product Operations teams but also Discovery & Innovation teams in charge of R&D deliver products in line with the Group’s strategy and market needs and seeking to maintain the competitive edge of ESI Group’s solutions, focused on outcomes and industries. The R&D policy supports: ◗ the business model to adapt the changes in how products are used and to push boundaries for new computer platforms (GPU, SaaS, Cloud) or platforms in development with a view to upgrading the installed base; ◗ product improvements with a view to expand the installed base or winning over new customers with existing products; ◗ new products with a view to encourage our customers to deploy new products and processes or to improve their performance by working jointly with ESI Group. The teams allot 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, to accelerate adoption of these products in industrial applications; ◗ investments are made in innovative products by increasing research contracts with leading customers to ensure the viability of these new tools, and where applicable, to increase the chance of commercial success. The teams follow an approach that is both specific and generic in nature to meet different goals: ◗ ensuring generic products and components to meet multiple needs in multiple industrial segments and to support develop- ments of services, customers, or 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 comprehensive virtual prototyping platform that makes it easy to take needs into account for specific applications or custom services. The teams continue to partner actively to ensure: ◗ the identification of technologies, acquisition targets, and market opportunities in collaboration with its Scientific Committee; ◗ an evaluation of financing opportunities to support 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); ◗ a rapid industrialization for optimal market introduction. This environment reduces risks and ensures a high rate of co-financing and research tax credits. The Outcome & Products Operation division 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, nearshoring 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 to reduce related expenses. 98 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS MANAGEMENT rEporT Business activities during the 2019 financial year 5.1.3.2. Intellectual property (excluding trademarks) Most of the Company’s intellectual property consists of software and databases that are protected by international 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 performed 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 publishing contracts held by its subsidiaries (which were owners of related intellectual property rights before being acquired by the Company). 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 products represent either software integrated within the Company’s offering (for which replacement solutions could be obtained if the third-party software is discontinued) or complementary solutions. These latter solutions are not, however, critical to the operation of the Company’s software. Furthermore, the Company owns patents directly or through its subsidiaries. 5.1.4. ESI GroUp ANNUAL FINANCIAL STATEMENTS AND ALLoCATIoN oF NET rESULT 5.1.4.1. ESI Group annual financial statements ESI Group is the parent company of the Group; therefore, it owns and/ or controls all of its subsidiaries. It oversees all of its subsidiaries and centralizes most of software publishing activities. ESI Group’s revenue consists mainly of: 1. Royalties paid by subsidiaries, distributors, and agents and received in return for the right to grant software licenses to end customers; 2. Amounts billed to direct customers for software licensing and/ or services, in territories not covered by its subsidiaries; (in € thousands) Revenue Inventory Net impact of capitalization of development costs (capitalization and amortization) External expenses Salaries and social charges Other change TOTAL OPERATING PROFIT (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. 3. Management fees billed to subsidiaries as compensation for ESI Group oversight responsibilities; 4. Self-created assets stemming from research and development work. 2019 fiscal year ran for 11 months, from February 1 to December 31, not including January. This month being very significant in terms of revenue, 11 months results differ considerably from those of a complete 12 months fiscal year. The operating result for 2019 is a loss of -€24.7 million, compared to a loss of -€0.3 million for the previous year. This drop results from significantly lower revenue, due to the 11 months fiscal year. 2019(1) (Feb.-Dec.) 2018(2) (Feb.-Jan.) 55,296 (553) 476 (56,220) (23,041) (651) (24,694) 86,023 53 1,901 (62,674) (24,710) (930) (337) Change (30,727) (606) (1,425) 6,454 1,669 279 (24,357) 1 2 3 4 5 6 7 8 9 99 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT55 MANAGEMENT rEporT Business activities during the 2019 financial year CONTENTS ESI Group financial result is a loss of -€5.2 million compared to a profit of €2.6 million in 2018. The financial result can be broken down as follows: (in € thousands) Realized foreign exchange currency result Interests on loans Net provision for depreciation of investments and related receivables Dividends received from subsidiaries Other financial income (expenses) TOTAL (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. December 31, 2019(1) January 31, 2019(2) 103 (857) (4,514) 194 (149) (5,223) 143 (824) 1,517 1,690 70 2,595 Operational and financial results lead to an income before tax which is a loss of -€29.9 million, compared to a profit of €2.3 million in 2018. The Company has also recorded -€1 million of exceptional losses, compared to -€2.1 million in 2018. The Company recognizes a profit on income tax of €3 million, compared to €2.7 million in 2018, due mainly to French R&D tax credit. Net result is a loss of -€27.9 million, compared to a profit of €2.8 million in 2018. The Company’s equity stands at €72.7 million, compared to €100.4 million end January 2019, due to 2019 fiscal year net loss. Main changes in the balance sheet are the following: ◗ Decrease in account receivables by -€21.6 million, from €61.6 million to €40 million: this important change is the result of the change of closing date from end January to end December and of the seasonality of our activity in January; ◗ Increase of financial debt by +€9.5 million, due mostly to a higher use of the revolving credit line (€10 million used, which is a usual level end December each year, compared to €1 million used end January 2019). Breakdown of invoices issued and received at December 31, 2019 (Article d. 441-4 of the French Commercial Code) Reference terms of payment used are contractual terms. Terms greater than 91 days are debts to Group subsidiaries. Invoices issued (Customers) (in € thousands) Installment payment Number of related invoices Total amount of the invoices (all taxes included) Percentage based on total of revenue of the year (all taxes included) Total amount of invoices excluded related to doubtful receivables or not yet issued Invoices received (Suppliers) (in € thousands) Installment payment Number of related invoices Total amount of the invoices (all taxes includes) Percentage based on total of expenses of the year (all taxes included) Total amount of invoices excluded that are related to bad debts or debts not invoiced or recorded 0 day (indicative) 1 to 30 days 31 to 60 days 61 to 90 days 91 days and more Total (1 day and more) 184 15 31 40 907 993 11,245 1,330 1,914 1,407 23,314 25,463 19.79% 2.34% 3.37% 2.48% 36.64% 44.83% 3,324 2,502 2,502 0 day (indicative) 1 to 30 days 31 to 60 days 61 to 90 days 91 days and more Total (1 day and more) 68 44 24 26 1,089 1,183 3,738 1,562 1,221 3,581 22,266 28,628 5.54% 2.32% 1.81% 5.31% 33.00% 42.43% 13,511 Two branches are integrated within ESI Group’s financial statements; details are shown in note F.3 to the financial statements. 100 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS MANAGEMENT rEporT Outlook 5.1.4.2. Allocation of net result Situation at December 31, 2019: ◗ Net loss for the year: -€27,851,405.66; ◗ Profit carried forward: €40,907,521.88; ◗ Total to be allocated: -€27,851,405.66. Allocation: ◗ -€27,851,405.66 to profit carried forward. Following this allocation, the legal reserve stands at €1,805,367.60. Profit carried forward stands at €13,056,116.22. 5.2. oUTLooK 5.2.1. LAUNCH oF A NEW pILoTING FrAMEWorK The Group has announced the implementation of a new Piloting Framework, reflecting its mission and ambitions, in the aim of reaching performance in a more efficient way. It also represents a new mindset and a new way of working together within ESI, as a shared commitment to execute the Group’s strategy. As the world is filled with technological disruption and rapid digital transformation, consumers increasingly value product performance and ecological footprint over sophisticated features. ESI offers its customers a highly credible path and partnership in order to adapt to the “outcome economy”. This new Piloting Framework ensures that ESI can fulfill this mission: to double down on ESI DNA while becoming more efficient and more global. In other words, the Piloting Framework represents a new mindset and a new way to look at performance and pilot the Company. It’s also important to point out that this Piloting Framework is an under continuous-construction project, that aims to provide a global vision to all ESI’s stakeholders. 5.2.2. BUSINESS TrENDS During last two years the Group was under perpetual transformation, resulting in a return to growth. Ongoing transformation plan is still impacting the profitability level of the Group: this impact is necessary and has been announced. Along with shorten industrial development cycles and time-to-market, regulatory and consumer requirements increase, industrial players must find trusted partners that will enable them to innovate more safely and achieve their performance and productivity objectives. The linearization of the Group’s organization to align with the value chain per industry: from Research to the marketing of solutions, via innovation and the Go to Market phase, allows it to eliminate silos in its organization, thus strengthening collaboration, complementarities and, de facto, operational efficiency. By launching at the right time its own in depth technological and organizational transformation, ESI Group has kept pace with the evolution of its industrial lead customers (Industry 4.0 and Smart Factory) and anticipated their future needs. By systematically integrating cutting-edge technologies (Internet of Things, Big Data, Artificial Intelligence, additive manufacturing etc.) into solutions that draw on its unique expertise in physics of materials, ESI Group has articulated a new global approach centered on industrial productivity and the performance of products beyond their initial development to their entire lifecycle (Product Performance LifecycleTM). The Group’s vision of: “Toward zero real tests, zero real prototypes, and zero unpredicted downtime”, fully addresses the short- and medium-term objectives of global industrial leaders. This approach is gaining traction with the Group’s strategic customers and is already bearing fruit in the form of tangible commercial successes. For example: ◗ elimination of the physical prototyping stage in the tender for supply of equipment for a major European car manufacturer; ◗ achievement of “zero real prototype” prior to the five stars official certification stage at a major European car manufacturer; ◗ use of immersive virtual reality to accelerate and secure the manufacturing of a new helicopter for a US aeronautic OEM. One of the main results of the implementation of this approach: Renault Group obtained a 5-star certification (maximum score) in the Euro NCAP safety tests for its new Clio 5 in 2019, using ESI Group’s Virtual Prototyping technologies for the design of this model. Since 2001, ESI Group has been supporting Renault Group in its design and manufacturing methodologies for its different vehicle ranges. 1 2 3 4 5 6 7 8 9 101 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT55 MANAGEMENT rEporT Table summarizing the results of past five financial years CONTENTS 5.3. TABLE SUMMArIZING THE rESULTS oF pAST FIVE FINANCIAL YEArS Closing date Duration of financial year (number of months) Capital at balance sheet date Share capital (in €) Number of shares ◆ ordinary shares ◆ preference shares Maximum number of shares to be created ◆ via convertible bonds ◆ via subscription rights Operations and results (in €) 12/31/2019 01/31/2019 01/31/2018 01/31/2017 01/31/2016 11 12 12 12 12 18,055,476 18,053,676 18,049,326 17,975,976 17,865,216 6,018,492 6,017,892 6,016,442 5,991,992 5,955,072 205,334 151,448 108,843 175,733 207,080 Revenue (excl. tax) 55,295,671 86,022,988 83,883,977 84,313,214 79,156,886 Earnings before tax, employee profit-sharing, allowances for amortization and provisions (2,973,365) 27,025,120 31,555,313 28,651,433 21,642,463 Income tax (3,024,257) (2,698,695) (2,228,379) (1,669,380) (2,205,946) Employee profit-sharing Allowances for amortization and provisions Net income Distributed earnings Earnings per share (in €) 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 Average headcount(1) Payroll (in €) Amounts paid in benefits (social security, social welfare, etc.) (in €) 33,849,027 26,903,999 28,762,466 28,688,439 19,916,428 (27,851,406) 2,819,816 5,546,976 1,632,374 3,931,981 15,967 (0.21) 4.94 5.70 5.06 4.00 (4.63) 0.47 0.92 0.27 0.66 258 264 243 234 217 15,027,428 15,880,764 14,766,952 14,159,959 13,203,318 6,969,914 7,466,508 6,971,314 6,711,622 6,295,088 (1) Average headcount in France and in branches outside France, presented starting financial year ending January 2019. 102 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 6 FINANCIAL STATEMENTS 6.1. CONSOLIDATED FINANCIAL STATEMENTS 6.1.1. Consolidated income statement 6.1.2. Consolidated balance sheet 6.1.3. Consolidated statement of changes in equity 6.1.4. Consolidated statement of cash flows 6.1.5. Notes to the consolidated financial statements 6.1.6. Statutory Auditors’ report on the consolidated financial statements 6.2. ESI GROUP ANNUAL FINANCIAL STATEMENTS 6.2.1. Income statement 6.2.2. Balance sheet 6.2.3. Notes to ESI Group annual financial statements 6.2.4. Statutory Auditors’ report on the financial statements 104 104 105 106 107 108 138 143 143 144 145 166 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 103 103 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 6.1. CONSOLIDATED FINANCIAL STATEMENTS 6.1.1. 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 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 €) Diluted earnings per share (in €) 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. Note December 31, 2019(1) (11 months) January 31, 2019(2) (12 months) 75,320 25,718 1,159 102,197 (33,873) (29,832) (38,841) (21,476) (21,825) 1 (21,824) (2,563) 26 (24,360) 3,446 (20,914) 32 (20,946) (4.06) (4.01) 109,836 28,793 784 139,413 (37,907) (31,718) (43,042) (19,970) 6,776 233 7,010 (1,277) 106 5,839 (2,505) 3,334 0 3,334 0.59 0.59 4.1 6.1.2 3.2.2 7.2 8.1 9.3 9.3 December 31, 2019(1) (11 months) January 31, 2019(2) (12 months) (20,914) (12) 866 (688) 166 (20,748) (20,792) 44 3,334 15 (534) (201) (720) 2,614 2,599 15 (1) February 1, 2019 - December 31, 2019. (2) February 1, 2018 - January 31, 2019. 104 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 6.1.2. CONSOLIDATED BALANCE SHEET (In € thousands) Assets Non-current assets Goodwill Intangible assets Property, plant and equipment Rights-of-use assets(1) 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 Liabilities 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 Non-current finance lease obligation(1) Provision for employee benefits Deferred tax liabilities Cash-flow hedging instruments Other long term debt Current liabilities Short-term share of financial debt Current finance lease obligation(1) Trade payables Accrued compensation; taxes and others short-term liabilities Provisions for contingencies, risks and disputes Deferred income TOTAL LIABILITIES Note December 31, 2019 January 31, 2019 3.2 6.1 6.2 4.7 8.2 10.1.1 7.1.4 4.2 10.1.2 10.1.3 7.1.3 9.1 7.1.2 4.7 5.3 8.2 7.1.4 7.1.2 4.7 10.2.1 10.2.2 4.3 152,176 41,448 62,139 5,633 20,680 1,099 17,204 3,264 6 82,183 44,733 13,720 3,489 20,241 129,389 41,404 61,811 6,101 - 1,083 10,920 8,070 0 101,186 65,131 15,348 2,620 18,087 233,655 230,575 85,983 85,912 18,055 25,833 61,982 (20,946) 987 71 65,941 30,457 20,002 11,016 3,761 28 677 81,731 19,143 631 8,632 24,230 675 28,421 105,633 104,863 18,054 25,818 57,862 3,334 (205) 771 51,370 36,255 - 9,979 3,738 13 1,385 73,572 8,801 - 8,848 30,560 762 24,601 233,655 230,575 (1) ESI Group has applied IFRS 16 standard for the first time as of February 1, 2019. In accordance with the adopted transition method, the comparative financial information has not been restated. The notes are an integral part of the consolidated financial statements. 105 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 6.1.3. 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 Equity attributable to parent company owners Translation differences Minority interests Total Equity At January 31, 2018 6,016,442 18,049 25,782 56,460 349 100,638 844 101,483 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 1,450 4 36 Treasury shares Share-based payments Transactions with non-controlling interests Other movements (554) (554) (554) 15 (196) (181) 3,334 3,153 (131) 751 688 276 15 (554) (196) (735) 3,334 2,599 40 (131) 751 688 276 15 (534) (201) (720) 3,334 2,614 40 (131) 751 599 277 20 (5) 15 0 15 (89) 1 At January 31, 2019 6,017,892 18,053 25,818 61,197 (205) 104,861 771 105,633 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 600 2 15 Treasury shares Share-based payments Transactions with non-controlling interests Other movements (20,946) (21,640) 22 690 927 187 (12) (682) 848 (12) 848 (682) (694) 848 154 (20,946) 848 (20,792) 44 (20,748) (12) 866 (688) 166 (20,912) 18 (6) 12 32 17 22 690 177 193 85,983 (750) 6 71 17 22 690 927 187 AT DECEMBER 31, 2019 6,018,492 18,055 25,833 41,383 643 85,912 The notes are an integral part of the consolidated financial statements. 106 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 6.1.4. CONSOLIDATED STATEMENT OF CASH FLOWS (In € thousands) Net income before minority interests Share of profit of associates Amortization and provisions(3) 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 (losses) on sales of assets Operating cash flow 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(3) Proceeds from issue of shares Purchase and proceeds from disposal of treasury shares Dividends paid Net cash used 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 NET CHANGE IN CASH AND CASH EQUIVALENTS December 31, 2019(1) (11 months) January 31, 2019(2) (12 months) (20,946) (32) 8,882 (1,300) (3,446) (1,980) 120 690 114 (17,879) 19,446 (293) (865) 18,288 409 (591) (1,390) - (795) (7) (2,784) 14,422 (10,148) 17 22 - 4,312 216 2,153 18,087 20,241 2,154 3,334 (106) 4,353 (2,679) 2,505 (1,736) (370) 751 (6) 6,046 (442) (1,066) 5,582 4,074 10,120 (796) (3,395) 8 (4) (2,425) (6,613) 49,365 (49,869) 40 (131) (89) (684) (456) 2,367 15,720 18,087 2,367 (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. (3) IFRS 16 impact: increase of amortization and provisions and thus improvement of operating cash flow by +€5.2 million, against the repayment of finance lease obligation in the financing part of the Cash Flow Statement for -€5.2 million. The notes are an integral part of the consolidated financial statements. 1 2 3 4 5 6 7 8 9 107 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 6.1.5. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS Table of contents of notes to the consolidated financial statements NOTE 1. Accounting principles NOTE 2. Significant events of the year NOTE 3. Scope of consolidation NOTE 4. Operating data NOTE 5. Personnel costs and employee benefits NOTE 6. Intangible and tangible assets NOTE 7. Financing and financial instruments 108 109 111 115 118 124 127 NOTE 8. Income tax NOTE 9. Equity and earnings per share NOTE 10. Other balance sheet items NOTE 11. Related party transactions NOTE 12. Fees paid to Statutory Auditors NOTE 13. Subsequent events 132 133 134 136 136 137 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 Suffren, Paris (75015), France. ESI Group SA is the parent company of some 30 subsidiaries operating throughout the world (see Chapter 1.3.2 of this Universal Registration Document), together comprising ESI Group. ESI Group is the world’s foremost creator of Virtual Prototyping 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 manufacture and test the products of the future, ensuring pre-certification. Used together with latest-generation technologies, today Virtual Prototyping is part of an overarching approach to the Product Performance LifecycleTM (PPL), which addresses products’ operating performance throughout its useful NOTE 1.2. ACCOUNTING STANDARDS APPLIED The consolidated financial statements at December 31, 2019 were prepared in accordance with the IFRS standards, as approved by the European Union at this date. These standards are available on the European Union website. lifecycle, from rollout to withdrawal. The creation of Hybrid TwinTM 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. 2019 fiscal year ran exceptionally for 11 months, from February 1 to December 31, further to the change of closing date decided by the General Meeting held on July 18, 2019, from January 31 (Y+1) to December 31 (Y). Please refer to note 2 “Significant events of the year”. Financial statements are presented in thousands of euros. The 2019 financial statements were approved by the Board of Directors on March 19, 2020 and will be submitted to the General Meeting of June 25, 2020 for approval. Moreover, consolidated financial statements have been prepared in accordance with the historical cost method, with some exceptions such as financial assets and liabilities booked at fair value. NOTE 1.3. NEW IFRS STANDARDS AND INTERPRETATIONS New standards, amendments and interpretations effective in the European Union and mandatory for financial years beginning on or after February 1, 2019 The group applies the mandatory new standards for financial years beginning on or after February 1, 2019: ◗ IFRS 16 – Leases; ◗ IFRIC 23 – Uncertainty over income tax treatments. / IFRS 16 – Leases IFRS 16 is a major revision in the accounting of leases. The standard provides a single lessee accounting model, requiring lessees to recognize assets and liabilities for all leases. Based on this model, the amortization of assets is accounted for in operating expense, and the cost of the debt towards the lessor is accounted for in financial expense. Under the standard applied on the financial year ended on January 31, 2019, the rent expense was recorded within the operating expense. The Company adopts IFRS 16 for the financial year beginning February 1, 2019 using the simplified retrospective approach. Under this approach, the effect of the first-time application of the standard is recognized as adjustment to the opening balance of the consolidated equity without restatement of comparative information. In accordance with IFRS 16, leases are recognized as property, plant and equipment under a right-of-use. These contracts are recognized at the commencement date of the contract for the discounted value of the minimum lease payments for a liability corresponding to the lease liabilities due to the lessor. The assets are amortized on a straight-line basis over the lease term, which corresponds to the non-cancellable period of each contract, unless the Group is reasonably certain to exercise the contractual renewal options. As of February 1, 2019, the Group has recognized a new right-of-use assets, mainly related to leased offices and vehicles, and a new liability related to lease debts for an amount of €23.470 million. 108 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements The following table summarizes the impacts of adoption IFRS 16 on the Group’s Consolidated Balance Sheet as at February 1, 2019 for each of line items affected. The line items which were not affected by the new standard are not included. (In € thousands) Assets Non-current assets Out of which Right-of-use – leased offices Out of which Right-of-use – leased cars TOTAL ASSETS Liabilities Non-current liabilities Out of which finance lease obligation TOTAL LIABILITIES Commitments under operating leases as disclosed in the consolidated financial statement as of January 31, 2019 Renewal options and other adjustments non identified in the commitments FINANCE LEASE OBLIGATION IN LIABILITIES AS OF FEBRUARY 1, 2019 January 31, 2019 IFRS 16 adjustment February 1, 2019 129,389 230,575 51,370 230,575 22,166 1,304 23,470 23,470 23,470 152,859 22,166 1,304 254,045 74,840 23,470 254,045 22,831 640 23,470 The Group has chosen to use the two exemptions allowed by IFRS 16 and to keep recognition as operating expense for leases with a lease term no more than 12 months or leases with underlying asset of low value. To determine the lease liabilities, the Group has discounted future lease payments using weighted average marginal borrowing rate as of February 1, 2019 of 2.5%. Details of impact of IFRS 16 on 2019 financial statements are presented in note 4.7. / IFRIC 23 – Uncertainty over income tax treatments On June 7, 2017, IFRIC IC published IFRIC 23. The application clarifies the accounting for uncertainties in income taxes. ESI Group has undertaken an assessment of the potential impacts of its application starting from February 1, 2019 and has not identified any significant impact. NOTE 1.4. USE OF ESTIMATES AND ASSUMPTIONS The preparation of the consolidated financial statements requires the consideration of estimates and assumptions established by Group management that have an impact on the valuation of assets and liabilities, as well as on the amounts recorded as income and expenses during the year. The estimates relate in particular, but not exclusively, to the assumptions used in determining the impact of stock options and free shares allocated to certain employees, business combinations, revenue recognition, depreciation of fixed assets, valuation of deferred tax assets, valuation of derivative instruments, capitalized development costs, provisions for depreciation of doubtful receivables, income tax expense, provisions for risks and litigation and provisions for post-employment commitments. NOTE 2. SIGNIFICANT EVENTS OF THE YEAR CHANGE OF CLOSING DATE – PROFORMA INFORMATION Further to the decision by General Meeting held on July 18, 2019, closing date of the fiscal year has been shifted from January 31 to December 31. Accordingly, 2019 fiscal year has run exceptionally for 11 months, from February 1 to December 31, not including the month of January. To ensure good comparability of information and in accordance with AMF Recommendation 2013-08, the main aggregates of the financial statements have been recalculated on proforma basis from January to December for 2019 and 2018. Proforma data allow to present the Group’ activity over two full financial years. As January is a significant month in terms of sales (renewal of almost half of the contracts in the licensing business), the results for the 11 months 2019 fiscal year differ substantially from those of a full 12 months year. 1 2 3 4 5 6 7 8 9 109 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS (In € millions) Revenue Gross margin Research and development costs Selling and marketing expenses General and administrative expenses Operating result (In € millions) Gross financial debt Cash and cash equivalent Net financial debt 2019 Proforma Jan. to Dec. 2018 Proforma Jan. to Dec. Variation 146.2 107.4 (31.7) (44.3) (23.1) 8.3 135.7 97.5 (31.3) (42.0) (20.6) 3.6 10.5 9.8 (0.4) (2.3) (2.7) 4.6 Var % 7.8% 10.1% 1.4% 5.5% 12.9% 127% December 31, 2019 December 31, 2018 49.6 20.2 29.4 51.6 12.4 39.2 (In € millions) Operating Cash flow Change in working capital requirement Acquisitions of intangible and tangible assets Other investment and financing flows Total change in cash explained Opening cash position at January 1, 2019 (proforma) Closing cash position at December 31, 2019 Change in cash position 2019 Proforma Jan. to Dec. 5.7 4.9 (2.6) (0.2) 7.8 12.4 20.2 7.8 Proforma data are presented mainly on the income statement, the cash flow statement and on financial debt. The 12 months proforma results substantially differ from 11 months results. In terms of accounting method, 2018 and 2019 proforma information have been prepared without any IFRS 16 impact to ensure comparability. Proforma information have been established according to the following methodology: ◗ Additional consolidation closings have been made for ESI Group and all subsidiaries as of December 31, 2017 and December 31, 2018, enabling to produce income statements from January to December 2018 and 2019 and balance sheet directly comparable with the balance sheet as of December 31, 2019. ◗ The process applied for additional consolidation closings was the same as for a usual year-end closing for all the Group’ subsidiaries. ◗ More specifically, the following methods have been applied: • licensing revenue is related to two performance obligations: access to the software (or license itself) and the maintenance service. Revenue for the access to the license is recognized at a point in time at the moment when control is transferred to the client, and the revenue from maintenance service is recognized on a straight-line basis over the one-year term of the support agreement – which is the usual method of each annual closing, in accordance with IFRS 15; • service revenue consists mainly of consulting fees. The consulting revenue is recognized according the percentage of completion method at end December 2018, for all entities with CHANGE IN SCOPE OF CONSOLIDATION During the year ended December 31, 2019: ◗ the Group has exercised its option to purchase the minority interests of ESI ITI GmbH (4%). The ownership of this German entity as well as its French subsidiary ITI Southern Europe is at 100% at December 31, 2019; monthly monitoring. In the absence of monthly monitoring, a prorata by month for the last quarter of fiscal year 2018 has been calculated – this approach being acceptable given the month-to-month linearity of this activity’s sales; • costs directly linked to revenue (such as royalties paid to third parties or commissions paid to agents) were calculated on the basis of monthly revenue; • staff costs excluding bonuses result from the payroll and social security charges paid each month, related accruals have been calculated according to the actual situation existing at each closing date. Bonus accruals have been adjusted so that each proforma reflects the costs for a full 12 months year; • the net impact of the capitalization of development costs and net charges to amortization, depreciation and provisions were calculated at each closing date; • some other external costs may result from prorata temporis estimates, such as office rental expenses which are invoiced quarterly. Finally, the components of the cash flow were determined through a cash flow statement drawn up according to the usual consolidation process. ◗ the Group has dissolved the Chinese entity Zhong Guo ESI Co, Ltd and the American entity ESI US Inc. as of December 31, 2019; ◗ in India, the entity Pacific Mindware Engineering Private Ltd. was absorbed by the entity ESI Software (India) Private Ltd. Please refer to notes 3.1 and 3.3. 110 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 3. SCOPE OF CONSOLIDATION NOTE 3.1. ACCOUNTING POLICIES RELATED TO THE SCOPE OF CONSOLIDATION Consolidation method Business combinations The annual financial statements of the companies controlled by ESI Group are fully consolidated from the date at which ESI Group takes control until the date when control 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 exercises joint control. The Group’s scope of consolidation at December 31, 2019 is detailed in note 3.4. Closing date The change of closing date from January 31 to December 31 has been applied to all Group’s entities, except for India where the only annual closing date permitted by local regulations is March 31. Indian subsidiaries prepare interim statements as of December 31 for consolidation purposes. Internal transactions All transactions between consolidated companies, including 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 currency 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 components of the net equity, which are maintained at the historical rate. Income statements are translated at the average exchange rate for the period. Translation differences are recorded in a specific “Translation differences” account on a different line from Other Comprehensive Income. Transactions and balances in foreign currencies At the closing date, monetary assets and liabilities denominated in a 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 Comprehensive Income (OCI), under “Translation differences”. Business combinations are recognized by the acquisition method: ◗ the identifiable assets acquired and liabilities assumed are measured at fair value as of the acquisition date; ◗ any non-controlling interest in the acquiree (i.e. minority interest) is measured either at fair value (“full goodwill method”) or at the non-controlling interest’s proportion of the acquiree’s identifiable net asset (“partial goodwill method”). This option applies on an individual transaction basis. Any contingent consideration related to business combinations 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 reporting period. Any changes in the fair value of contingent consideration arising more than one year after the acquisition 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 acquisition date. Other changes are offset against goodwill. Where put options have been granted to minority shareholders of subsidiaries, the amount recognized in liabilities 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”). Discounting 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 previously held at the corresponding acquisition date, revaluated in the income statement; and ◗ the net fair value of the identifiable assets and liabilities acquired. The Group has 12 months from the acquisition date to determine the fair value of the assets and liabilities and declare the amount of goodwill acquired. If the acquisition price is lower than the fair value of identified assets, liabilities and contingent liabilities, the difference is immediately recorded in the income statement. In accordance with IFRS standards, goodwill is not amortized 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-generating units (“CGU”) for the purposes of impairment test. Costs directly related to acquisitions are recorded as expenses when incurred, and presented on a separate line of the income statement, in “other operating income and expenses”. 1 2 3 4 5 6 7 8 9 111 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS For intangible assets acquired in the context of a business combination, amortization is recorded in Current Operating Income, split between “research and development costs” and “selling and marketing expenses”, depending on the type of asset – codes are amortized over five years in research and development costs, customer relationships are amortized in selling and marketing expenses over a period which vary according to each newly acquired activity. 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 acquired technologies (source codes, algorithms, etc.). As the Group has pursued its development, it has become clear that certain technologies acquired to resolve a specific issue could be used to resolve other issues as well. Incorporating this technology portfolio in the Group’s software packages makes it possible to use all of these technologies in all of the Group’s projects depending on the solutions 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 distribution subsidiary is dependent not only on its own commercial performance but also, even more so, on the software offering. The impairment test is based on discounted value of forecast future cash flows according to business projections, technology penetration and the competitive situation. Future cash flows are estimated as follows: ◗ the last financial 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 which can be based on past experience. The cash flows derive from the business plan drawn up by the Group’s Management. The discount rate applied as of December 31, 2019 is the Group’s weighted average cost of capital (WACC) adjusted with a risk premium. It stands at 9.95% compared to 10.5% at January 31, 2019. The present value of the CGU is determined by adding: ◗ the present value of forecasted future cash flows over the explicit period of 5 years, as described above; ◗ the terminal value calculated by capitalizing to perpetuity the last cash-flow of the explicit period. The long-term growth rate applied is 3%. This present value of the CGU either confirms the fair value of the assets of the CGU, or serves as a basis for calculating potential impairment. The impairment test performed on the CGU at December 31, 2019 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 or a 1% decrease in the long-term growth rate. No impairment has been identified. The Group’s Management believe no reasonable change in key assumptions mentioned above that would have caused the CGU’s recoverable to be significantly below its carrying amount. 112 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 3.2. IMPACT OF THE CHANGE IN THE SCOPE OF CONSOLIDATION ON GOODWILL AND NON-CURRENT RESULT 3.2.1. Change in goodwill (In € thousands) January 31, 2019 Increase Decrease Foreign exchange gain/loss December 31, 2019 Gross values TOTAL NET VALUES 41,404 41,404 No acquisition took place during financial year 2019. 3.2.2. Non-current result (In € thousands) Acquisition costs Other external expenses and income TOTAL OPERATING INCOME AND EXPENSES (92) (92) 137 137 41,448 41,448 December 31, 2019 January 31, 2019 1 1 233 233 As a reminder, until January 31, 2018, the amortization of intangibles assets acquired in business combinations was presented in Other operating income and expenses. However, due to significant amounts involved and the recurrence of the amortization, it has been reclassified in the Current operating result effective from January 31, 2019 closing – please refer to note 3.3. NOTE 3.3. AMORTIZATION OF INTANGIBLES ASSETS ACQUIRED IN BUSINESS COMBINATIONS Starting from January 31, 2019, the amortization of intangibles assets acquired in business combinations is presented in the Current operating result, allocated between research and development costs and selling and marketing expenses depending on their type (respectively for codes and customer relationships). At December 31, 2019, the amortization of codes amounts to €561 thousands (€613 thousand as of January 31, 2019), and the amortization of the customer relationships stands at €373 thousand (€406 thousand as of January 31, 2018). 1 2 3 4 5 6 7 8 9 113 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS NOTE 3.4. LIST OF ENTITIES IN THE SCOPE OF CONSOLIDATION The table below presents the dates of creation of head offices of Group subsidiaries and the percentage of capital directly or indirectly held: Subsidiaries Fully consolidated subsidiaries Date of creation or acquisition Subsidiary head office % of capital held December 31, 2019 January 31, 2019 Engineering System International April 1973 Paris, France Engineering System International GmbH July 1979 Eschborn, Germany ESI Japan, Ltd. ESI North America, Inc. Hankook ESI Co., Ltd. ESI Group Hispania s.l. STRACO SA Mecas ESI s.r.o. ESI UK Ltd. July 1991 Tokyo, Japan March 1992 Troy, Michigan, USA September 1995 Seoul, South Korea February 2001 Madrid, Spain April 2001 Compiègne, France May 2001 Plzen, Czech Republic January 2002 London, England ESI US Holding, Inc. August 2002 Dover, Delaware, United States ESI US R&D, Inc. August 2002 San Diego, California, United States Calcom ESI SA December 2002 Lausanne, Switzerland ESI Software (India) Private Ltd. February 2004 Bangalore, India Hong Kong ESI Co., Ltd. Zhong Guo ESI Co., Ltd. ESI-ATE Holdings Ltd. February 2004 Hong Kong, China February 2004 Guangzhou, China July 2006 Hong Kong, China ESI ATE Technology (China), Ltd. August 2006 Beijing, China ESI South America Comércio e Serviços de Informatica, Ltda June 2008 São Paulo, Brazil ESI Italia s.r.l. September 2008 Bologna, Italy Pacific Mindware Engineering Private Ltd. December 2008 ESI Services Tunisia ESI Group Beijing Co., Ltd. April 2009 October 2010 Pune, India Tunis, Tunisia Beijing, China ESI Software Germany GmbH August 2011 Stuttgart, Germany ESI Nordics AB ESI US, Inc. OpenCFD Ltd. CyDesign Ltd. December 2011 Sollentuna, Sweden February 2012 Farmington Hills, Michigan, United States September 2012 Berkshire, England October 2013 Oxford, England ESI Services Vietnam Co., Ltd. December 2013 Ho Chi Minh City, Vietnam CIVITEC SARL ITI GmbH March 2015 Versailles, France January 2016 Dresden, Germany ITI Southern Europe SARL January 2016 Rungis, France Mineset Inc. Scilab Enterprises February 2016 Milpitas, United States February 2017 Paris, France Subsidiaries accounted for using the equity method JV AECC-ESI (Beijing) Technology Co., Ltd. February 2014 Beijing, China 100% 100% 97% 100% 99% 100% 98% 95% 100% 100% 100% 99% 100% 100% 0% 100% 100% 95% 100% 0% 95% 100% 100% 100% 0% 100% 0% 100% 80% 100% 100% 100% 100% 45% 100% 100% 97% 100% 99% 100% 98% 95% 100% 100% 100% 99% 100% 100% 100% 100% 100% 95% 100% 100% 95% 100% 100% 100% 100% 100% 100% 100% 80% 96% 96% 100% 100% 45% 114 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 4. OPERATING DATA NOTE 4.1. REVENUE The Group ESI derives revenue from two primary sources: software licensing and related maintenance activity, and services activity. The Company accounts for a contract with a client when there is a written agreement that creates legally enforceable rights and obligations, including payment terms, when the contract has commercial substance and when collection consideration is probable. A performance obligation is a promise in a contract with a client to transfer products or services that are distinct from the other promises of the contract. Revenue is recognized when, or as, control of a promised product or service is transferred to a client, in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those products or services. Software licensing and maintenance Licensing revenue is generated from royalties paid under licensing agreements granted to end customers and related maintenance services. Maintenance services include updates and technical support. Revenue is split between three types of contracts: ◗ lease of annual renewable licenses that include the right to use the software plus maintenance services for one year; ◗ lease of “paid up licenses” conferring to end clients the right to use the software for unlimited duration, with one year of maintenance services – with the possibility of renewal through a maintenance contract; ◗ maintenance services alone – this contract completes “paid up licenses” contracts. In compliance with IFRS 15, ESI’ customer contracts have been analyzed in five stages in order to identify the component of the performance obligations and the price of each. Two performance obligations have been identified: access to the software (the licensing itself) and the maintenance service – please note that this distinction has been applied by the Group prior the entry into force of the standard. For the annual licensing contracts and the “paid up licenses”, the allocation of the price has been realized according to the residual approach. As a result, 15% of the price of annual licensing contracts and 5% of the price of “paid up licenses” contracts have been allocated to maintenance service. Revenue for the access to the license is recognized at a point in time at the moment when control is transferred to the client, and the revenue from maintenance service is recognized on a straight-line basis over the one-year term of the support agreement. Services Service revenue consists mainly of consulting and training fees. The consulting revenue is recognized according to the percentage of completion method. Corresponding costs are recorded as soon as they are incurred. Contracts with a probable final loss are covered by a provision for loss on completion, recorded as a liability on the balance sheet. The loss is fully provisioned as soon as it is known and reliably estimated, regardless the stage of completion. Revenue for training is recognized upon completion. Backlog The Group’s backlog for licensing activity is composed of all signed orders received from customers at the closing date, with execution starting from the first day of next fiscal year. Despite most of licensing contracts are renewable from a fiscal year to the next one, only signed orders for next year are included in the backlog. As purchase order are often signed by customers just before start of the execution period, this explain the level of backlog vs. high recurring part of licensing contracts. For services activity, backlog is composed of work to be done on contracts being executed, and of contracts signed at closing date which execution has not started yet. (In € thousands) Total licenses and maintenance Consulting Other revenue Total services CONSOLIDATED REVENUE O/w total co-financed research and development projects included in service revenue (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. December 31, 2019(1) (Feb. to Dec.) January 31, 2019(2) (Feb. to Jan.) 75,320 25,718 1,159 26,877 102,197 4,102 109,836 28,793 784 29,577 139,413 4,567 Backlog as of December 31, 2019 amounts to €23.2 million, out of which €22 million for Licensing and €1.2 million for Services. 1 2 3 4 5 6 7 8 9 115 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS Consolidated financial statements NOTE 4.2. TRADE RECEIVABLES Trade receivables are initially recorded at their nominal value, as the potential impact of discounting is immaterial. They are then recorded at amortized cost, reduced when applicable by impairment resulting from non recoverable amounts and estimate of future losses. Receivables are depreciated when their net realizable 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 receivables, the risk associated with bad debts is appreciated individually or based on statistical methods. Impairment of trade receivables represents best estimate of the risk related to the asset. Contract assets and liabilities After having delivered its services, the Group records the customers counterparty either as trade receivables or as contract assets. A trade receivable is an unconditionnal right to be paid, while a contract asset is a right to be paid which is conditionned to factors other than time. Contract assets are related to amounts to be invoiced on contracts with milestones or subject to customer’s acceptance. When invoiced amounts exceed recognised revenue, difference is recorded as contract liabilities. Details of trade receivables (In € thousands) Trade receivables Depreciation of trade receivables TOTAL TRADE RECEIVABLES, NET OF IMPAIRMENT December 31, 2019 January 31, 2019 46,191 (4,214) 41,977 64,822 (3,810) 61,012 (In € thousands) January 31, 2019 Depreciation TOTAL (3,810) (3,810) Consolidation scope entry Provisions Reversals (463) (463) 53 53 Foreign exchange gain/loss 6 6 Other movements December 31, 2019 (4,214) (4,214) The Group’s clientele mainly comprises: ◗ major industrial corporations, especially companies in the automotive, aerospace and steel industries; ◗ government agencies for governmental and defense projects; ◗ academic bodies. December 31, 2019 January 31, 2019 Not due 0 to 30 days 30 to 90 days Higher than 90 days TOTAL 21,894 5,114 5,266 9,703 41,977 44,390 5,652 4,999 5,971 61,012 52.2% Not due The amount of trade receivables due for more than 90 days includes receivables from Chinese state or parastatal clients for which collection time is more important. Contract assets (In € thousands) December 31, 2019 January 31, 2019 Contract assets 2,755 4,119 Age of trade receivables 23.1% Higher than 90 days 12.5% 30 to 90 days 12.2% 0 to 30 days 116 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 4.3. CONTRACT LIABILITIES AND DEFERRED INCOME (In € thousands) December 31, 2019 January 31, 2019 Contract liabilities – Maintenance services to be rendered Other deferred income DEFERRED INCOME 9,485 18,936 28,421 19,979 4,622 24,601 NOTE 4.4. OPERATING EXPENSES (In € thousands) Other purchases and external expenses Real estate rentals* Fees Taxes and duties Amortization and provisions* Personnel costs(3) Other external expenses and income Total current operating expenses Other operating income and expenses(4) TOTAL OPERATING EXPENSES December 31, 2019(1) (Feb. to Dec.) January 31, 2019(2) (Feb. to Jan.) (9,339) (1,818) (3,990) (598) (8,954) (86,787) (12,535) (124,021) 1 (124,020) (13,088) (6,764) (3,164) (515) (3,465) (92,774) (12,866) (132,636) 233 (132,403) (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. (3) Details on personnel costs are presented in note 5.2. (4) Details on other operating income and expenses are presented in note 3.2.2. * Significant changes between presented fiscal periods result from IFRS 16 standard application starting 2019. NOTE 4.5. INFORMATION BY GEOGRAPHIC AREA The Group develops sells and provides technical support for its softwares which allow engineers to predict and improve, by virtual tests, the performance and the expected quality of a product. Operating segments are the Group’s components which have isolated financial information available and whose operating results are regularly reviewed by the Company’s management in order to evaluate their performance and to decide how resources are allocated. The Group works in a unique segment, with close ties between its two-identified business, Licenses and Services. 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 being EMEA (Europe, Middle East, Africa), Asia-Pacific and the Americas). Revenue is split between regions where it is actually produced. (In € thousands) Year ended December 31, 2019 External clients Affiliate companies Net sales ASSETS ALLOCATED Year ended January 31, 2019 External clients Affiliate companies Net sales ASSETS ALLOCATED Europe, Middle East and Africa Asia-Pacific Americas Eliminations Consolidated 43,538 48,888 92,425 276,090 68,843 83,328 152,172 301,695 41,076 8,053 49,129 41,735 49,769 9,425 59,193 43,191 17,583 6,478 24,062 14,306 20,802 7,292 28,094 20,188 (63,420) (63,420) (98,476) (100,046) (100,046) (134,500) 102,197 102,197 233,655 139,413 139,413 230,575 Intra-Group transactions consist mainly of royalties paid by the Group’s subsidiaries. These royalties are proportional to Licensing revenue and based on a common practice observed between software publishers and distributors within the industry covered by ESI Group. 117 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS NOTE 4.6. OFF-BALANCE SHEET COMMITMENTS RELATED TO OPERATIONAL ACTIVITIES At December 31, 2019, ESI Group had a rent security deposit with Crédit du Nord in an amount of €82 thousand, established in November 2012 and expiring November 28, 2021 plus six months. NOTE 4.7. IMPACT OF IFRS 16 – LEASES In the assets of the balance sheet, the rights of use of leased assets represent a net value of €20.677 million, of which a gross value of €25.869 million and the amortization of €5.192 million. (In € thousands) February 1, 2019 Increase Decrease December 31, 2019 Right-of-use – Gross value For offices For cars Right-of-use – amortization For offices For cars Right-of-use – Net value For offices For cars 23,470 22,166 1,304 23,470 22,166 1,304 2,399 1,722 677 (5,192) (4,453) (739) (2,793) (2,731) (62) 25,869 23,888 1,981 (5,192) (4,453) (739) 20,677 19,435 1,242 In the liabilities of the balance sheet, the lease debts are split between €20.002 million of non-current debts and €631 thousand of current debts. Maturity of lease debts as at December 31, 2019: (In € thousands) Debts – leased offices Debts – leased cars LEASE DEBTS < 1 year Between 1 and 2 years Between 2 and 4 years 369 262 631 9,013 870 9,884 5,698 16 5,714 More than 5 years 4,405 4,405 December 31, 2019 19,484 1,149 20,633 In the income statement, the retreatment of rental expenses amounted to €5.351 million, almost entirely offset by the right-of-use amortization: the impact on the operational result is +€158 thousand. The impact of IFRS 16 retreatment on financial result is an additional expense of -€115 thousand. The impact on the result net is +€44 thousand. In the cash flow statement, IFRS 16’s impact is an increase of amortization and an improvement of cash flow amounted to +€5.236 million, against a reimbursement of lease debts in the financial part of the cash flow statement for -€5.236 million. 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: December 31, 2019(1) (Feb. to Dec.) January 31, 2019(2) (Feb. to Jan.) 326 912 1,238 317 904 1,221 FTE France Rest of the world TOTAL (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. 118 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 5.2. PERSONNEL COSTS Personnel costs are presented by destination in the income statement. Their break down by nature is as follows: (In € thousands) Salaries Payroll taxes Share-based payments Post-employment benefits TOTAL PERSONNEL COSTS (1) February 1, 2019 – December 31, 2019. (2) February 1, 2018 – January 31, 2019. 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 requirements 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 entity. 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 financial 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 benefits that may be paid when the employee retires. For defined-benefit plans, in accordance with IAS 19 R “Employee Benefits”, obligations are determined using the projected unit credit 5.3.1. Actuarial assumptions Discount rates France Germany Japan South Korea India December 31, 2019(1) (Feb. to Dec.) January 31, 2019(2) (Feb. to Jan.) (69,556) (15,914) (689) (627) (73,626) (17,834) (751) (563) (86,787) (92,774) 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 and future salary increases. Defined-benefit pension schemes and long-term benefits recognized in accordance with IAS 19 R are as follows: ◗ for France: retirement benefits, supplementary pension plan provided by an insurance company; ◗ for South Korea, India and Japan: severance pay owed to employees upon departure from the company regardless of reason for departure, calculated on the basis of length of service within the company; ◗ for Germany: defined-contribution benefits owed to selected managers. December 31, 2019 January 31, 2019 0.80% 0.88% 0.27% 1.70% 7.25% 1.45% 1.66% 0.43% 2.10% 7.83% Discount rates correspond to: ◗ for France: AA-rate corporate bond rates in the Eurozone, adjusted according to the duration of the Group’s commitments; ◗ for other counties: rates reported by the central banks. Rate of salary increase December 31, 2019 January 31, 2019 France Germany Japan South Korea India 2.50% 2.00% 3.00% 4.00% 10% Turnover rates are calculated per subsidiary and per age group according to the past experience of each subsidiary. 2.50% 2.00% 3.00% 4.00% 10% 119 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 5.3.2. Change in commitment and provisions (In € thousands) Provision for employee benefits TOTAL January 31, 2019 Change in equity (OCI) Provisions Reversals Foreign exchange gain/loss Other movements December 31, 2019 9,979 9,979 936 936 1,045 (1,008) 1,045 (1,008) 64 64 - - 11,016 11,016 Analysis of the variation in the provision recorded in the balance sheet (In € thousands) Change in commitments Commitments at opening Acquired companies Costs of services rendered in the period Interest expenses Benefits paid Actuarial gains and losses Others 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 Benefits paid Actuarial gains and losses booked in equity 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 Benefits paid Acquired companies Foreign exchange gain/loss Others PROVISION AT CLOSING 120 December 31, 2019 January 31, 2019 (12,034) (10,666) - (869) (228) 525 (855) 0 (59) - (902) (223) 243 (271) (5) (211) (13,521) (12,034) 2,086 1,867 52 793 (310) (82) (3) 2,536 (869) (176) (228) 52 49 175 (21) 2 15 2,086 (901) (175) (223) 49 (1,045) (1,076) (5,367) 2,591 (2,776) (8,239) (11,015) (9,979) (1,045) (936) 793 215 (64) (4,900) 2,141 (2,759) (7,686) (10,445) (8,798) (1,076) (269) 175 221 (198) (35) (11,016) (9,979) 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 5.3.3. Sensitivity of commitments to fluctuations in the discount rate (In € thousands) Commitment -0.5% Commitment Commitment +0.5% (In € thousands) Experience adjustment Change in financial assumptions Yield on assets Change in demographic assumptions TOTAL ACTUARIAL GAINS/LOSSES December 31, 2019 (13,453) (13,521) (13,588) December 31, 2019 (281) (689) (6) 39 (936) NOTE 5.4. SHARE-BASED PAYMENTS Stock options may be granted to selected Group employees. 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, estimated 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 equity. The expense is recorded in the income statement per destination according to the allocation of each concerned 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 period, 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. 1 2 3 4 5 6 7 8 9 121 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 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. Number of stock options/ shares allotted or to be allotted Number of stock options/ shares granted O/w performance shares Exercise price Number of existing stock options/shares at December 31, 2019 Limit year for exercising options Plan number (date of General Meeting) Plan 10 (GM 2012) Plan 10 bis (GM 2012) Plan 10 ter (GM 2012) Date of Board of Directors 02/01/2013 02/07/2014 02/01/2015 Plan 10 quater (GM 2012) 07/22/2015 150,850 62,300 11,000 15,000 3,150 Plan 15 (GM 2013) 02/01/2015 294,538 20,000 Total GM 2012 180,000 180,000 Plan 17 (GM 2014) Plan 17 bis (GM 2014) Plan 17 ter (GM 2014) Total GM 2013 07/22/2015 03/11/2016 05/05/2017 Plan 17 quater (GM 2014) 05/05/2017 7,350 10,000 18,175 1,875 Total GM 2014 180,000 37,400 Plan 19 (GM 2017) Plan 19 bis (GM 2017) Plan 1 9 ter (GM 2017) 07/18/2018 02/01/2019 12/18/2019 43,950 20,000 24,660 62,300 20,000 1,875 1,875 32,963 15,000 Authorization given at the GM of July 2017 Total stock-options Plan 6 (GM 2016) Plan 7 (GM 2016) Plan 8 (GM 2016) Plan 9 (GM 2018) Plan 9 bis (GM 2018) Plan 9 ter (GM 2018) Plan 9 quater (GM 2018) Total free shares TOTAL STOCK-OPTIONS AND FREE SHARES Total GM 2017 180,000 88,610 47,963 229,600 1,064,138 326,010 132,138 07/21/2016 12/23/2016 08/01/2017 60,000 07/18/2018 07/18/2018 07/18/2018 07/18/2018 7,964 25,000 2,275 9,000 10,617 2,441 15,500 16,250 6,712 2,521 90,316 7,964 Plan 9 quinquies (GM 2018) 12/18/2019 Plan 9 sexies (GM 2018) 12/18/2019 60,000 27.82 24.42 21.66 27.17 21.66 27.17 23.35 50.92 50.92 42.97 27.04 29.12 38,700 375 2,100 41,175 4,900 16,300 21,200 38,100 20,000 24,660 82,760 145,135 4,164 2,501 10,367 2,184 15,500 16,250 6,712 2,521 53,534 2021 2022 2025 2025 2025 2023 2026 2025 2025 2026 2027 2027 2020 2021 2021 2020 2020 2022 2023 2022 2021 1,184,138 415,876 140,102 205,334 The total expense related to share-based payments for the financial year ended December 31, 2019 stands at €164 thousand. That related to free shares stands at €526 thousand. All stock options and free shares include a continued employment requirement. 122 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements Movements in stock options and free shares plans 2019 2018 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 the opening Stock options/free shares granted Stock options expired or canceled Stock options exercised and free shares delivered Stock options and shares existing at the closing OPTIONS THAT MAY BE EXERCISED AT THE CLOSING 151,448 70,143 (4,990) (11,367) 205,334 0 24.49 17.95 24.92 40.01 23.83 108,843 72,510 (9,823) (20,080) 151,448 0 20.34 42.97 36.84 41.01 24.49 The main data and assumptions underlying the valuation of stock options and free shares at fair value were as follows: Share price at grant date Exercise period of stock options/free shares in years Volatility Dividend rate Interest rate Stock-options Plan 10 (Board of 02/01/2013) Plan 10 bis (Board of 02/07/2014) Plan 10 ter (Board of 02/01/2015) Plan 10 quater (Board of 07/22/2015) Plan 15 (Board of 02/01/2015) Plan 17 bis (Board of 07/22/2015) Plan 17 ter (Board of 03/11/2016) Plan 17 quater (Board of 05/05/2017) Plan 17 (Board of 05/05/2017) Plan 19 (Board of 07/18/2018) Plan 19 bis (01/02/2019) Plan 19 ter (12/12/2019) Free shares Plan 6 (Board of 07/21/2016) Plan 7 (Board of 12/23/2016) Plan 8 (Board of 08/01/2017) Plan 9 / 9 bis / 9 ter (Board of 07/18/2018) Plan 9 quater Plan 9 quinquies / 9 sexies 26.99 24.50 24.94 28.31 24.94 28.31 24.39 55.56 55.56 42.97 27.04 29.12 30.30 45.73 46.19 42.97 31.4 31.00 4 3 4 4 4 4 1 to 5 2 to 4 2 to 4 2 to 4 3 3 2 to 4 2 2 to 4 2 to 4 2 to 4 2 24.80% 23.73% 22.13% 23.36% 23.36% 22.13% 22.79% 28.16% 28.16% 37.33% 34.56% 26.76% n.a n.a n.a n.a n.a n.a 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 1.30% 0.30% 0.36% 0.65% 0.65% 0.36% 0.65% 0.86% 0.86% 0.66% 0.61% 0.65% 1.2% 1.1% 1.1% 0.95% 0.70% 0.65% 123 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 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, 2019 Increase Decrease Foreign exchange gain/loss Other movements December 31, 2019 63,192 28,323 (21,990) 12,044 21,636 96,872 554 (3) 28,878 (21,993) (19,041) (27,024) 21,990 (73) (15,948) (35,062) (1,526) 3 (28,550) 21,993 44,152 1,300 11,971 5,687 61,811 (972) 328 - - - - (44) (44) 44 44 - - - - - - - - - - - - - - - 69,525 12,044 22,143 103,712 (21,990) (73) (17,427) (39,490) 45,452 11,971 4,716 62,139 6.1.2. Capitalized development costs Research costs borne to gain new scientific or technical knowledge are recorded as expenses when incurred. 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 arising from the research and 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 research and development project and to sell the resulting product; ◗ the Group has the ability to reliably measure the expenses attributable to the research and development project. The expenses thus converted into assets include the cost of direct labor as well as sub-contracting. Capitalized expenses are amortized on a straight-line basis over a period of 12 months for development work that leads to the yearly release of new annual versions of software packages sold by the Group, and on a straight-line basis over 24 or 36 months for development work that leads to major improvements to existing products, depending on the degree of innovation. Research and development costs that do not meet IAS 38 criteria are recorded as expenses when incurred. In certain cases, research and development costs entitle the Group to a tax credit, recorded during the financial year when expenses were incurred. These tax credits are deducted from research and development costs. 124 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 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 December 31, 2019 January 31, 2019 28,323 (27,024) 1,300 29,937 (27,258) 2,679 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 upgrades during the year; in other cases, a new version featuring a major innovation may be marketed even if other improvements are planned in the near future. While project 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. Net value of capitalized developments costs represents 15 months of research and development costs (€45.5 million) incurred at December 31, 2019, compared to 14.4 months (€44.1 million) at January 31, 2019. Reconciliation of R&D costs incurred and accounted for in the income statement (In € thousands) R&D costs incurred during the period(1) Development costs capitalized during the period Development costs amortized during the period French R&D tax credit Amortization of codes acquired in business combinations TOTAL R&D COSTS RECOGNIZED AS EXPENSES DURING THE FINANCIAL YEAR December 31, 2019 January 31, 2019 (33,656) 28,323 (27,024) 3,086 (562) (29,832) (36,763) 29,937 (27,258) 2,979 (613) (31,718) (1) Including €5,332 million in expenses accounted for as direct costs in 2019, compared to €6,826 million in 2018. 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 intellectual property rights to the software code. Specifically, it involves the translation of the laws of physics into programming 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 revenue 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 research and development efforts (accounting for 30% of revenue from licensing) focusing on these up-and-coming 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 December 31, 2019 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 indefinite 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. 1 2 3 4 5 6 7 8 9 125 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 6.1.4. Other intangible assets NOTE 6.2. PROPERTY, PLANT AND EQUIPMENT 6.2.1. Accounting principles 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 following criteria: Office and similar software applications Method Useful life Straight-line 1 to 3 years Other operational software Straight-line 3 to 5 years Codes – third-party software integrated into products 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 Straight-line 5 to 10 years Computer hardware Straight-line 3 to 5 years Method Useful life Straight-line 5 to 8 years Office furnishings Straight-line 5 to 10 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. 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 Office furnishings and other tangible assets TOTAL Amortization Fixtures and fittings Computer hardware Office furnishings and other tangible assets TOTAL Net carrying amounts Fixtures and fittings Computer hardware Office furnishings and other tangible assets TOTAL January 31, 2019 Increase Decrease Other movements(1) Foreign exchange gain/loss December 31, 2019 4,596 15,633 3,508 23,737 (2,254) (12,791) (2,591) (17,636) 2,342 2,842 917 6,101 102 1,123 106 1,331 (283) (1,334) (5,359) (6,976) (181) (211) (5,254) 1,153 - (1,072) (243) (1,315) - 1,072 203 1,274 - - (40) (41) 6 (17) 25,890 25,879 (2) 64 (92) (29) 4 48 25,799 25,850 31 109 24 164 (16) (81) (19) (116) 15 28 5 48 4,735 15,777 29,285 49,797 (2,555) (13,070) (7,858) (23,484) 2,180 2,707 21,426 26,313 (1) Booking of right-of-use assets related to IFRS 16. 126 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 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; 7.1.1. Fair value of financial assets and liabilities ◗ derivative financial instruments – see details in note 7.1.4; ◗ short-term trade receivables — see details in note 4.2, and short-term trade payables. (In € thousands) Assets Financial assets: ◆ Non-consolidated investments ◆ Deposits and guarantees ◆ French R&D tax credit receivables for 2016 ◆ Derivative assets Trade receivables Cash and cash equivalents Liabilities Bank borrowings Factoring of French R&D tax credit for 2016 Other financial debts Derivative liabilities Other financial liabilities Payables Carrying amount December 31, 2019 Amortized cost Fair value through equity Fair value through profit and loss 28 - 20,241 - 28 490 2,968 2,433 44,733 45,851 2,433 1,305 8,631 Total 28 2,968 2,433 - 44,733 20,241 45,851 2,433 1,305 28 490 8,631 In accordance with IFRS 13, the various valuation techniques 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 assets or liabilities; ◗ Level 2: valuation method based on directly or indirectly 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. 7.1.2. Gross financial debt Derivative instruments (see notes 7.1.4 and 7.3) are valued using level 2. Debts on earnouts, put options (other financial liabilities) and investments in non-consolidated companies are valued using level 3. ESI Group’s main source of financing is the syndicated loan which consists of a long-term part of €28 million at December 31, 2019 and a €15 million revolving credit, out of which €10 million confirmed. The long-term part will be gradually reimbursed annually on April 30 each year until April 30, 2025. The syndicated loan is remunerated based on the Euribor rate and a margin of 2%, 2.25% or 2.5% depending on the level of the Net financial debt/ EBITDA ratio related to previous year financial statements. The margin applied since June 2019 is 2.25%. All financial debts are denominated in euros. 1 2 3 4 5 6 7 8 9 127 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS Consolidated financial statements / Detail and maturity of financial debt (In € thousands) Syndicated loan Short-term revolving loan Other bank borrowings Factoring of French R&D 2016 tax credit Repayable advances Other financial debts TOTAL 2020 3,500 10,000 2,900 2,433 - 309 19,142 451 65 5,721 Maturity at December 31 2021 4,405 2022 4,905 2023 4,905 2024 and beyond 9,810 800 800 800 2,775 Total 27,525 10,000 8,075 2,433 1,191 374 740 CURRENT: 19,142 NON-CURRENT: 30,457 5,705 5,705 13,325 49,598 (In € thousands) Syndicated loan Short-term revolving loan Other bank borrowings Maturity at January 31 2020 1,890 2021 3,390 2022 4,390 600 600 2019 2,000 1,000 3,111 Factoring of French R&D tax credit for 2015, 2016 and 2017 2,448 2,433 2,441 Repayable advances Other financial debts TOTAL 119 123 33 65 8,801 5,021 65 4,055 CURRENT: 8,801 / Financial debt by type of interest rate and maturity 2023 and beyond 17,780 1,575 995 Total 29,450 1,000 5,886 7,322 1,147 253 6,831 20,350 45,058 NON-CURRENT: 36,256 (In € thousands) Fixed-rate debt Variable-rate debt No-interest debt TOTAL 2020 400 18,433 309 19,142 2021 800 4,405 516 5,721 Maturity at December 31 2022 800 4,905 2023 800 4,905 2024 and beyond 2,775 9,810 740 5,705 5,705 13,325 Total 5,575 42,458 1,565 49,598 CURRENT: 19,142 NON-CURRENT: 30,457 128 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements The following table shows the changes in financial debt in 2019, with a split between flows with cash impact and flows without cash impact. Flows with cash impact Flows without cash impact (In € thousands) At January 31, 2019 New borrowings Repayment Syndicated loan 29,450 (2,000) Short-term revolving loan Other bank borrowings Factoring of French R&D tax credit Profit-sharing funds Other financial debts 1,000 10,000 (1,000) 5,886 4,000 (1,800) 7,322 1,147 253 - 162 260 (40) (73) TOTAL 45,058 14,422 (4,913) Other cash flows from financing activities Change in consolidation scope Foreign exchange gain/ loss Other movement At December 31, 2019 - - - - - - - - - - - - - - - - - - 2 75 - (11) 27,525 10,000 8,075 (4,889) 2,433 (78) (68) 1,191 374 (2) (4,971) 49,598 Other movement related to factoring of French R&D tax credit represents (i) the repayment by the French state of 2015 receivable directly to the factoring bank and (ii) the deconsolidated factoring of 2017 receivable. These flows have no cash impact for ESI Group. 7.1.3. Cash and cash equivalents “Cash and cash equivalents” correspond to cash, bank deposits, interest-bearing accounts, mutual funds, money market funds and other liquid and easily convertible investments, subject to an insignificant risk of changes in value, in accordance with IAS 7. In accordance with IFRS 9, marketable securities are recognized at market value at the closing date. Changes in market value are recognized in Financial Result. (In € thousands) Cash Marketable securities TOTAL CASH AND CASH EQUIVALENTS 7.1.4. Financial instruments The Group classifies as cash equivalents no-risk investments in interest-bearing accounts, commercial paper and certificates of deposit originally maturing in three months or less and not bearing any significant interest rate risk. December 31, 2019 January 31, 2019 20,241 - 20,241 18,073 14 18,087 The Group uses derivative instruments to manage its exposure to fluctuations in exchange rates and interest rates. In accordance with IFRS 9, derivative instruments are recorded at fair value on the balance sheet. Changes in fair value of derivative financial instruments are accounted for as follows: ◗ hedges accounting: 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: changes in fair value measurement of these derivative instruments are recognized in Financial Result. / Interest rate instruments Interest rate swaps signed by ESI Group have always been set up to hedge the variable interest rate of the syndicated loan. Two swaps have been setup in the 2019 first semester, with a nominal value of €14 million each, ESI Group receiving variable rate 3-month Euribor (with a 0% floor) and paying a fixed rate of 0.085% and 0.092%. The syndicated loan signed in December 2018 requires set up of interest rates hedging instruments for 50% of the outstanding loan. At December 31, 2019, the market value of these instruments was -€28 thousand. 1 2 3 4 5 6 7 8 9 129 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS / 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 currency options at any time and enter into any other type of foreign exchange contract. Foreign exchange instruments in place during 2019 concerned Japanese yen. At December 31, 2019, all foreign exchange instruments arrived to maturity. NOTE 7.2. FINANCIAL INCOME AND EXPENSES (In € thousands) Interest and related expenses on borrowings Interest income Foreign exchange gain/(loss) Other financial expenses FINANCIAL RESULT Interests on borrowings are mostly related the syndicated credit and related charges. Details on foreign exchange gains and losses are as follows: (In € thousands) USD JPY KRW Other currencies TOTAL December 31, 2019 January 31, 2019 (994) 16 (998) 586 (2,563) (1,187) 32 379 (501) (1,277) December 31, 2019 January 31, 2019 (708) (23) 44 (311) (998) 184 (54) 206 42 379 The negative foreign exchange result is mainly due to the revaluation at closing rate of the accounts payables and receivables. Other financial expenses include: ◗ interest charges calculated on employee benefit commitments; ◗ factoring expenses for receivables related to the French R&D tax credit; ◗ overdraft interest charges. NOTE 7.3. RISK MANAGEMENT POLICY Country risk and foreign currency risk During the financial year ended December 31, 2019, 42.6% of the Group’s revenue was generated in Europe, 40.2% in Asia (mainly Japan, South Korea, China and India) and 17.2% in the Americas (mainly the United States). The Group is thus exposed to economic and political uncertainties in these areas. The Group is also highly exposed to risks stemming from changes in foreign exchange rates: for the financial year ended December 31, 2019, 38.5% of revenue was generated in EUR, 20.3% in USD (US dollar), 24.3% in JPY (Japanese yen), 5.3% in KRW (Korean won) and 4.7% in CZK (Czech koruna). Furthermore, 55.4% of costs are spent in EUR, 15% in USD, 8.6% in JPY, 6.6% in INR (Indian rupee), 2.8% in KRW, 3.4% in CZK and 2.2% in CHF (Swiss franc). The following table 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 currencies to which the Group is exposed. Average consolidation exchange rate Exchange rate used for analysis Effect on Current Operating Result (in € millions) 121.85 1,307.03 25.67 1.12 78.67 1.11 134.03 1,437.73 28.24 1.23 86.54 1.22 (1.3) (0.2) (0.1) (0.2) 0.5 0.2 Currency JPY KRW CZK USD INR CHF 130 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements Interest rate risk Most of the Group’s financial debts feature variable interest rates. To limit the negative impacts of rate fluctuation, the Group applies a non-speculative management policy, using derivatives described in note 7.1.4. / Sensitivity analysis to interest rate risk 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 December 31, 2019, €10 million of the revolving credit line has been used and this line was entirely paid off at the date of approval of accounts by the Board of Directors. Given ESI Group’s optimization of cash 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, than at the end of the financial year. The calculations of foreign-exchange sensitivity presented below assume that financial debts remain stable at December 31, 2019 levels, meaning a fixed level of drawdown on bank loans as of that date. 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 Equity risk In accordance with IAS 32, treasury shares are accounted for as part of consolidated shareholder equity and variations 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 intended 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 < 1 year (18,433) ≥ 1 year, < 5 years (14,215) ≥ 5 years (9,810) Total (42,458) (18,433) (14,215) (9,810) (42,458) - (145) 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 ratio to be maintained with regard to the syndicated loan contract entered into in December 2018 is detailed in note 7.4. NOTE 7.4. OFF-BALANCE SHEET COMMITMENTS RELATING TO GROUP FINANCING As part of the credit agreement dated December 20, 2018, ESI Group granted a pledge of 99.98% of the shares of Engineering System International, 100% of the shares of the subsidiary ESI Software Germany, and 96% of the shares of the subsidiary ESI ITI GmbH. As long as it owes an obligation under the agreement or the security documents, the borrower undertakes, under prepayment constraint, to comply with the ratio of consolidated net financial debt divided by consolidated EBITDA, the thresholds to be respected over the term of the syndicated loan agreement are gradually decreasing. As at December 31, 2019, the threshold to be respected is 3.5%. At December 31, 2019, on the basis of the annual consolidated financial statements certified by the Statutory Auditors, the Group was in compliance with this ratio. Off-balance sheet financial commitments also include factoring of French R&D tax credit receivables of 2017 and 2018, which have been factored in 2018 for €2.441 million and in 2019 for €2.659 million. The terms and conditions of those factorings justify the non-recognition of those commitments as financial liabilities on the balance sheet (deconsolidating contracts). 1 2 3 4 5 6 7 8 9 131 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS Consolidated financial statements 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 reversed 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 realized. 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. The Group has three tax groups: ◗ in the United States, with ESI North America, Inc. as head ◗ in France, with the parent company, ESI Group, as head company; ◗ in Germany, with ESI Software Germany GmbH as head company; 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 net result 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 December 31, 2019 January 31, 2019 (2,372) 5,818 3,446 (2,397) (109) (2,505) December 31, 2019 January 31, 2019 (24,360) 26 28% 6,828 (2,202) 13 44 (1,319) 81 3,446 (14.1)% 5,840 106 29.5% (1,692) (452) (39) 384 (706) - (2,505) 43.7% 132 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 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 December 31, 2019 January 31, 2019 8,801 2,632 3,322 876 1,574 1,128 4,478 3,159 590 1,566 17,204 10,920 (808) (2,953) (3,761) 13,443 (1,323) (2,415) (3,738) 7,182 Unrecognized deferred tax assets on tax loss carryforwards came to €2.9 million. The timeframe used for estimating the recoverability of these deferred tax assets is generally five years. Reconciliation of deferred income tax expense on the balance sheet and income statement (In € thousands) Net deferred tax assets at opening (February 1, 2019) 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 Other movements NET DEFERRED TAX ASSETS AT CLOSING (DECEMBER 31, 2019) 7,182 83 5,617 262 (7) 306 13,443 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. / Share capital 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. At December 31, 2019, ESI Group’s share capital was €18.053 million, comprising 6,018,492 common shares with a par value of €3 each. / Dividend payout ESI Group did not pay out any dividend during the period. 1 2 3 4 5 6 7 8 9 133 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS / Treasury shares / Transactions with non-controlling interests The number of treasury shared declined by 13,540 shares over the financial year. The percentage of capital held as treasury shares following these transactions stood at 6.3% at December 31, 2019, compared to 6.4% at January 31, 2019. The Group owns a total of 377,342 treasury shares, purchased at a historical cost of €4.093 million and with a market value of €12.284 million at the same date, for an unrealized gain of €8.171 million. Transactions with non-controlling interests are recognized directly in equity. See details in notes 3.1 and 3.2. NOTE 9.2. MINORITY INTERESTS If, in the event of losses, the part of equity corresponding to minority interests becomes negative, it will be retreated so as to be at least equal to zero. NOTE 9.3. EARNINGS PER SHARE The table below details the net income (Group share) per share: (In € thousands) NET INCOME (GROUP SHARE) Net earnings per share (in €) Average number of shares Diluted earnings per share (in €) Average number of diluted shares Only stock options and free shares may have a dilutive effect. NOTE 10. OTHER BALANCE SHEET ITEMS NOTE 10.1. OTHER ASSETS 10.1.1. Other non-current assets (In € thousands) Security deposits Factored French R&D tax credit Other long term assets Investments in non-consolidated companies TOTAL OTHER NON-CURRENT ASSETS December 31, 2019 January 31, 2019 (20,946) (4.06) 5,164,418 (4.01) 5,225,409 3,334 0.59 5,616,310 0.59 5,666,522 December 31, 2019 January 31, 2019 2,968 - 266 28 3,262 2,929 4,874 239 28 8,070 Security deposits mainly concern real estate rentals. The evolution of factored French R&D tax credit results from the reclassification of 2016 receivable in other current assets (see note 10.1.2) and the deconsolidation of debt related to 2017 receivable (see note 7.4). 134 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements 10.1.2. Other current receivables (In € thousands) French R&D tax credit Other tax credits VAT and other receivables TOTAL OTHER CURRENT ASSETS December 31, 2019 January 31, 2019 5,847 1,501 6,371 13,720 6,036 1,392 7,920 15,348 French R&D tax credit receivables as of December 31, 2019 relates to costs incurred in 2019 for an amount of €3.103 million, and to 2016 receivable (repayment by the French State to the factor planned for 2019). 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) Employee-related liabilities Tax payables Other current liabilities TAX PAYABLES, EMPLOYEE-RELATED LIABILITIES AND OTHER SHORT-TERM LIABILITIES Tax payables consist primarily of VAT payables for €5.061 million. 10.2.2. Other provisions December 31, 2019 January 31, 2019 16,008 6,275 1,946 15,329 10,640 4,590 24,229 30,560 In accordance with IAS 37 “Provisions, Contingent Liabilities and Contingent Assets”, a provision is recorded when the following three conditions are met: the Group has an obligation towards a third party resulting from past events, it is probable 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. (In € thousands) Disputes CURRENT PROVISIONS FOR LIABILITIES January 31, 2019 Provisions Reversals – provisions used Reversals – provisions not used Foreign exchange gain/loss December 31, 2019 762 762 93 93 (193) (193) - - 13 13 675 675 1 2 3 4 5 6 7 8 9 135 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS NOTE 11. RELATED PARTY TRANSACTIONS / Executive corporate officers’ compensation Compensation and benefits paid to the Group’s four executive corporate officers during the financial years ended December 31, 2019 and January 31, 2019 breaks down as follows: (In € thousands) Fixed compensation Variable compensation Travel bonus Benefits in kind Directors' fees TOTAL / Related party transactions Not applicable. December 31, 2019 January 31, 2019 1,069 - - 20 98 1,186 717 42 17 160 16 952 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 ◆ Parent company ◆ Fully consolidated subsidiaries 160 63 Services other than certification of accounts ◆ Parent company ◆ Fully consolidated subsidiaries 21 0 161 86 21 0 57% 23% 51% 28% 191 139 184 128 57% 41% 58% 28% 351 202 344 214 57% 33% 55% 34% 7% 0% 7% 0% 7 0 7 0 2% 0% 2% 0% 28 0 28 0 4% 0% 4% 0% Sub-total statutory audit 244 267 87% 86% 337 319 100% 100% 581 586 94% 93% Other work and services directly related to statutory audit Legal, tax, social Others Sub-total other services 34 0 0 45 0 45 13% 0% 14% 0% 13% 14% 0 0 0 0 0 0 0% 0% 0% 0% 0% 0% 34 0 34 45 0 45 6% 0% 6% 7% 0% 7% TOTAL 278 312 100% 100% 337 319 100% 100% 615 631 100% 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 financial year ended December 31, 2019 came to €351 thousand. Services other than certification of accounts correspond primarily to certification of costs statements issued for co-financed projects and of bank covenant calculation. 136 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements NOTE 13. SUBSEQUENT EVENTS CORONAVIRUS In the short term, the global pandemic related to Covid-19 is expected to impact our financial year results, however many remaining uncertainties make it impossible to precisely quantify this impact at this stage. The resilience of our business model solidly anchored on renewable and critical software licenses will help us manage risks over the year. 1 2 3 4 5 6 7 8 9 137 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS 6.1.6. STATUTORY AUDITORS’ REPORT ON THE CONSOLIDATED FINANCIAL STATEMENTS This is a translation into English of the Statutory Auditors’ report on the consolidated financial statements of the Company issued in French and it is provided solely for the convenience of English speaking users. This Statutory Auditors’ report includes information required by European regulation and French law, such as information about the appointment of the Statutory Auditors or verification of the information concerning the Group presented in the management report and other documents provided to shareholders. This report should be read in conjunction with, and construed in accordance with, French law and professional auditing standards applicable in France. Eleven-months period ended December 31, 2019 To the General Meeting of ESI Group, Opinion In compliance with the engagement entrusted to us by your general meeting, we have audited the accompanying consolidated financial statements of ESI Group for the eleven-months period ended December 31, 2019. These consolidated financial statements were approved by the Board of Directors on March 19, 2020 on the basis of the elements available at that date, in the evolving context of the health crisis related to Covid-19. In our opinion, the consolidated financial statements give a true and fair view of the assets and liabilities and of the financial position of the Group as at December 31, 2019 and of the results of its operations for the year then ended in accordance with International Financial Reporting Standards as adopted by the European Union. The audit opinion expressed above is consistent with our report to the Audit Committee. Basis for opinion / Audit Framework We conducted our audit in accordance with professional standards applicable in France. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Statutory Auditors’ Responsibilities for the Audit of the Consolidated Financial Statements section of our report. / Independence We conducted our audit engagement in compliance with independence rules applicable to us, for the period from February 1, 2019 to the date of our report and specifically we did not provide any prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No 537/2014 or in the French Code of Ethics (Code de déontologie) for Statutory Auditors. Emphasis of matter Without qualifying our opinion expressed above, we draw your attention to the following matters: ◗ The note 1.3 “New IFRS standards and interpretations” which describes the impact on the consolidated financial statements of the first application of IFRS 16 – Leases; ◗ The note 2 “Significant events of the year “which presents the change in the closing date of the financial year and the information established for comparability purposes. Justification of assessments – Key Audit Matters In accordance with the requirements of Articles L. 823-9 and R. 823-7 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we inform you of the key audit matters relating to risks of material misstatement that, in our professional judgment, were of most significance in our audit of the consolidated financial statements of the current period, as well as how we addressed those risks. These matters were addressed in the context of our audit of the consolidated financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on specific items of the consolidated financial statements. 138 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements / Capitalization of development costs Risk identified In the balance sheet of the Group, non-current assets include capitalized development costs. As of December 31, 2019, their net book value amounts to €45,452 thousand. They correspond mostly to cost of direct labor as well as sub-contracting, incurred for the development of new annual versions or major improvements of existing ESI software. As indicated in note 6.1.2 to consolidated financial statements, development costs are capitalized in situations where the six requirements set forth under IAS 38, “Intangible Assets”, are met. Capitalized development costs start to be amortized after the market release of the related version of the software. Capitalized expenses are amortized on a straight-line basis over a period of 12 months for new annual versions of software, and over 24 or 36 months for major improvements to existing products, depending on the degree of innovation. ESI Management set up procedures and rules to ensure that: ◆ the process to distinguish between research and development costs is respected; ◆ capitalized development costs met all criteria set forth under IAS 38; and ◆ useful life period over which each project is amortized is adapted to the nature/level of innovation of the project. However, regarding the significant impact on the consolidated income statement of capitalization of development costs amounting to €29,832 thousand, and the significant gross balance of these capitalized costs recorded as assets in the consolidated balance sheet amounting to €69,525 thousand, it follows that any deviation from the procedures in place or any misinterpretation of the capitalization criteria could lead to significant impacts on the Group’s consolidated financial statements and financial performance. The assessment of compliance with the criteria for capitalization of development costs, as well as the determination of the amortization period depending on the nature of the project, are very much based on Management’s judgment and the reliability of the procedures applied for the identification and allocation of expenses between the different projects. On this basis, we considered capitalization of development costs as a key audit matter. Our response We examined the compliance of the Group’s accounting treatment of research and development costs with current accounting standards. We also conducted a critical review of how this methodology was implemented. In particular, we conducted the following procedures: ◆ we have taken notice of the procedure followed by the Group to distinguish between research and development costs and, for the latter, the rules put in place to assess compliance with the capitalization criteria laid down in IAS 38; ◆ we tested by sampling the correct application of the procedures implemented for the identification, monitoring and recording of research and development costs; ◆ we audited, for a selection of projects, the correct application of the capitalization criteria set out in IAS 38 and tested the accuracy and completeness of the most significant expenses charged to these projects; ◆ we verified the correct calculation of amortization expense mainly by controlling the correct application of the rules for setting the straight-line amortization period, depending on the nature of the project (major improvement or new version); We have reconciled accounting and management data in order to assess the accuracy and completeness of information reporting process for recording. 1 2 3 4 5 6 7 8 9 139 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS Consolidated financial statements / Valuation of goodwill Risk identified As part of its development, the Group was led to carry out targeted acquisitions leading to recognition of goodwill. This goodwill, which corresponds to the difference between the price paid and the fair value of identifiable assets and liabilities acquired, amounts to €41,448 thousand at end December 2019. Any adverse change in the expected returns of the business, due to internal or external factors, for example related to the economic and financial environment, is likely to significantly affect the recoverable amount and require the recognition of impairment. Such a change therefore implies a regular reappraisal (at least once a year, or when an indication of loss of value is identified) of the relevance of all the assumptions used to determine this value as well as the reasonableness and coherence of the valuation parameters. To this end, Management examines indicators of potential losses and performs an impairment test by ensuring annually that the book value of goodwill does not exceed their recoverable amount. This recoverable amount is determined by reference to the value in use, itself calculated from the present value of the expected cash flows of the group of assets. For the purpose of the impairment test, goodwill is allocated to cash generating units (“CGUs”). ESI Group uses a single CGU for the entire Group. Methodology applied for the impairment test and assumptions used are presented in note 3.1 to consolidated financial statements. The determination of the recoverable value of goodwill is largely based on Management’s judgment, in particular as regards the growth rate used for the cash flow projections and the discount rate applied. We therefore considered the valuation of goodwill as a key audit matter. We obtained the last budget and strategic plan as well as the impairment test established by Management. Based on this information, we performed the following procedures: ◆ We examined the regularity and permanence of the accounting principles and methods applied; ◆ We analyzed the key assumptions retained: • regarding cash flows: critical review of the budget and strategic plan validated by Management, based on our knowledge of the Group, • regarding the long-term growth rate and the discount rate applied to these flows, we have assessed, with the help of our valuation specialists, the main assumptions used, • we obtained and reviewed sensitivity analyzes performed by Management. Our response / Revenue recognition principles Risk identified The group ESI derives revenue from two primary sources: software licensing and related maintenance activity, and services activity. In the case of contracts that include several of these items sold together, the determination of the date of recognition of the revenue and its allocation between the different components of the contracts may require, if necessary, a part of the judgment of Management. In compliance with IFRS 15, ESI customer contracts have been analyzed in five stages in order to identify the component of the performance obligations and the price of each. For licensing revenue, two performance obligations have been identified: access to the software (the licensing itself) and the maintenance service. The part of revenue allocated to maintenance is determined as presented in note 4.1 to consolidated financial statements. This allocation of revenue between the different components of a contract requires analyzes and restatements of the Management. We therefore considered for these various reasons the recognition of revenue as a key audit matter. As part of our audit, we conducted tests on all contracts deemed significant as well as on a sample of contracts selected at random, in order to (i) review the allocation (in accordance with the accounting principles described in note 4.1 to consolidated financial statements) of the revenue between each component of the contract; (ii) analyze the revenue recognition for the appropriate amount and the appropriate accounting period. These tests include analyzing the contractual terms, recalculating each item and examining the revenue recognition in accordance with the principles set out in note 4.1 to consolidated financial statements, which compliance with IFRS was previously assessed. Our response 140 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS Consolidated financial statements Specific verifications We have also performed, in accordance with professional standards applicable in France, the specific verifications required by laws and regulations of the information given in the Board of Directors’s Group management report, as approved on March 19, 2020. Regarding the events that occurred, and the elements known after the date of approval of the consolidated financial statements relating to the effects of the Covid-19 crisis, Management has informed us that such events and elements will be communicated to the annual general meeting called to decide on these financial statements. We have no matters to report as to their fair presentation and their consistency with the consolidated financial statements. We attest that the consolidated non-financial information statement required by Article L. 225-102-1 of the French Commercial Code is presented in the Group’s information given in the management report, being specified that, in accordance with Article L. 823-10 of this Code, the information given in this statement have not been verified by us with respect to the fair presentation and consistency with the consolidated financial statements and has to be subject to a report by an independent third party. Report on other legal and regulatory requirements / Appointment of the Statutory Auditors We were appointed as Statutory Auditors of ESI Group by the General Meeting held on June 25, 2009 for PricewaterhouseCoopers Audit and on December 16, 1997 for Ernst & Young Audit. As at December 31, 2019, PricewaterhouseCoopers Audit and Ernst & Young Audit were in the 11th year and 23rd year of total uninterrupted engagement (which is the 20th year since securities of the Company were admitted to trading on a regulated market) respectively. Responsibilities of Management and those charged with Governance for the consolidated financial statements Management is responsible for the preparation and fair presentation of the consolidated financial statements in accordance with International Financial Reporting Standards as adopted by the European Union and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error. In preparing the consolidated financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless it is expected to liquidate the Company or to cease operations. The Audit Committee is responsible for monitoring the financial reporting process and the effectiveness of internal control and risks management systems and where applicable, its internal audit, regarding the accounting and financial reporting procedures. The consolidated financial statements were approved by the Board of Directors. Statutory Auditors’ responsibilities for the audit of the consolidated financial statements / Objectives and audit approach Our role is to issue a report on the consolidated financial statements. Our objective is to obtain reasonable assurance about whether the consolidated financial statements as a whole are free from material misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with professional standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these consolidated financial statements. As specified in Article L. 823-10-1 of the French Commercial Code (Code de commerce), our statutory audit does not include assurance on the viability of the Company or the quality of management of the affairs of the Company. As part of an audit conducted in accordance with professional standards applicable in France, the Statutory Auditor exercises professional judgment throughout the audit and furthermore: ◗ Identifies and assesses the risks of material misstatement of the consolidated financial statements, whether due to fraud or error, designs and performs audit procedures responsive to those risks, and obtains audit evidence considered to be sufficient and appropriate to provide a basis for his opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; ◗ Obtains an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control; 1 2 3 4 5 6 7 8 9 141 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS Consolidated financial statements CONTENTS ◗ Evaluates the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management in the consolidated financial statements; ◗ Assesses the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. This assessment is based on the audit evidence obtained up to the date of his audit report. However, future events or conditions may cause the Company to cease to continue as a going concern. If the Statutory Auditor concludes that a material uncertainty exists, there is a requirement to draw attention in the audit report to the related disclosures in the consolidated financial statements or, if such disclosures are not provided or inadequate, to modify the opinion expressed therein; ◗ Evaluates the overall presentation of the consolidated financial statements and assesses whether these statements represent the underlying transactions and events in a manner that achieves fair presentation; ◗ Obtains sufficient appropriate audit evidence regarding the financial information of the entities or business activities within the Group to express an opinion on the consolidated financial statements. The Statutory Auditor is responsible for the direction, supervision and performance of the audit of the consolidated financial statements and for the opinion expressed on these consolidated financial statements. / Report to the Audit Committee We submit to the Audit Committee a report which includes in particular a description of the scope of the audit and the audit program implemented, as well as the results of our audit. We also report, if any, significant deficiencies in internal control regarding the accounting and financial reporting procedures that we have identified. Our report to the Audit Committee includes the risks of material misstatement that, in our professional judgment, were of most significance in the audit of the consolidated financial statements of the current period and which are therefore the key audit matters that we are required to describe in this report. We also provide the Audit Committee with the declaration provided for in Article 6 of Regulation (EU) No. 537/2014, confirming our independence within the meaning of the rules applicable in France such as they are set in particular by Articles L. 822-10 to L. 822-14 of the French Commercial Code (Code de commerce) and in the French Code of Ethics (Code de déontologie) for Statutory Auditors. Where appropriate, we discuss with the Audit Committee the risks that may reasonably be thought to bear on our independence, and the related safeguards. Neuilly-sur-Seine and Paris-La Défense, April 23, 2020 The Statutory Auditors French original signed by PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau 142 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements 6.2. ESI GROUP ANNUAL FINANCIAL STATEMENTS 6.2.1. INCOME STATEMENT (In € thousands) Revenue Production held as inventory Capitalized production Operating subsidies Reversals of provisions and amortization, expense transfers Other income Operating income Purchase and change in stock of goods 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 RESULT FINANCIAL RESULT CURRENT RESULT BEFORE TAX EXCEPTIONAL RESULT Employee profit-sharing Income tax NET PROFIT (LOSS) Notes December 31, 2019 January 31, 2019 E.1 E.3 E.4 E.5 E.5 E.6 E.7 E.8 F.5 55,296 (495) 29,478 131 1,405 412 86,228 58 56,220 1,044 15,027 6,970 27,821 2,718 1,064 110,922 (24,694) (5,223) (29,916) (958) 0 (3,024) (27,851) 86,023 83 29,975 63 2,578 890 119,611 40 62,674 1,363 15,881 7,467 28,661 2,054 1,809 119,948 (337) 2,595 2,258 (2,138) 0 (2,699) 2,820 1 2 3 4 5 6 7 8 9 143 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS 6.2.2. 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 December 31, 2019 January 31, 2019 Gross value Amortization/ Provisions 95,632 11,472 69,951 (30,993) (8,774) (9,229) Net value 64,639 2,698 60,722 Net value 61,649 2,928 64,387 177,055 (48,996) 128,059 128,964 1,091 7 42,534 10,042 4,036 5,178 62,888 2,498 473 1,435 (2,515) (2,515) 1,091 7 40,019 10,042 4,036 5,178 60,373 2,498 473 1,435 1,998 152 61,559 9,840 4,163 2,365 80,077 1,550 552 890 Notes C.1 C.2 C.3 C.4 C.4 C.5 C.6 C.7 C.7 TOTAL ASSETS 244,329 (51,511) 192,838 212,033 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 Financial liabilities Down payments from clients Trade payables Tax payables and employee-related liabilities Other liabilities D.6 & D.10 Operating liabilities and miscellaneous debts Deferred income Foreign exchange gains and losses TOTAL LIABILITIES 144 Notes December 31, 2019 January 31, 2019 D.2 D.10 D.4 D.5 D.7 D.8 D.6 D.9 18,055 38,364 1,805 40,908 (27,851) 1,434 72,715 1,184 6,566 43,859 2,500 46,359 225 45,878 7,288 9,076 62,498 1,083 2,432 192,838 18,054 38,350 1,805 38,088 2,820 1,284 100,400 1,029 5,452 34,386 2,500 36,886 219 42,034 8,500 14,992 65,745 630 1,890 212,033 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements 6.2.3. NOTES TO ESI GROUP ANNUAL FINANCIAL STATEMENTS Table of contents of notes to the annual financial statements NOTE A. Significant events of the year NOTE B. Accounting principles and methods NOTE C. Asset details 145 146 149 NOTE D. Liability details NOTE E. Details on income statement NOTE F. Other information 154 158 161 Total balance sheet at December 31, 2019 amounts to €192,838 million and the income statement for the financial year shows net loss of €27.851 million. The financial statements were prepared in accordance with the French General Accounting Plan and generally accepted accounting principles (French GAAP Art. 831-1/1). 2019 fiscal year ran exceptionally for 11 months, from February 1 to December 31, further to the change of closing further to the change of closing date from January 31 (Y+1) to December 31 (Y) such as decided by the General Meeting held on July 18, 2019. All amounts listed in these notes are in thousands of euros unless otherwise indicated. The notes below are an integral part of the annual financial statements. Refer to note A. Significant events of the year. NOTE A. SIGNIFICANT EVENTS OF THE YEAR Change of closing date & proforma information Further to the decision by General Meeting held on July 18, 2019, closing date of the fiscal year has been shifted from January 31 to December 31. Accordingly, 2019 fiscal year has run exceptionally for 11 months, from February 1 to December 31, not including the month of January. As January is a significant month in terms of sales (renewal of almost half of the contracts in the licensing business), the results for the 11 months 2019 fiscal year differ substantially from those of a full 12 months year. To ensure good comparability of information and in accordance with AMF Recommendation 2013-08, the main aggregates of the financial statements have been recalculated on proforma basis from January to December for 2019 and 2018. Proforma data allow to present the Group’ activity over two full financial years. The data presented mainly relate to the income statement, cash and financial debt. (In € millions) Revenue Operating result (In € millions) Financial debt Cash 2019 Proforma January – December 2018 Proforma January – December 88.8 5.2 80.8 (0.7) December 31, 2019 December 31, 2018 47.0 9.2 46.3 8.2 Changes in scope occurred during the year ◗ Acquisition of minority interests in ESI ITI Gmbh (4%): percentage ownership of this German entity, as well as of its French subsidiary company ITI Southern Europe, is 100% as of December 31, 2019. ◗ Payment of the purchase additional price (final) for Scilab Enterprises. ◗ Dissolution of the Chinese entity Zhong Guo ESI Co., Ltd as of December 31, 2019. Refer to note C.3. 1 2 3 4 5 6 7 8 9 145 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS NOTE B. ACCOUNTING PRINCIPLES AND METHODS The rules and methods remain unchanged from last year. • consistency in accounting methods from one financial year The general accounting conventions have been applied prudently, in accordance with the following assumptions: to the next, • independence of financial years; ◗ Basic assumptions: • going concern, NOTE B.1. USE OF ESTIMATES ◗ General rules for preparing and presenting annual financial statements: the basic method used to measure accounting items is the historical cost method. Preparation of the financial statements requires the use of 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. These estimates, assumptions and assessments are established on the basis of existing information or situations at the time the financial statements are drawn up, and which may not reflect future realities. ESI Group carries out comprehensive reviews of these estimates and assessments to take account of past experience and other factors judged relevant with regard to economic conditions. These estimates mainly concern provisions for contingencies and charges and assumptions used for the valuation of equity investments and selected intangible assets. NOTE B.2. INTANGIBLE ASSETS Research and development costs Internal research and development costs are recorded in the appropriate expense category; expenses corresponding to research and development performed by service providers within the Group or third parties are recorded as subcontracting expenses. Internal expenses related to development work incurred during the financial year (wages, payroll taxes and environment-related costs) are capitalized and recognized as capitalized production. Capitalization is performed on a per-project basis. Only projects meeting the six criteria for capitalization defined in the regulation on assets are capitalized as assets. Research projects or the portion of expenses not meeting all of the six criteria continue to be recognized as expenses in the income statement. Amortization starts upon release of the project. Projects that are unfinished at the closing date are capitalized as work in progress. Other intangible assets 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. Amortization starts at release of the version. 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. Other intangible assets (patents, software) are amortized according to the straight-line method according to their estimated useful life. Office and similar software applications Other operational software Codes – third-party software integrated into products 1 year on a straight-line basis 3 years on a straight-line basis 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 impairment 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. 146 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements NOTE B.3. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are valued at cost (purchase price plus related expenses), and amortized according to expected useful life: General facilities Fixtures and fittings, miscellaneous building work Transportation equipment Office equipment New computer equipment Used computer equipment Furnishings 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 the methods presented here below according to the situation of the subsidiary: ◗ equity investments in active subsidiaries are valued on the basis of a multiple of revenue adjusted for net cash position of the subsidiary, or alternatively on the basis of discounted forecasted cash flows for recently acquired entities; ◗ equity investments in dormant subsidiaries or those with reduced activity are valued on the basis of the share of the net equity attributable to ESI Group. 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 Acquisition costs are recorded as part of the cost of the equity investments and deducted, for tax purposes, through accelerated capital allowances, over a period of five years. Receivables related to equity investments are provisioned if there is a risk of non-recovery. Other investments Other investments mainly comprise deposits and factoring guarantee funds (factoring of receivables from the French R&D tax credit). NOTE B.5. INVENTORIES Supply inventories Work in progress Other supply inventories are valued at cost according to the first in, first out method. Work in progress corresponds to consulting studies in progress and valued at production cost with a margin assessed according to the percentage of completion method. NOTE B.6. RECEIVABLES AND DEBTS Receivables and debts are measured at par value. A provision for impairment is recognized where the inventory value of a receivable (excluding advances to subsidiaries), based on the likelihood of recovery, is lower than its net book value. All NOTE B.7. MARKETABLE SECURITIES impairment is determined on a case-by-case basis or following statistical analysis. Regarding advances granted to subsidiaries, the net book value of these receivables follows the same rules as equity investments in terms of impairment. Marketable securities are recorded at their net purchase price. If, at the closing date, the net asset value is lower than the acquisition value, impairment is recorded for the difference. At December 31, 2019, marketable securities were made up exclusively of the Company’s treasury shares, valued according to the first in, first out method. 1 2 3 4 5 6 7 8 9 147 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS ESI Group annual financial statements 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. acquired in the context of other objectives set by the General Meeting (primarily external growth and grants to employees) are recognized as marketable securities. The recognition and impairment method for treasury shares depends on the objective underlying the acquisition. Treasury shares related to the liquidity contract signed by the Company are recognized as financial assets. Treasury shares Impairment is recorded when the share acquisition cost related to liquidity contract exceeds the actual value as determined by the share market price at the closing date. NOTE B.9. FOREIGN CURRENCY TRANSACTIONS Income and expenses in foreign currency are recorded at their converted value using the exchange rate of the transaction date. Liabilities, receivables and cash in foreign currency are recorded on the balance sheet converted at the exchange rate of the closing date. The difference resulting from the conversion of the debts and receivables at the exchange rate of the closing date is recorded on the balance sheet as a “currency translation adjustment”. NOTE B.10. FOREIGN EXCHANGE INSTRUMENTS A provision for contingencies for foreign exchange losses is recorded only for the part of related flows that does not have hedging. Foreign exchange realized gains and losses, as well as provision for unrealized losses, are booked in operating result if related to operating flows/receivables/payables, and in financial result if related to financial flows/receivables/payables. 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. At maturity date, gains and losses from financial instruments are booked in operating result when they are related to operating receivables or debts and in financial result when they are related to financial receivables or debts. 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. Signed financial instruments are presented as Off-balance-sheet commitments in the notes to the financial statements in the period between subscription and maturity. NOTE B.11. REGULATED PROVISIONS Regulated provisions consist of accelerated capital allowances of two types: ◗ differences between tax-related amortization and amortization for depreciation; ◗ amortization of equity investments acquisition costs. These regulated provisions are recorded in the income statement as 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 closing date. Provision for retirement and post-employment benefits Retirement commitments are valued and recognized using the projected unit 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, inflation rate and future salary increases. Differences observed between the valuation of obligations and forecasts of such obligations (on the basis of new projections or assumptions) are known as actuarial gains and losses. 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 pertaining to interest on discounting to present value. The provision at year-end represents the actuarial commitment. The Company has no hedging asset. NOTE B.13. REVENUE RECOGNITION Licensing revenue is generated from royalties paid under licensing agreements granted to end customers and related maintenance services. This revenue is recognized when the following four criteria are met: ◗ the Group can demonstrate the existence of an agreement with the client; ◗ the software has been delivered and accepted; 148 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements ◗ the amount of the user license for the software is determined or determinable; ◗ the recovery is likely. Revenues from services consist mainly of consulting and training fees. They are recognized according to the percentage 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 received from the Group’s distribution subsidiaries and income from subcontracted consulting services, re-invoicing of personnel expenses and invoicing of management fees. Co-financed projects During production of a co-financed project, recognized revenue is determined on the basis of the percentage of completion of the project, on a prorata basis with regard to the proportion financed. NOTE B.14. TAX CONSOLIDATION On February 1, 2008, ESI Group has formed a tax consolidation group with its French subsidiary, Engineering System International. the tax borne as part of the tax consolidation group and that which would have been borne in the absence of tax consolidation. As part of the tax consolidation agreement, it was agreed that the tax cost 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 member of the tax Group. As regards the financial statements for the financial year, for Engineering System International there is no difference between Neither of the two companies in the tax Group has loss carryforwards prior to the current year. For information, the French competitiveness and employment 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 January 31, 2019 42,879 26,339 1,028 16,617 2,402 89,265 (17,146) (10,397) (73) Increase 28,524 2,542 21,968 512 53,546 (26,309) (736) Decrease (23,668) 0 (21,047) (2,465) (47,180) 23,668 December 31, 2019 47,736 28,881 1,028 17,539 449 95,631 (19,787) (11,133) (73) Total amortization, provisions (27,616) (27,045) 23,668 (30,993) Development costs Patents, licenses, brands Goodwill Intangible assets in progress, development costs Other intangible assets in progress TOTAL NET VALUE 25,733 15,942 955 16,617 2,402 61,649 2,215 1,806 21,968 512 26,501 (21,047) (2,465) (23,512) 27,948 17,748 955 17,539 449 64,639 The decrease in development costs reflects scrapping of fully amortized assets. The goodwill mainly reflects the acquisition on July 26, 1991 from the company Engineering System International, 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. 1 2 3 4 5 6 7 8 9 149 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS 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 Provisions for depreciation of other financial assets Total amortization, provisions Equity investments Receivables related to equity investments Other investments TOTAL NET VALUE January 31, 2019 Increase Decrease December 31, 2019 2,961 8,013 27 11,001 (1,293) (6,761) (20) (8,073) 1,668 1,252 7 2,928 42 423 465 (193) (501) (0) (695) (151) (78) 0 (230) 3,003 8,435 27 11,466 (1,486) (7,261) (20) (8,768) 1,517 1,174 7 2,698 January 31, 2019 Increase Decrease December 31, 2019 55,002 12,419 1,368 68,788 (2,608) (1,790) (4) (4,402) 52,394 10,629 1,364 64,386 795 320 56 1,161 (3,582) (1,248) (4,830) (2,787) (928) 46 (3,669) 55,797 12,739 1,414 69,950 (6,190) (3,038) 0 (9,229) 49,607 9,700 1,414 60,722 (1) This line primarily includes deposits and guarantees on rental properties and factoring guarantee. 150 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group / Movements in equity investments (gross value) (In € thousands) Engineering System International ESI Japan, Ltd. ESI North America, Inc. ESI UK Ltd. Calcom ESI SA Hankook ESI Co., Ltd. ESI Group Hispania s.l. Mecas ESI s.r.o. STRACO SA ESI US Holding, Inc. Zhong Guo ESI Co., Ltd. Acquisition costs Zhong Guo ESI Co., Ltd. ESI Software (India) Private Ltd. ESI US R&D, Inc. Hong Kong ESI Co., Ltd. Acquisition costs Hong Kong ESI Co., Ltd. ESI-ATE Holdings Ltd. Acquisition costs ESI-ATE Holdings Ltd. 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 Ltd. Acquisition costs OpenCFD Ltd. 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 ESI ITI GmbH Acquisition costs ESI ITI GmbH Scilab Enterprises Acquisition costs Scilab Entreprises Cademce SAS TOTAL CONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements January 31, 2019 Increase Decrease December 31, 2019 458 75 3,726 164 2,678 941 100 912 1,789 834 193 2 2 111 119 2 1,737 56 1,050 6 242 8 543 10,708 322 446 129 2,351 162 124 14 576 87 4,017 293 900 62 17,952 436 550 25 100 193 758 230 458 75 3,726 164 2,678 941 100 912 1,789 834 - 2 2 111 119 2 1,737 56 1,050 6 242 8 543 10,708 322 446 129 2,351 162 124 14 576 87 4,017 293 900 62 18,710 436 780 25 100 1 2 3 4 5 6 7 8 9 55,002 988 193 55,797 Movements of the year are related to acquisition of minority interests in ESI ITI Gmbh (currently 100% of the capital owned by ESI Group); payment of the additional final price for Scilab Enterprises, and the liquidation of Zhong Guo Co (disposal of gross value of equity investment and of acquisition costs). 151 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS / Movements in the provision for equity investments (In € thousands) ESI-ATE Holdings Ltd. Hong Kong ESI CO., Ltd. Zhong Guo Co., Ltd. OpenCFD Ltd. Mineset Cademce TOTAL January 31, 2019 Increase Reversal December 31, 2019 1,737 119 193 459 0 100 193 296 3,479 2,608 3,775 193 1,737 119 0 755 3,479 100 6,190 As at December 31, 2019, following dissolution of the subsidiary Zhong Guo Co., Ltd, its related equity investment provision has been fully reversed, and those of the subsidiary OpenCFD has been adjusted according to the restated value of the shares (note B.4). The net carrying amount of the equity investment of Mineset has been adjusted to the value of the subsidiary’s net equity. / Receivables related to equity investments (In € thousands) Loan ESI North America, Inc. ($9.7 million) Loan Hong Kong ESI ($1.124 million)(1) Loan ESI Group Hispania SL Loan ESI ATE Holdings ($2.271 million)(1) TOTAL (1) These two loans are fully impaired. Gross value January 31, 2019 December 31, 2019 8,444 978 1,020 1,977 12,419 8,681 1,006 1,020 2,033 12,739 Remuneration rate 6-month Libor $ +1% margin 6-month Libor $ +1% margin Profit-sharing loan capped at 5% 6-month Libor $ +1% margin NOTE C.4. RECEIVABLES – PROVISIONS FOR DEPRECIATION OF RECEIVABLES (In € thousands) Loans granted to subsidiaries 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 Trade payables debtors Group and associates Other receivables Prepaid expenses TOTAL 152 At December 31, 2019 At January 31, 2019 Gross value 12,739 57 1,358 2,502 12,083 27,949 327 3,024 553 264 1,735 2,607 696 718 520 2,095 69,227 Due in 1 year or less Due in between 1 and 5 years 12,739 57 1,358 2,502 12,083 27,949 327 3,024 553 264 1,735 2,607 696 718 520 2,095 55,072 14,154 Gross value 12,419 70 1,298 1,939 12,978 48,600 210 3,189 620 443 1,569 2,732 742 486 130 1,550 88,974 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements / Details of provisions for depreciation of receivables (In € thousands) Provisions for doubtful receivables Provisions for other receivables TOTAL January 31, 2019 1,958 280 2,238 Increase 578 0 578 Reversal unused Reversal used December 31, 2019 21 0 21 0 280 280 2,515 0 2,515 NOTE C.5. TREASURY SHARES Treasury shares in the balance sheet are classified in Financial assets for €57 thousand (liquidity contract) and in Marketable securities for €4.036 million. / Change in the number of treasury shares TREASURY SHARES January 31, 2019 410,306 Increase 56,196 Decrease December 31, 2019 69,736 396,766 The total value on the balance sheet is thus €4.093 million, compared to a market fair value of €12.284 million at December 31, 2019, for an unrealized gain of €8.171 million. NOTE C.6. PREPAID EXPENSES AND EXPENSES CAPITALIZED, TO BE AMORTIZED (In € thousands) Prepaid rent Maintenance prepaid expenses Other prepaid expenses Expenses related to syndicated loan set up(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 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 Group vendors credit notes to be issued Miscellaneous income TOTAL December 31, 2019 January 31, 2019 847 903 749 473 2,971 420 493 638 552 2,102 December 31, 2019 January 31, 2019 897 538 1,435 473 416 890 December 31, 2019 January 31, 2019 2,594 731 0 696 17 4,037 5,755 1,552 123 619 0 8,050 153 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS ESI Group annual financial statements NOTE D. LIABILITY DETAILS NOTE D.1. EQUITY The main movements during the financial year are summarized in the table below: (In € thousands) Capital Share premium ESI Software merger premium Systus merger premium Legal reserve Retained earnings Net result for the year Regulated provisions TOTAL NOTE D.2. LEGAL CAPITAL January 31, 2019 Allocation of 2018 profit 2019 net result 18,054 25,818 9,677 2,854 1,805 38,088 2,820 1,285 (2,820) (27,851) 100,400 (2,820) (27,851) Other 16 2,819 151 2,986 December 31, 2019 18,054 25,834 9,677 2,854 1,805 40,907 (27,851) 1,435 72,715 Common shares (par value of €3) O/w preferred shares (double voting rights) Number of shares At the end of the financial year Created during the financial year Repaid during the financial year 6,018,492 2,254,387 600 - - The capital increase is attributable to the exercise of stock subscription options for 11,267 shares. 154 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements 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. Number of stock options/ shares allotted or to be allotted Number of stock options/ shares granted O/w performance shares Exercise price Number of existing stock options/shares at December 31, 2019 Limit year for exercising options Plan number (date of General Meeting) Date of Board of Directors Plan 10 (GM 2012) Plan 10 bis (GM 2012) Plan 10 ter (GM 2012) 02/01/2013 02/07/2014 02/01/2015 Plan 10 quater (GM 2012) 07/22/2015 Plan 15 (AG 2013) Plan 17 (GM 2014) Plan 17 bis (GM 2014) Plan 17 ter (GM 2014) 07/22/2015 03/11/2016 05/05/2017 Total 180,000 180,000 02/01/2015 294,538 20,000 62,300 20,000 150,850 62,300 11,000 15,000 3,150 7,350 10,000 18,175 1,875 Plan 17 quater (GM 2014) 05/05/2017 Total 180,000 37,400 Plan 19 (GM 2017) Plan 19 bis (GM 2017) Plan 19 ter (GM 2017) 07/18/2018 02/01/2019 12/18/2019 43,950 20,000 24,660 1,875 1,875 32,963 15,000 Total 180,000 88,610 47,963 229,600 1,064,138 326,010 132,138 07/21/2016 12/23/2016 08/01/2017 60,000 07/18/2018 07/18/2018 07/18/2018 07/18/2018 7,964 25,000 2,275 9,000 10,617 2,441 15,500 16,250 6,712 2,521 Authorization given at the GM of July 2017 Total stock-options Plan 6 (GM 2016) Plan 7 (GM 2016) Plan 8 (GM 2016) Plan 9 (GM 2018) Plan 9 bis (GM 2018) Plan 9 ter (GM 2018) Plan 9 quater (GM 2018) Total free shares TOTAL STOCK-OPTIONS AND FREE SHARES 27.82 24.42 21.66 27.17 21.66 27.27 27.27 27.92 50.92 42.97 27.04 29.12 38,700 375 2,100 41,775 4,900 16,300 21,200 38,100 20,000 24,660 82,760 145,135 4,164 2,501 10,367 2,184 15,500 16,250 6,712 2,521 53,534 2021 2022 2025 2025 2025 2023 2026 2025 2025 2026 2027 2027 2020 2021 2021 2020 2020 2022 2023 2022 2021 Plan 9 quinquies (GM 2018) 12/18/2019 Plan 9 sexies (GM 2018) 12/18/2019 60,000 120,000 90,316 7,964 1,184,138 415,876 140,102 205,334 All stock options and free shares include a continued employment requirement. NOTE D.4. CONDITIONAL ADVANCES (In € thousands) Ademe advance Bpifrance advance TOTAL December 31, 2019 Up to 1 year 803 382 1,184 1 to 5 years 803 382 1,184 More than 5 years January 31, 2019 772 257 1,029 155 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS NOTE D.5. PROVISIONS FOR CONTINGENCIES AND CHARGES (In € thousands) Foreign exchange unrealized losses (note C.7) Provisions for contingencies and charges (operating result) Provision for retirement obligations TOTAL January 31, 2019 Increase Reversal December 31, 2019 890 193 4,369 5,452 1,438 93 666 2,197 (890) (193) (1,083) 1,438 93 5,035 6,567 Movements of the year mostly refer to foreign exchange rates fluctuations. Provisions for contingencies and charges (operating result) correspond to social risks. Provision allowance for retirement obligations breaks down as follows: ◗ €609 thousand of operating allowance, o/w €257 thousand in costs for services rendered, €398 thousand in actuarial losses and -€46 thousand for indemnities paid by the employer; ◗ €57 thousand of financial allowance corresponding to interest expenses. / Actuarial assumptions for retirement obligations Discount rates Rate of salary increase December 31, 2019 January 31, 2019 0.80% 2.50% 1.45% 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. NOTE D.6. STATEMENT OF LIABILITIES (In € thousands) Banks borrowings (D.7) Miscellaneous financial debt (D.8) Trade payables Group trade payables 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 December 31, 2019 43,859 2,500 6,179 39,647 4,796 1,607 626 259 52 7,762 1,570 1,083 Up to 1 year 14,174 2,500 6,179 39,647 4,796 1,607 626 259 52 7,762 4,203 1,083 1 to 5 years More than 5 years January 31, 2019 24,275 5,400 34,386 2,500 7,293 34,690 4,361 1,652 1,999 489 51 12,362 2,630 630 109,940 80,264 24,275 5,400 103,042 156 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements NOTE D.7. BANK BORROWINGS At December 31, 2019, bank borrowings stand at €43.859 million and break down as follows: ◗ €28,000 thousand related to the long-term syndicated lines of credit, of which 3,5 million that needs to be repaid in 2020; ◗ €10 million in drawdowns from the revolving credit line; ◗ €4 million in long term borrowings from Bpifrance, including €400 thousand due in 2020; ◗ €1,575 thousand corresponding to a loan to finance the cost of moving Rungis’ offices – due October 2023; ◗ €284 thousand mostly in accrued interest on borrowings. ESI Group’s main source of financing is the syndicated loan. This syndicated loan consists of a long-term part of €28 million and a revolving loan (at December 31, 2019) of €15 million, of which €10 million has been confirmed. The long-term part will be gradually reimbursed annually on April 30 each year until April 30, 2025. The syndicated loan is remunerated based on the Euribor rate and a margin of 2%, 2.25% or 2.5% depending on the level of the Net financial debt/EBITDA ratio related to previous year financial statements. The margin used since June 2019 is 2,25%. Off-balance-sheet commitments associated with this syndicated loan are presented in note F.4. NOTE D.8. MISCELLANEOUS FINANCIAL DEBT (In € thousands) Promissory note TOTAL December 31, 2019 2,500 2,500 Up to 1 year 2,500 2,500 1 to 5 years More than 5 years January 31, 2019 2,500 2,500 NOTE 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 December 31, 2019 January 31, 2019 2,295 2,501 1,607 626 259 7,288 2,557 1,804 1,652 1,999 489 8,500 NOTE D.10. OTHER OPERATING PAYABLES (In € thousands) Creditor trade receivables Subsidiaries current account Advances on co-financed projects Other liabilities TOTAL January 31, 2019 Increase Decrease December 31, 2019 40 12,362 2,536 54 14,992 216 0 216 (4,600) (1,260) (17) (5,859) 256 7,762 1,276 38 9,332 1 2 3 4 5 6 7 8 9 157 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS 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 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 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 158 December 31, 2019 January 31, 2019 304 505 1,622 2,432 359 229 1,302 1,890 December 31, 2019 January 31, 2019 197 13,517 2,293 2,592 229 1,276 0 11 12,195 2,557 1,804 182 2,536 2 20,104 19,287 December 31, 2019 January 31, 2019 9,195 2,214 35,270 3,422 1,859 3,335 55,296 15,531 2,958 58,583 3,831 1,855 3,264 86,023 December 31, 2019 January 31, 2019 4,477 14,807 10,419 25,593 55,296 13,449 27,105 13,746 31,723 86,023 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements NOTE E.2. OTHER INCOME FROM OPERATIONS (In € thousands) Production held as inventory Capitalized production Reversal on depreciation and amortization Reversal on foreign exchange provision on trade receivables and payables Foreign exchange gains on trade receivables and payables 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 Postage, 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 December 31, 2019 January 31, 2019 (495) 29,478 494 890 412 153 83 29,975 973 1,576 889 93 30,933 33,588 December 31, 2019 January 31, 2019 4,858 16,847 20,596 265 4,314 1,999 206 2,713 1,055 858 1,459 388 662 8,224 17,824 20,978 338 4,473 1,953 339 2,153 2,286 962 2,014 428 701 56,220 62,674 December 31, 2019 January 31, 2019 477 208 266 93 1,044 697 115 314 236 1,363 1 2 3 4 5 6 7 8 9 159 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS 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 impairment of other assets Provision for retirement obligations Provision for foreign exchange on trade receivables and payables Provision for contingencies and charges TOTAL NOTE E.6. OTHER OPERATING EXPENSES (In € thousands) Royalties Directors' fees Foreign exchange losses on trade receivables and payables Loss on trades receivables Miscellaneous expenses TOTAL NOTE E.7. FINANCIAL RESULT (In € thousands) Foreign exchange gain/(loss) realized Interest on borrowings Interest on subsidiaries current account Provision for retirement obligations Provision for impairment equity investments and related receivables Reversal provision for investments (C3) AVIC ESI dividend Mecas ESI s.r.o. dividend Zhong Guo ESI Co, Ltd. dividend Other financial income/(expenses) TOTAL December 31, 2019 January 31, 2019 26,309 27,225 736 695 81 578 609 1,438 93 500 856 80 491 150 322 926 165 30,539 30,715 December 31, 2019 January 31, 2019 68 263 322 282 129 1,064 56 169 1,148 433 3 1,809 December 31, 2019 January 31, 2019 103 (857) (41) (57) (4,990) 193 0 0 194 (51) (5,223) 144 (824) 39 (55) 0 1,517 18 1,690 0 67 2,595 160 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements NOTE E.8. EXCEPTIONAL RESULT (In € thousands) Profit or loss on movements of treasury shares Accelerated capital allowances Exceptional amortization of set up costs of the previous syndicated loan Exceptional amortization Dissolution result of subsidiary CyDesign Labs, Inc. Presto additional payment Miscellaneous(1) TOTAL (1) Definitive loss on unused tax credit for €745 thousand. NOTE F. OTHER INFORMATION NOTE F.1. AVERAGE HEADCOUNT (In full-time equivalent) Executives Office personnel TOTAL December 31, 2019 January 31, 2019 (100) (150) 0 0 0 (3) (705) (958) (211) (224) (291) (30) (1,285) (73) (24) (2,137) December 31, 2019 Employees January 31, 2019 Employees 240 18 258 245 19 264 Average headcount in France and in branches outside France, data for year ended January 31, 2019 have been restated. NOTE F.2. COMPENSATION PAID TO EXECUTIVE CORPORATE OFFICERS Total compensation paid to ESI Group’s four executive corporate officers are as follows: (In € thousands) Wages Benefits in kind Directors' fees Compensation paid by controlled companies Fringe benefits paid by controlled companies TOTAL December 31, 2019 January 31, 2019 345 10 98 724 10 1,186 393 12 16 381 148 951 NOTE F.3. BRANCHES There are two branches integrated within ESI Group’s financial statements: Name ESI Group Netherlands – Branch Office ESI Group Shanghai Representative Office Address Country Postbus 1000-Box E57-2260BA Leidschendam Netherlands Cross Region Plaza, Unit 20D, 899 Lingling Road 200235 Shanghai China 1 2 3 4 5 6 7 8 9 161 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS NOTE F.4. OFF-BALANCE SHEET COMMITMENTS / Future lease obligations (In € thousands) Real estate rentals Movable property rentals TOTAL Less than 1 year Between 1 and 5 years 1,301 1,444 2,744 7,519 474 7,992 Future lease commitments correspond to the outstanding amounts due on the Group’s main lease and rental contracts until the contractual next maturity date. / Financial commitments ◗ Interest rate instruments As part of the credit agreement dated December 20, 2018, ESI Group granted a pledge of 99.98% of the shares of Engineering System International, 100% of the shares of the subsidiary ESI Software Germany, and 96% of the shares of the subsidiary ESI ITI GmbH. As long as it owes an obligation under the agreement or the security documents, the borrower undertakes, under prepayment constraint, to comply with the ratio of consolidated net financial debt divided by consolidated EBITDA, the thresholds to be respected over the term of the syndicated loan agreement are gradually decreasing. As at January 31, 2019, the threshold to be respected is 3.5%. At December 31, 2019, on the basis of the annual consolidated financial statements certified by the Statutory Auditors, the Group was in compliance with this ratio. In terms of managing its exposure to changes in foreign exchange and interest rates, ESI Group has subscribed to the following financial instruments. Results at maturity are recognized in financial income for interest rate instruments and in operating income for foreign exchange instruments: • The syndicated credit agreement signed in December 2018 requires the set-up of variable rate hedging up to 50% of the outstanding loan amount. Two swaps were signed during 2019 first half to meet this requirement, with a nominal value of €14 million each, where ESI Group receives a 3 months Euribor (with a 0% floor) and pays a fixed rate of 0.085% and 0.092% respectively. ◗ Foreign exchange instruments • In order to hedge foreign currency cash flows between the Group’s parent company and its subsidiaries, ESI Group may at any time acquire currency options and any other form of currency contract. The instruments in place during the year ended December 31, 2019 were the Japanese yen (tunnels). As at December 31, 2019, all financial instruments had matured. / Pledges At December 31, 2019, ESI Group had a rent security deposit with Crédit du Nord in an amount of €82 thousand, established in November 2012 and expiring November 28, 2021 plus 6 months. NOTE F.5. RECONCILIATION OF PROFIT/(LOSS) AND TAX INCOME/(CHARGE) (In € thousands) Current income (loss) Exceptional income 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 (29,917) (958) 3,024 8,024 3 (21,893) (955) 0 (21,893) (955) 8,027 (22,848) (22,848) 162 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements NOTE F.6. INCREASES AND DECREASES IN FUTURE TAX LIABILITIES (In € thousands) December 31, 2019 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%) 90 2,432 902 3,424 1,141 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. 1 2 3 4 5 6 7 8 9 163 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS NOTE F.8. TABLE OF CONTROLLED ENTITIES AND AFFILIATES (AT DECEMBER 31, 2019) Shareholders’ equity other than capital and net profit for the year (converted at the closing rate) Capital (converted at the closing rate) Carrying number of shares held % of capital owned (In %) Gross Net Outstanding loans and advances granted by the Company or by the subsidiary Total guarantees granted by the Company Revenues, after tax, for the last financial year (converted at the average exchange rate) Profit or loss for the last financial year (covered at the average exchange rate Dividends received by the Company during the financial year (In € thousands) Head-quarters A. Detailed information on each security with gross value exceeding 10% of the Company’s capital 1. Over 50%-owned subsidiaries France France Japan 1,020 499 99 3,325 3,046 2,440 100.0 97.7 97.0 458 1,789 75 458 1,789 75 (2,976) (511) 9,063 (2,482) 0 25,136 45 (389) South Korea 1,126 (2,186) 98.8 941 941 5,458 (318) USA 0 (1,599) 100.0 3,726 3,726 Spain Czech Republic United Kingdom China India China China Italy 100 16 120 194 83 0 1 1 (631) 100.0 100 100 1,926 95.0 1,269 1,687 634 100.0 74.0 98.5 912 164 111 912 164 111 2,678 2,678 3 0 6,271 100.0 0 2 (838) 100.0 119 0 2 0 0 8,681 1,020 (1,210) 1,006 2,033 16,809 (2,320) 2,757 (533) 5,552 (626) 0 2,685 10,093 3,056 0 (99) 403 271 (3) 10,483 705 0 0 0 0 194 10 500 (965) 218 100.0 100.0 1,737 1,050 1,050 3,114 (220) ESI US R&D, Inc. USA Calcom ESI SA Switzerland Brazil Tunisia 9 61 99 95.0 6 6 1,042 95.0 242 242 696 434 16 (9) China 650 1,785 100.0 543 543 2,577 (852) 517 10 0 73 1,125 8,169 682 100.0 10,708 10,708 100.0 446 446 (1,231) (9) 7,440 1,663 342 54 (229) 100.0 2,351 1,595 (126) 1,155 (409) 25 (1,026) 100.0 80.0 124 900 124 900 715 180 285 12 (427) Germany ESI Nordics AB Sweden OpenCFD Ltd. United Kingdom ESI Services Vietnam Co., Ltd CIVITEC Vietnam France 164 Engineering System International STRACO ESI Japan, Ltd. Hankook ESI Co., Ltd. ESI North America, Inc. ESI Group Hispania s.l. Mecas ESI s.r.o. ESI UK Ltd. Zhong Guo Co., Ltd ESI Software (India) Private Ltd Hong Kong ESI Co., Ltd. ESI-ATE Holdings Ltd. ESI Italia s.r.l. ESI South America Comércio e Serviços de Informática, Ltda ESI Services Tunisia ESI Group Beijing Co., Ltd ESI Software Germany GmbH 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements Shareholders’ equity other than capital and net profit for the year (converted at the closing rate) Capital (converted at the closing rate) % of capital owned (In %) 3,209 463 100 100 Carrying number of shares held Gross 18,710 4,017 Net 18,710 538 Outstanding loans and advances granted by the Company or by the subsidiary (1,299) Total guarantees granted by the Company (858) 100 780 780 (400) (474) 100 834 834 (In € thousands) Head-quarters ESI ITI GmbH Germany Mineset Inc. SAS Scilab Enterprises ESI US Holding, Inc. USA France USA 2. 10-50% owned subsidiaries 26 0 424 674 JV AECC-ESI China 1,275 672 45.0 576 576 Data as of December 31, 2019 presented in this table are non-audited data. NOTE F.9. SUBSEQUENT EVENTS Coronavirus Revenues, after tax, for the last financial year (converted at the average exchange rate) 5,893 570 41 0 0 Profit or loss for the last financial year (covered at the average exchange rate Dividends received by the Company during the financial year 201 74 (132) 0 236 In the short term, the global pandemic related to Covid-19 is expected to impact our financial year results, however many remaining uncertainties make it impossible to precisely quantify this impact at this stage. The resilience of our business model solidly anchored on renewable and critical software licenses will help us manage risks over the year. 165 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS 6.2.4. STATUTORY AUDITORS’ REPORT ON THE FINANCIAL STATEMENTS This is a translation into English of the Statutory Auditors’ report on the financial statements of the Company issued in French and it is provided solely for the convenience of English-speaking users. This Statutory Auditors’ report includes information required by European regulation and French law, such as information about the appointment of the Statutory Auditors or verification of the management report and other documents provided 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. Eleven-months period ended December 31, 2019 To the General Meeting of ESI Group, Opinion In compliance with the engagement entrusted to us by your general meeting, we have audited the accompanying financial statements of ESI Group for the eleven-months period ended December 31, 2019. These financial statements were approved by approved by the Board of Directors on March 19, 2020 on the basis of the elements available at that date, in the evolving context of the health crisis related to Covid-19. 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 December 31, 2019 and of the results of its operations for the year then ended in accordance with French accounting principles. The audit opinion expressed above is consistent with our report to the Audit Committee. Basis for opinion / Audit Framework We conducted our audit in accordance with professional standards applicable in France. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Our responsibilities under those standards are further described in the Statutory Auditors’ Responsibilities for the Audit of the Financial Statements section of our report. / Independence We conducted our audit engagement in compliance with independence rules applicable to us, for the period from February 1, 2019 to the date of our report and specifically we did not provide any prohibited non-audit services referred to in Article 5(1) of Regulation (EU) No. 537/2014 or in the French Code of Ethics (Code de déontologie) for Statutory Auditors. Emphasis of matter Without qualifying our opinion expressed above, we draw your attention to the following matter: ◗ The note A “Significant events of the year “which presents the change in the closing date of the financial year and the information established for comparability purposes. Justification of assessments – Key Audit Matters In accordance with the requirements of Articles L. 823-9 and R. 823-7 of the French Commercial Code (Code de commerce) relating to the justification of our assessments, we inform you of the key audit matters relating to risks of material misstatement that, in our professional judgment, were of most significance in our audit of the financial statements of the current period, as well as how we addressed those risks. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on specific items of the financial statements. 166 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements / Capitalization of development costs Risk identified Our response In the balance sheet of the Company, fixed assets include capitalized development costs. As of December 31, 2019 their net book value amounts to €27,948 thousand. They correspond mostly to direct labor costs as well as sub-contracting, incurred for the development of new annual versions or major improvements of existing ESI software. As indicated in note B.2 to annual financial statements, capitalization of development costs is subject to compliance with the six criteria set out in the regulation on assets of the Autorité des Normes Comptables. Capitalized development costs start to be amortized after the market release of the related version of the software. Capitalized expenses are amortized on a straight-line basis over a period of 12 months for new annual versions of software, and over 24 or 36 months for major improvements to existing products, depending on the degree of innovation. Regarding the significant impact on the income statement of capitalization of development costs amounting to €20,596 million, and the significant gross balance of these capitalized costs recorded as assets in the balance sheet amounting to €47,736 million, it follows that any deviation from the procedures in place or any misinterpretation of the capitalization criteria could lead to significant impacts on the Company’s annual financial statements and financial performance. The assessment of compliance with the criteria for capitalization of development costs, as well as the determination of the amortization period depending on the nature of the project, are very much based on Management’s judgment and the reliability of the procedures applied for the identification and allocation of expenses between the different projects. On this basis, we considered capitalization of development costs as a key audit matter. We examined the compliance of the Company’s accounting treatment of research and development costs with current accounting standards. We also conducted a critical review of how this methodology was implemented. In particular, we conducted the following procedures: ◆ we have taken notice of the procedure followed by the Company to distinguish between research and development costs and, for the latter, the rules put in place to assess compliance with the capitalization criteria laid down in French accounting rules and principles; ◆ we tested by sampling the correct application of the procedures implemented for the identification, monitoring and recording of research and development costs; ◆ we audited, for a selection of projects, the correct application of the capitalization criteria set out in French accounting rules and principles and tested the accuracy and completeness of the most significant expenses charged to these projects; ◆ we verified the correct calculation of amortization expense mainly by controlling the correct application of the rules for setting the straight-line amortization period, depending on the nature of the project (major improvement or new version). 1 2 3 4 5 6 7 8 9 167 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT6CONTENTS 6 FINANCIAL STATEMENTS ESI Group annual financial statements / Valuation of equity investments Risk identified Our response In the balance sheet as of December 31, 2019, net book value of equity investments amounts to €49,607 thousand. At acquisition date, equity investments are valued at acquisition cost, which includes the purchase price and the costs directly attributable thereto. At each year-end, the net book value of equity investments is compared with its value in use, and if the value is lower than the net book value, a provision for depreciation is recorded in order to reduce the book value to the value in use of the asset. The different methods used to determine the value in use of equity investments are described in note B.4 to annual financial statements and are detailed as follows: ◆ Equity investments in active subsidiaries are valued on the basis of a multiple of revenue adjusted for net cash position of the subsidiary, or alternatively on the basis of discounted forecast cash flows for recently acquired entities; ◆ Equity investments in dormant subsidiaries or those with reduced activity are valued on the basis of the share of the net equity attributable to ESI Group. Estimating the value in use of equity investments requires the exercise of Management’s judgment in identifying the criteria determining the choice of valuation method to be applied and the factors to be considered depending on the participating interests, particularly historical items (equity) or forecasts (profitability forecasts and economic conditions in related countries). We therefore considered equity investments valuation as a key audit matter. We examined the compliance of the Company’s methodology for the valuation of equity investments with the applicable accounting standards. Our work consisted of reviewing the justification provided by Management for the valuation method chosen and the data used. Our review of the methodology applied, for both types of equity investments, is detailed as follows: For equity investments related to active subsidiaries: ◆ Obtaining the multiple of revenue adjusted for net cash position of the subsidiary and assessing the consistency of the data used with the accounts of the corresponding entities; ◆ Review of the permanence of the calculation method used and its execution; ◆ Obtaining the cash flow and operating forecasts of the entities concerned and assessing their consistency with the forecast data from the latest strategic plans, drawn up under the control of Senior Management and approved by the Board of Directors; ◆ Review of the consistency of assumptions used with the economic environment at the closing date; ◆ Comparison of the forecasts retained for previous periods with corresponding achievements in order to assess the achievement of past objectives; ◆ Verification that the value resulting from the cash flow forecasts has been adjusted for the indebtedness of the entity. For equity investments in dormant subsidiaries or those with reduced activity: ◆ Reconciliation of net equity attributable to ESI Group retained for the valuation with the accounts of the concerned entities and, if applicable, examination of the documentation justifying the adjustments made. 168 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS FINANCIAL STATEMENTS ESI Group annual financial statements Specific verifications We have also performed, in accordance with professional standards applicable in France, the specific verifications required by laws and regulations. / Information given in the management report and in the other documents with respect to the financial position and the financial statements provided to the shareholders We have no matters to report as to the fair presentation and the consistency with the financial statements of the information given in the management report of the Board of Directors as at March 19, 2020 and in the other documents with respect to the financial position and the financial statements provided to the shareholders. Regarding the events that occurred and the elements known after the date of approval of the financial statements relating to the effects of the Covid-19 crisis, Management has informed us that such events and elements will be communicated to the annual general meeting called to decide on these financial statements. We attest the fair presentation and the consistency with the financial statements of the information relating to the payment terms required by Article D.441-4 of the French Commercial Code. / Report on corporate governance We attest that the Board of Directors’ Report on corporate governance sets out the information required by Articles L. 225-37-3 and L. 225-37-4 of the French Commercial Code (Code de commerce). Concerning the information given in accordance with the requirements of Article L. 225-37-3 of the French Commercial Code (Code de commerce) relating to remunerations and benefits received by the directors and any other commitments made in their favour, we have verified its consistency with the financial statements, or with the underlying information used to prepare these financial statements and, where applicable, with the information obtained by your Company from controlling and controlled companies. Based on these procedures, we attest the accuracy and fair presentation of this information. With respect to the information relating to items that your Company considered likely to have an impact in the event of a takeover bid or exchange offer, provided pursuant to Article L. 225-37-5 of the French Commercial Code (Code de commerce), we have agreed this information to the source documents communicated to us. Based on these procedures, we have no observations to make on this information. 1 2 3 4 / Other information In accordance with French law, we have verified that the required information concerning the purchase of investments and controlling interests and the identity of the shareholders and holders of the voting rights has been properly disclosed in the management report. 5 Report on other legal and regulatory requirements / Appointment of the Statutory Auditors We were appointed as Statutory Auditors of ESI Group by the General Meeting held on June 25, 2009 for PricewaterhouseCoopers Audit and on December 16, 1997 for Ernst & Young Audit. As at December 31, 2019, PricewaterhouseCoopers Audit were in the 11th year of total uninterrupted engagement and Ernst & Young Audit were in the 23rd year (which is the 20th year since securities of the Company were admitted to trading on a regulated market). Responsibilities of Management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with French accounting principles and for such internal control as Management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, Management is responsible for assessing the Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless it is expected to liquidate the Company or to cease operations. 6 7 8 The Audit Committee is responsible for monitoring the financial reporting process and the effectiveness of internal control and risks management systems and where applicable, its internal audit, regarding the accounting and financial reporting procedures. 9 The financial statements were approved by the Board of Directors. 169 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT66 FINANCIAL STATEMENTS ESI Group annual financial statements CONTENTS Statutory Auditors’ responsibilities for the audit of the financial statements / Objectives and audit approach Our role is to issue a report on the financial statements. Our objective is to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with professional standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As specified in Article L. 823-10-1 of the French Commercial Code (Code de commerce), our statutory audit does not include assurance on the viability of the Company or the quality of management of the affairs of the Company. As part of an audit conducted in accordance with professional standards applicable in France, the Statutory Auditor exercises professional judgment throughout the audit and furthermore: ◗ Identifies and assesses the risks of material misstatement of the financial statements, whether due to fraud or error, designs and performs audit procedures responsive to those risks, and obtains audit evidence considered to be sufficient and appropriate to provide a basis for his opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control; ◗ Obtains an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the internal control; ◗ Evaluates the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by Management in the financial statements; ◗ Assesses the appropriateness of Management’s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company’s ability to continue as a going concern. This assessment is based on the audit evidence obtained up to the date of his audit report. However, future events or conditions may cause the Company to cease to continue as a going concern. If the Statutory Auditor concludes that a material uncertainty exists, there is a requirement to draw attention in the audit report to the related disclosures in the financial statements or, if such disclosures are not provided or inadequate, to modify the opinion expressed therein; ◗ Evaluates the overall presentation of the financial statements and assesses whether these statements represent the underlying transactions and events in a manner that achieves fair presentation. / Report to the Audit Committee We submit to the Audit Committee a report which includes in particular a description of the scope of the audit and the audit program implemented, as well as the results of our audit. We also report, if any, significant deficiencies in internal control regarding the accounting and financial reporting procedures that we have identified. Our report to the Audit Committee includes the risks of material misstatement that, in our professional judgment, were of most significance in the audit of the financial statements of the current period and which are therefore the key audit matters that we are required to describe in this report. We also provide the Audit Committee with the declaration provided for in Article 6 of Regulation (EU) No. 537/2014, confirming our independence within the meaning of the rules applicable in France such as they are set in particular by Articles L. 822-10 to L. 822-14 of the French Commercial Code (Code de commerce) and in the French Code of Ethics (Code de déontologie) for Statutory Auditors. Where appropriate, we discuss with the Audit Committee the risks that may reasonably be thought to bear on our independence, and the related safeguards. Neuilly-sur-Seine and Paris-La Défense, April 23, 2020 The Statutory Auditors French original signed by PricewaterhouseCoopers Audit Thierry Charron Ernst & Young Audit Frédéric Martineau 170 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS RESOLUTIONS SUBMITTED TO THE GENERAL MEETING 7 7.1. DECISIONS FALLING WITHIN THE COMPETENCE OF THE ORDINARY GENERAL MEETING 7.2. DECISIONS FALLING WITHIN THE COMPETENCE OF THE EXTRAORDINARY GENERAL MEETING 7.3. JOINT DECISIONS 173 177 180 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 171 171 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT7 RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg CONTENTS DECISIONS FaLLINg WIThIN ThE COMPETENCE OF ThE ORDINaRY gENERaL MEETINg 1. Approval of the parent company financial statements for the 10. Approval of the remuneration policy of the Chief Operating financial year ended December 31, 2019 Officers for 2020 financial year 2. Approval of the consolidated financial statements for the financial year ended December 31, 2019 3. Allocation of net profit for the year 4. Special report of the Statutory Auditors on the regulated agree- ments and commitments and approval of the new agreements referred to in Article L. 225-38 of the French Commercial Code 5. Renewal of mandate of Mr. Vincent Chaillou 6. Renewal of mandate of Mr. Yves de Balmann 7. Approval of the remuneration policy of the members of the Board of Directors for 2020 financial year 8. Approval of the remuneration policy of the Chairman of the Board of Directors for 2020 financial year 11. Approval of the components of the total compensation payable or allocated to Mr. Alain de Rouvray, Chairman of the Board of Directors, for the financial year ended on December 31, 2019 12. Approval of the components of the total compensation payable or allocated to Mrs. Cristel de Rouvray, Chief Executive Officer, for the financial year ended on December 31, 2019 13. Approval of the components of the total compensation payable or allocated to Mr. Vincent Chaillou, Chief Operating Officer, for the financial year ended on December 31, 2019 14. Approval of the components of the total compensation payable or allocated to Mr. Christopher St John, Chief Operating Officer, for the financial year ended on December 31, 2019 15. Determination of the compensation paid to the members of 9. Approval of the remuneration policy of the Chief Executive the Board of Directors Officer for 2020 financial year 16. 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 17. Delegation of authority to the Board of Directors to award stock subscription options 18. Delegation of authority to the Board of Directors to award 20. Delegation of authority to the Board of Directors to award free shares to eligible employees and executive corporate officers of the Company and of its affiliated companies stock purchase options 19. Delegation of authority to the Board to reduce the share capital through the cancellation of shares purchased by the Company within the scope of Article L. 225-209 of the French Commercial Code JOINT DECISIONS 21. Powers for formalities 172 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI Group CONTENTS RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Ordinary General Meeting 7.1. DECISIONS FaLLINg WIThIN ThE COMPETENCE OF ThE ORDINaRY gENERaL MEETINg First resolution Third resolution Approval of the parent company financial statements for the financial year ended December 31, 2019 Renewal of the mandate of of net profit for the year Statement of reasons The General Meeting is requested to allocate the deficit of -€27,851,405.66 as follows: ◗ €0 to the legal reserve; ◗ -€27,851,405.66 to retained earnings. Following this allocation, the balance of the legal reserve will stand at -€1,805,367.60. Following this allocation, retained earnings will stand at -€13,056,116.22. The Board of Directors reminds the General Meeting that no dividends have been paid out for the past three financial years. The General Meeting, noting that the net deficit for the year ended December 31, 2019 amounted to -€27,851,405.66, decides, on a proposal from the Board of Directors, to allocate the result as follows: Current position: ◗ net result for the year: -€27,851,405.66; ◗ retained earnings: -€40,907,521.88; ◗ total to be allocated: -€27,851,405.66 Allocated as follows: ◗ €0 to the legal reserve; ◗ -€27,851,405.66 to retained earnings. Following this allocation, the balance of the legal reserve will stand at -€1,805,367.60. Following this allocation, retained earnings will stand at -€13,056,116.22. The Board of Directors reminds the General Meeting that no dividends have been paid out for the past three financial years. Statement of reasons Based on the review of the Management report of the Board of Directors, the report of the Board of Directors on corporate governance, the reports of the Statutory Auditors on the parent company financial statements, the General Meeting is requested to approve the parent company financial statements for the financial year ended December 31, 2019, showing deficit of -€27,851,405.66. It is reminded that 2019 financial year has 11 months due to the change in the financial closing date. The General Meeting, having reviewed the Management report of the Board of Directors, the report of the Board of Directors on corporate governance, and the reports of the Statutory Auditors on the parent company financial statements and the parent company financial statements for the financial year ended December 31, 2019, approves the financial statements and balance sheet, as presented, showing a deficit of -€27,851,405.66. 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 €5,003,109. Second resolution Approval of the consolidated financial statements for the financial year ended December 31, 2019 Statement of reasons Based on the review of the Management report of the Board of Directors, the report of the Board of Directors on corporate governance, and the reports of the Statutory Auditors on the consolidated financial statements, the General Meeting is requested to approve the consolidated financial statements for the financial year ended December 31, 2019 showing a net deficit of -€20,914,070. It is reminded that 2019 financial year lasts 11 months due to the change of closing date. The General Meeting, having reviewed the Management report of the Board of Directors, the report of the Board of Directors on corporate governance, and the reports of the Statutory Auditors on the consolidated financial statements and the consolidated financial statements as at December 31, 2019, approves these financial statements as presented, resulting in a net deficit of -€20,914,070. 1 2 3 4 5 6 7 8 9 173 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT77 RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Ordinary General Meeting CONTENTS Fourth resolution Sixth resolution Special report of the Statutory Auditors on the regulated agreements and commitments and approval of the new 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 the financial year ended on December 31, 2019, no new agreement gave rise to the procedure provided for in Articles L. 225-38 et seq. of the French Commercial Code. It should be noted that the special report by the Statutory Auditors on the agreements referred to in Article L. 225-38 of the French Commercial Code is presented in section 2.6 of the 2019 Universal Registration Document and will be submitted for approval of the General Meeting to be held on June 25, 2020. The General Meeting, having reviewed the special report by the Statutory Auditors on the agreements and commitments referred to in Articles L. 225-38 et seq. of the French Commercial Code, takes note of the conclusions of the said report and approves the agreements and commitments therein. Fifth resolution Renewal of the mandate of Mr. Vincent Chaillou Statement of reasons As the directorship of Mr. Vincent Chaillou expires at the end of this General Meeting, the shareholders are requested to renew his directorship for a term of four years, until the General Meeting to be convened in 2024 to approve the financial statements for 2023 financial year. The Board of Directors reminds the General Meeting that Vincent Chaillou has been director of the Company since its creation in 2004. He also exercises the function of Chief Operating Officer. His biography is presented in the report of the Board of Directors on corporate governance in section 2.3.2 of the 2019 Universal Registration Document. The General Meeting, having reviewed the report of the Board of Directors on corporate governance and noting that the term of office of Mr. Vincent Chaillou expires at the end of the General Meeting, resolves to renew his directorship for a term of four years, expiring at the end of the General Meeting to be convened in 2024 to approve the financial statements for 2023 financial year. Renewal of the mandate of Mr. Yves de Balmann Statement of reasons As the directorship of Mr. Yves Balmann expires at the end of this General Meeting, the shareholders are requested to renew his directorship for a term of four years, until the General Meeting to be convened in 2024 to approve the financial statements for 2023 financial year. The Board of Directors reminds the General Meeting that Mr. Yves Balmann has been an independent director since 2016. His biography is presented in the report of the Board of Directors on corporate governance in section 2.3.2 of the 2019 Universal Registration Document. The General Meeting, having reviewed the report of the Board of Directors on corporate governance and noting that the term of office of Mr. Yves de Balmann expires at the end of the General Meeting, resolves to renew his directorship for a term of four years, expiring at the end of the General Meeting to be convened in 2024 to approve the financial statements for 2023 financial year. Seventh, eighth, ninth and tenth resolutions Approval of the remuneration policy for the members of the Board of Directors, the Chairman of the Board of Directors, the Chief Executive Officer and the Chief Operating Officers for 2020 financial year Statement of reasons In accordance with Article L. 225-37-2 of the French Commercial Code, the General Meeting is requested every year to approve the principles and criteria for determining, distributing and allocating the fixed, variable and exceptional components of the total remuneration and benefits of all types attributable to the Chairman of the Board of Directors, Chief Executive Officer and the Chief Operating Officers, in respect to their mandate for 2020 financial year. The remuneration policy applicable to corporate officers is presented in the report of the Board of Directors on corporate governance in section 2.4.1.2 and 2.4.2.2 of the 2019 Universal Registration Document. Seventh resolution The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to members of the Board of Directors for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.1.2 of the 2019 Universal Registration Document. 174 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Ordinary General Meeting Eighth resolution Twelfth resolution The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chairman of the Board of Directors for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.1.2 of the 2019 Universal Registration Document. Ninth resolution The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chief Executive Officer for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.2.2 of the 2019 Universal Registration Document. Tenth resolution The General Meeting, pursuant to Article L. 225-37-2 of the French Commercial Code (paragraph 1), approves the remuneration policy, attributable to the Chief Operating Officers for 2020 financial year, as presented in the corporate governance report of the Board of Directors referred to in Article L. 225-37 of the French Commercial Code and set out in section 2.4.2.2 of the 2019 Universal Registration Document. Eleventh, twelfth, thirteenth and fourteenth resolution Approval of the fixed, variable and exceptional components of the total remuneration payable or allocated to the Chairman of the Board of Directors, Chief Executive Officer and Chief Operating Officers for the financial year ended on December 31, 2019 Statement of reasons In accordance with Article L. 225-100 II of the French Commercial Code, the General Meeting is requested every year to approve the fixed, variable and exceptional components of the total remuneration and benefits of all kinds payable or allocated to the Chairman of the Board of Directors, Chief Executive Officer and Chief Operating Officers in respect to their mandate. These components of the remuneration are presented in the report of the Board of Directors on corporate governance in section 2.4 of the 2019 Universal Registration Document, including in particular a summary table under section 2.4.2.1.13. Eleventh resolution Approval of the components of the total compensation payable or allocated to Mr. Alain de Rouvray, Chairman of the Board of Directors, for the financial year ended on December 31, 2019 The General Meeting, in accordance with Article L. 225-100 III of the French Commercial Code, approves the fixed, variable and exceptional components of the total compensation and benefits of all kinds paid or allocated to Mr. Alain de Rouvray, Chairman of the Board of Directors, for the financial year ended on December 31, 2019 as set out in the report of the Board of Directors on corporate governance pursuant to Article L. 225-37 of the French Commercial Code and presented in section 2.4.2.1.13 in the 2019 Universal Registration Document. Approval of the components of the total compensation payable or allocated to Mrs. Cristel de Rouvray, Chief Executive Officer, for the financial year ended on December 31, 2019 The General Meeting, in accordance with Article L. 225-100 III of the French Commercial Code, approves the fixed, variable and exceptional components of the total compensation and benefits of all kinds paid or allocated to Mrs. Cristel de Rouvray, Chief Executive Officer, for the financial year ended on December 31, 2019, as set out in the report of the Board of Directors on corporate governance pursuant to Article L. 225-37 of the French Commercial Code and presented in section 2.4.2.1.13 in the 2019 Universal Registration Document. Thirteenth resolution Approval of the components of the total compensation payable or allocated to Mr. Vincent Chaillou, Chief Operating Officer, for the financial year ended on December 31, 2019 The General Meeting, in accordance with Article L. 225-100 III of the French Commercial Code, approves the fixed, variable and exceptional components of the total compensation and benefits of all kinds paid or allocated to Mr. Vincent Chaillou, Chief Operating Officer, as set out in the report of the Board of Directors on corporate governance pursuant to Article L. 225-37 of the French Commercial Code, and presented in section 2.4.2.1.13 in the 2019 Universal Registration Document. Fourteenth resolution Approval of the components of the total compensation payable or allocated to Mr. Christopher St John, Chief Operating Officer, for the financial year ended on December 31, 2019 The General Meeting, in accordance with Article L. 225-100 III of the French Commercial Code, approves the fixed, variable and exceptional components of the total compensation and benefits of all kinds paid or allocated to Mr. Christopher St John, Chief Operating Officer, as set out in the report of the Board of Directors on corporate governance pursuant to Article L. 225-37 of the French Commercial Code, and presented in section 2.4.2.1.13 in the 2019 Universal Registration Document. Fifteenth resolution Determination of the compensation paid to the members of the Board of Directors Statement of reasons The General Meeting is requested to set the total annual amount of compensation to be allocated to members of the Board of Directors for the 2020 financial year at €350,000 (vs. €280,000). This increase is part of the remuneration policy of the Directors as presented in the report of the Board of Directors on corporate governance in section 2.4.1.2 of the 2019 Universal Registration Document. It will therefore allow the directors to be allocated specific missions in favour of the transformation of the Company and to anticipate possible changes in the composition of the Board of Directors. The General Meeting decides to set the compensation paid to the members of the Board of Directors at €350,000 for the 2020 financial year. The Board will freely distribute this amount among its members. 1 2 3 4 5 6 7 8 9 175 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT77 RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Ordinary General Meeting CONTENTS Sixteenth 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 2021, 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 (eighteen) months as from the General Meeting of June 25, 2020. It is proposed to set the maximum purchase price at €60 (sixty) 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, 6.3% as at December 31, 2019. The Company will not be allowed to pay out more than €13,000,000 (thirteen million) 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 investment 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, having reviewed the report of the Board of Directors in accordance with Article L. 225-209 of the French Commercial Code: 1. 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 25, 2020, 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 existing shares by the Group’s employees or corporate officers, • employee profit-sharing plans under which these shares would be granted to employees and/or corporate officers, • free share grants to the Group’s employees and corporate officers, • shares provided upon exercise of the rights attached to securities giving access to shares by any means, whether immediately or in the future, under the conditions set forth by the AMF and at any time deemed appropriate by the Board of Directors, (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; 2. decides that the purchase price per share may not exceed €60 (sixty); 3. decides to fix the maximum amount that the Company may spend within the framework of this buyback program at €13,000,000 (thirteen million); 4. acknowledges that this authorization shall render ineffective the previous authorization granted by the fourteenth resolution of the Combined General Meeting of July 18, 2019 authorizing the Board to trade on its own shares; 5. decides that the 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 authorized 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 accordance with the regulations in force; 6. acknowledges that 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; 7. 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 authorization, • place any and all stock market orders and enter into any and all agreements to record share purchases and sales, • make any and all disclosures to the stock market regulators, carry out any other formalities and, in general, take any necessary steps. The Board of Directors shall inform shareholders of any purchases or sales carried out pursuant to this authorization in its manage- ment report. 176 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Extraordinary General Meeting 7.2. DECISIONS FaLLINg WIThIN ThE COMPETENCE OF ThE EXTRaORDINaRY gENERaL MEETINg Seventeenth resolution Delegation of authority to the Board of Directors to award stock subscriptions options Statement of reasons As the existing authorization expires in August 2020, it is proposed to the General Meeting to terminate this authorization 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 25, 2020. 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 conditions 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 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 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 Shareholders’ 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 officers 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 Directors. 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 statements, 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 public, 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 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 General Meeting acknowledges that this authorization entails the Shareholders’ express waiver, for the benefit of beneficiaries of the options, of the Shareholders’ preferential subscription rights to shares that will be issued as options are exercised. The General Meeting grants full authority to the Board of Directors to decide all other terms and conditions regarding 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: • 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, during certain periods or within a certain period following certain events, • bring forward exercise dates or periods for the options, extend the exercisable 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 which the option was exercised; ◗ Adjust the number and the price of the shares that may be obtained by exercising options, where applicable, in keeping with the legal and regulatory requirements 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 offsetting receivables with the Company. 1 2 3 4 5 6 7 8 9 177 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT77 RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Extraordinary General Meeting CONTENTS 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 public disclosure formalities. This authorization cancels, in the amount of the unused portion, the tenth resolution of the Combined General Meeting of June 29, 2017. Eighteenth resolution Delegation of authority to the Board of Directors to award stock purchase options Statement of reasons As the previous authorization expires in August 2020, it is proposed to the General Meeting to terminate and grant the Board of Directors with a new delegation 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 25, 2020. 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. 300,000 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 conditions 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 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 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 officers 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 capital as of the date of this Meeting, i.e. 300,000 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 Directors. 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 statements, are published, nor within the period between the date on which the Company’s corporate bodies became aware of information that, if it was disclosed to the public, 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 during 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 regarding 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, during certain periods or within a certain period following certain events and (b) bring forward exercise dates or periods for the options, extend the exercisable 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 which the option was exercised; ◗ Adjust the number and the price of the shares that may be obtained by exercising options, where applicable, in keeping with the legal and regulatory requirements in force. This authorization cancels, in the amount of the unused portion, the eleventh resolution of the Combined General Meeting of June 29, 2017. 178 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Decisions falling within the competence of the Extraordinary General Meeting Nineteenth resolution Twentieth resolution Delegation of authority to the Board to reduce the share capital through the cancellation of shares purchased by the Company within the scope of Article L. 225-209 of the French Commercial Code Delegation of authority to the Board of Directors to award free shares to eligible employees and corporate officers of the Company and of its affiliated companies Statement of reasons As the previous authorization expires in September 2020, it is proposed to the General Meeting to terminate and grant the Board of Directors with a new delegation to cancel shares purchased, allowing it to carry out share cancellations, subject to the legal limits and the limit of 10% of the share capital at the day of operation. This authorization shall be granted for a duration of 26 (twenty-six) months from the General Meeting of June 25, 2020. The General Meeting, having reviewed the report of the Board of Directors and the special report of the Statutory Auditors: 1. Authorizes the Board of Directors, with the right to sub-delegate, in accordance with the legal and regulatory requirements, pursuant to Article L. 225-209 of the French Commercial Code, to: • cancel, at its sole discretion, on one or more occasions, the shares purchased by the Company on the basis of the authorization given by the General Meeting in the sixteenth resolution (provided that this resolution is adopted) or any similar resolutions adopted by previous General Meetings, within the limit of 10% of its share capital, this percentage applying to the share capital as subsequently adjusted following transactions after this General Meeting, per 24 (twenty-four) months period, and • conduct, for the same amount, a reduction in share capital by cancelling shares; 2. Gives to the Board of Directors all powers, with the right to subdelegate, in accordance with the legal and regulatory requirements, pursuant to Article L. 225-209 of the French Commercial Code, to: • determine the final amount of the capital reduction within the limits provided by the law and by this resolution, • set the terms for said operation and record its completion, • deduct the difference between the book value of the cancelled shares and their par value from the available reserves and premiums at the choice of the Board, • carry out all deeds, formalities, or declarations in order to record and finalize the capital reductions that may be conducted in accordance with this authorization and that would result in subsequent amendment to the articles of association; 3. Acknowledges that this authorization shall render ineffective the previous authorization granted by the thirteenth resolution of the Extraordinary General Meeting held on July 18, 2018. This authorization is granted to the Board of Directors for a duration of 26 (twenty-six) months from this General Meeting. Statement of reasons As the Company is considering the granting of free shares to employees and corporate officers of the Company and its affiliates, it is proposed to the General Meeting to terminate the authorization granted to the Board of Directors in 2018 and to grant it a new authorization for this purpose. Under the scope of this authorization, the number of free shares that may be granted may not exceed 60,000 shares, representing around 1% of the share capital existing on June 25, 2020. The Board of Directors will decide the identity of the beneficiaries of the grants, the number of shares allocated to each one, the terms, and, where applicable, the criteria for such share grants. The Board of Directors will be able to set, in accordance with the provisions of Article L. 225-197-1 of the French Commercial Code, the duration of vesting and holding periods, provided that the time condition respects a minimum vesting period of at least one year and the total duration of both vesting and holding periods is at least two years. Pursuant to Article L. 225-197-1 of the French Commercial Code, the free grant of shares to their beneficiaries will become final and binding subject to the satisfaction of the other conditions set at the time of the grant, and specifically the employment condition and/or the performance condition, after a vesting period set out by the Board of Directors. The General Meeting, having reviewed the report of the Board of Directors and the special report of the Statutory Auditors, and in accordance with Article L. 225-129-1 and L. 225-197-1 and following. of the French Commercial Code: 1. Authorizes the Board of Directors to carry out, on one or several occasions, free grants of existing shares or shares to be issued by ESI Group, to employees and executive corporate officers of the Company or its affiliated entities, in accordance with Article L. 225-197-2 of the French Commercial Code and the conditions set out hereinafter; 2. Resolves that the Board of Directors will decide the identity of the beneficiaries of the grants, the number of shares allocated to each one, as well as the conditions, and, where applicable, the criteria for such share grants; 3. Decides that the number of free shares that may be granted under the scope of this authorization may not exceed 60,000 shares, representing around 1% of the share capital existing on June 25, 2020; 1 2 3 4 5 6 7 8 9 179 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT77 RESOLUTIONS SUBMITTED TO ThE gENERaL MEETINg Joint decisions CONTENTS 4. Decides that the Board of Directors will be able to set, in accordance with the provisions of Article L. 225-197-1 of the French Commercial Code, the duration of vesting and holding periods, provided that the time condition respects a minimum vesting period of at least one year and the total duration of both vesting and holding periods is at least two years; 5. Decides that the free grant to their beneficiaries will become final and binding after a vesting period set out by the Board of Directors; 6. Authorizes the Board of Directors to vest the shares prior to the end of the vesting period as well as to permit the free transfer of these shares in the event the beneficiary has a disability corresponding to the second or third categories defined by Article L. 341-4 of the French Social Security Code; 7. Decides that the Board of Directors shall have all powers, including powers of sub-delegation in accordance with the legal requirements, to implement this authorization, and, in particular, in order to: • determine whether to grant existing shares or whether to issue shares for such purpose, • determine all the terms relating to the granting of shares, in particular the conditions under which such shares will be vested (especially the presence and performance conditions), define the categories of beneficiaries, the beneficiaries and establish the number of shares granted to each of them and the grant date or dates in compliance with the law and regulations in force as of the date of transactions contemplated, • adjust, during the vesting period, if it deems necessary, the number of shares granted in order to protect the rights of the beneficiaries, in compliance with the laws and regulations in force as of the date of the transactions contemplated, based on potential Company equity transactions, it being specified that the shares, granted further to these adjustments, shall be deemed granted on the same date as, that of the initial share grant, and • more generally, to take all necessary measures, in particular to conclude any and all agreements and contracts to effect the closing of an issuance, to carry out any and all formalities to effect the related share capital increase or increases subsequent to the vesting of Company shares, to amend the articles of association; 8. Acknowledges that this authorization automatically entails the waiver by shareholders of their preferential subscription rights to ordinary Company shares which may be issued for the purposes of the vesting of free shares, and of all rights to ordinary shares granted under the scope of this authorization; 9. Acknowledges that this authorization supersedes the unused portion of the previous authorization granted by the fourteenth resolution of the Extraordinary General Meeting held on July 18, 2018. Each year, in accordance with the legal and regulatory require- ments, in particular pursuant to Article L. 225-197-4 of the French Commercial Code, the Board of Directors shall inform the General Meeting about the operations carried out under this authorization. This authorization is granted to the Board of Directors for a duration of 38 (thirty-eight) months from the date of this Meeting. 7.3. JOINT DECISIONS Twenty-first 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. 180 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 8 INFORMATION ON THE COMPANY AND SHARE CAPITAL 8.1. INFORMATION ON THE COMPANY 8.1.1. General information 8.1.2. Information regarding rights, privileges and restrictions attached to shares Information concerning administrative and management bodies 8.1.3. 8.2. INFORMATION ON THE COMPANY’S CAPITAL 182 182 182 183 184 8.2.1. Statutory requirements governing modifications to the capital and rights attached to shares (Article 8 of the articles of association) 184 8.2.2. Issued share capital and authorized unissued share capital 184 184 8.2.3. History of changes in share capital 185 8.2.4. Corporate shareholding structure 188 8.2.5. Company share buybacks 8.3. ESI SHARES – MARKET 8.3.1. Share price trends 8.3.2. Survey of identifiable bearer shares 189 189 190 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 181 181 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT8 INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company CONTENTS 8.1. INFORMATION ON THE COMPANY 8.1.1. 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 Legal Entity Identifier (LEI) LEI – 969500SJCEYK6O6RXV95 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 distribute 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 portfolio of securities, especially in fields related to the publishing of scientific software, including digital simulation software for prototyping and manufacturing processes and related decision-making support 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, subscribing to shares in existing companies, purchasing securities or rights to equity instruments, merging companies, forming business alliances, undertaking joint investments, 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 recommendations in relation to investments, acquisitions and divestitures. It also helps as a management consultant 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 promote the Company’s expansion or growth. Financial year (Article 22 of the articles of association) The financial year begins on January 1 and ends on December 31 of each year. It covers 12 months. Exceptional events and disputes To the best of the Company’s knowledge, there is no exceptional event or dispute that may have or has had a material impact on the financial position or profit of the Company or the Group of which it is a part. Except for disputes arising in the ordinary course of business, the Company was not involved in any governmental, judicial or arbitration procedure during the exercise that ended at December 31, 2019. 8.1.2. 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 financial year, less any losses carried forward, 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 allocate 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 special account once the financial statements have been approved by the Annual General Meeting. 182 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company The General Meeting has the faculty to allow each shareholder, for all or part of the dividend distributed or advances on dividends, an option between the payment of the dividend or advances on dividends in cash or in shares. However, double voting rights are not lost and the abovementioned four-year period is not interrupted in the event that shares are transferred by way of an inheritance, following 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. Provisions of the articles of association concerning the participation of shareholders in General Meetings (Articles 18 and 19 of the articles of association) Please refer to section 2.5.3 of this Universal Registration Document. 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 available any documents necessary for shareholders to make informed decisions relating to the management and situation of the Company. Shareholders’ right to information, the nature of documents provided and the arrangements for such documents to be made available or transmitted shall adhere to the terms set out by applicable 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 Company’s assets and profits, proportionate to the percentage 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 General 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 already held that bear this entitlement. Any shares converted to bearer shares or transferred to a different owner are stripped of double voting rights, although other rights and obligations attached to the share are transferred to any owner thereof. Shareholding thresholds (Article 9 B of the articles of association) In accordance with the provisions of Article L. 233-7 of the French Commercial Code, any natural or legal person, acting alone or in concert, that comes to own, directly or indirectly, a number of shares accounting for more than the twentieth, the tenth, the three-twentieths, the fifth, the quarter, the three-tenths, the third, the half, the two thirds, the eighteen twentieths or the nineteen twentieths of the share capital or voting rights is required to so inform the Company as provided by law. In case they are not declared, the shares exceeding the participation to be declared are deprived of the right to vote under the conditions provided for by Article 233-14 of the French Commercial Code, i.e. for a period of two years from the regularization of the notification. In addition to the obligations provided for in paragraph 1 of Article L. 233-7 of the French Commercial Code, any crossing of a statutory threshold of 2.5% (and any multiple of this fraction) of the total number of shares or the Company’s voting rights must be declared at the latest on the 4th trading day following the day the threshold is crossed. Form and transfer of shares (Article 9 of the articles of association) / Form Shareholders may opt to hold fully paid-up shares as either registered shares or bearer shares. Shares will be recorded in the Company’s accounts in accordance with the terms and procedures set forth by law. / 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 accounts in accordance with the regulations in force. 8.1.3. INFORMATION CONCERNING AdMINIsTRATIVE ANd MANAGEMENT BOdIEs Information on administrative and management bodies, as well as their respective authority, is presented in Chapter 2, “Corporate governance”. 1 2 3 4 5 6 7 8 9 183 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT88 INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company’s capital CONTENTS 8.2. INFORMATION ON THE COMPANY’s CAPITAl 8.2.1. sTATUTORY REQUIREMENTs GOVERNING MOdIFICATIONs TO THE CAPITAl ANd RIGHTs ATTACHEd TO sHAREs (ARTICLE 8 OF THE ARTICLES OF ASSOCIATION) Extraordinary General Meetings have sole authority to decide to carry out or to authorize capital increases, upon recommendation by the Board of Directors. Shares representing contributions in kind or stemming from the capitalization of profits or reserves must be fully paid up upon issuance. 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 requirements 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 transaction 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. At least one-fourth of the value of cash shares and the entire 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, reduction in the number of shares, or reduction in the par value of shares; under no circumstances may the reduction in capital undermine the principle of equality between shareholders. 8.2.2. IssUEd sHARE CAPITAl ANd AUTHORIZEd UNIssUEd sHARE CAPITAl For a summary of the delegations granted to the Board of Directors that may impact the Company’s share capital, please refer to section 2.5.2 of this Universal Registration Document. 8.2.3. HIsTORY OF CHANGEs IN sHARE CAPITAl Meeting date* BoD meeting of 03/14/2018 BoD meeting of 02/01/2019 BoD meeting of 02/12/2020 Operation type Share capital adjustment Exercise of share subscription options Share capital adjustment Exercise of share subscription options Share capital adjustment Exercise of share subscription options * BoD: Board of Directors. Change in share capital Issue of cash shares Par value (in €) Premium (in €) Number of created shares Resulting total share capital Number of cumulated shares Par value (in €) 3 3 3 637,909 24,450 18,049,326 6,016,442 40,339 1,450 18,053,676 6,017,892 16,692 600 18,055,476 6,018,492 3 3 3 184 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company’s capital 8.2.4. CORPORATE sHAREHOldING sTRUCTURE Shareholding structure As of December 31, 2019, the shareholding structure of ESI Group is as follows: 56.6% Public 37.1% Founders and Board of Directors 6.3% Treasury stock Change in the breakdown of the Company’s share capital over the past three financial years Over the past three financial years, the breakdown of share capital and voting rights evolved as follows: At December 31, 2019 First and last name De Rouvray Xiu Mei Dubois Alex Peng Dubois-Sun Number of shares 1,824,385 25,200 355,419 % of capital 30.31% 0.42% 5.91% Number of voting rights that may be exercised 3,648,770 50,400 710,838 % of voting rights that may be exercised 46.22% 0.64% 9.00% Sub-total of shareholders’ agreement (registered shares) 2,205,004 36.64% 4,410,008 55.86% Vincent Chaillou Charles-Helen des Isnards Éric d'Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann Members of the Board of Directors (registered shares) (excluding founders) Total employee shareholding (registered shares) Public shareholding, registered shares Public shareholding, bearer shares Sub-total public shareholding Treasury shares TOTAL Total number of theoretical voting rights: 8,279,879. 21,197 3,951 1,589 157 1 1 26,896 81,312 23,891 3,303,698 3,327,589 377,691 0.35% 0.07% 0.03% 0.00% 0.00% 0.00% 0.45% 1.35% 0.40% 54.89% 55.29% 6.28% 34,794 7,702 3,178 158 2 2 45,836 99,465 36,181 3,303,698 3,339,879 0 0.44% 0.10% 0.04% 0.00% 0.00% 0.00% 0.58% 1.26% 0.46% 41.84% 42.30% 0.00% 6,018,492 100.00% 7,895,188 100.00% 1 2 3 4 5 6 7 8 9 185 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT88 INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company’s capital CONTENTS At January 31, 2019 First and last name De Rouvray Xiu Mei Dubois Alex Peng Dubois-Sun Number of shares 1,824,385 25,200 355,419 % of capital 30.2% 0.42% 5.91% Number of voting rights that may be exercised 3,638,907 48,200 710,838 % of voting rights that may be exercised 46.1% 0.61% 9.03% Sub-total of shareholders’ agreement (registered shares) 2,205,004 36.64% 4,397,945 55.84% 21,197 3,951 1,589 61 1 1 26,800 70,953 32,782 3,294,006 3,326,788 388,347 6,017,892 0.35% 0.07% 0.03% 0.00% 0.00% 0.00% 0.45% 1.18% 0.54% 54.74% 55.28% 6.45% 34,794 7,352 3,178 62 2 2 45,390 87,416 50,234 3,294,448 3,334,682 0 0.44% 0.09% 0.04% 0.00% 0.00% 0.00% 0.58% 1.11% 0.64% 41.83% 42.47% 0.00% 100.00% 7,875,433 100.00% Number of shares 1,824,385 380,619 % of capital 30.3% 6.3% Number of voting rights that may be exercised 3,638,907 759,038 % of voting rights that may be exercised 46.4% 9.6% 2,205,004 36.6% 4,397,945 56.0% 16,197 3,751 1,589 61 1 1 21,600 68,311 27,709 3,286,830 3,314,539 406,988 6,016,442 0.3% 0.1% 0.0% 0.0% 0.0% 0.0% 0.4% 1.1% 0.5% 54.6% 55.1% 6.8% 28,893 6,852 3,178 61 1 1 38,986 84,874 42,31 3,286,830 3,329,140 0 100.0% 7,850,945 0.4% 0.1% 0.0% 0.0% 0.0% 0.0% 0.5% 1.1% 0.5% 41.9% 42.4% 0.0% 100.0% Vincent Chaillou Charles-Helen des Isnards Éric d'Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann Members of the Board of Directors (registered shares) (excluding founders) Total employee shareholding (registered shares) Public shareholding, registered shares Public shareholding, bearer shares Sub-total public shareholding Treasury shares TOTAL Total number of theoretical voting rights: 8,263,780. At January 31, 2018 First and last name De Rouvray Estate of Jacques Dubois Sub-total of shareholders’ agreement (registered shares) Vincent Chaillou Charles-Helen des Isnards Éric d’Hotelans Véronique Jacq Rajani Ramanathan Yves de Balmann Members of the Board of Directors (registered shares) (excluding founders) Total employee shareholding (registered shares) Public shareholding. registered shares Public shareholding. bearer shares Sub-total public shareholding Treasury shares TOTAL Total number of theoretical voting rights: 8,257,933. 186 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company’s capital Shareholdings above legal thresholds Pursuant to the provisions of Article L. 233-13 of the French Commercial Code, it is noted that at December 31, 2019, Mr. Alain de Rouvray, jointly with its family group, held 1,824,385 shares representing 31% of the share capital and 46.21% of voting rights. On December 31, 2019, Mr. Alex Pen Dubois-Sun held 355,419 shares representing 5.91% of share capital and 9.03% of voting rights. As of the filing date of this Universal Registration Document, the Long Path Partners and Loys Investments funds each held more than 5% of the company’s capital: ◗ Long Path Partners holds 461,475 shares, i.e. 7.50% of the capital – 5.46% of the voting rights; ◗ LOYS Investments SA holds 271,079 shares, i.e. 4.50% of the capital – 3.72% of the voting rights. Crossing of legal and statutory thresholds declared to the Company during the financial year ended December 31, 2019 and until the filing date of this Universal Registration Document As of the filing date of this Universal Registration Document, the following exceedances of thresholds have been declared: ◗ Long Path Partners By letter dated October 7, 2019 sent by Vigilant Compliance, LLC, acting on behalf of the Long Path Partners fund, declares that the latter has crossed the legal and statutory threshold of 5% of the company’s capital upwards with 307,393 shares representing 5.11% of the shares and 3.89% of the voting rights. By letter dated January 5, 2020 sent by Vigilant Compliance, LLC, acting on behalf of the Long Path Partners fund, declares that the latter has crossed the legal and statutory threshold of 5% of the company’s voting rights upwards with 414,752 shares representing 6.89% of the shares and 5.01% of the voting rights. By letter dated February 13, 2020 sent by Vigilant Compliance, LLC, acting on behalf of the Long Path Partners fund, declares that the latter has crossed the statutory threshold of 7.50% of the company’s capital upwards with 451,475 shares representing 7.50% of the shares and 5.46% of the voting rights. ◗ LOYS Investments SA By letter dated October 3, 2019, the LOYS Investment SA fund declared that it had crossed the legal and statutory threshold of 5% of the company’s capital downward with 264,672 shares representing 4.40% of the shares and 3.20% voting rights. By letter dated December 13, 2019, the LOYS Investment SA fund declared that it had crossed the legal and statutory threshold of 5% of the company’s capital upward with 305,412 shares representing 5.08% of the shares and 3.69% voting rights. By letter dated March 9, 2020, the LOYS Investment SA fund declared that it had crossed below the legal and statutory threshold of 5% of the company’s capital with 288,458 shares representing 4.79% of the shares and 3.49% of the voting rights. By letter dated March 25, 2020, the LOYS Investment SA fund declared that it had crossed the legal and statutory threshold of 5% of the company’s capital upwards with 305,739 shares representing 5.08% of the shares and 3.70% of the voting rights. By letter dated April 7, 2020, the LOYS Investment SA fund declared having crossed the legal and statutory threshold of 5% of the company’s capital downwards with 291,614 shares representing 4.84% of the shares and 3.52% of the voting rights. By letter dated April 15, 2020, the LOYS Investment SA fund declared having crossed the legal and statutory threshold of 5% of the company’s capital upwards with 308,079 shares representing 5.12% of the shares and 3.72% of the voting rights. By letter dated April 17, 2020, the LOYS Investment SA fund declared having crossed the legal and statutory threshold of 5% of the company’s capital downwards with 271,079 shares representing 4.50% of the shares and 3.28% of the voting rights. Shareholders’ agreement and other agreements An agreement signed on October 25, 2000 and published in La Tribune on Friday October 27, 2000, after CMF decision n ° 200C1608 on October 27, 2000, related to the date of the filing of this Universal Registration Document, Alain de Rouvray (Chairman and founder), the members of his family group composed of Amy de Rouvray, Cristel Anne de Rouvray, John Alexandre de Rouvray and Amy Louise de Rouvray, as well as the heirs of the Dubois estate. This pact includes a mutual pre-emptive right. 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 individual 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 agreement, to either purchase or sell their shareholding: in the event that Alain de Rouvray decides to sell all 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 December 31, 2019, this agreement represented 30.31% of the Company’s capital and 46.22% of voting rights, and collectively binds its signatories to retain half of their shares. 1 2 3 4 5 6 7 8 9 187 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT88 INFORMATION ON THE COMPANY ANd sHARE CAPITAl Information on the Company’s capital CONTENTS 8.2.5. COMPANY sHARE BUYBACKs The Shareholders’ Meeting of July 18, 2019 authorized the Board of Directors. pursuant to the provisions of Article L. 225-209 of the French Commercial Code, of European regulation No. 596/2014 of April 16, 2014 on market abuse and of AMF’s General Rule, to purchase or sell Company’s shares in the context of the imple- mentation of a buyback program. The maximum purchase price has been fixed to €60 per share. The number of shares acquired could not exceed 10% of the share capital. This authorization was granted for a duration of 18 months and supplanted the previous authorization of the Shareholders’ Meeting of June 29, 2017. The description of the share buyback program implemented by the Board of Directors’ meeting of July 18, 2019, pursuant to the authorization granted by the Shareholders’ Meeting can be consulted on the website. Cancellation of shares for the financial year ended December 31, 2019 In 2019, ESI Group did not cancel any shares. Assignments or transfers of shares for the financial year ended December 31, 2019 In 2019, ESI Group distributed 10,667 shares under its free share plans. Liquidity contract Shares buyback for the financial year ended December 31, 2019 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. In 2019, ESI Group did not buy back any shares. Table summarizing the operations of the company on its own shares during its financial year ended on December 31, 2019 Date of authorization by the General Meeting Resolution 14 of July 18, 2019 Date of expiration of the authorization January 17, 2021 Ceiling on authorized buybacks Maximum purchase price per share Authorized purposes 10% of share capital at the transaction date €60 Cancellation Share purchase options Free share grants Liquidity and market-making External growth Board of Directors’ meeting at which buybacks were implemented July 18, 2019 Number of shares purchased in 2019 Number of shares cancelled in 2019 Number of treasury shares at December 31, 2019(1) Percentage of capital held by the Company at December 31, 2019 (1) Excluding liquidity contract. 0 0 377,691 6.3% 188 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS INFORMATION ON THE COMPANY ANd sHARE CAPITAl ESI shares – market 8.3. EsI sHAREs – MARKET 8.3.1. sHARE PRICE TRENds The chart below shows how ESI Group’s stock price has performed relative to the CAC Mid & Small and CAC 40 index since February 1, 2017 until the end of March 2020: 150 125 100 4,794.58 75 11,880.7 €47.50 50 25 0 (Basis 100) 4,396.12 9,485.83 €28.20 March-17 May-17 July-17 Aug.-17 Nov.-17 Jan.-18 March-18 May-18 July-18 Aug.-18 Nov.-18 Jan.-19 March-19 May-19 July-19 Aug.-19 Nov.-19 Jan.-20 March-20 ESI Group CAC 40 CAC Mid & Small The chart below shows how ESI Group’s stock price has performed since its initial public offering on July 6, 2000 until the beginning of April 2020 and the daily volume of transactions: (In €) 70 60 50 40 30 €26.72 20 10 0 (Number of shares) 350,000 300,000 250,000 €28.20 200,000 150,000 100,000 50,000 0 July 2000 July 2001 July 2002 July 2003 July 2004 July 2005 July 2006 July 2007 July 2008 July 2009 July 2010 July 2011 July 2012 July 2013 July 2014 July 2015 July 2016 July 2017 July 2018 July 2019 ESI Group stock price Daily volume 189 1 2 3 4 5 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT88 INFORMATION ON THE COMPANY ANd sHARE CAPITAl ESI shares – market CONTENTS 8.3.2. sURVEY OF IdENTIFIABlE BEARER sHAREs On March 31, 2020 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 25, 2019. French institutional investors Foreign investors Individual shareholders Companies At March 31, 2020 At April 25, 2019 As % of free float As % of share capital As % of free float As % of share capital 28.2% 65.6% 6% 0% 15.4% 36% 3.9% 0% 33.9% 58.6% 7.5% 0% 18.6% 32.2% 4.1% 0% This analysis points to a strong increase in foreign shareholders. which currently account for 36% of share capital. compared to 32.2% last year. 190 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS 9 ADDITIONAL INFORMATION 9.1. PERSONS RESPONSIBLE FOR THE UNIVERSAL REGISTRATION DOCUMENT 9.1.1. Person responsible for the content of the Universal Registration Document 9.1.2. Person responsible for the financial information 9.2. STATUTORY AUDITORS Statutory Auditors Alternate Auditors 9.3. DOCUMENTS AVAILABLE TO THE PUBLIC 192 192 192 192 192 192 193 In accordance with the resolution of the General Meeting of July 18, 2019, the Group now closes its financial statements at 31 December of each fiscal year. 1 2 3 4 5. 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT 191 191 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT9 ADDITIONAL INfOrmATION Persons responsible for the Universal Registration Document CONTENTS 9.1. PErSONS rESPONSIBLE fOr THE UNIVErSAL rEGISTrATION DOCUmENT 9.1.1. PErSON rESPONSIBLE fOr THE CONTENT Of THE UNIVErSAL rEGISTrATION DOCUmENT Paris, April 23, 2020. Mrs. Cristel de Rouvray, Chief Executive Officer of ESI Group: “I certify, after having taken all reasonable care to ensure that effect, that the information contained in the Universal Registration Document are, to the best of my knowledge, in accordance with the facts and does not include any omissions that might alter the contents thereof. I hereby certify that, to the best of my knowledge, the financial statements have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and results of the Company and all consolidated companies making up the Group, and that the attached management report 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 main risks and uncertainties these entities face.” 9.1.2. PErSON rESPONSIBLE fOr THE fINANCIAL INfOrmATION Mrs. Cristel de Rouvray, Chief Executive Officer of ESI Group. 9.2. STATUTOrY AUDITOrS STATUTOrY AUDITOrS / PricewaterhouseCoopers Audit / Ernst & Young Audit 63, rue de Villiers 92200 Neuilly-sur-Seine 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 December 31, 2020. PricewaterhouseCoopers Audit is a member of the Versailles Regional Association of Statutory Auditors. 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 December 31, 2020. 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. / Mr. Yves Nicolas 63, rue de Villiers 92200 Neuilly-sur-Seine Date of appointment: Combined General Meeting of July 22, 2015 for a term of six years. 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 December 31, 2020. Term of office: Annual General Meeting called to approve the financial statements for the year ended December 31, 2020. 192 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS ADDITIONAL INfOrmATION Documents available to the public 9.3. 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 starting from April 23, 2020. 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 Universal Registration Documents, financial reports, annual and interim consolidated financial statements, press releases, regulated information, the articles of association, shareholders letters and guides and stock prices. Following the Transparency Directive adopted in 2007, ESI Group has decided to use a reporting service licensed by the French Financial Markets Authority (AMF). This allows the Group to provide proof of compliance with legal reporting requirements. Lastly, if you have any questions regarding this Universal Registration Document, please contact: ESI Group Florence Barré 100-102, avenue de Suffren 75015 Paris investors@esi-group.com Shan Florent Alba 30, rue des Mathurins 75008 Paris esigroup@shan.fr 1 2 3 4 5. 6 7 8 9 193 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENT9ADDITIONAL INfOrmATION Universal Registration Document cross-reference tables CONTENTS CrOSS-rEfErENCE TABLES UNIVErSAL rEGISTrATION DOCUmENT CrOSS-rEfErENCE TABLES These cross-reference tables include the headings provided in Appendices I and II of the Commission Delegated Regulation (EU) 2019/980 of 14 March 2019 and refer to the pages of this Universal Registration Document where the information relating to each of these headings is mentioned. Information 1. Persons responsible, third party information, expert reports and approval of the competent authority 2. Statutory Auditors 3. Risk factors 4. Information concerning the issuer 5. Business overview 5.1. Main activities 5.1.1. Description of operations carried out by the issuer and its principal business activities 5.1.2. Significant new products or services launched on the market 5.2. Main markets 5.3. Important events in the activities’ development 5.4. Strategy and objectives 5.5. Level of dependence of the issuer on patents or licenses, industrial, commercial or financial contracts or new manufacturing processes 5.6. Competitive position 5.7. Investments 6. Flowchart 6.1. Brief description of the Group and the issuer’s position within the Group 6.2. List of significant subsidiaries 7. Review of financial position and results 7.1. Financial situation 7.2. Operating income 7.2.1. Major factors 7.2.2. Reasons for major changes in net revenues or income 7.2.3. Strategy or factor of a governmental, economic, budgetary, monetary nature or policy having materially influenced or potentially influencing, directly or indirectly, on the issuer's operations 8. Cash flows and capital 8.1. Information on the issuer’s capital 8.2. Source and amount of the issuer’s cash flows and descriptions of these cash flows 8.3. Information on the financing requirements 8.4. Restriction on use of capital 8.5. Information concerning anticipated sources of funds 9. Regulatory Environment 10. Information on business trends 11. Profit forecasts or estimates 12. Administrative, management and supervisory bodies and executive management 12.1. Administrative and management bodies 12.2. Conflicts of interest within administrative, management and supervisory bodies Page(s) 192 192 62 & seq. 182 14-15 14-15 14 15 16-17 N/A 15-16 N/A 16-17 25 21 22 22, 114 & 164-165 95 & seq. 95 & seq. 95 & seq. 95 & seq. 95 & seq. 62 & seq. 106, 133 107 127 & seq. N/A N/A 98 101 N/A 27 29 to 31 36 194 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS ADDITIONAL INfOrmATION Universal Registration Document cross-reference tables Information 13. Compensation and benefits 13.1. Compensation paid to corporate officers 13.2. Total amounts set aside or accrued to provide pension, retirement or similar benefits 14. Practices and procedures of the administrative and management bodies 14.1. End date of current terms of office 14.2. Service agreements 14.3. Information on the Audit Committee and the Compensation Committee 14.4. Declaration of compliance with the corporate governance standards 14.5. Potential significant impacts on corporate governance 15. Headcount 15.1. Number of employees 15.2. Profit-sharing and stock options 15.3. Description of any employee profit-sharing agreements involving the issuer’s capital 16. Key shareholders 16.1. Threshold crossing 16.2. Different voting rights 16.3. Control of the Company 16.4. 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 17. Related party transactions 18. Financial information concerning the issuer’s assets and liabilities, financial position and performance 18.1. Historical financial information 18.2. Interim financial information and others Page(s) 41 & seq. 41 to 56 43 29 to 40 29 & 32 56 39-40 28 32-33 76 & seq. 78 & 79 45 to 49 47 to 49 185-187, 190 187 183 185 59, 188 56, 136 95 to 170 95 to 170 N/A 18.3. Auditing of historical annual financial information 138 to 142, 166 to 170 18.4. Proforma financial information 18.5. Dividend payout policy 18.6. Legal and arbitration proceedings 18.7. Material changes in the financial position 19. Additional information 19.1. Legal capital 19.2. Instrument of incorporation and articles of association 20. Key contracts 21. Documents available to the public 145 N/A 182 N/A 191 184 58-59, 182 to 184 9, 18, 19, 101, 121 193 195 1 2 3 4 5. 6 7 8 9 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTADDITIONAL INfOrmATION Annual financial report cross-reference table CONTENTS 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 ◆ Person responsible for the document ◆ Annual financial statements of ESI Group ◆ Consolidated financial statements of ESI Group ◆ Statutory Auditors’ report on the annual financial statements ◆ Statutory Auditors’ report on the consolidated financial statements ◆ Management report ◆ Report of the Board of Directors on the corporate governance Page(s) 192 143 to 165 104 to 137 166 to 170 138 to 142 See cross-reference table below See cross-reference table below mANAGEmENT rEPOrT CrOSS-rEfErENCE TABLE For ease of reference, the following cross-reference table facilitates identification of information required in the Management 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 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 ◆ Declarations of ownership thresholds crossed ◆ Shareholder agreements corresponding to securities comprising Company’s share capital Environmental, social and societal information ◆ Environmental information ◆ Social information ◆ Societal information Other information ◆ Information regarding supplier payment terms ◆ Table summarizing the results of the past five financial years Internal control and risk management procedures ◆ Control environment ◆ Organization of internal control ◆ Risk management Page(s) 96 to 99 137 127 & seq. 64, 101 98-99 184 185 188 187 187 87 to 91 76 to 82 82 to 84 100 102 65 to 68 65-66 67-68 68 196 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS ADDITIONAL INfOrmATION Corporate governance report cross-reference table COrPOrATE GOVErNANCE rEPOrT CrOSS-rEfErENCE TABLE For ease of reference, the following cross-reference table facilitates identification of information required in the corporate governance report pursuant to Articles L. 225-37, L. 225-37-2 to L. 225-37-5 of the French Commercial Code. Information ◆ Executive management choices ◆ Limits on the powers of the Chief Executive Officer and Chief Operating Officers ◆ Composition of the Board of Directors, conditions for preparing and organizing the work of the Board of Directors ◆ List of all positions held in all companies by each corporate officer during the financial year ◆ Compensation and benefits paid during the financial year to each corporate officer ◆ Report on the principles and criteria for attributing and distributing compensation payable to executive corporate officers in respect of their term ◆ Agreements signed between a Director or a major shareholder and a subsidiary ◆ Grant and conservation of stock options to corporate officers ◆ Grant and conservation of free shares to corporate officers ◆ Table summarizing currently valid delegations granted by the Shareholders’ Meeting ◆ Factors that may have an impact in the event of a public offering Page(s) 29 29-30 31 to 40 34 to 36 41 to 56 42, 54 -56 60 45, 47-48 46 & 49 57-58 59 1 2 3 4 5. 6 7 8 9 197 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTADDITIONAL INfOrmATION Sustainable development and Corporate Social Responsibility cross-reference table CONTENTS SUSTAINABLE DEVELOPmENT AND COrPOrATE SOCIAL rESPONSIBILITY 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 accordance 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 198 Page(s) 78 to 80 80-81 82 81 N/A 81 81 81-82 81 N/A 77 73 79-80 80 79-80 N/A 79-80 78 80 & 85 84 to 87 84 to 87 84 to 87 N/A N/A 82 to 84 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupCONTENTS ADDITIONAL INfOrmATION Sustainable development and Corporate Social Responsibility cross-reference table 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 processes, where applicable ◆ Employee training and information on environmental protection ◆ 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 Investor Relations Corinne romefort-régnier & florence Barré 100-102, avenue de Suffren – 75015 Paris – France Phone: + 33 (0)1 49 78 28 28 investors@esi-group.com 1 2 3 4 5. 6 7 8 9 Page(s) 85 83 to 85 87 & seq. 88 & seq. 87-88 N/A 88 & seq. 87 & seq. 91 N/A 91 90-91 89-90 N/A 88-89 N/A N/A 199 ESI Group • 2019 UNIVERSAL REGISTRATION DOCUMENTCONTENTS KEYWOrDS Of THE 2019 UNIVErSAL rEGISTrATION DOCUmENT Keywords Aeronautics Aerospace Automotive Board of Directors Business model Capital Civil Society Clients Commercialization Communication Page(s) Keywords 18 18 18 31 Innovative offers Intellectual property Investment Investors 3, 6, 14 & seq. ISO 27001 184 ISO 9001 72, 84 Legal risks 18, 19, 82-84 Licenses 14, 23, 65, 96 Lifecycle 77, 78, 82 Maintenance Page(s) 5, 14-17 7, 63, 66, 99 25 1, 40, 84, 193 64, 83, 85 7, 64, 68, 83 7, 63 14, 15, 23, 97 6, 14-16, 70 14-16, 98 Consolidated financial statements 103 & seq. Manufacturers 2, 6, 14-19, 82-84 Crash-test CSR Digital simulation Digital transformation Distribution network Diversity EBITDA/EBIT Ecosystem Electric vehicle Employees Energy Engineering studies Environnement Ethical charter Euronext Paris Field services Financial results Financial risks Gaïa Index Governance Ground transportation Group Executive Committee (GEC) Human resources Human-centric Hybrid TwinTM IC.IDO Industrial sectors Industry of the Future Innovation 20, 88 Manufacturing 69 Manufacturing industries 15, 20, 182 Partnership 23 19 Performance Physical simulation 10, 31, 72-78 Physics of materials 4, 23, 95 & seq. Pre-Certification 10, 19, 69 & seq. Pre-Experience 88 Product Lifecycle Management (PLM) 76-82 18 15 87-90 84 12 15 100 7, 130 75 8, 27-60, 84 5, 6, 16, 18, 63, 70 8, 30 40, 62, 66, 76 6, 16 3, 5, 9, 14, 16, 17, 64, 83, 88 Product Performance LifecycleTM (PPL) Quality R&D Real time Revenue Scientific literature Services Smart Manufacturing Software Stock market information Strategic risks Strategic vision Strategy Suppliers Sustainable development Threshold crossing 14-19, 87-88 5, 18 19, 82-84 6, 14, 16, 96 88 14-16 3, 16, 83, 97 3, 16, 97 6, 16 6, 14, 16, 64, 70 64, 68, 83 5, 62, 98, 125 14, 16 23 5 15 6, 16, 97 14, 15, 19, 63, 70, 99 12, 189 7, 62 15 14, 96, 101 19, 83-84 69 & seq. 187 14, 20, 87 Transformation 2, 16, 20, 76, 82, 101 6, 18 Value creation 16, 86-87 Virtual Prototyping 15, 18, 19, 21, 62, 64, 82-84 6, 70 14, 71 200 2019 UNIVERSAL REGISTRATION DOCUMENT • ESI GroupDesign and production: Ruban Blanc Credit Photos: ©WilliamK, ©ClementMorin, ©shutterstock. G-FC-20-32-A www.esi-group.com FOLLOW US ON SOCIAL MEDIA French limited company (société anonyme) with a share capital of €18,055,476 Registered office: 100/102, avenue de Suffren, 75015 Paris – France Paris Trade and Company Register (RCS) number: 381 080 225 Tel.: +33 (0)1 41 73 58 00

Continue reading text version or see original annual report in PDF format above