As filed with the Securities and Exchange Commission on August 3, 2017.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
MICRO FOCUS INTERNATIONAL PLC
(Exact Name of Registrant as Specified in its Charter)
England and Wales
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7372
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Not Applicable
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(State or Other Jurisdiction of
Incorporation or Organization) |
(Primary Standard Industrial
Classification Code Number) |
(IRS Employer Identification Number)
|
The Lawn, 22-30 Old Bath Road
Newbury, Berkshire
RG14 1QN
United Kingdom
+44 (0) 1635-565-459
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
Mike Phillips
Chief Financial Officer
The Lawn, 22-30 Old Bath Road
Newbury, Berkshire
RG14 1QN
United Kingdom
+44 (0) 1635-565-459
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
Copies to:
Richard B. Aftanas, P.C.
David A. Curtiss Kirkland & Ellis LLP 601 Lexington Avenue New York, NY 10022 |
Spencer Summerfield
Jon Reddington Travers Smith LLP 10 Snow Hill London EC1A 2AL United Kingdom |
Andrew R. Brownstein
Benjamin M. Roth Wachtell, Lipton, Rosen & Katz 51 West 52nd Street New York, NY 10019 |
Julian Pritchard
Freshfields Bruckhaus Deringer LLP 65 Fleet Street London EC4Y 1HS United Kingdom |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective and upon completion of the merger described in the enclosed document.
If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the Securities Act), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering: o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer ☒ (Do not check if a smaller reporting company)
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Smaller reporting companyo
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If applicable, place an X in the box to designate the appropriate rule provision relied upon in conducting this transaction:
Exchange Act Rule 13e-4(i) (Cross-Border Issuer Tender Offer) o
Exchange Act Rule 14d-1(d) (Cross-Border Third-Party Tender Offer) o
CALCULATION OF REGISTRATION FEE
Title of each class of securities to be registered(1)
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Amount to be
registered(2) |
Proposed maximum offering price per share
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Proposed maximum aggregate offering price(3)
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Amount of
registration fee(4) |
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Ordinary Shares
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222,390,000
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N/A
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$
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6,061,000,000
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$
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702,469.90
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(1) | The securities being offered hereby will be issued in the form of American Depositary Shares of the registrant, referred to as Micro Focus ADSs. Each Micro Focus ADS represents one ordinary share, par value £0.10 per share, of the registrant, referred to as ordinary shares. The Micro Focus ADSs will be issuable upon deposit of ordinary shares with Deutsche Bank Trust Company Americas, acting as the depositary, and will be registered under a registration statement on Form F-6 (Registration No. 333- ). |
(2) | Represents an estimate as of July 27, 2017 of the maximum number of ordinary shares of the registrant issuable upon completion of the transactions contemplated by the Agreement and Plan of Merger dated as of September 7, 2016, among the registrant, Hewlett Packard Enterprise Company, Seattle SpinCo, Inc., Seattle Holdings, Inc. and Seattle MergerSub, Inc., as described in this registration statement. The estimated number of ordinary shares of the registrant is calculated pursuant to the following formula: an estimate of the registrant's outstanding ordinary shares on a fully diluted basis immediately prior to the closing of the merger, multiplied by the quotient of 50.1% divided by 49.9%, such that the amount of ordinary shares registered pursuant to this registration statement represents 50.1% of all outstanding ordinary shares of the registrant on a fully diluted basis after giving effect to the issuance. Pursuant to Rule 416 under the Securities Act of 1933, as amended (the Securities Act), this registration statement also covers an indeterminate number of additional shares of the registrant as may be issuable as a result of stock splits, stock dividends or similar transactions. |
(3) | Calculated pursuant to Rule 457(f)(2) under the Securities Act, based on the book value, as of April 30, 2017 (which is the most recent date for which such information is available) of all of the Seattle SpinCo, Inc. securities to be received by the registrant in exchange for the securities to be issued hereunder. |
(4) | Determined in accordance with Section 6(b) of the Securities Act at a rate equal to $115.90 per $1,000,000 of the proposed maximum aggregate offering price. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment that specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until this registration statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY NOTE
On September 7, 2016, Micro Focus International plc (Micro Focus) announced that it had entered into an Agreement and Plan of Merger (the Merger Agreement), dated September 7, 2016, with Hewlett Packard Enterprise Company (HPE), Seattle SpinCo, Inc. (Seattle), a Delaware corporation and wholly owned subsidiary of HPE, Seattle Holdings, Inc. (Holdings), a Delaware corporation and wholly owned subsidiary of Micro Focus, and Seattle MergerSub, Inc. (Merger Sub), a Delaware corporation and direct wholly owned subsidiary of Holdings, pursuant to which Micro Focus will combine with the software business segment of HPE, as further described herein.
Micro Focus is filing this registration statement on Form F-4 (Reg. No. 333- ) to register the exchange of all of the outstanding shares of Seattle Class A common stock, par value $0.01 per share (the Seattle Shares), for ordinary shares, par value £0.10 per share issued by Micro Focus (the Micro Focus Shares), all of which will be deposited with Deutsche Bank Trust Company Americas (the Depositary). The Depositary will issue American Depositary Shares (the Micro Focus ADSs) representing the Micro Focus Shares that will be issued as merger consideration in connection with the merger of Merger Sub with and into Seattle pursuant to the Merger Agreement, whereby the separate corporate existence of Merger Sub will cease and Seattle will continue as the surviving corporation and become an indirect wholly owned subsidiary of Micro Focus. At Closing (as defined herein), each Seattle Share distributed to HPE Stockholders (as defined herein) as further described herein will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement. Each Micro Focus ADS will represent one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. The Depositary will file a registration statement on Form F-6 (Reg. No. 333- ) with respect to the Micro Focus ADSs. Seattle has filed a registration statement on Form 10 (Reg. No. 000- ) with respect to the Seattle Shares being distributed by HPE to HPE Stockholders in connection with the separation of Seattle from HPE.
Information contained herein is preliminary and subject to completion or amendment. The securities described herein may not be issued until the registration statement filed by Micro Focus International plc and the registration statement to be filed by Seattle SpinCo, Inc., as applicable, with the U.S. Securities and Exchange Commission are effective. This information statement/prospectus does not constitute an offer to sell or a solicitation to buy any securities in any state or jurisdiction in which such offer or solicitation is not permitted.
PRELIMINARY AND SUBJECT TO COMPLETION, DATED AUGUST 3, 2017
Seattle SpinCo, Inc.
which will be merged with Seattle MergerSub, Inc., an indirect wholly owned subsidiary of
Micro Focus International plc
WE ARE NOT ASKING YOU FOR A PROXY AND YOU ARE REQUESTED NOT TO SEND US A PROXY.
Hewlett Packard Enterprise Company (HPE) intends to distribute to its stockholders all of the outstanding shares of Class A common stock (the Seattle Shares) of Seattle SpinCo, Inc. (Seattle), a wholly owned subsidiary of HPE that will hold, directly or indirectly, the assets and liabilities of HPEs software business segment (HPE Software) on a pro rata basis in a distribution that is intended to be tax-free to HPE and to HPE Stockholders (as defined below) for U.S. federal income tax purposes (the Distribution). Following the Distribution, pursuant to the merger of Seattle MergerSub, Inc. (Merger Sub) with and into Seattle (the Merger), with Seattle continuing as the surviving corporation and a direct wholly owned subsidiary of Seattle Holdings, Inc. (Holdings), and an indirect wholly owned subsidiary of Micro Focus International plc (Micro Focus), the Seattle Shares will be automatically converted into the right to receive American Depositary Shares (Micro Focus ADSs), issued by Deutsche Bank Trust Company Americas (the Depositary), representing ordinary shares of Micro Focus (Micro Focus Shares) that will be issued as consideration in the Merger. This information statement/prospectus forms a part of (a) the registration statement on Form F-4 filed by Micro Focus (Reg. No. 333- ) to register the exchange of the Seattle Shares for Micro Focus Shares which will be deposited with the Depositary and (b) the registration statement on Form 10 to be filed by Seattle (Reg. No. 000- ) to register the Seattle Shares (which will automatically be converted into the right to receive Micro Focus ADSs upon consummation of the Merger) to be distributed by HPE to HPE Stockholders in the Distribution. We expect that Seattle Shares will be distributed by HPE to HPE Stockholders on September 1, 2017. We refer to the date on which the effective time of the Distribution of the Seattle Shares to HPE Stockholders occurs as the Distribution Date.
For every one share of HPE common stock (each, an HPE Share) held of record as of the close of business on August 21, 2017, which is the Distribution Record Date, HPE Stockholders will receive one Seattle Share for each HPE Share held as of such time. All such Seattle Shares will then be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement. Each Micro Focus ADS will represent one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. You will not receive any fractional Micro Focus ADSs. Instead, you will receive cash in lieu of any fractional Micro Focus ADSs that you would otherwise have received in connection with the Merger.
No vote of HPE Stockholders is required for the Distribution or the Merger. HPE, as sole stockholder of Seattle prior to the Distribution, has approved the Merger. Therefore, you are not being asked for a proxy, and you are requested not to send HPE a proxy, in connection with the Distribution or the Merger. You do not need to pay any consideration, exchange or surrender your existing HPE Shares or take any other action to receive your Seattle Shares or to have your Seattle Shares converted into Micro Focus ADSs as described herein.
No trading market currently exists or will ever exist for Seattle Shares. You will not be able to trade the Seattle Shares before they are converted into Micro Focus ADSs. We have applied to list the Micro Focus ADSs on the New York Stock Exchange (the NYSE) under the symbol MFGP. We expect trading of the Micro Focus ADSs to begin on September 1, 2017. Micro Focus Shares are, and after the Merger are expected to continue to be, listed on the London Stock Exchange (the LSE) under the symbol MCRO. There can be no assurances regarding the prices at which Micro Focus ADSs issued hereby will trade following the Merger, including whether the Micro Focus ADSs will trade at the equivalent prices at which Micro Focus Shares traded prior to the Merger or at which Micro Focus Shares may trade following the Merger.
In reviewing this information statement/prospectus, you should carefully consider the matters described under the caption Risk Factors beginning on page 36.
Neither the U.S. Securities and Exchange Commission (the SEC) nor any state securities commission has approved or disapproved these securities or determined if this information statement/prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this information statement/prospectus is August , 2017.
Neither Micro Focus nor Seattle has previously filed reports, statements or other information with the SEC. All important business and financial information about Micro Focus and Seattle has been included in or delivered with this information statement/prospectus. We are not incorporating by reference any information with respect to Micro Focus or Seattle into this information statement/prospectus other than the exhibits filed with the registration statement on Form F-4 of Micro Focus and the registration statement on Form 10 of Seattle of which this information statement/prospectus forms a part.
You also may ask any questions about this transaction or request copies of documents relating to this transaction, without charge, upon oral or written request to Micro Focus or HPE at +44-(0)-1635-565-459 or investors@microfocus.com and (650) 687-5817 or investor.relations@hpe.com, respectively.
All information contained in this information statement/prospectus with respect to Micro Focus and its subsidiaries has been provided by Micro Focus. All information contained or incorporated by reference in this information statement/prospectus with respect to HPE and Seattle and their respective subsidiaries has been provided by HPE. Micro Focus and HPE have both contributed information contained in this information statement/prospectus relating to the Distribution, the Merger and the other proposed transactions.
The information contained on any website referenced in this information statement/prospectus is not incorporated by reference into this information statement/prospectus and should not be considered part of this information statement/prospectus.
This information statement/prospectus is not an offer to sell or exchange, and it is not a solicitation of an offer to buy, any HPE Shares, Seattle Shares, Micro Focus ADSs or Micro Focus Shares in any jurisdiction in which an offer, sale or exchange is not permitted.
TRADEMARKS AND SERVICE MARKS
Micro Focus, HPE, Seattle and their respective subsidiaries own or have rights to various trademarks, logos, service marks and trade names that each uses in connection with the operation of its business. Micro Focus, HPE, Seattle and their respective subsidiaries each also own or have the rights to copyrights that protect the content of their respective products. Solely for convenience, the trademarks, service marks, trade names and copyrights referred to in this information statement/prospectus are listed without the ™, ® and © symbols, but such references do not constitute a waiver of any rights that might be associated with the respective trademarks, service marks, trade names and copyrights included or referred to in this information statement/prospectus.
In this information statement/prospectus:
$, U.S. dollar and dollar means the United States Dollar.
£, GBP, pound, sterling and pound sterling means the British pound sterling.
€, and euros means the single currency of participating member states of the European Union.
Adjusted Earnings Per Share means the earnings attributable to Micro Focus Shareholders before the post-tax impact of exceptional items, amortization of purchased intangibles and share based compensation on a per Micro Focus Share basis.
Adjusted EBITDA means the operating profit before exceptional items, share based compensation and amortization of purchased intangibles, net finance costs, depreciation of property, plant and equipment and amortization of purchased software intangibles.
Admission means the admission of the new Micro Focus Shares (or, if the Share Capital Consolidation is not implemented, the existing Micro Focus Shares) and/or, as relevant, the admission of the Consideration Shares to the premium listing segment of the Official List becoming effective in accordance with the U.K. Listing Rules and to trading on the LSEs main market for listed securities becoming effective in accordance with the Admission and Disclosure Standards, which is expected to occur on September 1, 2017.
Admission and Disclosure Standards means the requirements contained in the publication entitled Admission and Disclosure Standards dated April 2013 containing, among other things, the admission requirements to be observed by companies seeking admission to trading on the LSEs main market for listed securities.
ADRs means American Depositary Receipts, evidencing Micro Focus ADSs.
Audit Committee means the audit committee of Micro Focus established by the Micro Focus Board.
B Shares means the redeemable B shares in the capital of Micro Focus to be issued and redeemed as part of the Micro Focus Return of Value.
Closing means the effective time of the Merger, which is expected to be 3:00 a.m., New York City time, on September 1, 2017.
Closing Date means the date on which Closing occurs, which is expected to be September 1, 2017.
Code means the Internal Revenue Code of 1986, as amended.
Companies Act 2006 means the U.K. Companies Act 2006, as amended.
Company Secretary means the company secretary of Micro Focus from time to time, with Jane Smithard being the Company Secretary as of the date of this information statement/prospectus.
Consideration Shares means the Micro Focus Shares underlying the Micro Focus ADSs to be issued to the holders of Seattle Shares as consideration in the Merger pursuant to the Merger Agreement.
Contribution means the contribution by HPE of HPE Software to Seattle pursuant to the terms of the Separation and Distribution Agreement.
CREST means the relevant system (as defined in the CREST Regulations) in respect of which Euroclear is the operator (as defined in the CREST Regulations).
CREST Regulations means the Uncertificated Securities Regulations 2001 (SI 2001 No. 3755), as amended from time to time.
Debt Financing means the debt financing entered into in connection with the Transactions, as further described in the section entitled Debt Financing.
Deferred Shares means the deferred shares of 10 pence each in the capital of Micro Focus to be issued as part of the Micro Focus Return of Value.
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Deposit Agreement means the deposit agreement to be entered into between Micro Focus and the Depositary governing the terms and conditions pursuant to which the Micro Focus ADSs will be issued, as it may be amended from time to time.
Depositary means Deutsche Bank Trust Company Americas, acting as (i) depositary for Micro Focus ADSs representing Consideration Shares and (ii) issuer of ADRs representing those Micro Focus ADSs (if applicable).
DGCL means the General Corporation Law of the State of Delaware.
Distribution means the pro rata distribution by HPE of all of the outstanding Seattle Shares to HPE Stockholders pursuant to and subject to the terms and conditions of the Separation and Distribution Agreement.
Distribution Date means the date on which the effective time of the Distribution occurs, which is expected to be 2:59 a.m. New York City time on September 1, 2017.
Distribution Record Date means August 21, 2017.
Employee Matters Agreement means the Employee Matters Agreement dated September 7, 2016, entered into by HPE, Seattle and Micro Focus, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled Other Agreements—Employee Matters Agreement.
Enlarged Group means the Micro Focus Group, as of and from Closing, as enlarged by the Merger.
Exchange Act means the U.S. Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
Executive Directors means the executive directors of Micro Focus from time to time, which as of Closing are expected to be the directors whose names are set out in the section entitled Board of Directors and Management of Micro Focus After the Merger—Profiles of the Executive Directors.
Existing Facilities Agreement means the New York law governed credit agreement documenting the Facility B-2 and the Existing RCF.
Existing RCF means the $375 million revolving credit facility available to Micro Focus pursuant to the Existing Facilities Agreement.
Euro Facility means the €470 million term loan facility provided to the Micro Focus Borrower pursuant to an escrow credit agreement.
Facility B-2 means the $1,515 million tranche B-2 term loan facility provided to the Micro Focus Borrower pursuant to the Existing Term Facility.
Facility B-3 means the $385 million tranche B-3 term loan facility provided to the Micro Focus Borrower pursuant to an escrow credit agreement.
Facility C means the existing $412 million tranche C term loan facility provided to the Micro Focus Borrower.
Facility EBITDA means Adjusted EBITDA before amortization of capitalized development costs.
FSMA means the Financial Services and Markets Act 2000 (United Kingdom), as amended.
Holdings means Seattle Holdings Inc., a Delaware corporation and wholly owned direct subsidiary of Micro Focus.
HPE means Hewlett Packard Enterprise Company, a Delaware corporation.
HPE Board means the board of directors of HPE.
HPE Group means HPE and its subsidiaries (which include the Seattle Group prior to the Distribution and exclude the Seattle Group from and after the Distribution).
HPE Nominated Director means a director nominated to the Micro Focus Board by HPE.
HPE Shares means shares of HPE common stock, par value $0.01 per share.
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HPE Software means HPEs software business segment, which will be transferred to (or retained by, as applicable) the Seattle Group, in accordance with the terms and conditions of the Separation and Distribution Agreement prior to the Distribution.
HPE Stockholder means a holder of an HPE Share.
HPE Tax Opinion means an opinion of Skadden, Arps, Slate, Meagher & Flom LLP (Skadden) in form and substance reasonably acceptable to HPE, dated as of the Distribution Date, regarding certain aspects of the U.S. federal income tax treatment of the Distribution and certain related transactions and the Merger.
HSR Act means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
IFRS means the International Financial Reporting Standards as adopted by the European Union.
Intellectual Property Matters Agreement means the Intellectual Property Matters Agreement among HPE, Hewlett Packard Enterprise Development LP and Seattle, to be entered into by such parties on or prior to the Distribution Date, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled Other Agreements—Intellectual Property Matters Agreement.
IRS means the U.S. Internal Revenue Service.
IRS Ruling means a ruling from the IRS regarding certain issues relevant to the U.S. federal income tax consequences of the Distribution and certain other aspects of the Separation.
LSE means the London Stock Exchange.
Merger means the merger of Merger Sub with and into Seattle on the terms and subject to the conditions set out in the Merger Agreement.
Merger Agreement means the Agreement and Plan of Merger dated September 7, 2016 entered into by Micro Focus, HPE, Merger Sub, Holdings and Seattle, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled The Merger Agreement.
Merger Sub means Seattle MergerSub, Inc., a Delaware corporation and an indirect wholly owned subsidiary of Micro Focus.
Micro Focus means Micro Focus International plc, a public limited company incorporated in England and Wales.
Micro Focus ADSs means American Depositary Shares issued by the Depositary, each representing one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE.
Micro Focus Articles means the articles of association of Micro Focus, as they may be amended from time to time.
Micro Focus ASG Awards means additional share grant awards with respect to Micro Focus Shares granted in accordance with the terms set out in the prospectus issued by Micro Focus on October 8, 2014 or granted in accordance with the authority obtained from Micro Focus Shareholders at its annual general meeting convened on September 22, 2016.
Micro Focus Board means the board of directors of Micro Focus.
Micro Focus Borrower means MA FinanceCo, LLC, a wholly owned subsidiary of Holdings.
Micro Focus Commitment Letter means the commitment letter, dated September 7, 2016, entered into by JPMorgan Chase Bank, N.A., Micro Focus Group Limited, and the Micro Focus Borrower (as amended from time to time) and relating to the Micro Focus Facilities.
Micro Focus Escrow Borrower means Miami Escrow Borrower, LLC, a Delaware limited liability company.
Micro Focus Facilities means the Micro Focus Term Loan Facilities and the Revolving Credit Facility.
Micro Focus Fully Diluted Shares means the aggregate number of Micro Focus Shares on a fully-diluted, as converted and as exercised basis in accordance with the treasury stock method, including Micro Focus Shares underlying outstanding Micro Focus Options, Micro Focus ASG Awards and any other securities convertible into
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or exercisable for Micro Focus Shares, excluding, for purposes of the Micro Focus Fully Diluted Shares immediately following Closing, any Micro Focus Shares to be issued pursuant to a de minimis number of replacement awards to be granted to HPE Software employees at Closing under their existing employee incentive arrangements.
Micro Focus General Meeting means the general meeting of Micro Focus held at 2:00 p.m. U.K. time on May 26, 2017 at which the Micro Focus Shareholders approved the Resolutions.
Micro Focus Group means Micro Focus and its subsidiaries from time to time.
Micro Focus Options means an option to purchase Micro Focus Shares with an exercise price at or greater than zero granted pursuant to a Micro Focus plan providing for awards of options to employees, as amended from time to time.
Micro Focus Return of Value means the proposed transactions comprising the return of value by way of the issuance of the B Shares and the Share Capital Consolidation, as further described in the section entitled The Transactions—Micro Focus Return of Value.
Micro Focus Shareholder means a holder of a Micro Focus Share.
Micro Focus Shares means, as the context requires, the existing ordinary shares of Micro Focus and/or the new ordinary shares of Micro Focus issued in connection with the Transactions, in each case, par value £0.10.
Micro Focus Term Loan Facilities means the $2.4 billion term loan facilities to be provided to the Micro Focus Borrower pursuant to the New Micro Focus Facility Agreement, it being understood that (i) the borrower with respect to a $885 million tranche B facility (which will consist of a combination of €470 million (equivalent to approximately $500 million) euro-denominated term loans and $385 of U.S. dollar-denominated term loans) will initially be a newly formed domestic subsidiary of the Micro Focus Borrower (the Micro Focus Escrow Borrower), to be merged with and into Micro Focus Borrower prior to Closing and (ii) a $1,515 million tranche B facility will be provided through an amendment to Facility B-2.
New Facilities means the Micro Focus Term Loan Facilities, the Revolving Credit Facility and the Seattle Term Loan Facility.
New Micro Focus Facility Agreement means the New York law governed credit agreement to become effective at or prior to the Merger to document the Micro Focus Facilities. The New Micro Focus Facility Agreement will be effected through an amendment to the Existing Facilities Agreement.
New Seattle Facility Agreement means the New York law governed credit agreement to be entered into or deemed entered into at or prior to the Merger to document the Seattle Term Loan Facility.
Nomination Committee means the nomination committee of Micro Focus established by the Micro Focus Board.
Non-Executive Directors means the non-executive directors of Micro Focus from time to time, which as of Closing are expected to be the non-executive directors whose names are set out in the section entitled Board of Directors and Management of Micro Focus After the Merger—Profiles of the Non-Executive Directors.
NYSE means the New York Stock Exchange.
OEM means original equipment manufacturers.
Official List means the Official List of the U.K. Listing Authority.
Real Estate Matters Agreement means the Real Estate Matters Agreement between HPE and Seattle, to be entered into by such parties on or prior to the Distribution Date, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled Other Agreements—Real Estate Matters Agreement.
Remuneration Committee means the remuneration committee of Micro Focus established by the Micro Focus Board.
Reorganization means the transfer of HPE Software assets that are not already owned by members of the Seattle Group to members of the Seattle Group and the assumption of HPE Software liabilities that are not
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already obligations of members of the Seattle Group by members of the Seattle Group, and the transfer of certain excluded assets that are not already owned by members of the HPE Group (excluding the Seattle Group) to members of the HPE Group (excluding the Seattle Group) and the assumption of certain excluded liabilities that are not already obligations of members of the HPE Group (excluding the Seattle Group) by the HPE Group (excluding the Seattle Group), in each case, in accordance with the Separation and Distribution Agreement.
Resolutions means the resolutions proposed and approved at the Micro Focus General Meeting relating to the approval of the Merger, the issuance of the Consideration Shares, the Micro Focus Return of Value and the amendments to the Micro Focus Articles.
Revolving Credit Facility means the new revolving credit facility of up to $500 million to be provided to the Micro Focus Borrower pursuant to the New Micro Focus Facility Agreement.
RIS means any of the services authorized by the U.K. FCA from time to time for the purpose of disseminating regulatory announcements.
SaaS means software as a service.
SDRT means U.K. stamp duty reserve tax.
Seattle means Seattle SpinCo, Inc., a Delaware corporation and, prior to the Distribution, a direct wholly owned subsidiary of HPE.
Seattle Borrower means, initially, Seattle Escrow Borrower LLC, a Delaware limited libility company and a wholly owned subsidiary of Seattle, prior to the Effective Date (as defined in the New Seattle Facility Agreement), and thereafter, Seattle.
Seattle Commitment Letter means the commitment letter dated September 7, 2016 entered into by JPMorgan Chase Bank, N.A., Micro Focus Group Limited and the Micro Focus Borrower (as amended from time to time) and relating to the Seattle Term Loan Facility.
Seattle Group means Seattle and its subsidiaries from time to time.
Seattle Payment means the $2.5 billion in cash that Seattle will pay to HPE in connection with the Contribution, subject to adjustment in limited circumstances, pursuant to and in accordance with the Separation and Distribution Agreement.
Seattle Shares means shares of Class A common stock, par value $0.01 per share, of Seattle.
Seattle Term Loan Facility means the $2.6 billion term loan facility to be provided to the Seattle Borrower pursuant to the New Seattle Facility Agreement.
SEC means the U.S. Securities and Exchange Commission.
Securities Act means the U.S. Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
Separation means the Reorganization and the Distribution, in each case, in accordance with the terms and conditions of the Separation and Distribution Agreement.
Separation and Distribution Agreement means the Separation and Distribution Agreement dated September 7, 2016 entered into between HPE and Seattle, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled The Separation and Distribution Agreement.
Share Capital Consolidation means the proposed consolidation, subdivision and redesignation of Micro Focus share capital, as further described in the section entitled The Transactions—Share Capital Consolidation.
SUSE means the SUSE open source product portfolio and SUSE brand.
Tax Matters Agreement means the Tax Matters Agreement among HPE, Seattle and Micro Focus, to be entered into by such parties on or prior to the Distribution Date, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled Other Agreements—Tax Matters Agreement.
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Total Shareholder Returns means the value to a Micro Focus Shareholder over a period of time of the increase in the price of Micro Focus Shares from the beginning to the end of such period, if any, as well as any cash received in such period from normal dividend payments.
Transaction Documents means the Merger Agreement, the Separation and Distribution Agreement, the Employee Matters Agreement, the Tax Matters Agreement, the Transition Services Agreement, the Real Estate Matters Agreement and the Intellectual Property Matters Agreement, including, in each case, all annexes, exhibits, schedules, attachments and appendices thereto, and any certificate or other instrument delivered by any party to any other party pursuant to any of the foregoing.
Transactions means the transactions contemplated by the Merger Agreement and the Separation and Distribution Agreement, including the Merger, on the terms and subject to the conditions set out in the Merger Agreement and the Separation and Distribution Agreement.
Transition Services Agreement means the Transition Services Agreement between HPE and Seattle, to be entered into on or prior to the Distribution Date, as it may be amended from time to time, and a summary of the principal terms and conditions of which is set out in the section entitled Other Agreements—Transition Services Agreement.
Treasury Regulations means the Treasury Regulations promulgated under the Code.
U.K. Circular means the Micro Focus circular dated May 9, 2017 and made available to Micro Focus Shareholders in connection with the Merger, the Micro Focus Return of Value, and the convening of the Micro Focus General Meeting at which the Resolutions were passed.
U.K. Corporate Governance Code means the U.K. Corporate Governance Code published by the Financial Reporting Council, as amended from time to time.
U.K. FCA means the United Kingdom Financial Conduct Authority.
U.K. Listing Authority means the Financial Conduct Authority acting in its capacity as the competent authority for the purposes of Part VI of FSMA.
U.K. Listing Rules means the listing rules produced by the U.K. FCA under part VI of FSMA.
U.K. Prospectus means the final prospectus dated July 28, 2017, which was approved by the U.K. FCA as a prospectus and prepared in accordance with the U.K. Prospectus Rules in connection with the Merger.
U.K. Prospectus Rules means the prospectus rules produced by the U.K. FCA under part VI of FSMA.
U.S. GAAP means generally accepted accounting principles in the United States.
we, us and our mean Micro Focus, unless the context requires otherwise.
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QUESTIONS AND ANSWERS ABOUT THE TRANSACTIONS
The following are some of the questions that you may have about the Transactions, and answers to those questions. These questions and answers, as well as the following summary, are not meant to be a substitute for the information contained in the remainder of this information statement/prospectus, and these questions and answers are qualified in their entirety by the more detailed descriptions and explanations contained elsewhere in this information statement/prospectus. You are urged to read this information statement/prospectus in its entirety, as well as the registration statements (including the exhibits thereto) of which this information statement/prospectus forms a part, as they contain important information about Micro Focus, HPE, Seattle, the Seattle Shares, the Micro Focus Shares and the Micro Focus ADSs. See the section entitled Where You Can Find Additional Information.
Q: What are the key steps of the Transactions?
A: Below is a summary of the key steps of the Transactions. A step-by-step description of material events relating to the Transactions is set forth in the section entitled The Transactions.
• | HPE will transfer HPE Software to Seattle in the Contribution pursuant to the terms and conditions set forth in the Separation and Distribution Agreement. |
• | In connection with the Contribution, Seattle will issue to HPE additional Seattle Shares and pay to HPE the Seattle Payment. Seattle Borrower will incur new indebtedness in an aggregate principal amount of $2.6 billion pursuant to the Seattle Term Loan Facility. The majority of the proceeds of this loan will be used by Seattle to pay to HPE the Seattle Payment. |
• | Prior to Closing, the Micro Focus Borrower will incur new indebtedness in the form of (i) the $2.4 billion Micro Focus Term Loan Facility, including $1,515.2 million of Facility B-2 repriced, amended and extended pursuant to an amendment to the Existing Facilities Agreement and $884.8 million of term loans incurred by the Micro Focus Escrow Borrower pursuant to an escrow credit agreement (which term loans will automatically be deemed issued under the Micro Focus Term Loan Facilities upon the merger of the Micro Focus Escrow Borrower with and into the Micro Focus Borrower prior to the Merger) and (ii) the $500 million Revolving Credit Facility. The proceeds received by the Micro Focus Borrower will be used to fund (i) the Micro Focus Return of Value of an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs or proceeds) to the Micro Focus Shareholders, (ii) the partial repayment of the indebtedness pursuant to the Existing Facilities Agreement, dated as of November 20, 2014, by and among Micro Focus, Micro Focus Group Limited, the Micro Focus Borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, collateral agent and swingline lender, (iii) fees and expenses incurred in connection with the Transactions and (iv) working capital and general corporate purposes of the Micro Focus Group. |
• | HPE will distribute all of the outstanding Seattle Shares on a pro rata basis to HPE Stockholders in a distribution that is intended to be tax-free to HPE and to HPE Stockholders for U.S. federal income tax purposes. |
• | After the Distribution, Merger Sub will merge with and into Seattle, whereby the separate corporate existence of Merger Sub will cease and Seattle will continue as the surviving corporation and as an indirect wholly owned subsidiary of Micro Focus. In the Merger, each Seattle Share will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement, each representing one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. The Micro Focus Shares issued as Consideration Shares in connection with the Merger will be deposited with the Depositary. |
• | Immediately following Closing, pre-Merger HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares and the balance of the then-outstanding Micro Focus Shares will be held by pre-Merger Micro Focus Shareholders. |
Q: What is Seattle and why is HPE separating HPE Software and distributing Seattle Shares?
A: Seattle is a wholly owned subsidiary of HPE that was formed in connection with the Transactions to hold HPE Software. The separation of Seattle from HPE and the Distribution are intended to effectuate the separation
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of HPE Software from HPE, which will be followed by the acquisition of HPE Software by Micro Focus by way of a merger of Merger Sub with and into Seattle with Seattle continuing as the surviving corporation and a wholly owned subsidiary of Micro Focus. For more information, see the sections entitled The Transactions—HPEs Reasons for the Separation, the Distribution and the Merger and The Separation and Distribution Agreement.
Q: What will happen in the Separation?
A: Pursuant to and in accordance with the terms and conditions of the Separation and Distribution Agreement, HPE will engage in a series of transactions to transfer certain entities, assets and liabilities relating to HPE Software to Seattle in the Contribution. As consideration for such contribution of HPE Software, Seattle will issue to HPE additional Seattle Shares and pay to HPE the Seattle Payment.
Q: What will happen in the Distribution and what is the Distribution Record Date?
A: Pursuant to and in accordance with the terms and conditions of the Separation and Distribution Agreement, after the Contribution, HPE will distribute all of the outstanding Seattle Shares on a pro rata basis to HPE Stockholders as of the close of business on August 21, 2017, which is the Distribution Record Date, in accordance with a distribution ratio of one Seattle Share for each HPE Share held as of such time. Seattle Shares will be distributed in book-entry form. HPE Stockholders of record will receive additional information from HPEs distribution agent shortly after Closing. Beneficial holders will receive information from their brokerage firms or other nominees.
Q: What will happen in the Merger?
A: Pursuant to and in accordance with the terms and conditions of the Merger Agreement, Merger Sub will merge with and into Seattle, with Seattle continuing as the surviving corporation and as a direct wholly owned subsidiary of Holdings and an indirect wholly owned subsidiary of Micro Focus. Immediately following Closing, pre-Merger HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares, and the balance of the then-outstanding Micro Focus Shares will be held by pre-Merger Micro Focus Shareholders. In the Merger, each Seattle Share will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement, each representing one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. See the section entitled The Merger Agreement—Merger Consideration.
Q: What shareholder approvals are needed in connection with the Transactions?
A: Micro Focus Shareholders approved the proposal relating to the Merger, including the issuance of the Consideration Shares, by the affirmative vote of a majority of votes cast by Micro Focus Shareholders on the proposal at the Micro Focus General Meeting held on May 26, 2017. HPE Stockholders are not required and are not being asked to approve the Transactions. HPE, as sole stockholder of Seattle prior to the Distribution, has approved the Merger. For more information regarding the HPE Boards reasons for approving the Separation, the Distribution and the Merger, see the section entitled The Transactions—HPEs Reasons for the Separation, the Distribution and the Merger.
Q: What will Seattles relationship be with HPE following the Transactions?
A: Seattle and Micro Focus will continue to have certain relationships with HPE following the Transactions, including with respect to specified transition services for an interim period. Seattle has entered into the Separation and Distribution Agreement with HPE to effect the Separation. Seattle and HPE will also enter into (to the extent they have not done so already) certain other agreements, including among others the Tax Matters Agreement, the Employee Matters Agreement, the Transition Services Agreement, the Real Estate Matters Agreement and the Intellectual Property Matters Agreement. These agreements will provide for the allocation between Seattle and HPE of HPEs assets, employees, liabilities and obligations (including its investments, property and employee benefits and tax-related assets and liabilities). For additional information regarding the Separation and Distribution Agreement and other Transaction Documents and the continuing contractual obligations the parties will have under these agreements following the completion of the Transactions, see the sections entitled The Separation and Distribution Agreement and Other Agreements.
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Q: Who will manage Seattle after the Transactions?
A: Micro Focus will own, operate and manage Seattle after the Transactions.
Kevin Loosemore and Mike Phillips will continue as Executive Chairman and Chief Financial Officer, respectively, of the Enlarged Group. Chris Hsu, who is currently Executive Vice President and General Manager of HPE Software as well as Chief Operating Officer at HPE, will become the Chief Executive Officer of the Enlarged Group at Closing, and Stephen Murdoch, who is the current Chief Executive Officer of Micro Focus, will become the Chief Operating Officer of the Enlarged Group. Nils Brauckmann will continue as the Chief Executive Officer of SUSE following Closing.
With effect from Closing until the second annual general meeting of the Micro Focus Shareholders that occurs after Closing, HPE will have the right to nominate (i) one new Non-Executive Director who is a serving executive of HPE to the Micro Focus Board and (ii) one-half of the Micro Focus Boards independent Non-Executive Directors, in each case, subject to approval of the Nomination Committee. The current Nomination Committee has approved the appointments of John Schultz (as the HPE Nominated Director who is a serving executive of HPE and is not independent) with effect from Closing, and Silke Scheiber and Darren Roos as independent Non-Executive Directors with effect from May 15, 2017. In accordance with the Merger Agreement, a further independent HPE Nominated Director will be appointed following Closing.
As a result of the proposed appointments to the Micro Focus Board, at Closing, it is expected that the Micro Focus Board will comprise 10 directors, five of whom will be independent under the U.K. Corporate Governance Code. Once an additional independent HPE Nominated Director is appointed following Closing, this will increase the total number of directors to 11 and the number of independent Non-Executive Directors to six.
Q: What will Micro Focus Shareholders receive in connection with the Transactions?
A: Prior to the Merger, Micro Focus will implement the Micro Focus Return of Value. After the Micro Focus Return of Value, and disregarding the dilutive effect of the Merger if and when completed, existing Micro Focus Shareholders will own the same proportion of Micro Focus as they did immediately prior to the implementation of the Micro Focus Return of Value, subject only to fractional roundings. Immediately after Closing, pre-Merger Micro Focus Shareholders and pre-Merger holders of Micro Focus equity awards will collectively hold 49.9% of the Micro Focus Fully Diluted Shares.
Micro Focus Shareholders will not receive separate consideration as part of the Merger and no additional Micro Focus Shares or Micro Focus ADSs will be issued to pre-Merger Micro Focus Shareholders pursuant to the Merger. Micro Focus Shareholders will receive the commercial benefit of owning an equity interest in Seattle, which will include HPE Software as it exists following the Separation. Micro Focus Shareholders will thus hold an interest in a company with expanded opportunities in the software industry and software infrastructure market, a substantial recurring revenue base, access to important new growth drivers and new revenue models, accelerated operational effectiveness and operational efficiencies. See the section entitled The Transactions—Micro Focus Reasons for Engaging in the Transactions.
As a result of the Transactions, Micro Focus Shareholders ownership of Micro Focus Shares will also mean that they own an interest in a company with increased levels of indebtedness. In connection with the Transactions, Micro Focus will incur new indebtedness of $2.9 billion in the form of the Micro Focus Facilities, which is expected to have $500 million of unused availability immediately following consummation of the Transactions. In addition, following Closing, Micro Focus will guarantee the indebtedness that Seattle Borrower will incur in connection with the Transactions, consisting of $2.6 billion in the form of the Seattle Term Loan Facility. See the section entitled Debt Financing.
Q: What is the Micro Focus Return of Value?
A: Micro Focus will issue one B Share for each existing Micro Focus Share to the holders of record of Micro Focus Shares as of one business day prior to the expected Closing Date. Micro Focus will, shortly following such issuance, redeem each B Share in issue for its nominal value and these B Shares will be subsequently cancelled. HPE Stockholders will not be entitled to receive the Micro Focus Return of Value since the record date will be prior to the Closing Date. For more information on the Micro Focus Return of Value, see the section entitled The Transactions—Micro Focus Return of Value.
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Q: What is the estimated enterprise value of HPE Software and the consideration to be received by holders of Seattle Shares in the Merger?
A: The estimated $6.6 billion market value of the Micro Focus ADSs to be issued to holders of Seattle Shares (calculated for the purposes of this information statement/prospectus by reference to the closing mid-market price of a Micro Focus Share as of the close of business on July 27, 2017) and the $2.5 billion Seattle Payment imply an enterprise value for HPE Software of approximately $9.1 billion. The actual value of the Micro Focus Shares to be issued in the Merger and the Micro Focus ADSs to be issued by the Depositary will depend on the market price of Micro Focus Shares as of Closing.
Q: How will the Transactions impact the future liquidity and capital resources of Micro Focus and Seattle?
A: Micro Focus will incur indebtedness of $2.4 billion in connection with the Transactions pursuant to the Micro Focus Term Loan Facilities and will also enter into the Revolving Credit Facility which is expected to have $500 million of unused availability immediately after Closing.
Seattle Borrower will incur indebtedness of $2.6 billion in connection with the Transactions pursuant to the Seattle Term Loan Facility.
Although, in the opinion of Micro Focus, the Enlarged Groups expected available liquidity and working capital will be sufficient for not less than the next 12 months following the date of this information statement/prospectus, in the longer term these financings could materially and adversely affect the liquidity, results of operations and financial condition of Micro Focus. Micro Focus also expects to incur significant one-time costs in connection with the Transactions, which may have an adverse impact on Micro Focus liquidity, cash flows and operating results in the periods in which they are incurred.
Following Closing, the indebtedness to be incurred by Micro Focus is expected to be guaranteed by Seattle and its subsidiaries and the indebtedness to be incurred by Seattle is expected to be guaranteed by Micro Focus and its subsidiaries. As a result of the increased borrowing, the Micro Focus Board estimates that the initial pro forma net debt to Facility EBITDA ratio of the Enlarged Group as of Closing will be approximately 3.3x Facility EBITDA and is targeting to reduce this to its stated target of 2.5x Facility EBITDA within two years following Closing. See the section entitled Debt Financing.
As a result of the Transactions, Micro Focus will incur a number of one-time costs in respect of due diligence, financing and other advisor fees. Transaction-related costs payable to advisors are expected to be $60.0 million, of which $41.2 million have been paid within the year ended April 30, 2017. Financing fees in respect of the Transactions are estimated to be $206.5 million, all of which are expected to be capitalized and amortized over the life of the financing agreements. Micro Focus also anticipates $150.0 million in costs to implement certain IT upgrades and to migrate the Enlarged Group on to a single system. All remaining costs are expected to be incurred prior to October 31, 2018, with the exception of $50.0 million of costs related to the migration on to a single system, which are expected to be incurred in the first half of the year ending October 31, 2019. In addition, Micro Focus anticipates that the Enlarged Group will incur further one-off integration and restructuring costs in relation to headcount reductions and property rationalization which have yet to be quantified.
Q: When will the Transactions occur?
A: It is expected that all of the outstanding Seattle Shares will be distributed by HPE on September 1, 2017 to HPE Stockholders of record as of the close of business on August 21, 2017, which is the Distribution Record Date. The Reorganization will occur prior to the Distribution. The Merger is expected to occur immediately following the Distribution on September 1, 2017. Substantially concurrently with Closing, Micro Focus will issue to the Depositary the Micro Focus Shares underlying the Micro Focus ADSs to be issued to holders of Seattle Shares and immediately following Closing, the Depositary will issue Micro Focus ADSs to the holders of Seattle Shares.
However, no assurance can be provided as to the timing of the Transactions or that all conditions to the Transactions will be met by the dates set forth herein, or at all. The Merger Agreement provides that either HPE or Micro Focus may terminate the Merger Agreement if the Merger is not consummated on or before March 7, 2018. For a discussion of the conditions to the Transactions and the circumstances under which the Merger Agreement may be terminated by the parties, see the sections entitled The Merger Agreement—Conditions to the Merger and The Merger Agreement—Termination, respectively.
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Q: Are there any conditions to the consummation of the Transactions?
A: Yes. The consummation of the Transactions is subject to a number of conditions, including:
• | the expiration or termination of any applicable waiting period under the HSR Act, and the receipt of applicable consents, authorizations, orders, or approvals required under the antitrust or competition laws of certain specified jurisdictions, including merger control approval from the European Commission, all of which have been received and which condition has been satisfied; |
• | the consummation of the Reorganization and the Distribution in all material respects in accordance with the Separation and Distribution Agreement; |
• | the effectiveness of the registration statement of Micro Focus of which this information statement/prospectus forms a part, the registration statement of Seattle on Form 10 of which this information statement/prospectus forms a part, the Form F-6 filed with the SEC by the Depositary with respect to the Micro Focus ADSs and the Form 8-A filed with the SEC by Micro Focus, and the absence of any stop order issued by the SEC or any pending proceeding before the SEC seeking a stop order with respect thereto; |
• | the approval of the U.K. Prospectus by the U.K. Listing Authority and the U.K. Prospectus having been made publicly available, which condition has been satisfied; |
• | the approval of the U.K. Circular by the U.K. Listing Authority and the U.K. Circular having been made available to Micro Focus Shareholders, which condition has been satisfied; |
• | Admission occurring; |
• | the approval for listing on the NYSE of the Micro Focus ADSs issuable pursuant to the Merger; |
• | the approval by Micro Focus Shareholders of the Merger and specified related matters, which condition has been satisfied; |
• | the receipt by HPE of the HPE Tax Opinion; and |
• | the absence of any law or action by a governmental authority that enjoins, restrains or prohibits the consummation of the Reorganization, the Distribution or the Merger. |
To the extent permitted by applicable law, HPE, on the one hand, and Micro Focus, on the other hand, may waive the satisfaction of the conditions to their respective obligations to consummate the Transactions. In addition, the waiver by HPE or Seattle of conditions to their respective obligations under the Separation and Distribution Agreement requires the consent of Micro Focus, not to be unreasonably withheld, conditioned or delayed.
See the section entitled The Merger Agreement—Conditions to the Merger.
Q: Are there risks associated with the Transactions?
A: Yes. The material risks and uncertainties associated with the Transactions are discussed in the section entitled Risk Factors and the section entitled Cautionary Statement on Forward-Looking Statements. Those risks include, among others, the possibility that the Transactions may not be completed or may not achieve the intended benefits, the possibility that Micro Focus may fail to realize the anticipated benefits of the Merger, the possibility that Micro Focus will not be able to integrate HPE Software successfully, the possibility that Micro Focus may be unable to provide benefits and services to, or access to equivalent financial strength and resources to HPE Software that historically have been provided to HPE Software by HPE, the possibility that the Distribution may be taxable to HPE and HPE Stockholders, the risks resulting from the additional long-term indebtedness and liabilities that Micro Focus and its subsidiaries will have following consummation of the Transactions and the risks associated with the substantial dilution to the ownership interest of current Micro Focus Shareholders following consummation of the Merger.
Q: How do the Transactions impact Micro Focus dividend policy?
A: In connection with the Transactions, Micro Focus will implement the Micro Focus Return of Value. The Micro Focus Return of Value will be funded by the Micro Focus Facilities. With the exception of the Micro Focus Return of Value, the Transactions are not expected to affect Micro Focus stated dividend policy.
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Following Closing and subject to the Enlarged Groups performance (and, in particular, Micro Focus being able to comply with the restrictions on paying dividends imposed by the Micro Focus Facilities), the Micro Focus Board intends to continue its stated dividend policy of paying an annual dividend that is approximately twice covered by Adjusted Earnings Per Share. In addition to certain other exceptions, the Micro Focus Facilities permit the payment of dividends provided that no event of default is continuing under such agreements and, taking into account such payment, the ratio of secured debt (net of free cash) of the Enlarged Group to its consolidated EBITDA (as defined in the New Micro Focus Facility Agreement) is less than 3.0:1. Until that financial metric is achieved, under the Micro Focus Facilities, Micro Focus will have access to the available amount basket of $100 million plus an additional basket for restricted payments of $250 million, providing $350 million of dividend payment capacity. See the sections entitled The Transactions—Micro Focus Return of Value and Historical Per Share Data, Market Price and Dividend Policies.
Q: What are the U.S. federal income tax consequences to HPE, Micro Focus and their respective shareholders resulting from the Distribution and the Merger?
A: The consummation of the Transactions is conditioned upon the receipt by HPE of the HPE Tax Opinion from its tax counsel, Skadden, substantially to the effect that, among other items, for U.S. federal income tax purposes (i) the Distribution, taken together with the Contribution, should qualify as a reorganization under Sections 368(a)(1)(D), 361 and 355 of the Code, upon which no income, gain or loss should be recognized by HPE or Seattle (except for certain items required to be recognized under Treasury Regulations regarding consolidated federal income tax returns) and (ii) the Merger should qualify as a reorganization under Section 368(a) of the Code. Provided that the Distribution and Contribution so qualify, HPE and HPE Stockholders will generally not recognize any taxable income, gain or loss as a result of the Distribution for U.S. federal income tax purposes.
The Merger is intended to qualify as a reorganization under Section 368(a) of the Code. However, pursuant to certain rules contained in Section 367(a) of the Code and the Treasury Regulations promulgated thereunder, U.S. Holders (as defined in the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger) will generally recognize gain, if any, but not loss, on the exchange of Seattle Shares for Micro Focus ADSs pursuant to the Merger.
The consummation of the Transactions is conditioned upon the receipt by HPE of the HPE Tax Opinion. An opinion of counsel neither binds the IRS nor precludes the IRS or the courts from adopting a contrary position. HPE intends to request a ruling from the IRS on certain issues related to the U.S. federal income tax consequences of the Distribution. The receipt of any such ruling is not a condition to HPEs and Seattles obligation to consummate the Transactions and there can be no assurance that any or all of such requested rulings will be received. If the Distribution or certain related transactions fail to qualify for the intended tax treatment, HPE and/or HPE Stockholders may be subject to substantial U.S. federal income taxes.
Following Closing, Micro Focus is expected to continue to be treated as a foreign corporation for U.S. federal income tax purposes, but under Section 7874 of the Code, Micro Focus U.S. affiliates likely will be subject to certain adverse U.S. federal income tax rules as a result of the Merger. See the section entitled U.S. Federal Income Tax Consequences Relating to Section 7874 of the Code below for more information.
Because Micro Focus Shareholders will not participate in the Distribution or the Merger, Micro Focus Shareholders in their capacity as such will not recognize gain or loss upon either the Distribution or the Merger.
The U.S. federal income tax consequences of the Distribution and the Merger are described in more detail in the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger. The tax consequences to you of the Distribution and the Merger will depend on your particular circumstances. You should consult your own tax advisor regarding the particular tax consequences to you of the Transactions.
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Q: Where can I find more information about HPE, Seattle and Micro Focus?
Before the Transactions, if you have any questions relating to HPEs or Seattles business performance, you should contact:
Hewlett Packard Enterprise Company
3000 Hanover Street
Palo Alto, CA 94304
Attn: Investor Relations
(650) 687-5817
investor.relations@hpe.com
HPEs investor website is http://investors.hpe.com. The information contained on HPEs investor website is not incorporated by reference into this information statement/prospectus and should not be considered part of this information statement/prospectus.
After the Transactions, holders of Micro Focus Shares or Micro Focus ADSs who have any questions relating to Seattles or Micro Focus business performance should contact Micro Focus at:
Micro Focus International plc
The Lawn, 22-30 Old Bath Road
Berkshire, RG14 1QN
United Kingdom
+44 (0) 1635-565-459
investors@microfocus.com
Micro Focus investor website is http://investors.microfocus.com/. The information contained on Micro Focus investor website is not incorporated by reference into this information statement/prospectus and should not be considered part of this information statement/prospectus.
QUESTIONS AND ANSWERS FOR HPE STOCKHOLDERS
For the purposes of this section, I, my, mine, you and your refer to each HPE Stockholder as of the close of business on the Distribution Record Date, each of whom will be entitled to receive Seattle Shares in the Distribution, with such Seattle Shares being converted into Micro Focus ADSs in the Merger, as further described elsewhere in this information statement/prospectus.
Q: Why am I receiving this document?
A: You are receiving this information statement/prospectus because you are a holder of HPE Shares. If you are a holder of HPE Shares as of the close of business on August 21, 2017, which is the Distribution Record Date, you will be entitled to receive a number of Seattle Shares with respect to each HPE Share that you held as of the close of business on such date, in accordance with a distribution ratio of one Seattle Share for each HPE Share held as of such time. Your Seattle Shares will then be automatically converted into the right to receive Micro Focus ADSs representing Micro Focus Shares in connection with the Merger. Each Micro Focus Share issued in connection with the Merger will be issued directly to the Depositary. The Depositary will issue one Micro Focus ADS for each Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. This information statement/prospectus will help you understand the Transactions and your investment in Micro Focus after the Merger.
Q: What do HPE Stockholders need to do to participate in the Transactions?
A: HPE Stockholders as of the close of business on the Distribution Record Date will not be required to take any action to receive Seattle Shares in the Distribution or receive Micro Focus ADSs in the Merger, but you are urged to read this entire information statement/prospectus carefully. No vote of HPE Stockholders is required for the Distribution or the Merger. HPE, as sole stockholder of Seattle prior to the Distribution, has approved the Merger. Therefore, you are not being asked for a proxy, and you are requested not to send HPE a proxy, in connection with the Distribution or the Merger. You do not need to pay any consideration, exchange or surrender your existing HPE Shares or take any other action to receive Micro Focus ADSs in the Merger. Please do not send in any HPE stock certificates. The Transactions will not affect the number of outstanding HPE Shares or any rights of HPE Stockholders, although it is expected to affect the market value of each outstanding HPE Share.
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Q: How many Micro Focus ADSs will I receive in the Transactions?
A: In the Distribution, HPE will distribute all of the outstanding Seattle Shares on a pro rata basis to HPE Stockholders as of the close of business on the Distribution Record Date. One Seattle Share will be distributed with respect to each HPE Share held as of the close of business on the Distribution Record Date. Each Seattle Share will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement. Each Micro Focus ADS will represent one Micro Focus Share issued pursuant to the Merger to the Depositary, unless another ratio is agreed by Micro Focus and HPE.
Q: Will fractional Micro Focus ADSs be issued in the Transactions?
A: No. The Depositary will not issue fractional Micro Focus ADSs. You will receive cash in lieu of any fractional Micro Focus ADSs that you would have otherwise received following the Transactions.
Q: Where will I be able to trade Micro Focus ADSs?
A: We expect trading of Micro Focus ADSs to begin September 1, 2017. We have applied to list the Micro Focus ADSs on the NYSE under the symbol MFGP. Micro Focus Shares are currently listed on the LSE under the symbol MCRO.
Q: What will happen to the listing of HPE Shares?
A: HPE Shares will continue to trade on the NYSE after the Distribution under the symbol HPE.
Q: Will the number of HPE Shares that I own change as a result of the Transactions?
A: No. The number of HPE Shares that you own will not change as a result of the Transactions.
Q: Will the Transactions affect the market price of my HPE Shares?
A: Yes. As a result of the Transactions, it is expected that the trading price of HPE Shares immediately following the Transactions will be lower than the trading price of such shares immediately prior to the Transactions because the trading price will no longer reflect the value of HPE Software, which is being transferred to Micro Focus as part of the Transactions.
Q: Will HPE Stockholders who sell their HPE Shares shortly before the completion of the Distribution and the Merger still be entitled to receive Micro Focus ADSs with respect to the HPE Shares that were sold?
A: It is currently expected that beginning on or about August 17, 2017, which is two business days before the Distribution Record Date, and continuing through the close of trading on August 31, 2017, which is the last business day prior to September 1, 2017, the expected Closing Date, there will be two markets in HPE Shares on the NYSE: a regular way market and an ex-distribution market.
If an HPE Stockholder sells HPE Shares in the regular way market under the ticker symbol HPE during this time period, that HPE Stockholder will be selling both his HPE Shares and the right (represented by a due-bill) to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing. HPE Stockholders should consult their brokers before selling their HPE Shares in the regular way market during this time period to be sure they understand the effect of the NYSE due-bill procedures. The due-bill process is not managed, operated or controlled by HPE, Seattle or Micro Focus.
If an HPE Stockholder sells HPE Shares in the ex-distribution market during this time period, that HPE Stockholder will be selling only his HPE Shares, and will retain the right to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing. It is currently expected that ex-distribution trades of HPE Shares will settle within three business days after the Closing Date and that if the Merger is not completed all trades in this ex-distribution market will be cancelled.
After the close of trading on August 31, 2017, HPE Shares will no longer trade in this ex-distribution market, and HPE Shares that are sold in the regular way market will no longer reflect the right to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing.
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Q: How may HPE Stockholders sell the Micro Focus ADSs that they will be entitled to receive in the Merger prior to receiving those Micro Focus ADSs?
A: It is currently expected that beginning on or about August 17, 2017, which is two business days before the Distribution Record Date, and continuing through the close of trading on August 31, 2017, which is the business day prior to September 1, 2017, the expected Closing Date), there will be a when issued market in Micro Focus ADSs on the NYSE.
The when issued market will be a market for the Micro Focus ADSs that will be issued to holders of Seattle Shares at Closing. If an HPE Stockholder sells Micro Focus ADSs in the when issued market during this time period, that HPE Stockholder will be required to deliver the number of Micro Focus ADSs so sold in settlement of the sale after Micro Focus ADSs are issued upon Closing. It is currently expected that when issued trades of Micro Focus ADSs will settle within three business days after the Closing Date and that if the Merger is not completed, all trades in this when issued market will be cancelled. After the close of trading on August 31, 2017, Micro Focus ADSs will no longer trade in this when issued market.
Q: What are the implications to HPE Stockholders of Micro Focus being a foreign private issuer?
A: Following completion of the Transactions, Micro Focus will be subject to the reporting requirements under the Exchange Act applicable to foreign private issuers. Micro Focus will be required to file an annual report on Form 20-F with the SEC within four months after the end of each fiscal year. Micro Focus current fiscal year begins on May 1 and ends on April 30. However, as described further below, Micro Focus intends to align its accounting year end with HPE Softwares accounting year end of October 31 upon Closing. In addition, Micro Focus will be required to furnish reports on Form 6-K to the SEC regarding certain information required to be publicly disclosed by Micro Focus by way of a Regulatory News Service, referred to as an RNS, in the United Kingdom or filed with the LSE or U.K. Companies House, or regarding information distributed or required to be distributed by Micro Focus to Micro Focus Shareholders under English law and/or regulations. Micro Focus will be exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations under Section 14 of the Exchange Act, and will not be required to comply with Regulation FD, which addresses certain restrictions on the selective disclosure of material information. In addition, among other matters, Micro Focus officers, directors and principal shareholders will be exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of Micro Focus Shares. If Micro Focus loses its status as a foreign private issuer, it will no longer be exempt from such rules and, among other things, will be required to file periodic reports and financial statements as if it were a domestic U.S. issuer.
Q: What is the effect of Micro Focus aligning its accounting year end with HPE Software in connection with Closing?
A: At and conditional upon Closing, Micro Focus will align its accounting year end with HPE Softwares accounting year end of October 31, with the first accounting period to be audited after Closing being for the 18 months ended October 31, 2018. During this extended accounting period and in order to comply with the U.K. Listing Rules, Micro Focus will publish an unaudited interim report for the six months ended October 31, 2017 and a second unaudited interim report for the six months ended April 30, 2018.
QUESTIONS AND ANSWERS ABOUT AMERICAN DEPOSITARY SHARES
For the purposes of this section, I, my, you and your refer to each HPE Stockholder as of the close of business on the Distribution Record Date, each of whom will be entitled to receive Seattle Shares in the Distribution, with such Seattle Shares being converted into Micro Focus ADSs in the Merger, as further described elsewhere herein.
The following is only a summary of the questions and answers you may have relating to the Micro Focus ADSs that you will become entitled to receive in the Merger upon conversion of the Seattle Shares distributed to you in the Distribution. Your rights as a Micro Focus ADS holder will be governed by, among other things, the terms of the Deposit Agreement with the Depositary. You should read the section below in conjunction with the section entitled Description of the Micro Focus American Depositary Shares and the Deposit Agreement, which is included as an exhibit to the registration statement on Form F-4 of Micro Focus of which this information statement/prospectus forms a part.
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Q: What is an ADS and will the Micro Focus ADSs be listed?
A: An American Depositary Share, or ADS, is a security representing another security that has been deposited at a custodian bank. ADSs allow investors in the United States to more easily hold and trade interests in foreign-based companies. ADSs are represented by American Depositary Receipts, or ADRs, and are typically issued by a depositary in uncertificated form.
Micro Focus is a public limited company incorporated under the laws of England and Wales that issues ordinary shares that are equivalent in many respects to common stock of a U.S. corporation. Each Micro Focus ADS will represent one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. We have applied to list the Micro Focus ADSs on the NYSE under the symbol MFGP. Micro Focus Shares are listed on the main market of the LSE and quoted in sterling under the symbol MCRO.
Q: Can I request a certificated American Depositary Receipt?
A: Yes. All of the Micro Focus ADSs issued will be part of the Depositarys direct registration system, and a registered holder will receive periodic statements from the Depositary which will show the number of Micro Focus ADSs represented by uncertificated ADRs registered in such holders name. Typically, the registered holder is either The Depository Trust Company (DTC) or an intermediary, such as a broker, which holds the ADRs in the interest of the beneficial owner. Alternatively, upon receipt by the Depositary of a proper instruction from a registered holder of uncertificated Micro Focus ADSs requesting the exchange of uncertificated Micro Focus ADSs for certificated Micro Focus ADSs, the Depositary will execute and deliver as directed by the registered holder a certificated ADR evidencing those Micro Focus ADSs.
Q: How can I cancel my Micro Focus ADS and obtain deposited securities?
A: As a registered holder, you may turn in your ADSs at the Depositarys principal office, but if you are not a registered holder, you must provide appropriate instructions to your broker. Upon payment of applicable fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the Depositary will direct the custodian to deliver the Micro Focus Shares and any other deposited securities underlying the Micro Focus ADSs to you or a person you designate.
Q: How do I vote as a Micro Focus ADS holder?
A: You may instruct the Depositary to vote the Micro Focus Shares or other deposited securities underlying your Micro Focus ADSs. Otherwise, you could exercise your right to vote directly if you withdraw the Micro Focus Shares underlying your Micro Focus ADSs. However, there can be no guarantee that you will know about any applicable meeting of Micro Focus Shareholders sufficiently far in advance to withdraw the Micro Focus Shares underlying your Micro Focus ADSs in time to vote such Micro Focus Shares at such meeting.
Upon timely notice from us as described in the Deposit Agreement, the Depositary will notify you of any upcoming vote and arrange to deliver our voting materials to you by regular mail delivery or by electronic transmission. The materials will (i) describe the matters to be voted on, (ii) explain how you may instruct the Depositary to vote the Micro Focus Shares or other deposited securities underlying your Micro Focus ADSs as you direct and (iii) include an express indication that if no vote is timely received or instructions are timely received that do not specify the manner in which the Depositary is to vote, then no vote will be placed on your behalf.
For your voting instructions to be valid, the Depositary must receive them in writing on or before the date specified. The Depositary will, subject to timely receipt of valid voting instructions, applicable law and the provisions of the Deposit Agreement, the deposited securities and the Micro Focus Articles, vote or have its agents vote the Micro Focus Shares or other deposited securities as you instruct. The Depositary will only vote or attempt to vote as you instruct. If we timely requested the Depositary to solicit instructions of holders of Micro Focus ADSs but no instructions are received by the Depositary from an owner with respect to any of the deposited securities represented by the Micro Focus ADSs of that owner on or before the date established by the Depositary for such purpose, the Depositary shall not exercise any voting rights whatsoever with respect to the deposited securities.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the Depositary to vote the deposited securities underlying your Micro Focus ADSs. In addition, the Depositary and
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its agents are not responsible for failing to carry out voting instructions or for the manner in which any vote is cast. This means that you may not be able to exercise your right to vote and you may have no recourse if the Micro Focus Shares underlying your Micro Focus ADSs are not voted as you requested.
Q: How will I receive dividends on the Micro Focus Shares underlying my Micro Focus ADSs?
A: Micro Focus may make various types of distributions with respect to the Micro Focus Shares. The Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on the Micro Focus Shares or other deposited securities, after converting into U.S. dollars and deducting applicable fees and expenses. You will receive these distributions in proportion to the number of Micro Focus Shares your Micro Focus ADSs represent as of the record date set by the Depositary with respect to the Micro Focus ADSs (which will be as close as practicable to the record date for Micro Focus Shares).
The Depositary is not responsible if it determines, to the extent permitted to do so under the Deposit Agreement, that it is unlawful or impractical to make a distribution available to any Micro Focus ADS holders. Other than with respect to the Merger, we have no obligation to register Micro Focus ADSs, shares, rights or other securities under the Securities Act. Other than with respect to the Merger, we also have no obligation to take any other action to permit the distribution of Micro Focus ADSs, shares, rights or other property to Micro Focus ADS holders. This means that you may not receive certain distributions we make on the Micro Focus Shares or any value for them if it is illegal or impractical for us or the Depositary to make them available to you.
Q: Are there possible adverse effects of the Transactions on, or other risks to, the value of Micro Focus ADSs representing Micro Focus Shares ultimately to be received by HPE Stockholders?
A: The issuance of Micro Focus Shares pursuant to the Merger may negatively affect the market price of Micro Focus Shares, and in turn, the market price of Micro Focus ADSs. The market price of Micro Focus ADSs representing Micro Focus Shares also will be affected by the performance of HPE Software and other risks associated with the Transactions. This risk and other risk factors associated with the Transactions are described in more detail in the section entitled Risk Factors.
In addition, we expect that the Micro Focus ADSs issued to holders of Seattle Shares will be listed on the NYSE. Micro Focus Shares are currently and will, subject to Admission, continue to be listed on the LSE. A public market has not previously been established for Micro Focus ADSs and such a market, even if established, may not be sustained. There can be no assurance that the Micro Focus ADSs issued in the Merger will trade at prices equivalent to those at which Micro Focus Shares traded prior to the Merger or at which Micro Focus Shares may trade after the Merger, due to the costs associated with holding a Micro Focus ADS as compared to holding a Micro Focus Share, as well as the differences in rights between a Micro Focus Shareholder and a Micro Focus ADS holder. See the section entitled Comparison of Rights of Micro Focus Shareholders and Micro Focus ADS Holders and HPE Stockholders.
Q: Are there any material differences between the rights of HPE Stockholders, Micro Focus ADS holders and Micro Focus Shareholders?
A: Yes. HPE is a Delaware corporation and HPE Stockholders rights are governed by HPEs organizational documents and Delaware law. HPE Stockholders will receive Micro Focus ADSs (upon the conversion of Seattle Shares distributed in the Distribution) and the rights of Micro Focus ADS holders will be governed by the terms of the Deposit Agreement with the Depositary. In addition, Micro Focus is a public limited company organized under the laws of England and Wales and the rights of Micro Focus Shareholders are governed by the Micro Focus Articles and English law.
The material differences between the rights associated with HPE Shares and Micro Focus Shares and Micro Focus ADSs relate to, among other things, shareholder action by written consent, amendment of organizational documents, appraisal rights, preemptive rights, shareholder votes on certain transactions, removal of directors, and limitations of liability of directors and officers. For a further discussion of the material differences between the rights of HPE Stockholders and Micro Focus Shareholders, see the section entitled Comparison of Rights of Micro Focus Shareholders and Micro Focus ADS Holders and HPE Stockholders.
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Micro Focus Group
The Micro Focus Group is a global enterprise software provider supporting the technology needs and challenges of the Forbes Global 2000. The Micro Focus Groups solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements, including the protection of corporate information at all times.
The Micro Focus Groups product portfolios are Micro Focus and SUSE. Within Micro Focus, the solution portfolios are COBOL Development and Mainframe Solutions, Host Connectivity, Identity, Access and Security, IT Development and IT Operations Management Tools, and Collaboration and Networking. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, cloud infrastructure and storage solutions. Micro Focus has also announced plans to add a Container-as-a-Service Platform (CaaSP) product and a Platform-as-a-Service (PaaS) product.
The Micro Focus Group has more than 4,800 employees in over 90 global locations and has over 20,000 customers, including 91 of the Fortune 100 companies.
Hewlett Packard Enterprise Company
HPE is a leading global provider of the technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. HPE conducts its business through its Enterprise Group, Software, Financial Services and Corporate Investments segments. The Enterprise Group provides a broad portfolio of enterprise technology solutions to address customer needs in building the foundation for the next generation of applications, web services and user experiences. Software, which will be transferred to Seattle in the Reorganization and which is further described in the section entitled Information about Seattle, provides big data platform analytics, application testing and delivery management, security and information governance, and IT operations management solutions for businesses and other enterprises of all sizes. Financial Services provides flexible investment solutions for HPEs customers—such as leasing, financing, IT consumption and utility programs—and asset management services that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software and services from HPE and others. Corporate Investments includes Hewlett Packard Labs and certain business incubation projects, among others. As of April 1, 2017, HPE owned or leased approximately 18.5 million square feet of space worldwide, had operations in approximately 111 countries and employed approximately 81,000 people.
Seattle SpinCo, Inc.
Pursuant to the Reorganization and prior to the Distribution and the Merger, HPE will transfer HPE Software to Seattle, a wholly owned subsidiary of HPE, as further described herein. HPE Software is a leading global infrastructure software provider offering a broad range of software products, services and solutions, including big data platform analytics, application testing and delivery management, security and information governance and IT operations management solutions for businesses and other enterprises of all sizes. HPE Softwares offerings include licenses, support, professional services and SaaS.
HPE Softwares products are available worldwide. HPE Software has over 30,000 customers worldwide, including 98 of the Fortune 100 companies.
On September 7, 2016, Micro Focus and HPE entered into the Merger Agreement with Seattle, Holdings and Merger Sub, and HPE and Seattle entered into the Separation and Distribution Agreement, which together provide for the combination of Micro Focus and Seattle.
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Below is a step-by-step summary description of the sequence of material events relating to the Transactions, which should be read in conjunction with the sections entitled The Merger Agreement and The Separation and Distribution Agreement.
Step 1 Separation of HPE Software
Pursuant to the Contribution and prior to the Distribution and the Merger, HPE will transfer HPE Software to Seattle pursuant to the terms and conditions set forth in the Separation and Distribution Agreement.
Step 2 Issuance of Seattle Shares to HPE, Incurrence of Seattle Debt and the Seattle Cash Payment
In connection with the transfer of HPE Software to Seattle in the Contribution in Step 1, Seattle will issue to HPE additional Seattle Shares and make the Seattle Payment to HPE. Seattle Borrower will incur new indebtedness in an aggregate principal amount of $2.6 billion and Seattle will use $2.5 billion of the proceeds of this loan to pay to HPE the Seattle Payment in connection with the transfer of HPE Software to Seattle. Seattle will use the balance to pay certain fees and expenses related to such indebtedness and for general corporate purposes.
Step 3 Incurrence of Micro Focus Debt
Prior to Closing, the Micro Focus Borrower will incur new indebtedness in the form of (i) the $2.4 billion Micro Focus Term Loan Facilities, including $1,515 million of Facility B-2 refinanced pursuant to an amendment to the Existing Facilities Agreement and $885 million of term loans incurred by the Micro Focus Escrow Borrower pursuant to an escrow credit agreement which term loans will automatically be deemed issued under the Micro Focus Term Loan Facilities upon the merger of the Micro Focus Escrow Borrower with and into the Micro Focus Borrower prior to the Merger and (ii) the $500 million Revolving Credit Facility. The proceeds received by the Micro Focus Borrower will be used to fund (i) the Micro Focus Return of Value of an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs or proceeds) to the Micro Focus Shareholders, (ii) the partial repayment of the indebtedness pursuant to the Existing Facilities Agreement, dated as of November 20, 2014, by and among Micro Focus, Micro Focus Group Limited, the Borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, collateral agent and swingline lender, (iii) fees and expenses incurred in connection with the Transactions and (iv) working capital and general corporate purposes of Micro Focus and its subsidiaries.
Step 4 Distribution
HPE will distribute all of the outstanding Seattle Shares on a pro rata basis to HPE Stockholders as of the close of business on the Distribution Record Date pursuant to the terms and conditions set forth in the Separation and Distribution Agreement. The Distribution is expected to occur on September 1, 2017.
Step 5 Merger
After the Distribution, Merger Sub will merge with and into Seattle, whereby the separate corporate existence of Merger Sub will cease and Seattle will continue as the surviving corporation and as an indirect wholly owned subsidiary of Micro Focus. In the Merger, each Seattle Share will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement, each representing one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE, as described in the section entitled The Merger Agreement—Merger Consideration. The Micro Focus Shares underlying the Micro Focus ADSs issued in connection with the Merger (sometimes referred to herein as the Consideration Shares) will be issued directly to the Depositary. Immediately following Closing, pre-Merger HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares, and the balance of the then-outstanding Micro Focus Shares will be held by pre-Merger Micro Focus Shareholders.
After completion of all of the steps described above, Micro Focus will own and operate HPE Software through Seattle, which will be a direct wholly owned subsidiary of Holdings, and an indirect wholly owned subsidiary of Micro Focus. Micro Focus will also continue to own and operate its current businesses. Seattle will continue as the obligor under the new indebtedness to be incurred by Seattle in connection with the Transactions which, after Closing, is expected to be guaranteed by Micro Focus. We have applied to list Micro Focus ADSs on the NYSE under the symbol MFGP and Micro Focus Shares will remain listed on the LSE after Closing under the symbol MCRO.
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In connection with the Transactions, on or prior to the Distribution Date, HPE (or its applicable subsidiaries) and Micro Focus (or its applicable subsidiaries) will enter into the Transaction Documents not already entered into as of the date hereof. See the sections entitled The Merger Agreement, The Separation and Distribution Agreement and Other Agreements.
Set forth below are diagrams that graphically illustrate, in simplified form, the existing corporate structures of HPE and Micro Focus, the corporate structures immediately following the Separation and the Distribution but before the Merger and the corporate structures immediately following the Merger.
Existing Structures
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Structures Immediately Following the Merger
* | Excludes overlap. Percentages reflect ownership of Micro Focus Fully Diluted Shares immediately following the Merger, with pre-Merger holders of Micro Focus equity awards included within Micro Focus Shareholders solely for purposes of this illustration. For further details, see the section entitled The Merger Agreement—Merger Consideration. |
Micro Focus Reasons for Engaging in the Transactions
The Micro Focus Board believes that segments of the infrastructure software market are consolidating and that successful companies in such markets will be those with outstanding operational efficiency and scale. The Transactions present a rare opportunity to achieve a significant increase in Micro Focus scale and breadth, with the potential to deliver enhanced Total Shareholder Returns consistent with Micro Focus stated objectives.
The Micro Focus Board believes the Transactions will enhance Adjusted Earnings Per Share by April 30, 2019 and thereafter, with scope for further benefits as operational improvements are realized across the Enlarged Group.
The Micro Focus Board believes the Transactions represent a substantial opportunity to:
• | create significantly greater scale and breadth of product portfolio covering largely adjacent areas of the software infrastructure market, thereby creating one of the world’s largest pure-play infrastructure software companies; |
• | add a substantial recurring revenue base to Micro Focus’ existing product portfolio, together with access to important new growth drivers and new revenue models; and |
• | accelerate operational effectiveness over the medium term, through the alignment of best practices between Micro Focus and HPE Software in areas such as product development, support, product management, account management, and sales force productivity, as well as achieving operational efficiencies where appropriate. |
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Given the scale of the Enlarged Group, the Micro Focus Board believes that significant cost benefits will arise from reducing duplicated central costs, combining corporate support functions (where appropriate) and increasing efficiency across all functions. For more information on the process undertaken by Micro Focus that resulted in the execution of the Transaction Documents, as well as further information regarding the reasons that the Micro Focus Board believes that the Transactions are in the best interests of Micro Focus and the Micro Focus Shareholders, see the sections entitled The Transactions—Background of the Separation, the Distribution and the Merger and The Transactions—Micro Focus Reasons for Engaging in the Transactions.
HPEs Reasons for the Separation, the Distribution and the Merger
The HPE Board believes that the Transactions will accomplish a number of important business objectives for HPE, as well as provide enhanced opportunities for the combined business of Micro Focus and HPE Software. These important business objectives include, among other things, the following:
• | the Transactions are expected to enable HPE to sharpen its focus and expand its leadership in building the vital end-to-end infrastructure solutions necessary for providing cloud and mobility services; |
• | the Transactions are expected to increase HPE’s management focus on secure, next-generation, software-defined infrastructure that leverages a portfolio of servers, storage, networking, converged infrastructure and software assets to help customers run their traditional IT better, while building a bridge to multi-cloud environments; |
• | the Transactions are expected to unlock faster growth, higher margins and more free cash flow at HPE; and |
• | the Transactions are expected to result in, among other things, improved operating efficiencies to enable HPE Software, combined with Micro Focus, to accelerate financial and operational performance. |
As part of its decision to approve the Transactions, the HPE Board recognized that HPE was likely to continue to face challenges in its maturing infrastructure software business as part of the general market shift to cloud computing and SaaS. The HPE Board believed that these challenges were exacerbated by HPE Softwares lack of a separate general and administrative expense structure within HPE, scalability challenges (including in sales and marketing), and demands on HPE management from HPEs other businesses. The HPE Board believed that a combination of HPE Software with Micro Focus would help address these challenges by creating a more focused, nimble and scalable software business, particularly given Micro Focus historical experience with and focus on effectively managing portfolios of mature infrastructure software products.
For more information on the process undertaken by HPE that resulted in the execution of the Transaction Documents, as well as further information regarding the reasons that the HPE Board believes that the Separation, the Distribution and the Merger are in the best interests of HPE and HPE Stockholders, see the sections entitled The Transactions—Background of the Separation, the Distribution and the Merger and The Transactions—HPEs Reasons for the Separation, the Distribution and the Merger.
The Merger Agreement provides that, at Closing, each issued and outstanding Seattle Share (except for any such shares held as treasury stock or by Micro Focus, Holdings or Merger Sub, which will be cancelled) will be automatically converted into the right to receive a number of Micro Focus ADSs representing Micro Focus Shares equal to the exchange ratio multiplied by the ADS ratio, subject to adjustment as set forth in the Merger Agreement. The exchange ratio will be determined prior to Closing based on the number of Micro Focus Fully Diluted Shares, on the one hand, and the number of Seattle Shares, on the other hand, in each case outstanding immediately prior to Closing, such that HPE Stockholders (who will have received Seattle Shares in the Distribution prior to Closing) will own Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. As defined in the Merger Agreement, the exchange ratio equals the quotient of (a) the aggregate number of Micro Focus Fully Diluted Shares outstanding immediately prior to Closing multiplied by the quotient of 50.1% divided by 49.9%, divided by (b) the number of outstanding Seattle Shares immediately prior to Closing. For example, solely for illustrative purposes, assume there are 1,000 Micro Focus Fully Diluted Shares outstanding immediately prior to Closing and 2,000 Seattle Shares outstanding immediately prior to Closing. In order for HPE Stockholders to own Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing, Micro Focus must issue to
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holders of the outstanding Seattle Shares the Micro Focus ADSs representing a number of Micro Focus Shares equal to 1,000 multiplied by the quotient of 50.1% divided by 49.9%, or 1,004 Micro Focus Shares. The exchange ratio therefore equals the quotient of 1,004 Micro Focus Shares divided by 2,000 Seattle Shares, or 0.502004. With aggregate ownership of Micro Focus ADSs representing 1,004 Micro Focus Shares out of 2,004 Micro Focus Fully Diluted Shares outstanding, HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. The ADS ratio is defined in the Merger Agreement as one unless otherwise mutually agreed to by Micro Focus and HPE.
As such, the Merger is expected to result in HPE Stockholders as of the close of business on the Distribution Record Date receiving Micro Focus ADSs representing an aggregate number of newly issued Micro Focus Shares equal to 50.1% of the Micro Focus Fully Diluted Shares as of immediately following Closing.
Pursuant to an adjustment provision in the Merger Agreement, in the event that the percentage of outstanding Micro Focus Shares to be received in the Merger by HPE Stockholders with respect to the qualified Seattle Shares (which are Seattle Shares distributed in the Distribution with respect to HPE Shares that were not acquired directly or indirectly pursuant to a plan (or series of related transactions) which includes the Distribution (within the meaning of Section 355(e) of the Code)) would be less than 50.1% of all Micro Focus Shares outstanding immediately following Closing (determined before any adjustment pursuant to this adjustment provision), then at HPEs election, the exchange ratio will be increased so that the number of Micro Focus Shares to be received in the Merger by HPE Stockholders with respect to such Seattle Shares represents 50.1% of the Micro Focus Shares outstanding immediately following Closing. If such an increase is necessary, then, in certain limited circumstances described in the Merger Agreement, the amount of the Seattle Payment will be decreased.
No fractional Micro Focus ADSs will be issued pursuant to the Merger.
The value of the Consideration Shares and Micro Focus ADSs issued in the Merger, as well as cash in lieu of fractional shares (if any) paid in connection with the Merger will be reduced by any applicable tax withholding.
The obligations of the parties to the Merger Agreement to consummate the Merger are subject to the satisfaction or, if permitted under applicable law, waiver, of the following conditions:
• | the expiration or termination of any applicable waiting period under the HSR Act, and the receipt of applicable consents, authorizations, orders, or approvals required under the antitrust or competition laws of certain specified jurisdictions, including merger control approval from the European Commission, all of which have been received and which condition has been satisfied; |
• | the consummation of the Reorganization and the Distribution in all material respects in accordance with the Separation and Distribution Agreement; |
• | the effectiveness of the registration statements of Micro Focus and Seattle filed with the SEC of which this information statement/prospectus forms a part, the Form F-6 filed by the Depositary with the SEC with respect to the Micro Focus ADSs (to the extent required by law) and the Form 8-A filed by Micro Focus, and the absence of any stop order issued by the SEC or any pending proceeding before the SEC seeking a stop order with respect thereto; |
• | the approval of the U.K. Prospectus by the U.K. Listing Authority and the U.K. Prospectus having been made publicly available in accordance with the U.K. Prospectus Rules, which condition has been satisfied; |
• | the approval of the U.K. Circular by the U.K. Listing Authority and the U.K. Circular having been made available to Micro Focus Shareholders in accordance with the U.K. Listing Rules and the Micro Focus Articles, which condition has been satisfied; |
• | Admission occurring; |
• | the approval for listing on the NYSE of the Micro Focus ADSs issuable pursuant to the Merger; |
• | the approval by Micro Focus Shareholders of the Merger and specified related matters, which condition has been satisfied; and |
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• | the absence of any law or action by a governmental authority that enjoins, restrains or prohibits the consummation of the Reorganization, the Distribution or the Merger. |
The obligations of Micro Focus, Holdings and Merger Sub to consummate the Merger are subject to the satisfaction or, if permitted by applicable law, waiver, of the following additional conditions:
• | the performance of and compliance with all covenants required under the Merger Agreement to be complied with or performed by HPE or Seattle in all material respects at or prior to Closing; |
• | the truth and correctness in all material respects of specified representations and warranties of HPE and Seattle with respect to corporate organization, due authorization, certain capitalization matters of Seattle, the board and stockholder approvals of HPE and Seattle necessary to effect the Transactions and the absence of brokers’ fees, in each case, as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of specified representations and warranties of HPE relating to Seattle with respect to its capital stock and the absence of a material adverse effect with respect to Seattle as of the date of the Merger Agreement and as of the Closing Date (except that the representation and warranty with respect to the capitalization of Seattle will still be deemed true and correct so long as any deviations are de minimis, and except that certain representations and warranties that by their terms address matters only as of a specified date must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of all other representations and warranties made by HPE in the Merger Agreement (without giving effect to any materiality, material adverse effect or similar qualifiers) as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date), except to the extent the failure to be so true and correct would not, individually or in the aggregate, have a material adverse effect with respect to Seattle; and |
• | the delivery by HPE to Micro Focus of a certificate, dated as of the Closing Date, and signed by a senior officer of HPE, certifying the satisfaction of the conditions described in the preceding four bullet points. |
The obligations of HPE and Seattle to effect the Merger are subject to the satisfaction or, if permitted by applicable law, waiver, of the following additional conditions:
• | the performance of and compliance with all covenants required under the Merger Agreement to be complied with or performed by Micro Focus, Holdings or Merger Sub in all material respects at or prior to Closing; |
• | the truth and correctness in all material respects of specified representations and warranties of Micro Focus with respect to organization, due authorization, certain capitalization matters, brokers’ fees, certain findings of the Micro Focus Board and the shareholder approvals necessary to effect the Transactions, in each case, as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of specified representations and warranties of Micro Focus with respect to the capital stock of Micro Focus and the absence of a material adverse effect with respect to Micro Focus as of the date of the Merger Agreement and as of the Closing Date (except that the representation and warranty with respect to the capitalization of Micro Focus will still be deemed true and correct so long as any deviations are de minimis, and except that certain representations and warranties that by their terms address matters only as of a specified date must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of all other representations and warranties made by Micro Focus, Holdings or Merger Sub in the Merger Agreement (without giving effect to any materiality, material adverse effect or similar qualifiers) as of the date of the Merger Agreement and as of the |
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Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date), except to the extent the failure to be so true and correct would not, individually or in the aggregate, have a material adverse effect with respect to Micro Focus;
• | the delivery by Micro Focus to HPE of a certificate, dated as of the Closing Date, and signed by a senior officer of Micro Focus, certifying the satisfaction of the conditions described in the preceding four bullet points; and |
• | the receipt by HPE of the HPE Tax Opinion. |
Board of Directors and Management of Micro Focus After the Merger
Kevin Loosemore and Mike Phillips will continue as Executive Chairman and Chief Financial Officer, respectively, of the Enlarged Group. Chris Hsu, who is currently Executive Vice President and General Manager of HPE Software as well as Chief Operating Officer at HPE, will become the Chief Executive Officer of the Enlarged Group at Closing and Stephen Murdoch, who is the current Chief Executive Officer of Micro Focus, will become the Chief Operating Officer of the Enlarged Group at Closing. Nils Brauckmann will continue as Chief Executive Officer of SUSE following Closing.
With effect from Closing until the second annual general meeting of the Micro Focus Shareholders that occurs after Closing, HPE will have the right to nominate (i) one new Non-Executive Director who is a serving executive of HPE to the Micro Focus Board and (ii) one-half of the Micro Focus Boards independent Non-Executive Directors, in each case, subject to approval of the Nomination Committee. The current Nomination Committee has approved the appointments of John Schultz (as the HPE Nominated Director who is a serving executive of HPE and is not independent) with effect from Closing, and Silke Scheiber and Darren Roos as independent Non-Executive Directors with effect from May 15, 2017. In accordance with the Merger Agreement, a further independent HPE Nominated Director will be appointed following Closing.
As a result of the proposed appointments to the Micro Focus Board, at Closing it is expected that the Micro Focus Board will comprise 10 directors, five of whom will be independent under the U.K. Corporate Governance Code. Once an additional independent HPE Nominated Director is appointed following Closing, this will increase the total number of directors to 11 and the number of independent Non-Executive Directors to six.
Micro Focus Shareholders and HPE Stockholders should carefully consider the matters described in the section entitled Risk Factors, as well as other information included in this information statement/prospectus and the other documents incorporated herein by reference.
On September 7, 2016, in connection with the execution of the Merger Agreement, Micro Focus Group Limited and the Micro Focus Borrower entered into the Micro Focus Commitment Letter and the Seattle Commitment Letter pursuant to which the commitment parties agreed to provide debt financing for the Transactions. On April 28, 2017, pursuant to the terms of the Micro Focus Commitment Letter, Micro Focus Borrower entered into Amendment No. 3 to the Existing Facilities Agreement, which amended its existing facility by combining two tranches into one $1,515 million Facility B-2 term loan, providing for the incremental borrowing of $385 million pursuant to a Facility B-3 term loan and a €470 million (equivalent to approximately $500 million) Euro Facility term loan, and providing for a $500 million Revolving Credit Facility. Pursuant to the Seattle Commitment Letter, the commitment parties will provide a $2.6 billion Seattle Term Loan Facility under a separate credit agreement. See the section entitled “Debt Financing” for further information.
Listing of Micro Focus ADSs on the NYSE
We have applied to list the Micro Focus ADSs on the NYSE under the symbol MFGP. We expect trading of the Micro Focus ADSs to begin on September 1, 2017.
Comparison of the Rights of Micro Focus Shareholders and HPE Stockholders
As a result of the Merger, HPE Stockholders as of the close of business on the Distribution Record Date will become holders of Micro Focus ADSs. Following the Merger, HPE Stockholders will have different rights as holders of Micro Focus ADSs than they had as HPE Stockholders due to the differences between, on the one
26
hand, the laws of the jurisdiction of incorporation of HPE, which is Delaware, and the certificate of incorporation and bylaws of HPE, and, on the other hand, the laws of the jurisdiction of incorporation of Micro Focus, which is England and Wales, and the Micro Focus Articles. See the section entitled Comparison of Rights of Micro Focus Shareholders and Micro Focus ADS Holders and HPE Stockholders.
The Merger Agreement may be terminated at any time prior to the consummation of the Merger by the mutual written consent of HPE and Micro Focus. Also, subject to specified qualifications and exceptions, either HPE or Micro Focus may terminate the Merger Agreement at any time prior to the consummation of the Merger if:
• | any governmental authority of competent jurisdiction has promulgated, entered, enforced, enacted or issued or deemed applicable to the Merger or the other transactions contemplated by the Merger Agreement any law that permanently prohibits, restrains or makes illegal the Merger or the other transactions contemplated by the Merger Agreement; |
• | the Merger has not been consummated on or prior to March 7, 2018; or |
• | Micro Focus Shareholders fail to approve the Merger and specified related matters upon a vote taken at the meeting of Micro Focus Shareholders held for such purpose (including any adjournment or postponement thereof). |
In addition, subject to specified qualifications and exceptions, HPE may terminate the Merger Agreement if:
• | Micro Focus has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to HPE’s and Seattle’s obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018; |
• | the Micro Focus Board effects a Change in Recommendation; or |
• | Micro Focus has breached in any material respect specified obligations relating to non-solicitation or its obligation to hold the Micro Focus General Meeting to approve the Merger and specified related matters. |
In addition, subject to specified qualifications and exceptions, Micro Focus may terminate the Merger Agreement if HPE or Seattle has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to Micro Focus, Holdings or Merger Subs obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018.
In the event of termination of the Merger Agreement, the Merger Agreement will terminate without any liability on the part of any party except as described below under —Termination Payment and Expenses Payable in Certain Circumstances, provided that nothing in the Merger Agreement will relieve any party of liability for fraud or willful breach prior to termination.
Termination Payment and Expenses Payable in Certain Circumstances
The Merger Agreement provides that upon termination of the Merger Agreement under specified circumstances, Micro Focus is required to pay HPE a termination payment of $59,825,000 (the Termination Payment). The circumstances under which the Termination Payment will be payable are as follows:
• | if HPE or Micro Focus terminates the Merger Agreement as a result of the failure to obtain the required approval of Micro Focus Shareholders upon a vote taken at a meeting of Micro Focus Shareholders held for such purpose (including any adjournment or postponement thereof); |
• | if HPE terminates the Merger Agreement after Micro Focus has breached in any material respect specified obligations relating to non-solicitation or its obligation to hold a special meeting of Micro Focus Shareholders to approve the Merger and specified related matters; |
• | if HPE terminates the Merger Agreement following a Change in Recommendation (as defined below) by the Micro Focus Board; |
27
• | if (i) a Competing Proposal (as defined below) (replacing references to 20% in that definition with 50% for purposes of this Termination Payment trigger) with respect to Micro Focus is publicly announced or otherwise communicated to the Micro Focus Board and not publicly withdrawn at least five business days prior to the termination of the Merger Agreement; (ii) Micro Focus consummates, or enters into a definitive agreement with respect to, any Competing Proposal within twelve months of the termination of the Merger Agreement; and (iii) the Merger Agreement is terminated in either of the following circumstances: |
• | Micro Focus has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to HPE’s and Seattle’s obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018; or |
• | the outside date of March 7, 2018 is reached without a vote of the Micro Focus Shareholders to approve the Merger and related specified matters having occurred. |
In no event will Micro Focus be required to pay the Termination Payment more than once.
If accepted by HPE, payment of the Termination Payment will be HPEs sole and exclusive remedy for any losses or damages based upon, arising out of or relating to the Merger Agreement, except in the case of willful breach or fraud by Micro Focus.
In addition, because HPE consented in writing on or before October 31, 2016 to the completion of the Debt Financing on or before April 4, 2017, Seattle shall pay HPE the full amount of interest and ticking or other fees and any interest on borrowings incurred to finance such amounts actually paid by HPE (without reduction) no later than ten business days following the Closing Date.
Each party to the Merger Agreement has agreed to promptly make its respective filings under the HSR Act and to the Committee on Foreign Investment in the United States (CFIUS) and to make any other required or appropriate filings under any competition laws with respect to the Transactions and to supply the appropriate governmental authorities with any additional information and documentary material that may be requested pursuant to the HSR Act and such other laws as promptly as practicable. The parties have agreed to use reasonable best efforts to cause the expiration or termination of the applicable waiting periods under the HSR Act and the receipt of clearance from the CFIUS and approvals under other applicable competition laws as soon as practicable. As of the date hereof, Micro Focus and HPE have received all of the required antitrust and competition approvals to consummate the Transactions, including the termination of the waiting period under the HSR Act on November 28, 2016 and other regulatory approvals in the European Union, Turkey, Russia, South Africa and Brazil. In addition, CFIUS approved the Transactions on May 1, 2017. See the section entitled The Transactions—Regulatory Approvals.
IFRS 3 Business Combinations requires the use of acquisition accounting for business combinations. In applying acquisition accounting, it is necessary to identify both the accounting acquiree and the accounting acquiror. In a business combination effected through an exchange of equity interests, such as the Merger, the entity that issues the interests (Micro Focus in this case) is generally the acquiring entity. In identifying the acquiring entity in a combination effected through an exchange of equity interests, however, all pertinent facts and circumstances must be considered, including the following:
• | The relative voting interests in the combined entity after the combination. In accordance with the exchange ratio agreed to in the Merger Agreement, the HPE Stockholders as of the close of business on the Distribution Record Date will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. |
• | The composition of the governing body of the combined entity. At Closing, it is expected that the Micro Focus Board will consist of, at a minimum, the current Micro Focus Executive Chairman and Chief Financial Officer, Chris Hsu as Chief Executive Officer, Nils Brauckmann as Chief Executive Officer |
28
of SUSE, one executive of HPE designated by HPE as a Non-Executive Director and five independent Non-Executive Directors, of which three will be nominated by Micro Focus and two will be HPE Nominated Directors. An additional independent HPE Nominated Director will be appointed following Closing. All proposed director appointments must be approved by the Nomination Committee and will be subject to election by the Micro Focus Shareholders on an annual basis by a simple majority vote.
• | The composition of the senior management of the combined entity. Kevin Loosemore and Mike Phillips will continue as Executive Chairman and Chief Financial Officer, respectively, of the Enlarged Group following Closing. Chris Hsu (currently Executive Vice President and General Manager of HPE Software as well as Chief Operating Officer at HPE) will become Chief Executive Officer of the Enlarged Group at Closing. Stephen Murdoch (the current Chief Executive Officer of Micro Focus) will become the Chief Operating Officer of the Enlarged Group at Closing. Nils Brauckmann will continue as Chief Executive Officer of SUSE following Closing. |
Micro Focus management has determined that Micro Focus represents the accounting acquirer in this combination based on analysis of the facts and circumstances outlined above. Micro Focus will apply acquisition accounting to the acquired assets and assumed liabilities of Seattle upon consummation of the Merger. Upon completion of the Transactions, the historical financial statements will reflect only the assets and liabilities of Micro Focus.
U.S. Federal Income Tax Consequences of the Distribution and Merger
It is intended that the Distribution, taken together with the Contribution, qualify for U.S. federal income tax purposes as a reorganization under Sections 368(a)(1)(D), 361 and 355 of the Code, upon which no income, gain or loss is recognized by HPE or Seattle (except for certain items required to be recognized under Treasury Regulations regarding consolidated federal income tax returns). Provided that the Distribution and Contribution so qualify, HPE and HPE Stockholders will generally not recognize any taxable income, gain or loss as a result of the Distribution for U.S. federal income tax purposes.
The Merger is intended to qualify as a reorganization under Section 368(a) of the Code. However, pursuant to certain rules contained in Section 367(a) of the Code and the Treasury Regulations promulgated thereunder, U.S. Holders (as defined in the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger) will generally recognize gain, if any, but not loss, on the exchange of Seattle Shares for Micro Focus ADSs pursuant to the Merger.
The consummation of the Transactions is conditioned upon the receipt by HPE of the HPE Tax Opinion. An opinion of tax counsel neither binds the IRS nor precludes the IRS or the courts from adopting a contrary position. HPE intends to request a ruling from the IRS on certain issues related to the U.S. federal income tax consequences of the Distribution. The receipt of any such ruling is not a condition to HPEs and Seattles obligation to consummate the Transactions, and there can be no assurance that any or all of such requested rulings will be received. If the Distribution or certain related transactions fail to qualify for the intended tax treatment, HPE and/or HPE Stockholders may be subject to substantial U.S. federal income taxes.
Following Closing, Micro Focus is expected to continue to be treated as a foreign corporation for U.S. federal income tax purposes, but under Section 7874 of the Code, Micro Focus U.S. affiliates likely will be subject to certain adverse U.S. federal income tax rules as a result of the Merger. See the section entitled U.S. Federal Income Tax Consequences Relating to Section 7874 of the Code below for more information.
Because Micro Focus Shareholders will not participate in the Distribution or the Merger, Micro Focus Shareholders in their capacity as such will not recognize gain or loss upon either the Distribution or the Merger.
The U.S. federal income tax consequences of the Distribution and the Merger are described in more detail in the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger. The tax consequences to you of the Distribution and the Merger will depend on your particular circumstances. You should consult your own tax advisor regarding the particular tax consequences to you of the Transactions.
29
SUMMARY HISTORICAL, PRO FORMA AND SUPPLEMENTAL FINANCIAL DATA
Summary Historical Consolidated Financial Data of Micro Focus
The following table sets forth certain of Micro Focus consolidated financial data, prepared in accordance with IFRS. The summary historical consolidated financial data as of and for the years ended April 30, 2015, 2016 and 2017 are derived from Micro Focus audited consolidated financial statements, which are included elsewhere in this information statement/prospectus.
In the opinion of Micro Focus management, the unaudited data reflects all adjustments, consisting only of normal and recurring adjustments, necessary for a fair presentation of results as of and for these periods. The historical results are not necessarily indicative of results to be expected in any future period.
The summary historical consolidated financial data presented below should be read in conjunction with the section entitled Managements Discussion and Analysis of the Financial Condition and Results of Operations of Micro Focus and Micro Focus consolidated financial statements and the related notes thereto, which are included elsewhere in this information statement/prospectus. The summary historical consolidated financial data in this section are not intended to replace Micro Focus financial statements and the related notes thereto.
|
As of and for the Year
Ended April 30, |
||||||||
(in thousands)
|
2015
|
2016
|
2017
|
||||||
Statement of Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
834,539
|
|
$
|
1,245,049
|
|
$
|
1,380,702
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
$
|
140,547
|
|
$
|
230,174
|
|
$
|
237,169
|
|
Selling and distribution costs
|
|
290,475
|
|
|
416,333
|
|
|
467,084
|
|
Research and development expenses
|
|
113,292
|
|
|
164,646
|
|
|
180,104
|
|
Administrative expenses
|
|
142,989
|
|
|
138,962
|
|
|
202,902
|
|
|
|
687,303
|
|
|
950,115
|
|
|
1,087,259
|
|
Operating profit
|
|
147,236
|
|
|
294,934
|
|
|
293,443
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Share of results of associates
|
|
(788
|
)
|
|
(2,190
|
)
|
|
(1,254
|
)
|
Net finance costs
|
|
(55,021
|
)
|
|
(97,348
|
)
|
|
(95,845
|
)
|
Profit before tax
|
|
91,427
|
|
|
195,396
|
|
|
196,344
|
|
Income tax benefit (expense), net
|
|
10,024
|
|
|
(32,424
|
)
|
|
(38,541
|
)
|
Net income
|
$
|
101,451
|
|
$
|
162,972
|
|
$
|
157,803
|
|
Statement of Financial Position Data:
|
|
|
|
|
|
|
|
|
|
Total current assets
|
$
|
460,967
|
|
$
|
954,361
|
|
$
|
442,193
|
|
Total noncurrent assets
|
$
|
3,879,634
|
|
$
|
3,681,332
|
|
$
|
4,203,764
|
|
Total assets
|
$
|
4,340,601
|
|
$
|
4,635,693
|
|
$
|
4,645,957
|
|
Total current liabilities
|
$
|
988,030
|
|
$
|
1,061,797
|
|
$
|
944,697
|
|
Total noncurrent liabilities
|
$
|
2,074,510
|
|
$
|
1,980,168
|
|
$
|
2,087,770
|
|
Total liabilities
|
$
|
3,062,540
|
|
$
|
3,041,965
|
|
$
|
3,032,467
|
|
Total equity
|
$
|
1,278,061
|
|
$
|
1,593,728
|
|
$
|
1,613,490
|
|
Total liabilities and equity
|
$
|
4,340,601
|
|
$
|
4,635,693
|
|
$
|
4,645,957
|
|
30
Summary Historical Combined Financial Data of Seattle
The following table presents the summary historical combined financial data for Seattle, prepared in accordance with U.S. GAAP. The Combined Statements of Operations data and the Combined Statements of Cash Flows data for the six months ended April 30, 2016 and 2017 and the Combined Balance Sheets data as of April 30, 2017 are derived from Seattles unaudited Condensed Combined Financial Statements included elsewhere in this information statement/prospectus. The Combined Statements of Operations data and the Combined Statements of Cash Flows data for each of the three fiscal years ended October 31, 2016 and the Combined Balance Sheets data as of October 31, 2015 and 2016 set forth below are derived from Seattles audited Combined Financial Statements included elsewhere in this information statement/prospectus. The Combined Balance Sheets data as of October 31, 2014 is derived from Seattles audited Combined Financial Statements that are not included in this information statement/prospectus.
The summary historical combined financial data should be read in conjunction with the sections entitled Selected Historical Combined Financial Data of Seattle, Managements Discussion and Analysis of Financial Condition and Results of Operations of Seattle, and Seattles Combined and Condensed Combined Financial Statements and accompanying notes included elsewhere in this information statement/prospectus. Seattles summary historical combined financial data presented below may not be indicative of its future performance and does not necessarily reflect what Seattles financial position and results of operations would have been had it been operating as a standalone public company during the periods presented, and the results for the six months ended April 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year. The summary historical combined financial data in this section are not intended to replace Seattles Combined and Condensed Combined Financial Statements and the accompanying notes thereto.
|
As of and for the
Fiscal Years Ended October 31 |
As of and for the
Six Months Ended April 30 |
|||||||||||||
(in millions)
|
2014
|
2015
|
2016
|
2016
|
2017
|
||||||||||
Combined Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
3,933
|
|
$
|
3,622
|
|
$
|
3,195
|
|
$
|
1,554
|
|
$
|
1,406
|
|
Earnings (loss) from operations
|
|
415
|
|
|
321
|
|
|
238
|
|
|
109
|
|
|
(48
|
)
|
Net earnings (loss)
|
|
361
|
|
|
391
|
|
|
80
|
|
|
124
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
11,634
|
|
$
|
10,979
|
|
$
|
10,647
|
|
|
|
|
$
|
10,460
|
|
Total capital lease obligations
|
|
21
|
|
|
32
|
|
|
36
|
|
|
|
|
|
39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
$
|
708
|
|
$
|
235
|
|
$
|
123
|
|
$
|
253
|
|
$
|
176
|
|
Net cash (used in) provided by investing activities
|
|
(16
|
)
|
|
40
|
|
|
211
|
|
|
222
|
|
|
(17
|
)
|
Net cash used in financing activities
|
|
(813
|
)
|
|
(322
|
)
|
|
(354
|
)
|
|
(455
|
)
|
|
(122
|
)
|
31
Summary Unaudited Pro Forma Condensed Combined Financial Information
The following table presents the summary unaudited pro forma condensed combined financial information of Micro Focus and Seattle, based upon the historical financial statements of each of Micro Focus and Seattle included elsewhere in this information statement/prospectus, after giving effect to the Merger, as further described in the section entitled The Transactions—Transaction Steps.
The unaudited pro forma condensed combined statement of comprehensive income for the year ended April 30, 2017 gives effect to the Merger as if it had occurred on May 1, 2016, the first day of Micro Focus fiscal year ended April 30, 2017, while the unaudited pro forma condensed combined statement of financial position as of April 30, 2017 gives effect to the Merger as if it had occurred on that date. The unaudited pro forma condensed combined financial information does not include adjustments for other acquisitions completed by Micro Focus or Seattle during the periods presented, as these acquisitions were not considered significant individually or in the aggregate.
The summary unaudited pro forma condensed combined financial information is only a summary and does not purport to be complete, and should be read in conjunction with:
• | The section entitled Unaudited Pro Forma Condensed Combined Financial Information; |
• | Micro Focus’ audited consolidated financial statements and related notes as of and for the year ended April 30, 2017, as well as the section entitled Management’s Discussion and Analysis of the Financial Condition and Results of Operations of Micro Focus; and |
• | Seattle’s audited combined financial statements and related notes as October 31, 2016 and 2015 and for the fiscal years ended October 31, 2016, 2015 and 2014, and Seattle’s unaudited condensed combined financial statements and related notes as of and for the six months ended April 30, 2017, as well as the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations of Seattle. See Index to Financial Statements. |
The unaudited pro forma condensed combined financial information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the Merger occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Enlarged Group will experience after the completion of the Merger. The unaudited pro forma condensed combined financial information does not reflect the cost of any integration activities or benefits from the Merger including potential synergies that may be derived in future periods.
Micro Focus Unaudited Pro Forma Condensed Combined Statement of Comprehensive Income for the Year Ended April 30, 2017
(In millions of U.S. dollars, except for per share data)
|
Historical Micro
Focus for the year ended April 30, 2017 |
Adjusted Seattle
for the twelve months ended April 30, 2017 |
Pro forma merger
adjustments |
Total pro forma
combined |
||||||||
Revenue
|
$
|
1,381
|
|
$
|
3,053
|
|
$
|
—
|
|
$
|
4,434
|
|
Cost of sales comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excluding amortization of capitalized development costs and acquired technology intangibles)
|
|
(146
|
)
|
|
(823
|
)
|
|
—
|
|
|
(969
|
)
|
Amortization of product development costs
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
(22
|
)
|
Amortization of acquired technology intangibles
|
|
(69
|
)
|
|
(97
|
)
|
|
(62
|
)
|
|
(228
|
)
|
Cost of sales
|
|
(237
|
)
|
|
(920
|
)
|
|
(62
|
)
|
|
(1,219
|
)
|
Gross profit
|
$
|
1,144
|
|
$
|
2,133
|
|
$
|
(62
|
)
|
$
|
3,215
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution costs
|
|
(467
|
)
|
|
(994
|
)
|
|
(437
|
)
|
|
(1,898
|
)
|
Research and development expenses comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditure incurred in the year
|
|
(208
|
)
|
|
(526
|
)
|
|
—
|
|
|
(734
|
)
|
Capitalization of product development costs
|
|
28
|
|
|
—
|
|
|
—
|
|
|
28
|
|
Research and development expenses
|
|
(180
|
)
|
|
(526
|
)
|
|
—
|
|
|
(706
|
)
|
Administrative expenses
|
|
(203
|
)
|
|
(546
|
)
|
|
321
|
|
|
(428
|
)
|
Operating profit
|
$
|
294
|
|
$
|
67
|
|
$
|
(178
|
)
|
$
|
183
|
|
32
(In millions of U.S. dollars, except for per share data)
|
Historical Micro
Focus for the year ended April 30, 2017 |
Adjusted Seattle
for the twelve months ended April 30, 2017 |
Pro forma merger
adjustments |
Total pro forma
combined |
||||||||
Share of results of associates and gain on dilution of investment
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Finance costs
|
|
(97
|
)
|
|
(72
|
)
|
|
(148
|
)
|
|
(317
|
)
|
Finance income
|
|
1
|
|
|
13
|
|
|
—
|
|
|
14
|
|
Profit (loss) before tax
|
|
197
|
|
|
8
|
|
|
(326
|
)
|
|
(121
|
)
|
Taxation
|
|
(39
|
)
|
|
(123
|
)
|
|
108
|
|
|
(54
|
)
|
Profit (loss) for the period
|
$
|
158
|
|
$
|
(115
|
)
|
$
|
(218
|
)
|
$
|
(175
|
)
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity shareholders of the parent
|
|
158
|
|
|
(115
|
)
|
|
(218
|
)
|
|
(175
|
)
|
Noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Profit (loss) for the period
|
$
|
158
|
|
$
|
(115
|
)
|
$
|
(218
|
)
|
$
|
(175
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to equity shareholders of the parent:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.69
|
|
|
|
|
|
|
|
$
|
(0.40
|
)
|
Diluted
|
$
|
0.67
|
|
|
|
|
|
|
|
$
|
(0.40
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
229
|
|
|
|
|
|
206
|
|
|
435
|
|
Diluted
|
|
237
|
|
|
|
|
|
198
|
|
|
435
|
|
33
Micro Focus Unaudited Pro Forma Condensed Combined Statement of Financial Position as of April 30, 2017
(In millions of U.S. dollars)
|
Historical Micro
Focus as of April 30, 2017 |
Adjusted Seattle as
of April 30, 2017 |
Pro forma
merger adjustments |
Total pro forma
combined as of April 30, 2017 |
||||||||
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
2,829
|
|
$
|
8,095
|
|
$
|
(4,081
|
)
|
$
|
6,843
|
|
Other intangible assets
|
|
1,089
|
|
|
339
|
|
|
6,196
|
|
|
7,624
|
|
Property, plant and equipment
|
|
41
|
|
|
147
|
|
|
44
|
|
|
232
|
|
Investments in associates
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Long-term pension assets
|
|
22
|
|
|
—
|
|
|
—
|
|
|
22
|
|
Other non-current assets
|
|
3
|
|
|
139
|
|
|
—
|
|
|
142
|
|
Deferred tax assets
|
|
208
|
|
|
964
|
|
|
—
|
|
|
1,172
|
|
|
|
4,204
|
|
|
9,684
|
|
|
2,159
|
|
|
16,047
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
—
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Trade and other receivables
|
|
289
|
|
|
604
|
|
|
—
|
|
|
893
|
|
Current tax receivables
|
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
Cash and cash equivalents
|
|
151
|
|
|
167
|
|
|
285
|
|
|
603
|
|
Assets classified as held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
442
|
|
|
776
|
|
|
285
|
|
|
1,503
|
|
Total assets
|
$
|
4,646
|
|
$
|
10,460
|
|
$
|
2,444
|
|
$
|
17,550
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
$
|
170
|
|
$
|
499
|
|
$
|
6
|
|
$
|
675
|
|
Borrowings
|
|
71
|
|
|
16
|
|
|
—
|
|
|
87
|
|
Provisions
|
|
20
|
|
|
43
|
|
|
—
|
|
|
63
|
|
Current tax liabilities
|
|
43
|
|
|
153
|
|
|
—
|
|
|
196
|
|
Deferred income
|
|
641
|
|
|
750
|
|
|
(57
|
)
|
|
1,334
|
|
|
|
945
|
|
|
1,461
|
|
|
(51
|
)
|
|
2,355
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income
|
|
224
|
|
|
164
|
|
|
(27
|
)
|
|
361
|
|
Borrowings
|
|
1,490
|
|
|
23
|
|
|
3,278
|
|
|
4,791
|
|
Retirement benefit obligations
|
|
31
|
|
|
80
|
|
|
—
|
|
|
111
|
|
Long-term provisions
|
|
12
|
|
|
6
|
|
|
—
|
|
|
18
|
|
Other non-current liabilities
|
|
4
|
|
|
31
|
|
|
—
|
|
|
35
|
|
Deferred tax liabilities
|
|
327
|
|
|
5
|
|
|
1,865
|
|
|
2,197
|
|
|
|
2,088
|
|
|
309
|
|
|
5,116
|
|
|
7,513
|
|
Total liabilities
|
|
3,033
|
|
|
1,770
|
|
|
5,065
|
|
|
9,868
|
|
Net assets
|
|
1,613
|
|
|
8,690
|
|
|
(2,621
|
)
|
|
7,682
|
|
Capital and reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
40
|
|
|
—
|
|
|
22
|
|
|
62
|
|
Share premium account
|
|
192
|
|
|
—
|
|
|
—
|
|
|
192
|
|
Parent company investment
|
|
—
|
|
|
8,720
|
|
|
(8,720
|
)
|
|
—
|
|
Merger reserve
|
|
338
|
|
|
—
|
|
|
6,607
|
|
|
6,945
|
|
Capital redemption reserve
|
|
163
|
|
|
—
|
|
|
—
|
|
|
163
|
|
Retained earnings/(deficit)
|
|
902
|
|
|
—
|
|
|
(560
|
)
|
|
342
|
|
Foreign currency translation reserve/(deficit)
|
|
(23
|
)
|
|
(30
|
)
|
|
30
|
|
|
(23
|
)
|
Total equity attributable to owners of the parent
|
|
1,612
|
|
|
8,690
|
|
|
(2,621
|
)
|
|
7,681
|
|
Non-controlling interests
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Total equity
|
$
|
1,613
|
|
$
|
8,690
|
|
$
|
(2,621
|
)
|
$
|
7,682
|
|
|
34
Summary Comparative Historical, Pro Forma and Supplemental Per Share Data
The following table sets forth selected per share data for Micro Focus on a historical basis. It also includes unaudited pro forma combined per share data for Micro Focus, which combines the data of Micro Focus and Seattle on a pro forma basis giving effect to the Merger. This data does not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the Merger. This data also does not include any integration costs Micro Focus or Seattle may incur related to the Merger as part of combining their respective operations. This comparative historical and pro forma per share data is being provided for illustrative purposes only. Micro Focus and Seattle may have performed differently had the Merger and the other Transactions occurred prior to the periods or as of the date presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Micro Focus and Seattle been combined during the periods or as of the date presented or of the future results or financial condition of Micro Focus or Seattle to be achieved following the consummation of the Merger and the other Transactions.
This data has been prepared in accordance with IFRS and should be read in conjunction with Micro Focus and Seattles historical financial statements and accompanying notes included elsewhere in this information statement/prospectus as well as the section entitled Unaudited Pro Forma Condensed Combined Financial Information. See Index to Financial Statements.
|
As of and for the
Year Ended April 30, 2017 |
||
Micro Focus Historical Per Share Data:
|
|
|
|
Net profit per basic ordinary share
|
$
|
0.69
|
|
Net profit per diluted ordinary share
|
|
0.67
|
|
Cash dividends per share
|
|
0.88
|
|
Book value per share
|
|
7.04
|
|
Micro Focus Unaudited Pro Forma Combined Per Share Data:
|
|
|
|
Net loss per basic ordinary share
|
$
|
(0.40
|
)
|
Net loss per diluted ordinary share
|
|
(0.40
|
)
|
Cash dividends per share
|
|
0.88
|
|
Book value per share(1)
|
|
17.66
|
|
(1) | Book value per share uses equity on a pro forma basis at April 30, 2017, divided by weighted average pro forma shares outstanding at April 30, 2017. |
35
There are risks associated with owning Micro Focus ADSs. In addition to the other information included elsewhere in this information statement/prospectus, including in the section entitled Cautionary Statement on Forward-Looking Statements, you should carefully consider the following risk factors. The risks and uncertainties described below are not the only risks and uncertainties that Micro Focus, Seattle, the Enlarged Group and holders of Micro Focus ADSs may face. Additional risks and uncertainties not presently known to Micro Focus or HPE, or that Micro Focus or HPE currently considers immaterial, could also negatively affect the business, results of operation, financial condition and prospects of Micro Focus, Seattle or the Enlarged Group, as well as the value of Micro Focus ADSs.
The order in which the following risk factors are presented does not necessarily reflect the likelihood of their occurrence or the relative magnitude of their potential material adverse effect on the business, financial condition, results of operation or prospects of the Enlarged Group or the market price of the Micro Focus Shares or Micro Focus ADSs.
The information given is as of the date of this information statement/prospectus, and any forward-looking statements are made subject to the reservations specified under the section entitled Cautionary Statement on Forward-Looking Statements.
For the purposes of this Risk Factors section, references to the Group shall (unless the context shall otherwise require) mean prior to Closing, the Micro Focus Group and, following Closing, the Enlarged Group.
Risks Relating to the Business of the Group
The Group is dependent upon its senior management team and other key employees, and it may not be able to attract or retain sufficiently qualified management and key employees following Closing.
Micro Focus believes the Groups success is dependent upon its ability to attract and retain senior management as well as other key employees, such as sales management, product management and development personnel that provide expertise and experience critical to the implementation of the Groups strategy. There is and will be competition for qualified personnel in the Groups markets, and the number of people with the appropriate skills and experience is limited. Furthermore, the U.K. government is currently considering a number of changes to the U.K.s corporate governance framework, including with respect to executive compensation. Such changes could limit the ability of the Group to attract or retain qualified senior management, which could have a material adverse effect on the business, results of operation, financial condition and prospects of the Group.
In addition, while the Group has taken steps, and intends to take further steps, to reduce any adverse effects on its key employees resulting from the Merger, the Merger could impair its ability to attract, retain and motivate key personnel. The departure of key management or other employees of the Micro Focus Group or HPE Software may materially and adversely affect the ability of the Group to realize the benefits and synergies of the Merger and could cause its customers, suppliers and others that deal with the Group to seek to change existing business relationships.
It is also common in the software industry for employees to enter into non-compete and confidentiality agreements with their employers. The Group or the employees it hires may be subject to claims related to prior agreements with such restrictions, which may delay the impact new employees may be able to have on the Group or otherwise delay the Groups ability to grow its teams. Furthermore, whilst much of the Groups proprietary know-how will be documented, there can be no guarantee that members of the technical team who contribute valuable skills and know-how to the business and who may be subject to contractual confidentiality agreements in favor of the Group, will not join its competitors or otherwise compete with the Group in the future. Failure to retain the services of any of these employees may have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups operational and financial flexibility may be restricted by its level of indebtedness and covenants and financing costs could increase or financing could cease to be available in the long term.
As a result of increased borrowing in relation to the Transactions, the $2.5 billion Seattle Payment to HPE and the Micro Focus Return of Value, the Micro Focus Board estimates that the initial pro forma net debt to Facility EBITDA ratio of the Group as of Closing will be approximately 3.3x Facility EBITDA and is targeting to reduce
36
this to its stated target of 2.5x Facility EBITDA within two years following Closing. However, in the event of material disruptions to cash flows, there is a risk that the Groups leverage may not decrease to the intended target at the anticipated rate or at all, or that the Group will not be able to obtain future financing on favorable terms or at all. Under such circumstances, the Micro Focus Board has stated that the Group would be precluded from considering the buyback of any Micro Focus Shares or any further returns of value to Micro Focus Shareholders, other than normal dividends.
Although, in the opinion of Micro Focus, the Groups expected available liquidity and working capital will be sufficient for the next 12 months following the date of this document, the Group is subject to the risk that, in the longer term (in relation to which the Groups business prospects and capital requirements are harder to predict) it may be unable to generate sufficient cash flow to service the indebtedness under the terms of the New Facilities.
The Groups level of indebtedness and the covenants contained in the New Facilities may have important consequences for the Groups future prospects and financial condition including:
• | increasing the Group’s vulnerability to both general and industry-specific adverse economic conditions and its flexibility to respond to such conditions; |
• | limiting the Group’s flexibility in planning for, or reacting to, changes in technology, customer demand and competitive pressures; |
• | placing the Group at a disadvantage compared to its competitors, who may be less leveraged and restricted by financial covenants than the Group; |
• | causing the Group to dedicate a substantial portion of its cash flow from operations to service the indebtedness and causing it to reprioritize the uses to which its capital is put to the potential detriment of the Group’s other business needs, which, depending on the level of the Group’s borrowings, prevailing interest rates and exchange rates fluctuations, could result in reduced funds being available for expansion, dividend payments, returns of value and other general corporate purposes; |
• | restricting the payment of dividends; |
• | increasing the cost of servicing the Group’s borrowings in the event such covenants are renegotiated; and |
• | materially and adversely affecting investor perception of the Group, leading to a decline in the price of its securities. |
The Groups access to debt, equity and other financing as a source of funding for its operations and for refinancing maturing debt will be subject to many factors, many of which will be beyond its control. The type, timing and terms of any future financing will depend on the Groups cash needs and the then prevailing conditions in the financial markets, including in the corporate bond, term loan and equity markets. There is a risk that these conditions will not be favorable at the time any refinancing is required to be undertaken or that the Group will not be able to complete any such refinancing in a timely manner or on favorable terms, if at all. An increase in the cost, or lack of availability, of financing and capital could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group is exposed to interest rate risk related to its variable rate indebtedness, which could cause its indebtedness service obligations to increase significantly.
Interest rates may and are expected to increase in the future. As a result, interest rates on the New Facilities or other variable rate debt offerings could be higher or lower than current levels. If interest rates increase, the Groups debt service obligations on its variable rate indebtedness would increase even though the amount borrowed remained the same, and the Groups net income and cash flows, including cash available for servicing its indebtedness, would correspondingly decrease. In addition, the Group does not currently use interest rate swaps to manage its cash flow interest rate risk due to low market rates. Interest rate hikes in the future by the Federal Reserve, the Bank of England and various other governmental bodies in the countries where the Group has, or will have, operations could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
37
The Group may incur materially significant costs if it breaches its covenants under the New Facilities.
The New Facilities will be subject to a number of restrictive covenants, including a first lien net leverage covenant (which covenant is determined as the ratio of (a) total debt of the Group that is secured on a first lien basis (net of unrestricted cash of the Group) to (b) consolidated Adjusted EBITDA of the Group) that will apply only when 35% of the Revolving Credit Facility (less certain outstanding letters of credit) are drawn at the end of any fiscal quarter. Although the Micro Focus Board believe that the current financial condition, cash generation and capital reserves of the Group are sufficient to enable it not to trigger, or to comply with, the first lien net leverage covenant for the next 12 months from the date of this document, deterioration in the Groups primary markets created by, for example, continued economic uncertainty or a return to a recessionary economic environment may have a material adverse effect on its earnings, which, in the longer term, could affect the Groups ability to comply with the first lien net leverage covenant or other covenants under the New Facilities. There can be no assurance that the Group can continue to comply with these covenants in the longer term, and to the extent that the Group is in breach of any of these covenants, this could result in the New Facilities becoming immediately repayable. In order to remain in compliance with these covenants and depending on the future performance of its business, the Group may be required to take actions that it would not otherwise have chosen or may be unable to pursue opportunities it otherwise would have pursued, such as possible acquisition opportunities. In addition, any future debt financing that the Group may need to obtain may impose additional restrictions on its financing and operating activities. Any of the above factors could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group is dependent upon its intellectual property, and its rights to such intellectual property may be challenged or infringed by others or otherwise prove insufficient to protect its business.
The Group relies on patent, trade secret, trademark and copyright law to protect its intellectual property. Failure to protect, maintain and enforce the Groups existing intellectual property rights or pursue registrations for new intellectual property rights may result in the loss of the Groups exclusive right to use technologies which are included in its software products or are otherwise used in its businesses. Most of the Groups intellectual property is not covered by a patent or patent application and includes trade secrets and other know-how. In addition, some of the Groups intellectual property includes technologies and processes that may be similar to the technologies and processes of third parties that are protected by patent, copyright or trade secret law.
It may also be possible for an unauthorized third party to reverse engineer or decompile the Groups software products, and the Group may be unable to detect the unauthorized use of, or take appropriate steps to enforce, its intellectual property rights, particularly in certain international markets. Litigation may be required to enforce such intellectual property rights and such litigation can be time consuming and expensive and there can be no certainty as to the outcome of any such legal proceedings once initiated. If the Group does not adequately protect its right to use its technologies, it may have to pay others for rights to use their intellectual property, pay damages for infringement or misappropriation or be enjoined from using such intellectual property.
The Groups intellectual property is subject to complex factual and legal issues that may give rise to uncertainty as to the validity, scope and enforceability of a particular intellectual property right. Effective protection for the software of the Group may be unavailable or limited or not applied for in countries in which the Group operates. The Group will seek to protect its proprietary information and trade secrets that may not be patented or patentable and to secure its rights to copyright and patentable inventions by confidentiality agreements and, if applicable, inventors rights agreements with its customers, partners and employees. These agreements may be breached, and the Group may not have adequate means to remedy any such breach. The inability of the Group to protect its intellectual property, or enforce its rights against third parties, could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups products and services depend in part on intellectual property and technology licensed from third parties, and third party claims of intellectual property infringement against the Group may disrupt its ability to sell its products and services.
Many of the Groups product offerings and services rely on technologies developed by, and intellectual property licensed from, third parties, including through both proprietary and Open Source software licenses. In order to remain in compliance with the terms of its third party licenses, the Group must carefully monitor and manage its use of third party technology and intellectual property, including both proprietary and Open Source license terms
38
that may require the licensing or public disclosure of the Groups own intellectual property, including parts of its source code, without compensation or on undesirable terms.
In addition, these third party technologies and licenses may over time become incompatible with the Groups products and services, or the Groups relationship with the third party could deteriorate and lead to the Group facing legal or business disputes with licensors that may threaten or lead to the disruption of inbound licensing relationships. If this were to occur, there can be no assurance that a comparable third party license or agreement would be available to the Group, or that the Group could otherwise procure the third party technology and intellectual property it requires, in the future on terms that are acceptable or that would allow its product offerings and services to remain competitive, which could have a material adverse effect on the Groups business, financial condition, results of operation and prospects.
In addition, there is a risk that the Group may inadvertently infringe the intellectual property rights of a third party. Claims of intellectual property infringement could require the Group to redesign affected products, enter into costly settlement or license agreements with the third party, pay costly damage awards or face a temporary or permanent injunction prohibiting the Group from importing, marketing or selling certain of its products. There is also a risk that such claims against the Group could result in litigation, as has been the case with the ongoing patent infringement actions brought against HPE by Realtime Data LLC as described in the section entitled Information on HPE Software—Litigation, Proceedings and Investigations. Any intellectual property claims or litigation involving the Group, even those without merit or with a favorable outcome for the Group, can be time consuming, costly to defend against and divert managements attention and resources away from the Groups business. As a result, any such intellectual property claims against, or litigation involving, the Group could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Some of the Groups products utilize Open Source technology which is dependent upon third party developers.
The Group uses Open Source technologies which often rely on a number of largely informal communities of independent Open Source software programmers to develop and enhance the Groups enterprise technologies. If these groups of programmers fail to continue to develop and enhance Open Source technologies adequately, the Group would have to rely on other parties to develop and enhance its offerings or the Group would need to develop and enhance its offerings with its own resources. The Group cannot predict whether further developments and enhancements to these technologies would be available from reliable alternative sources. In either event, the Groups development expenses could be increased and its technology release and upgrade schedules could be delayed. Moreover, if third party software programmers fail to continue to develop or enhance Open Source technologies adequately, the development and adoption of these technologies could be stifled and the Groups offerings could become less competitive. Delays in developing, completing or delivering new or enhanced offerings could result in delayed or reduced revenue for those offerings and could also materially and adversely affect customer acceptance of those offerings.
Moreover, different groups of Open Source software programmers compete with one another to develop new technology. Typically, the technology developed by one group will become more widely used than that developed by others. If the Group acquires, or adopts, new technology and incorporates it into its offerings but competing technology becomes more widely used or accepted, the market appeal of the Groups offerings may be reduced and that could harm the Groups reputation, diminish its brands and materially and adversely affect the business, financial condition, results of operation and prospects of the Group.
The Groups success will depend on its investment in and development of products and services that continue to meet the needs of its customers.
The success of the Group depends on its ability to meet the ongoing needs of its customers by continuing to invest in and develop its products and services. If the Groups products and services do not meet its customers requirements, they will seek alternative solutions, potentially resulting in the loss of new revenue opportunities and the cancellation of existing contracts. The Group must make long-term investments, develop, obtain and protect appropriate intellectual property and commit significant research and development and other resources before knowing whether its predictions will accurately reflect customer demand for its products, services and solutions. Any failure to make such investments or take such action, or any failure to accurately predict customer demand, control research and development costs or execute the Groups product development strategy could harm its business and financial performance.
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The Group has and, following Closing, will have a significant number of products and services at differing stages of their life cycle and the extent of investment in each product will need to be managed and prioritized considering its expected future prospects. Failure to manage and develop its current and, following Closing, enlarged portfolio of products may damage the long-term growth prospects of the Group. Product development and enhancement involves a significant commitment of time and resources and is subject to a number of risks and challenges, including:
• | managing the length of the development cycle, which may be longer than anticipated; |
• | extensive testing compatibility with a wide variety of application software and hardware devices and the need to ensure the quality of products prior to their distribution; |
• | incorporating acquired products and technologies into the Group’s portfolio; |
• | adapting to (and anticipating) emerging and evolving industry standards and technological developments by the Group’s competitors and customers; |
• | continuously updating the skill sets of employees of the Group with respect to technological developments and the demands of customers; |
• | managing new product and service strategies; and |
• | accurately forecasting volumes, mixes of products and configurations that meet diverse customer requirements. |
Any resulting delays in the development of new or upgrades to existing products may adversely impact customer acceptance of such products and result in delayed or reduced revenue for the Group.
In addition, the Group must develop and expand its sales channels and ability to deliver its products. For example, the Groups success is dependent on its ability to address the market shift to SaaS and other go-to-market execution challenges. To be successful in addressing these challenges, the Group must improve its go-to-market execution with multiple product delivery models, which better address customer needs and achieve broader integration across the Groups overall product portfolio as it works to capitalize on important market opportunities in cloud computing, big data, enterprise security, applications and mobility. Improvements in SaaS delivery, however, do not guarantee that the Group will achieve increased revenue or profitability. SaaS solutions often have lower margins than other software solutions throughout the subscription period and customers may elect to not renew their subscriptions upon expiration of their agreements.
If the Group is not successful in managing these risks and challenges, or if its products and services are not technologically competitive or do not achieve market acceptance, it could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group operates in a number of competitive markets and success in those markets depends on a variety of factors. Should the Group not be able to compete effectively against its competitors then it is likely to lose market share which may result in decreased sales and weaker financial performance.
The Group currently operates in, and following Closing will operate in an even greater number of, competitive markets. Many of the Groups competitors will have, or may have, greater brand recognition, larger customer bases or greater financial, sales and marketing, distribution, technical and other resources than the Group. As a result, the Groups competitors may be able to respond more quickly to market demands, to devote greater resources to the development, promotion, sale and deployment of their products than the Group or to exert negative pricing pressure on the markets in which the Group operates. Certain of these competitors may expand their product and service offerings and emerging competitors could introduce new technologies and business models that compete directly with the Group. The widespread inclusion of solutions that perform the same or similar functions as the Groups products within other companies bundled or individual software products, or services similar to those provided by the Group, could reduce the perceived need among customers for the Groups products and services or otherwise render its products obsolete and unmarketable. The Group could be adversely affected through declining product sales if it fails to assess and understand the competitive landscape adequately and thereby identify competitive risks and threats to its business.
In addition, the software industry is currently undergoing consolidation as certain software companies seek to offer more extensive suites and integrated solutions as well as broader arrays of individual software products and
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services, as well as integrated products and solutions. The Groups competitors, as well as partners and other parties that are not currently in competition with the Group, may establish financial and strategic relationships among themselves or with existing or potential customers or other third parties, which may have the effect of reducing the ability of the Group to promote and sell its products successfully. This trend could create opportunities for large enterprise software companies to increase their market share through the acquisition of companies that dominate certain lucrative market niches or that have loyal installed customer bases. In doing so, these competitors may be able to reduce prices on software that competes with the Groups solutions, in part by leveraging their larger economies of scale. Consolidation may also permit competitors of the Group to offer a broader suite of individual products as well as more comprehensive bundled solutions, including hardware, software and services. This industry consolidation may result in stronger competitors that are better able to compete, either through offering a particularly strong individual solution in a specialized area or as sole-source vendors for customers, and could lead to more variability in the Groups operating results due to lengthening of the customer evaluation process, increased pricing pressure and/or loss of business to these larger competitors, which may have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The IT environments of both the Group and its customers may be subject to hacking or other cybersecurity threats, which may harm customer relationships and the market perception of the effectiveness of the Groups products.
There is a risk of actual or perceived breaches of the Groups and its customers IT security systems resulting in unauthorized access to data centers or other parts of IT environments containing confidential information. The Group incurs, and expects to continue to incur, substantial expense to protect itself, its products and its customers, against, and to remedy, security breaches and their consequences. Despite the Group implementing such protections, it is possible that computer circumvention capabilities, new discoveries or advances or other developments, including the Groups own acts or omissions, could result in a party (whether internal, external, an affiliate or unrelated third party) compromising or circumventing the security systems of either the Group or its customers and obtaining access to sensitive customer and personal data or the Groups proprietary information or causing significant disruptions to the Groups operations. The Group cannot guarantee that its security measures will prevent data breaches or that its customers will be successful in implementing security systems that prevent data breaches. Regardless of whether a breach (whether actual or perceived) is attributable to the Groups products, such a breach could cause contractual disputes and negatively affect the market perception of the effectiveness of the Groups products and reputation. Alleviating any of these problems could require significant expenditures of capital and diversion of resources from development efforts, result in the Group losing existing or potential customers and/or result in the Group being subject to legal action by customers or government authorities, any of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups business and products are dependent on the availability, integrity and security of its IT systems.
The Groups IT systems and related software applications are integral to its business and the Group relies on controls and systems to ensure data integrity of critical business information and the proper operation of the Groups systems and networks. Lack of data integrity could create inaccuracies and hinder the Groups ability to analyze its business and make informed business decisions. Despite network security, disaster recovery and systems management measures in place, the Group may encounter unexpected general systems outages or failures that may affect its ability to conduct research and development, provide maintenance and support of its products, manage the Groups contractual arrangements, accurately and efficiently maintain the Groups books and records, record its transactions, provide critical information to its management and prepare its financial statements. Additionally, any unexpected systems outages or failures may require additional personnel and financial resources, disrupt the Groups business or cause delays in the reporting of its financial results.
The Group may also be required to modify, enhance, upgrade or implement new systems, procedures and controls to reflect changes in its business or technological advancements, which could cause it to incur additional costs and require additional management attention, placing burdens on the Groups internal resources. The Group also outsources certain of its IT-related functions to third parties that are responsible for maintaining their own network security, disaster recovery and systems management procedures. Any of the above factors could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
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Failure to adequately protect personal information could have a material adverse effect on the Groups business.
The Group and its customers rely on a number of its products (such as email and communications and identity management solutions) to store and access personal information and data, and a wide variety of local, state, national, and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and other processing of such information and data. These data protection and privacy-related laws and regulations are becoming increasingly restrictive and complex and may result in greater regulatory oversight and increased levels of enforcement and sanctions. For example, the European Unions General Data Protection Regulation will come into force on May 25, 2018 and will be a major reform of the EU legal framework on the protection of personal data. This increasingly restrictive and complex legal framework has resulted in a greater compliance burden for businesses with customers in Europe, such as the Groups, and could further increase compliance costs for the Group going forward. The Groups failure to comply with this or other applicable laws and regulations, or to protect such personal information and data, could result in significant litigation or enforcement action against the Group, including fines, imprisonment of company officials and public censure, claims for damages by customers and other affected individuals, damage to the Groups reputation and loss of goodwill (both in relation to existing customers and prospective customers), any of which could have a material adverse effect on the Groups business, financial condition, results of operation and prospects.
As personal privacy and data protection become increasingly sensitive issues for regulators and customers, the Group may also become exposed to potential liabilities as a result of differing views between regulators or courts on the protections that should apply to personal data. These and other privacy and security developments are difficult to anticipate and could materially adversely affect the business, financial condition, results of operation and prospects of the Group.
The Group is dependent upon the effectiveness of its sales force and distribution channels to maintain and grow license, maintenance and consultancy sales.
The Group is dependent on the success of its sales force, and its failure to develop the skill sets of its sales personnel may lead to poor sales performance. Furthermore, weak organizational alignment and inadequate incentivization may lead to poor performance among employees of the Group. From time to time, the Group may make changes to the organizational structure and compensation plans of the Groups sales organizations, each of which may increase the risk of sales personnel turnover. To the extent that the Group experiences significant turnover within its direct sales force or sales management, there is a risk that the productivity of the sales force would be negatively impacted which could lead to revenue declines. In addition, it can take time to implement new sales management plans and to effectively recruit and train new sales personnel.
In addition to its sales force, the Group uses a variety of other distribution channels to sell its products, subscriptions and services, and the Groups product marketing programs and strategies to exploit channel opportunities may not be effective and may reduce the prospects for additional revenue streams going forward for the Group. Whilst it is expected that a significant proportion of the Groups sales will be derived from direct sales channels, the Group will continue to depend on indirect channel distributors such as packaged application providers, OEMs, systems integrators and resellers.
Systems integrators, OEMs and packaged application providers develop their respective customer bases and incorporate the software technology of the Group into the software and services such distributors offer to their respective customers. The Groups business, financial condition, results of operation and prospects could be materially adversely affected if systems integrators, OEMs or packaged application providers:
• | renegotiate existing contractual arrangements; |
• | use a competitor’s technology; |
• | are unable to attract additional customers, maintain existing customer relationships or effectively market the solutions of the Group; |
• | engage in inappropriate practices without the knowledge of the Group which could result in penalties and/or reputational damage to the Group; |
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• | are unable to deliver the same quality or standard of services that the Group provides to its direct customers, which may require the Group to engage with its customers directly (and incur additional costs to the Group) to protect the Group’s product and services standards and reputation; |
• | are in conflict with the activities of the Group’s direct sales and marketing activities; |
• | experience financial difficulties that may impact their ability to market the Group’s products and may lead to delays, or even default, in their payment obligations to the Group; and/or |
• | fail to provide accurate and timely reporting of the Group’s channel sales. |
In addition, the Group will rely on third parties to sell, distribute and support its software products in territories where the Group does not have a physical presence. If the sales and marketing strategy for the Group were to change in the future, the Group may need to make further investment in sales staff in certain geographic areas. Should any direct or indirect sales channel suffer from a decreased level of effectiveness, the ability of the Group to reach customers and thereby sell its products may be impaired, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group must maintain high customer satisfaction levels in order to retain and grow its customer base.
The Groups ability to maintain customer satisfaction depends in part on the quality of its professional service organization and technical and other support services, including the quality of the support provided on its behalf by certain partners. Once products are deployed within the IT environments of the Groups customers, these customers depend on the Groups ongoing technical and other support services, as well as the support of the Groups channel partners, to resolve any issues relating to the implementation and maintenance of the Groups products. If the Group or its channel partners do not effectively assist its customers in deploying its products, succeed in helping its customers quickly resolve post-deployment issues, or provide effective ongoing support, the Group may be unable to sell additional products to existing customers and its reputation with potential customers could be damaged. As a result, the failure by the Group to maintain high-quality customer support could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups business and reputation may be harmed by errors or defects in its products.
Software produced by the Group may contain undetected errors or defects when first introduced or as upgrades or newer versions are released. The Group may lose revenue as a result of product defects or errors and suffer damage to its reputation. As a result, the Group may incur significant product development, support and warranty costs and be subject to product liability claims. A product defect or error could also divert the attention of software development and product management personnel and cause significant customer relationship problems or loss of customers, including loss of maintenance service contracts, any or all of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups maintenance revenue could decline.
Maintenance revenue is an important source of recurring revenue for the Group and the Group invests significant resources to provide maintenance and support services to its customers. Maintenance revenue generally increases when customers enter into new license and maintenance agreements or license the Groups products for additional processing capacity. However, increased price competition with respect to enterprise license agreements may result in the discounting of maintenance fees for higher levels of supplemental processing capacity. In addition, customers are typically entitled to reduced annual maintenance fees for entering into long-term maintenance contracts. Declines in the Groups license bookings, increases in the proportion of long-term maintenance contracts and/or increased discounting with respect to enterprise licenses could lead to declines in the Groups maintenance revenue growth rates. Furthermore, should customers migrate from systems and applications which the Groups products support, use alternatives to the Groups products, including maintenance-free solutions such as on demand, or become dissatisfied with the Groups maintenance services, increased cancellations could lead to declines in the maintenance revenue of the Group. As maintenance revenue is a significant contributor to the Groups total revenue, any such decline could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
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The Groups reputation and business may be negatively impacted by decisions to discontinue or restrict development expenditure on certain products.
The Group may, for the purposes of product portfolio rationalization and optimization, discontinue particular products. The business of the Group could be adversely affected by negative customer reaction if the Group fails to communicate clearly the possible impacts this may have on its partners, customers and other interested parties. Customers of discontinued products could elect to migrate to other products, including those of the Groups competitors, sooner than they may otherwise have done. Furthermore, limiting new development expenditure with respect to certain de-emphasized products may cause them to become obsolete prematurely, limiting the potential for new license sales associated with these products. If the Group fails to promote and maintain the reputation of its brands, incurs excessive costs in doing so or experiences negative customer reaction with respect to discontinued or de-emphasized products, it may have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups businesses may be subject to inherent risks arising from the general and sector specific economic conditions in the markets in which the Group operates.
The Groups business and financial performance depend significantly on global economic conditions and the demand for software and related services in the markets in which it competes. The growth and development of these markets depends on numerous factors, many of which are beyond the Groups control, and the exact effect of which cannot accurately be predicted. Such factors include changes in general economic conditions, political developments (including elections in the jurisdictions in which the Group operates), government regulation and taxation, any of which could result in decreased demand and increased price competition for the Groups products and could cause the Groups expenses to vary materially from its expectations.
Furthermore, any financial turmoil affecting the banking system and financial markets or any significant financial services institution failures could negatively impact the Groups operations, as the financial condition of such institutions may deteriorate rapidly and without notice in times of market volatility and disruption. In addition, poor financial performance of asset markets combined with lower interest rates and the adverse effects of fluctuating currency exchange rates could lead to higher pension and post-retirement benefit expenses for the Group, and its interest and other expenses could also vary materially from expectations.
As a result, any deterioration in the political, financial or general economic conditions in the markets in which the Group operates could have a material adverse effect on the business, financial conditions, results of operation and prospects of the Group.
The Group sells and distributes its software products globally and is subject to associated risks and uncertainties.
The Group sells and distributes its software products and services, directly or indirectly, around the world. As a result, the business of the Group is and, following Closing, will be increasingly subject to various risks inherent in international operations, including risks associated with the following:
• | ongoing instability or changes in a country’s or region’s economic or political conditions, including inflation, recession, interest rate fluctuations and actual or anticipated military or political conflicts; |
• | difficulties in collecting accounts receivable from, or longer collection cycles or financial instability among, customers; |
• | trade regulations and procedures and actions affecting production, pricing and marketing of products, including policies adopted by countries that may champion or otherwise favor domestic companies and technologies over foreign competitors; |
• | local labor conditions and regulations, including local labor issues faced by specific suppliers and OEMs; |
• | managing a geographically dispersed workforce; |
• | difficulties associated with working with disparate cultures across geographies; |
• | changes in the international, national or local regulatory and legal environments; |
• | differing technology standards or customer requirements; |
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• | import, export or other business licensing requirements or requirements relating to making foreign direct investments; and |
• | difficulties associated with repatriating earnings in a tax-efficient manner, and changes in tax laws. |
Any of the foregoing factors could materially and adversely affect the business, financial condition, results of operation and prospects of the Group.
The Group is exposed to fluctuations in foreign currency exchange rates.
The Group is exposed to foreign currency rate fluctuations, as it operates in various countries and, following Closing, will operate in a greater number of countries. The Group has significant businesses in the United Kingdom, Europe, Canada and Japan, among other countries, which generate turnover and have associated operating costs in currencies other than its reporting currency, the U.S. dollar. The Group is exposed to currency transaction risks when its subsidiaries enter into transactions using a currency other than their functional currency. This can result in gains or losses with respect to movements in foreign exchange rates and may be material. The Group may enter into financial transactions to hedge a portion of these currency exposures. However, hedging transactions may not be available at a reasonable cost or may prove ineffective in reducing these exposures. Any losses incurred in connection with any hedging transactions could adversely affect the operating results of the Group. In addition, fluctuations in the exchange rate between the pound sterling, euro, Japanese yen, Chinese renminbi, Canadian dollar, Australian dollar, Indian rupee and other currencies in which the Group transacts and, following Closing, will transact relative to the U.S. dollar may cause fluctuations in reported financial results that may not necessarily relate to the business, financial condition, results of operation or prospects of the Group.
The Groups contracts with government clients subject it to risks, including litigation, early termination, renegotiation, audits, investigations, sanctions and penalties.
Some of the Groups revenue is associated with multi-year contracts signed with federal, state, provincial and local government customers. These contracts are generally subject to annual fiscal funding approval or may be renegotiated or terminated at the discretion of the government, any of which could adversely affect the sales and revenue of the Group. Additionally, the Groups government contracts are generally subject to audits and investigations, which could result in various civil and criminal actions and penalties or administrative sanctions, including the termination of contracts, refunding of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with the relevant government, any of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group may face operational risks that may not be covered by insurance policies.
The Group maintains insurance policies to cover a variety of operational risks. However, such insurance policies may not fully cover all of the consequences of any event, including damage to persons or property, business interruptions, failure of counterparties to conform to the terms of an agreement or other liabilities. If a significant claim or number of claims is made on any of the Groups insurance policies, the Group may be subject to significant increases in premiums or even find it difficult, prohibitively expensive or impossible to obtain sufficient levels of insurance coverage thereafter. If the Groups insurance coverage is not sufficient for any reason, the Group could incur significant out-of-pocket expenses, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group may be involved in legal and other proceedings from time to time, and as a result may face damage to its reputation or legal liability.
In the ordinary course of business, the Group may be involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures in a variety of jurisdictions, the outcomes of which will determine its rights and obligations under insurance and other contractual agreements or under tort law or other legal obligations. From time to time, the Group may institute, or be named as a defendant in, legal proceedings, and may be a claimant or respondent in arbitration proceedings or involved in investigations and regulatory proceedings, some of which could result in adverse judgments, settlements, fines and other outcomes. The Group could also be subject to litigation risks arising from potential employee misconduct, including non-compliance
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with internal policies and procedures. The Group may settle litigation or regulatory proceedings prior to a final judgment or determination of liability in order to avoid the cost, management efforts or negative business, regulatory or reputational consequences of continuing to contest liability, even when it believes it has valid defenses to liability. The Group may also do so when the potential consequences of failing to prevail would be disproportionate to the costs of settlement. Furthermore, the Group may, for similar reasons, reimburse counterparties for their losses even in situations in which it does not believe that it is legally compelled to do so. The financial impact of legal risks might be considerable but may be hard or impossible to estimate and to quantify, so that amounts eventually paid may exceed the amount of reserves set aside to cover such risks. Any significant litigation or substantial legal liability could cause the Group significant reputational harm and have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
In addition, while the Group will seek to ensure where possible that the governing law clause of each contract to which a Group member is a party is explicitly and validly set out in the terms of the contract, and identifies a jurisdiction that is acceptable to and appropriate in respect of the Group, it is possible that this legal framework may be deemed invalid or inappropriate by courts in the relevant jurisdiction.
The Group may also be exposed to liability as a result of ongoing litigation involving HPE Software following Closing. For example, HPE Software may be subject to monetary liability or injunctions against selling certain of its products and services as a result of ongoing IP-related litigation involving HPE. Following Closing, there can be no assurance that either the Group or HPE will be successful in defending such claims or that the amount of the Groups liability will not be significantly higher than anticipated, any of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups strategy may involve the making of further acquisitions to protect or enhance its competitive position and failure to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully could have a material adverse effect on the Groups business.
It is possible that acquisition, divestiture and other transaction opportunities may arise which Micro Focus decides to pursue, and that such transactions may continue to form part of the Groups strategy. Should further acquisitions be made, the Group may have difficulty incorporating the acquired technologies or products into its existing product lines and integrating the operations, facilities, personnel and commission plans of the acquired business and may therefore not realize the anticipated benefits of such acquisitions. Such transactions may also place additional strain on the Groups senior management team, as well as the Groups financial and other resources. Difficulties in effectively managing these transactions could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
In addition, the Group may not be able to identify suitable acquisition opportunities or obtain acceptable financing to consummate such acquisitions, in a timely manner or at all. The Group also competes for acquisitions with other potential acquirers, some of which may have greater financial or operational resources than the Group has. This competition may intensify due to the ongoing consolidation in the software industry, which may increase the Groups acquisition costs. If the Group is not able to identify or consummate these transaction opportunities, it could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group has entered into various acquisitions and dispositions over recent years and may be subject to or have the benefit of certain residual representations, warranties, indemnities, covenants or other liabilities, obligations or rights.
The Group has entered into various acquisitions and dispositions over recent years and may be subject to or have the benefit of certain residual representations, warranties, indemnities, covenants or other liabilities, obligations or rights including change of control provisions which may be triggered by the Transactions. The Group may become subject to or may take legal proceedings if for any reason any such representations, warranties, indemnities, covenants or other liabilities, obligations or rights become enforceable against or by the Group. Any such litigation may be time consuming and expensive and there may be no certainty as to the outcome of any such legal proceedings once initiated. The Group may not have insurance cover for these types of claims or such insurance may not be adequate. Any such litigation may also divert the attention and time of the management of the Group and may materially adversely affect the business, financial condition, results of operation and prospects of the Group.
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The Group will be subject to the laws and regulations of a greater number of jurisdictions covering a wide variety of areas affecting international transactions.
Following Closing, the Group will be subject to the laws and regulations of a greater number of jurisdictions covering a wide variety of areas affecting international transactions, including export controls, anti-corruption legislation and data protection requirements. The Group may be required to devote more time and resources than it had previously devoted to ensure compliance with all such laws, rules and regulations to which it is subject. In addition, the Group will be subject to changes in any such laws, rules and regulations, including the interpretation or enforcement of existing laws and regulations, in the additional jurisdictions in which the Group will operate and the cost of compliance with such changes, any of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Exposure to political developments in the United Kingdom, including the process and terms of the U.K.s withdrawal from the EU following the result of the June 2016 referendum and subsequent triggering of Article 50, could have a material adverse effect on the Group.
On June 23, 2016, a referendum was held on the U.K.s membership in the EU, the outcome of which was a vote in favor of leaving the EU. On March 29, 2017, the U.K. government notified the EU that it was triggering the formal process for leaving the EU under Article 50 of the Treaty of the European Union, which allows a Member State to decide to withdraw from the EU in accordance with its own constitutional requirements. The triggering of Article 50 commenced a two year negotiating period for the U.K. to agree the terms of its exit from the EU, although this period can be extended with the unanimous agreement of the European Council. Without any such extension or agreement on the terms of the U.K.s withdrawal from the EU, the U.K.s membership in the EU would end automatically upon the expiration of the two year period.
The result of the referendum and the triggering of Article 50 mean that the long term nature of the U.K.s relationship with the EU is unclear, which may create an uncertain political and economic environment in the U.K. and other EU Member States that could potentially last for a number of months or years. There is also considerable uncertainty as to whether the terms of the U.K.s withdrawal from the EU will be agreed upon within the two year negotiating period and, if an extension of the negotiating period is not agreed, the U.K. may be forced to exit the EU without mutually acceptable terms having been agreed. The terms of any such exit, and the accompanying political and economic uncertainty surrounding the U.K.s withdrawal from the EU, could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Future changes to U.S. and non-U.S. tax laws could adversely affect the Group.
The U.S. Congress, the Organization for Economic Co-operation and Development and other government agencies in jurisdictions in which Micro Focus and its affiliates will conduct business have had an extended focus on issues related to the taxation of multinational corporations. One example is in the area of base erosion and profit shifting (BEPS), including situations where payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The Organization of Economic Co-operation and Development in particular is contemplating changes to numerous long-standing international tax principles through its so-called BEPS project, which is focused on a number of issues including sharing of profits between affiliated entities in different tax jurisdictions. As a result of BEPS and other similar initiatives, the tax laws in the United States, the U.K. and other countries in which Micro Focus and its affiliates will do business could change on a prospective or retroactive basis, and any such changes could have a material adverse effect on the business, results of operation, financial condition and prospects of the Group.
Members of the Group may not qualify for benefits under the tax treaties entered into between the U.K. and other countries.
The Group intends to operate in a manner such that the relevant members of the Group are eligible for benefits under the tax treaties entered into between the U.K. and other countries, particularly the United States. However, the ability of such members to qualify for such benefits will depend upon whether they are treated as U.K. tax residents and upon the requirements contained in each treaty and the applicable domestic laws, as the case may be, on the facts and circumstances surrounding the Groups operations and management, and on the relevant interpretation of the tax authorities and courts.
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The failure by the relevant members of the Group to qualify for benefits under the tax treaties entered into between the U.K. and other countries could result in adverse tax consequences to Micro Focus and its subsidiaries, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group will be subject to tax laws of numerous jurisdictions, and the interpretation of those laws is subject to challenge by the relevant governmental authorities.
The Group will be subject to tax laws and regulations in the U.K., the United States and the numerous other jurisdictions in which the Group operates. These laws and regulations are inherently complex and the Group will be obliged to make judgments and interpretations about the application of these laws and regulations to Micro Focus and its subsidiaries and their operations and businesses. The interpretation and application of these laws and regulations could be challenged by the relevant governmental authorities, which could result in administrative or judicial procedures, actions or sanctions, the ultimate outcome of which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Risks Relating to the Transactions
Integration of HPE Software with the existing businesses carried on by the Micro Focus Group may be more time consuming and costly than anticipated.
The Micro Focus Group and HPE Software currently operate and, until Closing, will continue to operate as two separate businesses. The Merger will require the integration of the businesses, and the success of the Group will depend, in part, on the effectiveness of the integration process.
The key potential difficulties of combining the businesses following Closing include the following:
• | developing, operating and integrating a large number of different technology platforms and systems, in particular integrating the IT platforms of both businesses; |
• | coordinating and consolidating services and operations, particularly across different service areas, regulatory systems and business cultures; |
• | consolidating infrastructure, procedures, systems, facilities, accounting functions, compensation structures and other policies; |
• | integrating the management teams and retaining and incentivizing key employees; |
• | coordinating communications with and/or the provision of services by the Group to customers of both the Micro Focus Group and HPE Software; and |
• | disruption to the businesses of each of the Micro Focus Group and HPE Software. |
There may also be additional challenges to the combination of the businesses which will not be known until after Closing and any delays or difficulties encountered in connection with the integration of the businesses could result in an interruption to the Groups operations and/or reputational damage to the Group. In addition, the management teams of both businesses will be required to devote significant attention and resources to integrating their respective business practices and operations. There is a risk that the challenges associated with managing the integration of the Micro Focus Groups and HPE Softwares respective businesses may result in management distraction and that, consequently, the underlying businesses may not perform in line with expectations. Any such difficulties or delays encountered in connection with the integration of the business could as a result have an adverse effect on the business, financial condition, results of operation and prospects of the Group.
Closing is subject to a number of conditions which may not be satisfied or waived.
Closing is subject to the satisfaction (or waiver, where applicable) of a number of conditions, some of which are outside of the parties control, and which are further described in the section entitled The Merger Agreement—Conditions to the Merger. There is no guarantee that these conditions will be satisfied (or waived, if applicable) in a timely manner or at all, in which case Closing may be delayed or may not occur and the benefits expected to result from the Merger may not be achieved. Failure to complete, or a delay in completing, the Merger for whatever reason could have a significant impact on the Groups reputation and business strategy,
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as considerable resources have been devoted to effect the Merger including substantial expenses and managements time and attention. Therefore the aggregate consequences of a failure to complete or a material delay in completing the Merger could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Micro Focus may be obliged to pay a termination payment if the Merger Agreement is terminated under certain circumstances.
Micro Focus has agreed to pay HPE a termination payment equal to approximately $60 million in cash under certain circumstances, including among other circumstances (as set out in more detail in the section entitled The Merger—Termination Payment and Expenses Payable in Certain Circumstances) if (a) a competing proposal has been publicly announced or communicated to the Micro Focus Board and not withdrawn at least five business days prior to the termination of the Merger Agreement, and such competing proposal, or a different competing proposal, is consummated (or a definitive agreement entered into with respect thereto) within 12 months following the Merger Agreement being terminated in specified circumstances; or (b) the Merger Agreement is terminated as a result of, among other things, Micro Focus breaching in any material respect the specified undertakings in the Merger Agreement prohibiting it and its representatives from soliciting competing proposals.
If Micro Focus is obliged to pay the termination payment under any of the circumstances described above, it could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Costs and expenses related to the Transactions could exceed amounts currently estimated.
The Group expects to incur a number of costs in relation to the Transactions, including integration and post-Closing costs, which could exceed the amounts currently estimated. There may also be further additional and unforeseen expenses incurred in connection with the Transactions either due to delays or otherwise. Whilst the Micro Focus Board believes that the costs related to the Transactions will be offset by the realization of the benefits of the Merger, there can be no guarantee that any benefits of the Merger that are realized will offset such costs, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group will not be able to recover damages from HPE for any losses suffered as a result of a breach of warranty by HPE under the Merger Agreement following Closing.
The Merger Agreement contains customary representations and warranties by HPE made for the benefit of Micro Focus, Merger Sub and Holdings given as of the date of the signing of the Merger Agreement and repeated as of the date of Closing (unless such representation and warranty is made as of a particular date), subject to specified materiality qualifications. Prior to Closing, Micro Focus only remedy for any breach (or breaches) of such representations and warranties by HPE will be to terminate the Merger Agreement but only to the extent such breach or breaches would cause a failure of a condition to Closing set forth in the Merger Agreement, subject to a specified cure period. However following Closing, there will be no recourse for any breaches of the representations and warranties, and so the Group will not have contractual recourse against, or otherwise be able to recover from, HPE or any other party, in respect of any losses which it may suffer in respect of a breach of such representations and warranties in the Merger Agreement regardless of whether or not such breach is material or significant. As a result, any such losses following Closing resulting from the breach of any such representation and warranty could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
There can be no guarantee that the Micro Focus Return of Value will be executed as planned or at all.
Shortly prior to Closing, Micro Focus intends to implement the Micro Focus Return of Value to existing Micro Focus Shareholders of an aggregate principal amount in sterling equivalent of $500 million in cash (inclusive of any currency or hedging costs or proceeds), as set out in more detail in the section entitled The Transactions—Micro Focus Return of Value.
If the Micro Focus Return of Value is not implemented, the Micro Focus Board may have to consider alternative ways to deliver value to the Micro Focus Shareholders, which may not be possible on commercially similar terms or at all.
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The development of IT systems for HPE Software and the integration of the Groups existing IT systems with HPE Softwares IT systems could be subject to delays or difficulties.
The success of the Merger and the Group will depend, in part, on the successful development of IT systems for HPE Software and the integration with the Groups existing IT systems. Under the Separation and Distribution Agreement, HPE is obliged to use its commercially reasonable efforts to develop and deliver certain standalone IT systems to HPE Software by the date of the Distribution. HPE may be unable to develop and deliver, or could be delayed in delivering, functional standalone IT systems, in which case HPE Software will remain reliant on HPEs existing IT systems under the Transition Services Agreement for a period of time following Closing. The failure to develop, or delay in developing, functional IT systems could delay or complicate the integration of the Groups existing IT systems with HPE Softwares IT systems. In addition, if HPE has not delivered such standalone IT systems to HPE Software by the date of the Distribution, HPE and Micro Focus have agreed to discuss in good faith which party will be responsible for the completion and remaining costs of developing such standalone IT systems, and as such it is possible that Micro Focus will be responsible for all or part of such remaining costs.
Moreover, the integration of the Groups existing IT systems with HPE Softwares IT systems through a shared infrastructure will be a complex and time consuming process that will require the dedication of significant management time and resources, with the Group expecting to incur approximately $150 million of cash costs to complete the IT systems integration. The Group may encounter significant difficulties in integrating these systems and, as a result, be required to re-develop and replace HPE Softwares IT systems with standalone IT systems in order for them to be compatible with the Groups existing infrastructure at significant cost to the Group.
Any delays or difficulties encountered in developing HPE Softwares standalone IT systems and integrating the Groups existing infrastructure with these systems, for whatever reason, could adversely affect the co-ordination and consolidation of the Groups operations, reporting systems and accounting functions, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group may fail to realize the anticipated benefits of the Merger.
The success of the Group will depend, in part, on its ability to realize the anticipated benefits and operational efficiencies from combining the businesses of the Micro Focus Group and HPE Software. These anticipated benefits include, among other things, convergence of businesses operating in adjacent and complementary product areas in order to better serve customers as a global provider of infrastructure software and the improvement of the profitability of HPE Software through the application of Micro Focus operating model. If the anticipated benefits are not realized, the purposes and rationale for the Merger will not be fully achieved, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
HPE Software may not perform in line with expectations prior to or following Closing.
The anticipated benefits and operational efficiencies to be created by the Merger are based on assumptions regarding, among other things, the financial and operational performance of HPE Software, including in the period prior to Closing, when the financial and operational performance of HPE Software is outside the control of Micro Focus. Until Closing, it is possible that an adverse event, or events, could affect the financial or operational performance of HPE Software. In such an event, the value of HPE Software may be less than the consideration paid by Micro Focus and, accordingly, the net assets of the Group could be reduced. This could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Integration and implementation of the business strategies of the Micro Focus Group and HPE Software could fail or not achieve the objectives of the Group.
Following Closing, the implementation and co-ordination of the Micro Focus Groups and HPE Softwares business strategies will be complex, time-consuming and expensive. The ability of the Group to integrate and implement such strategies depends on a variety of factors, including development of demand for its services and the ability to recruit and retain skilled employees, in particular retention of skilled employees of HPE Software,
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following Closing. Implementation of the Groups business strategies could fail to be achieved quickly enough or fail to achieve the anticipated growth, efficiency, cost savings, return or customer service improvements, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Merger may result in a loss of customers for the Group.
As a result of the Merger (including as a result of its public announcement and during the pendency of the Merger), some of the Micro Focus Groups or HPE Softwares customers or strategic partners may seek to terminate or reduce their business relationships with the Group due to, for example, the interruption of operations that may result from the integration of the businesses or customers not wanting to increase the proportion of services sourced from a single company. Furthermore, potential customers of the Micro Focus Group or HPE Software may delay entering into, or decide not to enter into, a business relationship with the Micro Focus Group or HPE Software until Closing on account of any perceived uncertainty in connection with the Merger. If the Micro Focus Groups or HPE Softwares relationships with their current or potential future customers or strategic partners are negatively impacted by the Merger, this could result in a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Third parties may terminate or seek to modify existing contracts with HPE Software as a result of the Merger.
As part of the Separation, members of the Seattle Group will become counterparties by assignment to a number of contracts of the HPE Group or its subsidiaries with third party suppliers, distributors, clients, customers, licensors, licensees, lessees, lessors, lenders, insurers, landlords, other business partners and other counterparties. Some of these contracts require the counterpartys consent to assignment. If these consents cannot be obtained, or if a number of these consents remain outstanding following the Separation, HPE Software may be unable to obtain some of the benefits, assets and/or contractual commitments that are intended to be allocated to it as part of the Separation.
In addition, some of the contracts to be assigned to the Seattle Group following the Separation contain change of control or similar clauses that allow the counterparty to terminate or change the terms of their contract as a result of the Merger, or may otherwise enable the counterparty to seek to modify the terms of the existing contract. There can be no assurance that the Group will be able to contract on the same terms as HPE did prior to Closing. If a large number of third party consents cannot be obtained, or the terms of such contracts are modified in a manner that is adverse to the Group, there may be a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group could incur operational difficulties or losses if HPE were unable to perform under the agreements entered into as part of the Separation.
In connection with the Separation, Seattle will, prior to Closing, enter into several agreements with HPE or its subsidiaries, including among others, the Transition Services Agreement, which in general provide for the performance of certain services or obligations by each of HPE and Seattle for the benefit of each other for a transitional period following the Separation. If either party is unable to satisfy its obligations under such agreements in a timely manner or at all, including for the provision of a standalone IT platform by HPE for the Seattle Group and obtaining third party consent, where necessary, for the transfer of certain assets to Seattle, or if the transitional agreements fail to provide for or cover certain essential services needed by Seattle during the transitional period, there is limited recourse for Micro Focus and Seattle could incur operational difficulties or losses or face liability that could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group may be negatively affected if HPE Software is unable to obtain the same types and level of benefits, services and resources that historically have been provided by HPE, or may be unable to obtain them at the same cost.
HPE Software has historically received benefits and services from HPE. Following Closing, HPE Software will no longer benefit from HPEs services or business relationships to the extent not otherwise addressed in the Separation and Distribution Agreement, Transition Services Agreement or other Transaction Documents. While HPE has agreed to provide certain transitional services to HPE Software, it cannot be assured that the Group will be able to adequately replace or provide resources formerly provided to HPE Software by HPE, or replace them
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at the same or lower cost. If the Group is not able to replace the services provided by HPE or is unable to replace them without incurring significant additional costs or is delayed in replacing the services provided by HPE or if the potential customers or other partners of HPE Software do not view the Groups business relationships as equivalent to HPEs, it could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group will have an ongoing relationship with HPE following Closing and, as a result, the future state or actions of HPE or any successor of HPE could adversely affect the Group.
Certain agreements related to the Separation and Merger provide for ongoing services by HPE to the Group. Changes in the strategic direction of HPE, or any successor of HPE, could, over time, impact the positioning and offerings of HPEs brands and programs, including those being made available to the Group. Any such changes impacting the services being provided by HPE, could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group is exposed to funding risks in relation to its pension schemes.
As part of the Separation, the Seattle Group will assume or retain obligations to pay contributions to, and fund the pension benefits of, personnel who are allocated to the Seattle Group globally pursuant to the Separation, in relation to service by such personnel both before and after the Separation. However, this will not apply for personnel in certain jurisdictions, who will instead be either (a) provided with pension benefits under HPEs existing pension arrangements until Closing and the Groups pension arrangements following Closing, or (b) moved from defined benefit plans into defined contribution plans established within the Seattle Group prior to Closing, in which case liabilities in respect of defined benefit accrual prior to the transition to defined contribution plans will not be assumed by the Seattle Group. Following Closing, the Group will be exposed to liabilities for these contributions and pension benefits.
The Group will have obligations to pay contributions to defined contribution schemes and insured or similar arrangements in various jurisdictions that were created, assumed or retained by the Seattle Group as part of the Separation or by the Group with effect from Closing pursuant to the Separation and Merger, which will require contributions to be made to separately administered funds.
The Group will also have obligations to fund defined benefit pension schemes in various jurisdictions (i) that were created, assumed or retained by the Seattle Group as part of the Separation or by the Group with effect from Closing pursuant to the Separation and Merger, or (ii) in which HPE Software staff participated prior to Closing. As of June 1, 2017, HPE Software staff participated in 31 relevant defined benefit arrangements worldwide for which obligations will transfer to the Group and of which 30 were open to further accrual of benefits at varying levels. The combined deficit relating to the relevant defined benefit liabilities to transfer was estimated to be approximately $65 million on a U.S. GAAP accounting basis as of June 1, 2017. The Separation and Distribution Agreement provides that, as of Closing, HPE will cause the Seattle Group to have immediately available cash with respect to HPE Softwares defined benefits plan liabilities to be assumed by Seattle (or will have pre-funded such liabilities in whole or in part prior to Closing) in an aggregate amount agreed by the parties.
The actual pension obligations of the Group may vary depending on the final allocation of employees to the Seattle Group and local legal or collective bargaining or employee consultation outcomes in connection with the Separation and Merger, as well as the nature of the pension arrangements established for the employees within the Seattle Group legal structure prior to Closing or within the Group from Closing.
Defined benefit pension schemes are subject to risks in relation to their liabilities and required funding levels as a result of changes in life expectancy, inflation and future salary increases, volatility regarding the value of investments and the returns derived from such investments, and applicable local legal and regulatory regimes. A significant funding requirement in respect of future years could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Distribution could result in significant tax liabilities to HPE and the HPE Stockholders, and, under the Tax Matters Agreement, the Group may in certain circumstances be obligated to indemnify HPE for any tax liabilities relating to the Separation, which could be material.
The consummation of the Transactions is conditioned upon the receipt by HPE of the HPE Tax Opinion, substantially to the effect that, among other things, for U.S. federal income tax purposes, the Distribution, taken
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together with the Contribution, should qualify as a reorganization under Sections 368(a)(1)(D), 361 and 355 of the Code. HPE also intends to seek a ruling from the IRS regarding certain issues relevant to the qualification of the Distribution and certain other aspects of the Separation for tax-free treatment for U.S. federal income tax purposes. The receipt of any such ruling is not a condition to HPEs and Seattles obligation to consummate the Transactions, and there can be no assurance that any or all of such requested rulings will be received.
Although the IRS Ruling, if received, will generally be binding on the IRS, the continuing validity of the IRS Ruling will be subject to the accuracy of factual representations and assumptions made in the ruling request. In addition, as part of the IRSs general ruling policy with respect to transactions under Section 355 of the Code, the IRS will not rule on the overall qualification of the Distribution for tax-free treatment, but instead only on certain significant issues related thereto.
The HPE Tax Opinion will be based on current law and will rely upon various factual representations and assumptions, as well as certain undertakings made by HPE, Seattle and Micro Focus. If any of those representations or assumptions is untrue or incomplete or any of those undertakings is not complied with, or if the facts upon which the HPE Tax Opinion is based are different from the actual facts that exist at the time of the Distribution, the conclusions reached in the HPE Tax Opinion could be adversely affected and the Distribution and/or certain related transactions may not qualify for the intended tax treatment. Furthermore, HPE understands that it is not possible for its tax counsel, Skadden, to reach a more definitive conclusion regarding the characterization of the Contribution and the Distribution for U.S. federal income tax purposes given the lack of direct authority on which taxpayers can rely involving a foreign counterparty such as Micro Focus (which is incorporated in the U.K.). Given Micro Focus status as a foreign corporation for U.S. tax purposes, unless the IRS Ruling is received and addresses such matters, certain conclusions in the HPE Tax Opinion will relate to matters for which there is no legal authority directly on point and where similar issues are not present in transactions involving domestic counterparties, and such conclusions will therefore necessarily be based upon analysis and interpretation of analogous authorities. Based upon such analysis and authorities, the HPE Tax Opinion will provide that the Distribution, taken together with the Contribution, should qualify as a reorganization. However, an opinion of counsel is not binding on the IRS or the courts. Accordingly, no assurance can be given that the IRS will not challenge the conclusions set forth in the HPE Tax Opinion or that a court would not sustain such a challenge. The lack of a more definitive conclusion in the HPE Tax Opinion reflects the risk of such challenge and that such challenge may be sustained.
If the Distribution, taken together with the Contribution, were determined not to qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, HPE would generally be subject to U.S. federal income tax as if it had sold the Seattle Shares for its fair market value in a taxable transaction, which could result in a material tax liability for HPE. In addition, the HPE Stockholders who receive Seattle Shares in the Distribution generally would be subject to U.S. federal income tax as if they had received a taxable distribution in an amount up to the fair market value of such common stock. In addition, HPE could be subject to material tax liability if certain transactions related to the Distribution were not to qualify for their intended tax treatment.
Even if the Distribution, taken together with the Contribution, otherwise qualifies under Section 355 of the Code, the Distribution would be taxable to HPE (but not to HPE Stockholders) pursuant to Section 355(e) of the Code if one or more persons acquire a 50% or greater interest (measured by vote or value) in the stock of HPE or Seattle, directly or indirectly (including through acquisitions of Micro Focus stock after the completion of the Transactions), as part of a plan or series of related transactions that includes the Distribution. Current law generally creates a presumption that any direct or indirect acquisition of stock of HPE or Seattle within two years before or after the Distribution is part of a plan that includes the Distribution, although the parties may be able to rebut such presumption in certain circumstances. The process for determining whether an acquisition is part of a plan under these rules is complex, inherently factual in nature, and subject to a comprehensive analysis of the facts and circumstances of the particular case. Although it is expected that the Merger will be treated as part of such a plan, the Merger, standing alone, should not cause Section 355(e) of the Code to apply to the Distribution because holders of Seattle Shares immediately before the Merger will hold more than 50% of the stock of Micro Focus (by vote and value) immediately after the Merger. However, if the IRS were to determine that other direct or indirect acquisitions of stock of HPE or Seattle, either before or after the Distribution, were part of a plan that includes the Distribution, such determination could cause Section 355(e) of the Code to apply to the Distribution, which could result in a material tax liability for HPE.
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Under the Tax Matters Agreement, subject to certain limited exceptions, Seattle and Micro Focus will be required to indemnify HPE against any taxes resulting from any action (or failure to act) by Seattle or Micro Focus, any event involving the shares or assets of Seattle or Micro Focus or any breach of any representation, warranty or covenant made by Seattle in the Tax Matters Agreement that, in each case, would affect the intended tax treatment of the Distribution or certain related transactions. If Seattle and Micro Focus were required to indemnify HPE for taxes resulting from the Distribution or such related transactions, that indemnification obligation would likely be substantial and could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group. For a detailed description of the Tax Matters Agreement, see the section entitled Other Agreements—Tax Matters Agreement.
Seattle and Micro Focus will be subject to potentially significant restrictions under the Tax Matters Agreement that could limit the Groups ability to undertake certain corporate actions (such as the issuance of Micro Focus Shares or Micro Focus ADSs or the undertaking of a merger or consolidation) that otherwise could be advantageous to the Group.
To preserve the intended tax treatment of the Distribution and certain related transactions to HPE and/or HPE Stockholders, Micro Focus and Seattle will, during the two-year period following the date of the Distribution, be restricted under the Tax Matters Agreement from taking certain actions that could cause the Distribution or certain related transactions to fail to qualify for their intended tax treatment. Micro Focus and Seattle may only undertake such restricted actions if Micro Focus or Seattle obtains an unqualified opinion from its tax advisers and/or a ruling from the IRS, in each case, satisfactory to HPE, confirming that the restricted action or actions will not affect the tax-free treatment of the Distribution or certain related transactions. These restrictions may limit the Groups ability to pursue certain strategic transactions or engage in other transactions during the restricted period. For example, Micro Focus could be restricted from issuing Micro Focus Shares as consideration in connection with the acquisition of additional business assets or a combination with another company. Similarly, Micro Focus could be restricted from issuing Micro Focus Shares to raise cash to be used in its business or to acquire additional business assets or other companies. Micro Focus could also be restricted from disposing of certain HPE Software business assets. As a result, the Group might determine to delay or even forgo certain transactions that otherwise could be advantageous, which could have an adverse effect on the business, financial condition, results of operation and prospects of the Group. See the section entitled Other Agreements–Tax Matters Agreement for a detailed description of these restrictions.
Seattle Stockholders that are U.S Holders (as defined in the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger) will be subject to U.S. federal income tax on any gain resulting from the Merger without the corresponding receipt of cash.
The consummation of the Transactions is conditioned upon the receipt by HPE of the HPE Tax Opinion, substantially to the effect that, among other things, for U.S. federal income tax purposes the Merger should qualify as a reorganization within the meaning of Section 368(a) of the Code. However, pursuant to certain rules contained in Section 367(a) of the Code and the Treasury Regulations promulgated thereunder, U.S. Holders will generally recognize gain, if any, but not loss, on the exchange of Seattle Shares for Micro Focus ADSs pursuant to the Merger. No cash will be distributed in the Distribution or paid in the Merger, except for cash distributed or paid to holders of Seattle Shares who would otherwise be entitled to fractional Micro Focus ADSs. As a result, U.S. Holders may be subject to tax liability with respect to the Merger without the corresponding receipt of cash. See the section entitled U.S. Federal Income Tax Consequences of the Distribution and the Merger for more information regarding the tax consequences of the Distribution and the Merger.
Micro Focus U.S. affiliates likely will be subject to certain adverse U.S. federal income tax rules as a result of the Transactions.
Following the acquisition of a U.S. corporation by a foreign corporation, Section 7874 of the Code (and certain related provisions) can limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize certain tax attributes and subject such U.S. entities to certain other adverse U.S. federal income tax rules. These rules generally apply to Micro Focus and its U.S. affiliates if, following the Merger, (a) holders of Seattle Shares own (within the meaning of Section 7874 of the Code) 60% or more (by vote or value) of Micro Focus by reason of having held Seattle Shares (the 60% ownership test, and such ownership percentage the Section 7874 ownership percentage) and (b) Micro Focus expanded affiliated group does not have substantial business
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activities in the United Kingdom when compared to the total business activities of such expanded affiliated group (the substantial business activities test). The Section 7874 ownership percentage of holders of Seattle Shares must be calculated in accordance with specific tax rules under the Code and Treasury Regulations, and will likely differ significantly from the calculation of the 50.1% of the Micro Focus Fully Diluted Shares to be owned by holders of Seattle Shares following Closing. In particular, under the Temporary Section 7874 Regulations, certain adjustments are required that generally have the effect of increasing, for purposes of determining the Section 7874 ownership percentage, the percentage of shares of a foreign acquiring corporation deemed owned by the former shareholders of an acquired U.S. corporation by reason of holding shares in such U.S. corporation. Certain of these adjustments are calculated based on a three-year look back period.
Based on the terms of the Merger, the rules for determining the Section 7874 ownership percentage referenced above and certain factual assumptions, it is expected that the 60% ownership test will be met. It also is expected that the substantial business activities test will not be met. Accordingly, it is expected that several adverse U.S. federal income tax rules could apply to the U.S. affiliates of Micro Focus (including both Seattle and its U.S. affiliates and U.S. affiliates historically owned by Micro Focus). In particular, Section 7874 of the Code could limit the ability of such U.S. affiliates to utilize certain U.S. tax attributes (including net operating losses and certain tax credits) to offset any taxable income or gain resulting from certain transactions, including any transfers or licenses of property to a foreign related person, during the 10-year period following the Merger. Additionally, the Temporary Regulations and certain temporary regulations issued under other provisions of the Code may limit Micro Focus ability to engage in certain restructuring transactions or access cash earned by certain of its non-U.S. affiliates, in each case, without incurring substantial U.S. tax liabilities, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The IRS may not agree that Micro Focus should be treated as a non-U.S. corporation for U.S. federal income tax purposes following the Merger.
Under current U.S. federal income tax law, a corporation is generally classified as U.S. or non-U.S. based on the jurisdiction of its organization or incorporation. Because Micro Focus is a company incorporated in England and Wales, Micro Focus would generally be classified as a non-U.S. corporation for U.S. federal income tax purposes. However, the IRS may assert that Micro Focus should be treated as a U.S. corporation (and therefore subject to U.S. federal income tax on its income regardless of source) pursuant to Section 7874 of the Code.
Under Section 7874 of the Code, if, following the Merger: (a) the Section 7874 ownership percentage (described above) is 80% or more (the 80% ownership test) and (b) the substantial business activities test (described above) is not met, then Micro Focus would be treated as a U.S. corporation (and therefore subject to U.S. federal income tax on its income regardless of source) for U.S. federal income tax purposes.
Based on the terms of the Merger, the rules for determining share ownership under Section 7874 of the Code referenced above and certain factual assumptions, holders of Seattle Shares are expected to own (within the meaning of Section 7874 of the Code) at least 60% but less than 80% (by both vote and value) of Micro Focus after the Merger by reason of holding Seattle Shares. Therefore, under current law, it is expected that Micro Focus should not be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Section 7874 of the Code.
However, certain of the rules under Section 7874 of the Code are relatively new and complex and there is limited guidance regarding their application. Moreover, share ownership for purposes of computing the Section 7874 ownership percentage is subject to various complex adjustments which are uncertain in their application. In particular, under the Temporary Section 7874 Regulations, certain adjustments are required that generally have the effect of increasing, for purposes of determining the Section 7874 ownership percentage, the percentage of the shares of a foreign acquiring corporation deemed owned by the former shareholders of an acquired U.S. corporation by reason of having held shares in such U.S. corporation. Certain of these adjustments are based on a three-year look back period. In addition, certain of the relevant determinations must be made based on the facts at the time of Closing. As a result, the precise determination of the Section 7874 ownership percentage will be subject to factual and legal uncertainties. Therefore, there can be no assurance that the IRS will agree with the position that Micro Focus should be treated as a non-U.S. corporation for U.S. federal income tax purposes. If the IRS successfully challenged Micro Focus status as a non-U.S. corporation, significant adverse U.S. federal income tax consequences would result for Micro Focus and for certain of Micro Focus Shareholders.
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If the 80% ownership test were met after the Merger and Micro Focus were accordingly treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code, Micro Focus would be subject to substantial additional U.S. tax liability. Additionally, in such case, Micro Focus Shareholders that are not U.S. persons for U.S. federal income tax purposes would be subject to U.S. withholding tax on the gross amount of any dividends paid by Micro Focus to such Micro Focus Shareholders (subject to any exemption or reduced rate available under an applicable tax treaty). Regardless of the application of Section 7874 of the Code, Micro Focus is expected to be treated as a tax resident of England and Wales for U.K. income tax purposes. Consequently, if Micro Focus were to be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code, it could be liable for both U.S. and U.K. taxes, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Groups ability to engage in certain transactions could be limited to prevent the treatment of Micro Focus as a U.S. corporation under Section 7874 of the Code.
Even if the 80% ownership test (described above) is not met as a result of the Merger, future transactions by the Group could cause the 80% ownership test to be met, causing Micro Focus to be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code. Therefore, the ability of the Group to engage in certain strategic transactions (including future acquisitions of U.S. businesses in exchange for Company shares) may be limited in order to avoid Micro Focus being treated as a U.S. corporation, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Changes to U.S. tax laws could result in Micro Focus being treated as a U.S. corporation for U.S. federal income tax purposes or in Seattle and its U.S. affiliates being subject to certain adverse U.S. federal income tax rules.
As discussed in the risk factor above The IRS may not agree that Micro Focus should be treated as a non-US corporation for U.S. federal income tax purposes following the Merger, under current law, Micro Focus is expected, following Closing, to be treated as a non-U.S. corporation for U.S. federal income tax purposes. However, changes to Section 7874 of the Code, or the U.S. Treasury regulations promulgated thereunder, could affect Micro Focus status as a non-U.S. corporation for U.S. federal income tax purposes, or could result in the application of certain adverse U.S. federal income tax rules to Micro Focus and its U.S. affiliates (including Seattle and its U.S. affiliates historically owned by Micro Focus). For example, recent legislative and other proposals have aimed to expand the scope of U.S. taxation of certain non-U.S. corporations, including in such a way as would cause Micro Focus to be treated as a U.S. corporation for U.S. federal income tax purposes if the management and control of Micro Focus were determined to be located primarily in the United States. In addition, recent legislative and other proposals have aimed to expand the scope of Section 7874 of the Code or otherwise to address certain perceived issues arising in connection with so-called inversion transactions. Any such proposals or similar proposals which could have prospective or retroactive application, could cause Micro Focus to be treated as a U.S. corporation for U.S. federal income tax purposes or subject Micro Focus and its U.S. affiliates to certain adverse U.S. federal income tax rules. In such case, the Group could be subject to substantially greater U.S. tax liability than currently contemplated, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Changes to the U.S. Model Income Tax Treaty, if adopted by applicable treaties, could adversely affect the Group.
On February 17, 2016, the U.S. Treasury released a newly revised U.S. model income tax convention (the model) which is the baseline document used by the U.S. Treasury to negotiate and re-negotiate tax treaties. The revisions made to the model treaty modify existing model treaty provisions and introduce entirely new model treaty provisions. Specifically, the new model treaty provisions target (a) permanent establishments subject to little or no foreign tax; (b) special tax regimes; (c) expatriated entities subject to Section 7874 of the Code; (d) the anti-treaty shopping measures of the limitation on benefits article; and (e) subsequent changes in treaty partners tax laws. For this purpose, the model provisions pertaining to expatriated entities fix the definition of expatriated entity to the meaning ascribed to such term under Section 7874(a)(2)(A) of the Code as of the date the relevant bilateral treaty is signed.
It is expected that the Merger will result in Seattle being an expatriated entity as defined in Section 7874 of the Code as of the date hereof (by reason of the satisfaction of the 60% ownership test, discussed above). Therefore,
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if applicable U.S. income tax treaties were subsequently amended to adopt the new model treaty provisions (and Section 7874 of the Code was not amended in a manner that would preclude Seattle from being an expatriated entity), payments of interest, dividends, royalties and certain other items of income by or to Seattle and/or its U.S. affiliates to or from certain non-US persons could be subject to such tax treaty provisions and become subject to full withholding tax. Accordingly, if applicable U.S. income tax treaties were amended to adopt the new model provisions, then Micro Focus and its affiliates could incur additional tax expense, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Legislative or other governmental action in the U.S. could adversely affect the Groups business.
Legislative action may be taken by the U.S. Congress that, if ultimately enacted, could limit the availability of tax benefits or deductions that the Group currently expects to claim, override tax treaties upon which the Group is expected to rely or otherwise increase the taxes that the United States may impose on the Groups worldwide operations. Such changes could materially adversely affect the Groups effective tax rate and/or require the Group to take further action, at potentially significant expense, to seek to achieve its intended effective tax rate. In addition, if proposals were enacted that had the effect of limiting Micro Focus ability, as a company organized under the laws of England and Wales, to take advantage of the income tax treaty between the United Kingdom and the United States, the Group could incur additional tax expense that could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The tax rate that will apply to the Group is uncertain and may vary from expectations.
There can be no assurance that the Merger will improve Micro Focus ability to maintain any particular worldwide effective corporate tax rate. Micro Focus cannot give any assurance as to what the Groups effective tax rate will be after the Merger because of, among other things, uncertainty regarding the tax policies of the jurisdictions in which the Group and its affiliates will operate. The Groups actual effective tax rate may vary from Seattles and Micro Focus expectations, and such variance may be material. Additionally, tax laws or their implementation and applicable tax authority practices in any particular jurisdiction could change in the future, possibly on a retroactive basis, and any such change could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
The Group will need to ensure that its internal control over financial reporting complies with Section 404 of the Sarbanes-Oxley Act of 2002.
As part of its disclosure and reporting obligations in the United States, the Group will be required to furnish an annual report by its management on its internal control over financial reporting and include an attestation report issued by its independent registered public accounting firm pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 (Section 404). The first report will be required to be produced as of October 31, 2019.
To achieve compliance with Section 404, the Group is engaged in a process to document and evaluate its internal controls over financial reporting. In this regard, the Group will need to continue to dedicate internal resources, potentially engage outside consultants and adopt a detailed work plan to assess and document the adequacy of its internal control over financial reporting for the purposes of Section 404. This may include taking steps to improve control processes as appropriate, validating that controls are functioning as documented and implementing a continuous reporting and improvement process for internal control over financial reporting.
Micro Focus internal controls over financial reporting were for the first time subject to review under the U.S. Public Company Accounting Oversight Board (PCAOB) auditing standards in connection with the audit of Micro Focus annual consolidated financial statements for the three years ended April 30, 2017. As a result of the work undertaken, certain weaknesses in the Groups internal control over financial reporting have been identified, which under PCAOB standards are considered to be material weaknesses. Under the PCAOB standards a material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Groups annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses relate to the fact that Micro Focus did not have sufficient formally documented and implemented processes and review procedures, nor did it have sufficient formality and evidence of controls over key reports and spreadsheets. Micro Focus has already begun to implement measures to address and remediate these material weaknesses. While the Directors are satisfied that the Group has been and will continue to be in compliance with
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the internal controls and related financial reporting requirements under the U.K. Corporate Governance Code and the Listing Rules, such material weaknesses may not be able to be remedied by October 2019 and there is a risk that other deficiencies for the purposes of Section 404 may be identified. This could result in an adverse reaction in the financial markets due to a loss of confidence in the reliability of the Groups financial statements and could have a material adverse effect on the Groups business, financial condition, results of operation and prospects.
Following Closing, the Group is likely to be deemed to operate under foreign ownership, control or influence, and if so, to participate in and perform under U.S. classified contracts the Group will need to become a party to a mitigation agreement with the U.S. Department of Defense and will be subject to the requirements of the National Industrial Security Program Operating Manual (NISPOM), which will impose significant compliance obligations upon the Group. The Group's failure to comply with these obligations could result in it not being able to continue participating in and performing under U.S. classified contracts.
If a companys ownership structure presents the potential for foreign ownership, control, or influence (FOCI), then the U.S. Department of Defense, pursuant to the NISPOM, may require certain protective measures to mitigate the FOCI in order for the company and its subsidiaries to maintain clearances to access classified U.S. government information or facilities.
Because a significant percentage of the Group's voting equity following Closing is expected to be owned by non-U.S. persons, the Group is likely to be determined to be under FOCI, and will likely be required to operate pursuant to a mitigation agreement in order for its subsidiaries to be able to maintain the requisite security clearances to access classified information or facilities and perform under classified contracts. The mitigation agreement may place certain security-related restrictions on the Group, including restrictions on the composition of the Micro Focus Board, the separation of certain employees and operations, as well as restrictions on access to and control by the Group of the flow of certain information and facilities. The provisions contained in the mitigation agreement may limit certain projected benefits to be realised from the Merger by placing additional costs or restrictions on the Group's operations.
HPE Software currently derives approximately 3% of its revenue from classified contracts. If the Group is unable to enter into a mitigation agreement or were to violate the terms and requirements of any such mitigation agreement, the NISPOM, or any other applicable U.S. government industrial security regulations, the Group may not be able to continue to perform any of its classified contracts in effect at that time or enter into new classified contracts, which could have a material adverse effect on the business, financial condition, results of operation and prospects of the Group.
Risks Relating to Micro Focus Shares
Any future issues of Micro Focus Shares will further dilute the holdings of Micro Focus Shareholders and could adversely affect the market price of the Micro Focus Shares.
Other than in relation to the Transactions, Micro Focus has no current plans for further issues of Micro Focus Shares apart from possible issues in relation to employee share plans and, prior to Closing, Micro Focus is subject to restrictions under the Merger Agreement in respect of such issuances (as set out in the section entitled The Merger Agreement—Conduct of Business Pending the Merger). However, subject to such restrictions, it is possible that Micro Focus may decide to offer additional shares in the future either to raise capital or for other purposes. If Micro Focus Shareholders did not take up such an offer of Micro Focus Shares or are not eligible to participate in such an offering, their proportionate ownership and voting interests in Micro Focus will be reduced and the percentage that their Micro Focus Shares will represent of the total share capital of Micro Focus will be reduced accordingly. An additional offering, or significant sales of shares by Micro Focus Shareholders, could have a material adverse effect on the market price of the Micro Focus Shares as a whole.
Additionally, the Micro Focus ADSs to be issued in connection with the Transactions will generally be eligible for immediate resale. The market price of the Micro Focus Shares could decline as a result of sales of a large number of Micro Focus Shares in the market, or even the perception that these sales could occur. These sales, or the possibility that these sales may occur, may also make it more difficult for the Group to obtain additional capital by selling equity securities in the future on favorable terms when desired.
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Micro Focus cannot assure investors that it will make dividend payments in the future.
Dividend payments to Micro Focus Shareholders will depend upon a number of factors, including the results of operation, cash flows and financial position, contractual restrictions and other factors considered relevant by the Micro Focus Board. In addition, under English law, any payment of dividends is subject to the Companies Act 2006 and the Micro Focus Articles, which generally require that dividends be recommended by the Micro Focus Board and approved by Micro Focus Shareholders. Moreover, under English law, Micro Focus may pay dividends on the Micro Focus Shares only out of profits available for distribution determined in accordance with the Companies Act 2006. Although the Micro Focus Board intends to continue paying dividends to Micro Focus Shareholders in accordance with its stated dividend policy, there is no assurance that Micro Focus will declare and pay, or have the ability to declare and pay, any dividends on the Micro Focus Shares in the future.
Risks Relating to Micro Focus ADSs
HPE Stockholders will not know until Closing the value of the Micro Focus ADSs they will receive in the Merger.
The exchange ratio as defined in the Merger Agreement is the quotient of (a) the product of (i) the number of Micro Focus Fully Diluted Shares as of immediately prior to Closing multiplied by (ii) the quotient of 50.1% divided by 49.9%, divided by (b) the number of Seattle Shares issued and outstanding immediately prior to Closing. The market value of the Micro Focus ADSs issued to holders of Seattle Shares in the Merger will depend upon the business and financial results of Micro Focus and HPE Software as of and following Closing. Therefore, the exact amount of Micro Focus ADSs that HPE Stockholders will receive will not be known until immediately prior to Closing, and the value of Micro Focus ADSs is likely to fluctuate over time. See the section entitled The Merger Agreement—Merger Consideration.
Micro Focus ADSs may not be as liquid as Micro Focus Shares or HPE Shares.
Some companies that have issued ADSs on U.S. stock exchanges have experienced lower levels of liquidity in their ADSs than is the case for their equity securities listed on their domestic exchange. There is a possibility that Micro Focus ADSs will be less liquid than Micro Focus Shares listed on the LSE, or less liquid than HPE Shares listed on the NYSE. In addition, investors may incur higher transaction costs when buying and selling Micro Focus ADSs than they would incur in buying and selling HPE Shares or Micro Focus Shares.
There is no guarantee that an active public market in Micro Focus ADSs will develop or be sustained after Closing. If an active market for Micro Focus ADSs does not develop after Closing, the market price and liquidity of Micro Focus ADSs may be adversely affected.
Liquidity in the market for Micro Focus securities may be adversely affected by Micro Focus maintenance of two exchange listings.
Following Closing, at which time Micro Focus ADSs will be listed and traded on the NYSE, Micro Focus intends to continue to list the Micro Focus Shares on the premium segment of the Official List and expects that Micro Focus Shares will continue to trade on the main market for listed securities of the LSE. Micro Focus cannot predict the effect of having its securities traded or listed on both of these markets. This dual listing may, however, dilute the liquidity of Micro Focus securities in one or both markets and may adversely affect the development of an active trading market for Micro Focus ADSs on the NYSE.
The value of Micro Focus ADSs to be received in the Merger will be subject to currency and exchange rate fluctuations.
Prior to Closing, any change in the exchange rate between the U.S. dollar and the sterling will affect the U.S. dollar market value of the consideration that HPE Stockholders will receive upon Closing. Neither HPE nor Micro Focus is permitted to terminate the Merger Agreement, solely because of changes in currency exchange rates. Following Closing, fluctuations in the exchange rate between the U.S. dollar and the sterling will continue to affect the U.S. dollar equivalent of the sterling price of Micro Focus Shares quoted on the LSE and the market price of Micro Focus ADSs traded on the NYSE. If the value of the sterling relative to the U.S. dollar declines, the U.S. dollar price of such Micro Focus ADSs and the U.S. dollar equivalent of the sterling price of the Micro Focus Shares traded on the LSE is also likely to decline. Micro Focus has paid and may in the future pay cash dividends on its Micro Focus Shares in sterling. A decline in the relative value of the sterling to the U.S. dollar would also result in a decline in the U.S. dollar value of these dividends.
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After Closing, the market price of Micro Focus ADSs on the NYSE may not be identical, in U.S. dollar terms, to the market price of Micro Focus Shares on the LSE.
While the market price of Micro Focus ADSs on the NYSE is generally expected to fluctuate in line with fluctuations in the market price of Micro Focus Shares on the LSE, subject to additional fluctuations resulting from changes in the U.S. dollar and sterling exchange rate, there is no guarantee that these relationships will be observed at all times, or at any time. The market price of Micro Focus ADSs may differ from the market price of Micro Focus Shares in U.S. dollar terms for a number of reasons, including the relative liquidity of Micro Focus ADSs and Micro Focus Shares.
The market prices of Micro Focus Shares and Micro Focus ADSs are expected to be volatile.
Global stock markets in general, and Micro Focus Shares in particular, are subject to significant price and volume volatility. Micro Focus Shares historically have been, and Micro Focus Shares and Micro Focus ADSs following Closing are expected to be, subject to significant fluctuations due to many factors, including but not limited to the pending Merger (in the case of pre-Closing volatility of Micro Focus Shares), fluctuations in operating results, announcements regarding new products, product and software enhancements or technological advances by the Group or its competitors, changes in earnings estimates by market analysts, and general market conditions or market conditions specific to particular industries. The price of Micro Focus Shares is, and the price of Micro Focus ADSs is expected to be, subject to speculation in the press and the analyst community, changes in recommendations by financial analysts, changes in investors or analysts valuation measures, changes in global financial markets and global economies and general market trends unrelated to the performance of the Group. Technology stocks have historically experienced wide fluctuations in prices, which sometimes have been unrelated to their operating performance. The market price of Micro Focus Shares and Micro Focus ADSs could be adversely affected by these factors and fluctuations.
Sales of a significant number of Micro Focus ADSs that HPE Stockholders will be entitled to receive in the Merger as a result of the automatic conversion of Seattle Shares may depress the market price of such Micro Focus ADSs as well as that of Micro Focus Shares.
HPE Stockholders may sell a significant number of the Micro Focus ADSs they will be entitled to receive in the Merger, and such sales could be concentrated in the period shortly after Closing. These sales could depress the market price of such Micro Focus ADSs as well as that of Micro Focus Shares after Closing. Sales of Micro Focus Shares by other Micro Focus Shareholders could also depress the market price of the Micro Focus Shares as well as that of the Micro Focus ADSs.
The rights of HPE Stockholders who become holders of Micro Focus ADSs pursuant to the Merger will not be the same as the rights of holders of Micro Focus Shares or HPE Shares.
HPE is a corporation organized under the laws of Delaware. The rights of HPE Stockholders are governed by the DGCL, the certificate of incorporation and bylaws of HPE and the listing rules of the NYSE. Micro Focus is a public limited company organized under the laws of England and Wales. The rights of holders of Micro Focus ADSs will be governed by English law, the Micro Focus Articles, the Deposit Agreement pursuant to which the Micro Focus ADSs will be issued and the listing rules of the NYSE.
There are differences between the rights presently enjoyed by HPE Stockholders and the rights to which such stockholders will be entitled as holders of Micro Focus ADSs following Closing. In some cases, the holders of Micro Focus ADSs to be issued in the Merger may not be entitled to important rights to which they are entitled as HPE Stockholders or would have been entitled as Micro Focus Shareholders. The rights and terms of the Micro Focus ADSs are designed to replicate, to the extent reasonably practicable, the rights attendant to Micro Focus Shares, which are currently listed on the LSE. However, because of aspects of English law, the Micro Focus Articles and the terms of the Deposit Agreement, the rights of holders of Micro Focus ADSs will not be identical to and, in some respects, may be less favorable than, the rights of Micro Focus Shareholders. For more information regarding the characteristics of, and differences between HPE Shares, Micro Focus Shares and Micro Focus ADSs, see the sections entitled Description of the Micro Focus American Depositary Shares, Description of Micro Focus Shares and Comparison of Rights of Micro Focus Shareholders and Micro Focus ADS Holders and HPE Stockholders.
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Holders of Micro Focus ADSs may not receive certain distributions on Micro Focus Shares represented by Micro Focus ADSs or any value for such distributions if it is illegal or impractical to make such distributions to holders of Micro Focus ADSs.
The Depositary has agreed to pay to holders of Micro Focus ADSs distributions with respect to cash or other distributions it or the custodian receives on Micro Focus Shares held by it on behalf of holders of Micro Focus ADSs after deducting its agreed fees and expenses. Holders of Micro Focus ADSs will receive these distributions in proportion to the number of Micro Focus Shares their Micro Focus ADSs represent. However, the Depositary is not responsible if it reasonably determines, to the extent permitted to do so under the Deposit Agreement, that it is unlawful or impractical to make a distribution available to any holders of Micro Focus ADSs. Micro Focus has no obligation to take any other action to permit the distribution of its Micro Focus ADSs, Micro Focus Shares, rights or anything else to holders of its Micro Focus ADSs. As a result, holders of Micro Focus ADSs may not receive the distributions made on Micro Focus Shares or any value from them if it is illegal or impractical for Micro Focus or the Depositary to make such distributions available to holders of Micro Focus ADSs. These restrictions may have a material adverse effect on the value of Micro Focus ADSs.
The Micro Focus ADSs may be subject to limitations on transfer.
Micro Focus ADSs are transferable on the books of the Depositary. However, the Depositary may refuse to issue and deliver Micro Focus ADSs or register transfers of Micro Focus ADSs generally when the register of the Depositary or the Micro Focus transfer books are closed or at any time if the Depositary or Micro Focus think it is necessary or advisable to do so.
It may be difficult for holders of Micro Focus ADSs to bring any action or enforce any judgment obtained in the United States against Micro Focus or members of the Micro Focus Board, which may limit the remedies otherwise available to holders of Micro Focus ADSs.
Micro Focus is incorporated as a public limited company in England and Wales and the majority of Micro Focus assets are located outside the United States. In addition, certain of the members of the Micro Focus Board are nationals and residents of countries, including the United Kingdom, outside of the United States. Most of the assets of these individuals are located outside the United States. As a result, it may be difficult or impossible for holders of Micro Focus ADSs to bring an action against Micro Focus or against these individuals in the United States if such holders believe their rights have been infringed under the securities laws or otherwise. In addition, an English court may prevent such holders from bringing an action, or enforcing a judgment of a U.S. court, against Micro Focus or its directors based on the securities laws of the United States or any state thereof.
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CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The forward-looking statements contained in this information statement/prospectus involve risks and uncertainties that may affect Micro Focus and Seattles operations, markets, products, services, prices and other matters. These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the expectations of Micro Focus or Seattle will be realized. This information statement/prospectus also contains forward-looking statements about the Transactions. Many factors could cause actual results to differ materially from these forward-looking statements with respect to the Transactions, including risks relating to the completion of the Transactions on anticipated terms and timing, including obtaining stockholder and regulatory approvals, anticipated tax treatment, unforeseen liabilities, future capital expenditures, revenues, expenses, earnings, synergies, economic performance, indebtedness, financial condition, losses, future prospects, business and management strategies for the management, expansion and growth of the new combined companys operations, Micro Focus ability to integrate the businesses successfully and to achieve anticipated synergies, and the risk that disruptions from the Transactions will harm Micro Focus business. While the list of factors presented here is considered representative, no such list should be considered to be a complete statement of all potential risks and uncertainties. Unlisted factors may present significant additional obstacles to the realization of forward-looking statements. Consequences of material differences in results as compared with those anticipated in the forward-looking statements could include, among other things, business disruption, operational problems, financial loss, legal liability to third parties and similar risks, any of which could have a material adverse effect on Micro Focus consolidated financial condition, results of operations or liquidity. Neither Micro Focus nor HPE assumes any obligation to provide revisions or updates to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.
Important factors that could cause the actual results of Micro Focus, Seattle or the Enlarged Group to differ materially from those reflected in or implied by the forward looking statements, or that could affect the value of Micro Focus Shares or Micro Focus ADSs include, without limitation, regional, national or global political, economic, business, competitive and market conditions, as well as risks related to any of the following:
• | ability to attract and retain sufficiently qualified management and key employees; |
• | restrictions on financing; |
• | interest rate hikes; |
• | covenants under the New Facilities; |
• | dependence on intellectual property and ability to protect intellectual property; |
• | third party claims of intellectual property infringement; |
• | dependence on third party developers; |
• | development of products and services that satisfy the needs of customers; |
• | competitive markets; |
• | hacking or other cybersecurity threats; |
• | availability, integrity and security of IT systems; |
• | protection of personal information; |
• | effective sales force and distribution channels; |
• | defective products; |
• | decisions to discontinue or restrict development expenditures; |
• | foreign currency exchange rates; |
• | acquisitions or divestitures; |
• | the integration of HPE Software into Micro Focus, including satisfaction of all applicable conditions set forth in the Transaction Documents prior to Closing; |
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• | failure to realize the anticipated benefits of the Merger; |
• | the ability of the Enlarged Group to obtain the same types and levels of benefits, services and resources that have historically been provided to Seattle by HPE; |
• | significant tax liabilities and indemnification in certain circumstances; |
• | share dilution, share price fluctuation and the liquidity of the markets for Micro Focus Shares and Micro Focus ADSs; |
• | other risks described in the section entitled Risk Factors; and |
• | our ability to manage the risks involved in the foregoing. |
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U.S. FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of the U.S. federal income tax consequences of the Distribution and the Merger to HPE Stockholders that are U.S. Holders (as defined below) and that receive Seattle Shares in the Distribution and that receive Micro Focus ADSs (and cash in lieu of fractional Micro Focus ADSs) in exchange for Seattle Shares pursuant to the Merger. The following discussion is based on the Code, Treasury Regulations, and interpretations of such authorities by the courts and the IRS, all as they exist as of the date of this information statement/prospectus and all of which are subject to change or differing interpretations, possibly with retroactive effect. Any such change or differing interpretation could affect the accuracy of the statements and conclusions set forth in this discussion. There can be no assurance that the IRS or a court will agree with the statements and conclusions reached in the following discussion.
This discussion is limited to HPE Stockholders who are U.S. Holders (as defined below), and hold, or will hold, their HPE Shares, their Seattle Shares received in the Distribution and their Micro Focus ADSs received in the Merger as capital assets within the meaning of Section 1221 of the Code (generally, property held for investment). Further, this discussion does not purport to consider all aspects of U.S. federal income taxation that may be relevant to HPE Stockholders in light of their particular circumstances, nor does it address any consequences to stockholders subject to special treatment under the U.S. federal income tax laws, such as tax-exempt entities, partnerships (including entities treated as partnerships for U.S. federal income tax purposes) or other flow-through entities (or investors therein), persons who are subject to the alternative minimum tax, certain former citizens or long-term residents of the United States, persons who have acquired their HPE Shares pursuant to the exercise of employee stock options or otherwise as compensation, banks or other financial institutions, insurance companies, dealers or traders in stocks, securities or currencies, persons who use or are required to use a mark-to-market method of accounting, or persons who hold their HPE Shares (or the Seattle Shares received in the Distribution or their Micro Focus ADSs received in the Merger) as part of a straddle, hedge, conversion, constructive sale, synthetic security, integrated investment, or other risk-reduction transaction for U.S. federal income tax purposes. This discussion does not address any U.S. federal non-income tax laws, including the estate and gift tax laws, the so-called Medicare tax on net investment income, any considerations with respect to any withholding required pursuant to the Foreign Account Tax Compliance Act of 2010 (including the Treasury Regulations promulgated thereunder and any intergovernmental agreements entered in connection therewith), any reporting requirements except to the extent expressly discussed below, or any state, local or foreign tax consequences. HPE Stockholders should consult their own tax advisors as to the particular tax consequences to them of the Distribution and the Merger.
For the purposes of this discussion, the term U.S. Holder means a beneficial owner of HPE Shares (and Seattle Shares received in the Distribution and Micro Focus ADSs received in the Merger) that is, for U.S. federal income tax purposes:
• | an individual who is a citizen or resident of the United States; |
• | a corporation (or other entity that is classified as a corporation for U.S. federal income tax purposes) that is created or organized under the laws of the United States or any State or political subdivision thereof or the District of Columbia; |
• | an estate the income of which is subject to U.S. federal income taxation regardless of its source; or |
• | a trust (a) if a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) that has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person for U.S. federal income tax purposes. |
If a partnership (including any entity or arrangement treated as a partnership for U.S. federal income tax purposes) holds HPE Shares (or Seattle Shares received in the Distribution or Micro Focus ADSs received in the Merger) the tax treatment of a partner in the partnership generally will depend upon the status of the partner and the activities of the partnership. A partnership or partner in a partnership holding HPE Shares, Seattle Shares received in the Distribution or Micro Focus ADSs received in the Merger should consult its own tax advisors regarding the tax consequences of the Distribution and the Merger.
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The summary of certain U.S. federal income tax consequences set out below is for general information only and is subject to the considerations set out above. It is not a substitute for careful tax planning and advice. HPE Stockholders should consult their own tax advisors as to the particular tax consequences to them of the Distribution and the Merger, the applicability and effect of state, local, non-U.S. and other tax laws (including the U.S. federal and gift tax laws), the applicability of any tax treaty, and possible changes in tax laws.
U.S. Federal Income Tax Consequences of the Distribution and the Merger
HPE Tax Opinion and IRS Ruling
The consummation of the Transactions is conditioned upon HPEs receipt of the HPE Tax Opinion from its tax counsel, Skadden, substantially to the effect that, among other items, for U.S. federal income tax purposes, (i) the Distribution, taken together with the Contribution, should qualify as a reorganization under Sections 368(a)(1)(D), 361 and 355 of the Code upon which no income, gain or loss should be recognized by HPE or Seattle (except for certain items required to be recognized under Treasury Regulations regarding consolidated federal income tax returns) and (ii) the Merger should qualify as a reorganization within the meaning of Section 368(a) of the Code.
The HPE Tax Opinion will be based on current law and will rely upon various factual representations and assumptions, as well as certain undertakings made by HPE, Seattle and Micro Focus. If any of those representations or assumptions is untrue or incomplete or any of those undertakings is not complied with, or if the facts upon which the HPE Tax Opinion is based are different from the actual facts that exist at the time of the Distribution, the conclusions reached in the HPE Tax Opinion could be adversely affected and the Distribution and/or certain related transactions may not qualify for the intended tax treatment. Furthermore, HPE understands that it is not possible for its tax counsel, Skadden, to reach a more definitive conclusion regarding the characterization of the Contribution and the Distribution for U.S. federal income tax purposes given the lack of direct authority on which taxpayers can rely involving a foreign counterparty such as Micro Focus (which is incorporated in the U.K.). Given Micro Focus status as a foreign corporation for U.S. tax purposes, unless the IRS Ruling is received and addresses such matters, certain conclusions in the HPE Tax Opinion will relate to matters for which there is no legal authority directly on point and where similar issues are not present in transactions involving domestic counterparties, and such conclusions will therefore necessarily be based upon analysis and interpretation of analogous authorities. Based upon such analysis and authorities, the HPE Tax Opinion will provide that the Distribution, taken together with the Contribution, should qualify as a reorganization. However, an opinion of counsel is not binding on the IRS or the courts. Accordingly, no assurance can be given that the IRS will not challenge the conclusions set forth in the HPE Tax Opinion or that a court would not sustain such a challenge. The lack of a more definitive conclusion in the HPE Tax Opinion reflects the risk of such challenge and that such challenge may be sustained.
HPE also intends to seek the IRS Ruling regarding certain issues relevant to the qualification of the Distribution and certain other aspects of the Separation for tax-free treatment for U.S. federal income tax purposes. The receipt of any such ruling is not a condition to HPEs and Seattles obligation to consummate the Transactions, and there is no assurance that any or all of the requested rulings will be received.
Although the IRS Ruling, if received, will generally be binding on the IRS, the continuing validity of the IRS Ruling will be subject to the accuracy of factual representations and assumptions made in the ruling request. In addition, as part of the IRSs general ruling policy with respect to transactions under Section 355 of the Code, the IRS will not rule on the overall qualification of the Distribution for tax-free treatment, but instead only on certain significant issues related thereto.
The Distribution
Assuming that the Distribution, taken together with the Contribution, qualifies as a reorganization under Sections 368(a)(1)(D) and 355 of the Code as described above, then, for U.S. federal income tax purposes:
• | HPE will generally not recognize any income, gain or loss on the Distribution (except for taxable income or gain possibly arising as a result of certain internal restructuring transactions undertaken prior to or in anticipation of the Distribution or with respect to any excess loss account or intercompany transaction required to be taken into account by HPE under Treasury Regulations relating to consolidated federal income tax returns); |
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• | U.S. Holders of HPE Shares will not recognize any income, gain or loss upon the receipt of Seattle Shares in the Distribution; |
• | a U.S. Holder’s aggregate tax basis in its HPE Shares and the Seattle Shares immediately after the Distribution will be the same as the aggregate tax basis of the HPE Shares held by such U.S. Holder immediately before the Distribution, allocated between such HPE Shares and Seattle Shares in proportion to their relative fair market values on the date of the Distribution; and |
• | a U.S. Holder’s holding period of the Seattle Shares received in the Distribution will include the holding period of the HPE Shares with respect to which the Seattle Shares were received. |
U.S. Holders that have acquired different blocks of HPE Shares at different times or at different prices should consult their tax advisors regarding the allocation of their aggregate tax basis in, and the holding period of, the Seattle Shares distributed with respect to such blocks of HPE Shares.
As discussed above, notwithstanding the receipt by HPE of the HPE Tax Opinion, the IRS could assert that the Distribution and/or certain related transactions do not qualify for tax-free treatment for U.S. federal income tax purposes. If the IRS were successful in taking this position, the consequences described above would not apply and HPE, Seattle and HPE Stockholders could be subject to significant U.S. federal income tax liability. In addition, certain events that may or may not be within the control of HPE, Seattle or Micro Focus could cause the Distribution and certain related transactions to not qualify for tax-free treatment for U.S. federal income tax purposes. Depending on the circumstances, Seattle and Micro Focus may be required to indemnify HPE for taxes (and certain related losses) resulting from the Distribution and certain related transactions not qualifying for the intended tax treatment.
If the Distribution were determined not to qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, HPE would generally be subject to U.S. federal income tax as if it sold the Seattle Shares in a taxable transaction. In particular, HPE would recognize taxable gain (but not loss) in an amount equal to the excess of (i) the total fair market value of the Seattle Shares distributed in the Distribution over (ii) HPEs aggregate tax basis in such Seattle Shares. In addition, each U.S. Holder who receives Seattle Shares in the Distribution would generally be treated as receiving a taxable distribution in an amount equal to the fair market value of the Seattle Shares received by such holder in the Distribution. In general, such distribution would be taxable as a dividend to the extent of HPEs current and accumulated earnings and profits (as determined for U.S. federal income tax purposes). To the extent the distribution exceeds such earnings and profits, the distribution would generally constitute a non-taxable return of capital to the extent of the holders tax basis in its HPE Shares, with any remaining amount of the distribution taxed as capital gain. A U.S. Holder would have a tax basis in its Seattle Shares received in the Distribution equal to their fair market value on the date of the Distributions. Certain U.S. Holders may be subject to special rules governing taxable distributions, such as those that relate to the dividends received deduction and extraordinary dividends.
Even if the Distribution, taken together with the Contribution, were otherwise to qualify as a reorganization under Sections 368(a)(1)(D) and 355 of the Code, the Distribution would be taxable to HPE (but not to HPE Stockholders) pursuant to Section 355(e) of the Code if one or more persons were to acquire a 50 percent or greater interest (by vote or value) in the stock of either HPE or Seattle, directly or indirectly (including through the acquisition of stock of Micro Focus after the Merger), as part of a plan or series of related transactions that include the Distribution. For this purpose, any acquisitions of an interest in HPE or Seattle within the period beginning two years before the Distribution and ending two years after the Distribution are presumed to be part of such a plan, although HPE may be able to rebut that presumption. For purposes of this test, the Merger will be treated as part of a plan, but the Merger standing alone should not cause the Distribution to be taxable to HPE under Section 355(e) of the Code because HPE Stockholders will directly own more than 50 percent of Micro Focus Shares following the Merger. Nevertheless, if the IRS were to determine that other acquisitions of HPE Shares or Seattle Shares, either before or after the Distribution, were part of a plan or series of related transactions that included the Distribution, such determination could result in the recognition of a material amount of taxable gain by HPE under Section 355(e) of the Code.
The Merger
The Merger is intended to qualify as a reorganization within the meaning of Section 368(a) of the Code. However, even if the Merger so qualifies, pursuant to certain rules contained in Section 367(a) of the Code and the Treasury Regulations promulgated thereunder, U.S. Holders will generally recognize gain, if any, but not loss,
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on the exchange of Seattle Shares for Micro Focus ADSs pursuant to the Merger, in an amount equal to the excess of the fair market value of the Micro Focus ADSs received by the U.S. Holder pursuant to the Merger over such stockholders adjusted basis in the Seattle Shares (determined as described above under —The Distribution) exchanged therefor. Any gain recognized by a U.S. Holder in the Merger should be capital gain, and should be long-term capital gain if the HPE Shares in respect of which the Seattle Shares were received have been held by such stockholder for more than one year at Closing. A U.S. Holder should not be permitted to recognize any loss realized on the exchange of its Seattle Shares for Micro Focus ADSs.
A U.S. Holder that recognizes gain pursuant to the Merger should have an adjusted tax basis in the Micro Focus ADSs it receives equal to the fair market value of the Micro Focus ADSs received in the Merger and a U.S. Holder that realizes a loss with respect to its Seattle Shares exchanged in the Merger should have an adjusted tax basis in the Micro Focus ADSs received in the Merger equal to such stockholders adjusted tax basis in its Seattle Shares surrendered in exchange therefor. Such U.S. Holders holding period of such Micro Focus ADSs should include the holding period of such stockholders Seattle Shares surrendered in exchange therefor (determined as described above under —The Distribution).
Special considerations may exist for U.S. Holders that have acquired different blocks of HPE Shares at different times or at different prices, or otherwise have varying holding periods and bases with respect to different blocks of their HPE Shares. Such U.S. Holders should consult their tax advisors regarding the allocation of their aggregate basis among, and their holding period of, HPE Shares and Seattle Shares received in the Distribution and the amount and character of gain recognized pursuant to the Merger, as well as the basis and holding period of the Micro Focus ADSs received in the Merger. In determining the amount of gain recognized in the Merger, each Seattle Share transferred should be treated as the subject of a separate exchange. Thus, if a U.S. Holder transfers some Seattle Shares on which gains are realized and other Seattle Shares on which losses are realized, such U.S. Holders may not net the losses against the gains to determine the amount of gain recognized.
A U.S. Holder that receives cash in lieu of fractional Micro Focus ADSs in the Merger should be treated as though it first received such fractional Micro Focus ADS in the Merger, and then sold such fractional Micro Focus ADSs for the amount of cash received in lieu thereof. Such U.S. Holder should recognize capital gain or loss on such sale measured by the difference between the cash received for such fractional Micro Focus ADS and the stockholders basis in the fractional Micro Focus ADS, as determined above. Such capital gain or loss should generally be a long-term capital gain or loss if the U.S. Holders holing period in such fractional Micro Focus ADSs (determined as described above) exceeds one year on such disposition.
Information Reporting and Backup Withholding
Payments of cash to a U.S. Holder in lieu of fractional Micro Focus ADSs in the Merger may be subject to information reporting and backup withholding (currently at a rate of 28%), unless such U.S. Holder provides a correct taxpayer identification number (generally on an IRS Form W-9) and otherwise complies with the requirements of the backup withholding rules. Backup withholding is not an additional tax. Rather, the tax liability of persons subject to backup withholding is generally reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund may generally be obtained, provided that the required information is properly furnished in a timely manner to the IRS.
U.S. Federal Income Tax Considerations of Owning and Disposing of Micro Focus ADSs Received in the Merger
The following is a discussion of certain U.S. federal income tax consequences to U.S. Holders of ownership and disposition of Micro Focus ADSs. The discussion is based on the determination by Micro Focus that it is not a passive foreign investment company (PFIC) for U.S. federal income tax purposes and the assumption that it will be treated as a non-U.S. corporation for U.S. federal income tax purposes.
Ownership of ADSs in General
For U.S. federal income tax purposes, a U.S. Holder of the Micro Focus ADSs generally will be treated as the owner of the Micro Focus Shares represented by the Micro Focus ADSs.
The U.S. Treasury Department has expressed concern that depositaries for American Depositary Receipts, or other intermediaries between the holders of shares of an issuer and the issuer, may be taking actions that are
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inconsistent with the claiming of U.S. foreign tax credits by U.S. Holders of those receipts or shares. Accordingly, the analysis regarding the availability of a U.S. foreign tax credit for U.K. taxes and sourcing rules described below could be affected by future actions that may be taken by the U.S. Treasury Department.
Dividends
Under the U.S. federal income tax laws, and subject to the PFIC rules discussed below, for U.S. Holders, the gross amount of any dividend Micro Focus pays out of its current or accumulated earnings and profits (as determined for U.S. federal income tax purposes) is subject to U.S. federal income taxation. For certain noncorporate U.S. Holders, including individuals, dividends that constitute qualified dividend income will be taxable to such U.S. Holder at the preferential rates applicable to long-term capital gains, provided that the U.S. Holder holds the Micro Focus ADSs for more than 60 days during the 121 day period beginning 60 days before the ex-dividend date and meets other holding period requirements. Dividends Micro Focus pays with respect to the Micro Focus ADSs generally will be qualified dividend income.
The dividend is taxable to a U.S. Holder when a U.S. Holder receives the dividend, actually or constructively. The dividend will not be eligible for the dividends-received deduction generally allowed to United States corporations in respect of dividends received from other United States corporations. The amount of the dividend distribution that a U.S. Holder must include in its income will be the U.S. dollar value of the payments made, determined at the spot pound sterling/U.S. dollar rate on the date the dividend distribution is includible in the U.S. Holders income, regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or loss resulting from currency exchange fluctuations during the period from the date a U.S. Holder includes the dividend payment in income to the date a U.S. Holder converts the payment into U.S. dollars will be treated as ordinary income or loss and will not be eligible for the special tax rate applicable to qualified dividend income. Such foreign exchange gain or loss generally will be income or loss from sources within the United States for foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and profits, as determined for U.S. federal income tax purposes, will be treated as a non-taxable return of capital to the extent of a U.S. Holders basis in the Micro Focus ADSs and thereafter as capital gain. However, Micro Focus does not expect to calculate earnings and profits in accordance with U.S. federal income tax principles. Accordingly, a U.S. Holder should expect to generally treat distributions made by Micro Focus as dividends.
A U.S. Holder must include any foreign tax withheld from the dividend payment in this gross amount even though the U.S. Holder does not in fact receive it. Subject to certain limitations, U.K. tax withheld, if any, in accordance with the United Kingdom-United States Income Tax Convention (1975), as amended (the Treaty), and paid over to the United Kingdom will be deductible or creditable against a U.S. Holders U.S. federal income tax liability. Special rules apply in determining the foreign tax credit limitation with respect to dividends that are subject to the preferential tax rates. To the extent a refund of the tax withheld is available to a U.S. Holder under U.K. law or under the Treaty, the amount of tax withheld that is refundable will not be eligible for credit against a U.S. Holders U.S. federal income tax liability.
Dividends paid by Micro Focus generally will be income from sources outside the United States and will, depending on a U.S. Holders circumstances, be either passive or general income for purposes of computing the foreign tax credit allowable to a U.S. Holder. The rules governing the foreign tax credit are complex and involve the application of rules that depend upon a U.S. Holders particular circumstances. Accordingly, U.S. Holders are urged to consult their own tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
Capital Gains
Subject to the PFIC rules discussed below, if a U.S. Holder sells or otherwise disposes of its Micro Focus ADSs in a taxable disposition, a U.S. Holder will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference between the U.S. dollar value of the amount that the U.S. Holder realizes and the U.S. Holders tax basis, determined in U.S. dollars, in the U.S. Holders Micro Focus ADSs. Capital gain of certain noncorporate U.S. Holders, including individuals, is generally taxed at preferential rates where the property is held for more than one year. The gain or loss will generally be income or loss from sources within the United States for foreign tax credit limitation purposes.
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PFIC Rules
Special U.S. federal income tax rules apply to U.S. persons owning stock of a PFIC. A foreign corporation will be considered a PFIC for any taxable year in which (i) 75% or more of its gross income is passive income, or (ii) 50% or more of the value (determined on the basis of a quarterly average) of its assets are considered passive assets (generally, assets that generate passive income). With certain exceptions, a U.S. Holders Micro Focus ADSs will be treated as stock in a PFIC if Micro Focus were a PFIC at any time during a U.S. Holders holding period in its Micro Focus ADSs.
Micro Focus believes that Micro Focus ADSs should not be treated as stock of a PFIC for U.S. federal income tax purposes, but this conclusion is a factual determination that is made annually and thus may be subject to change. If Micro Focus were to be treated as a PFIC, gain realized on the sale or other disposition of a U.S. Holders Micro Focus ADSs would in general not be treated as capital gain. Instead, unless a U.S. Holder elects to be taxed annually on a mark-to-market basis with respect to a U.S. Holders Micro Focus ADSs, a U.S. Holder would be treated as if it had realized such gain and certain excess distributions ratably over its holding period for the Micro Focus ADSs and would generally be taxed at the highest tax rate in effect for each such year to which the gain was allocated, together with an interest charge in respect of the tax attributable to each such year. In addition, dividends that a U.S. Holder receives from Micro Focus would not be eligible for the reduced tax rates applicable to qualified dividend income if Micro Focus is treated as a PFIC with respect to a U.S. Holder either in the taxable year of the distribution or the preceding taxable year, but instead would be taxable at rates applicable to ordinary income. In some cases, the adverse consequences resulting from Micro Focus being treated as a PFIC can be mitigated if a U.S. Holder is eligible for and timely makes a valid election to treat Micro Focus as a qualified electing fund. Micro Focus does not, however, expect to collect and provide certain of the information required for U.S. Holders to make this election.
Information with Respect to Foreign Financial Assets
Owners of specified foreign financial assets with an aggregate value in excess of $50,000 (and in some circumstances, a higher threshold) may be required to file an information report with respect to such assets with their tax returns. Specified foreign financial assets include financial accounts maintained by foreign financial institutions, as well as the following, but only if they are held for investment and not held in accounts maintained by financial institutions: (i) stocks and securities issued by non-U.S. persons, (ii) financial instruments and contracts that have non-U.S. issuers or counterparties, and (iii) interests in foreign entities. U.S. Holders are urged to consult their own tax advisors regarding the application of this reporting requirement to their ownership of the Micro Focus ADSs.
Backup Withholding and Information Reporting
Information reporting requirements generally will apply to dividend payments or other taxable distributions with respect to Micro Focus ADSs made to a noncorporate U.S. Holder within the United States, and the payment of proceeds to a noncorporate U.S. Holder from the sale of Micro Focus ADSs effected in the United States or through a United States office of a broker.
In addition, backup withholding may apply to such payments if a U.S. Holder fails to comply with applicable certification requirements or is notified by the IRS that such U.S. Holder has failed to report all interest and dividends required to be shown on a U.S. Holders U.S. federal income tax returns.
Payment of the proceeds from the sale of Micro Focus ADSs effected through a foreign office of a broker generally will not be subject to information reporting or backup withholding. However, a sale effected through a foreign office of a broker could be subject to information reporting in the same manner as a sale within the United States (and in certain cases may be subject to backup withholding as well) if (i) the broker has certain connections to the United States, (ii) the proceeds or confirmation are sent to the United States or (iii) the sale has certain other specified connections with the United States.
A U.S. Holder generally may obtain a refund of any amounts withheld under the backup withholding rules that exceed a U.S. Holders federal income tax liability by timely filing a refund claim with the IRS.
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U.S. Federal Income Tax Considerations Relating to Section 7874 of the Code
Characterization of Micro Focus for U.S. Federal Income Tax Purposes
Micro Focus is, and after the Merger generally would be, classified as a non-U.S. corporation (and, therefore, generally not subject to U.S. federal income taxation) under general rules of U.S. federal income taxation. Section 7874 of the Code, however, contains rules that can cause a non-U.S. corporation to be treated as a U.S. corporation (which would generally be subject to U.S. federal income tax on its income regardless of source) for U.S. federal income tax purposes. Many of these rules are relatively new, their application is complex, and there is little guidance regarding their application.
Under Section 7874 of the Code, a non-U.S. corporation (i.e. a corporation created or organized outside the U.S.) will nevertheless be treated as a U.S. corporation for U.S. federal income tax purposes (and therefore subject to U.S. federal income tax on its income, regardless of source) if each of the following three conditions are met:
• | the non-U.S. corporation acquires, directly or indirectly, or is treated as acquiring under applicable Treasury Regulations, substantially all of the assets held, directly or indirectly, by a U.S. corporation; |
• | after the acquisition, the former shareholders of the acquired U.S. corporation hold at least 80 percent (by vote or value) of the shares of the non-U.S. corporation by reason of holding shares of the U.S. acquired corporation (the 80 percent ownership test, and such ownership percentage the Section 7874 ownership percentage); and |
• | after the acquisition, the non-U.S. corporation’s expanded affiliated group (as defined in applicable Treasury Regulations) does not have substantial business activities in the non-U.S. corporation’s country of organization or incorporation when compared to the expanded affiliated group’s total business activities (the substantial business activities test). |
Although a significant portion of the operations of Micro Focus are in the United Kingdom, it is not expected that Micro Focus and its expanded affiliated group will have substantial business activities within the meaning of the Code and the Treasury Regulations in the United Kingdom after the Merger, and this discussion assumes that it will not.
80 Percent Ownership Test
Based on the terms of the Merger Agreement, the rules for determining the Section 7874 ownership percentage and certain factual assumptions, it is expected that the holders of Seattle Shares should be treated as owning, in the aggregate, less than 80 percent (by vote and value) of the Micro Focus Shares by reason of their ownership of Seattle Shares. Therefore, under current U.S. federal income tax law, it is expected that Micro Focus should not be treated as a U.S. corporation for U.S. federal income tax purposes pursuant to Section 7874 of the Code.
However, computing the Section 7874 ownership percentage is subject to various complex adjustments for which there is limited guidance. In particular, under recently issued temporary regulations under Section 7874 of the Code (the Temporary 7874 Regulations), certain adjustments are required that generally have the effect of increasing, for purposes of determining the Section 7874 ownership percentage, the percentage of shares of a foreign acquiring corporation that is deemed owned by the former shareholders of an acquired U.S. corporation by reason of holding shares in such U.S. corporation, certain of which are made based on a three-year look-back period starting on the closing date of the relevant acquisition transaction. For example, certain pre-acquisition distributions made by an acquired U.S. corporation are added back to the value of the shares of the non-U.S. corporation held by the former shareholders of the acquired U.S. corporation, which would have the effect of increasing the Section 7874 ownership percentage. Certain pre-Merger distributions made by Seattle (and certain of its predecessors or affiliates) may be subject to this rule. In addition, certain pre-acquisition share issuances made by the acquiring non-U.S. corporation could be backed out of the value of the non-U.S. corporations shares, which also would have the effect of increasing the Section 7874 ownership percentage. Certain pre-Merger issuances of Micro Focus Shares may be subject to this rule.
Moreover, certain of the relevant determinations for purposes of the Section 7874 ownership percentage must be made based on the facts at the time of Closing, such as the trading price of Micro Focus Shares. In addition, future changes to the rules in the Code or the Treasury Regulations promulgated thereunder could further expand the scope of Section 7874 of the Code, and any such changes could have retroactive effect.
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As a result of the foregoing, the precise determination of the Section 7874 ownership percentage will be subject to factual and legal uncertainties. There can be no assurance that the IRS will agree with the position that Micro Focus should not be treated as a U.S. corporation for U.S. federal income tax purposes after the Merger under current law or that a change in law would not result in Micro Focus being treated as a U.S. corporation.
If the 80 percent ownership test were met after Closing and Micro Focus were accordingly treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code, Micro Focus would be subject to substantial additional U.S. tax liability. Additionally, in such case, Micro Focus Shareholders that are not U.S. persons (for U.S. federal income tax purposes) would be subject to U.S. withholding tax on the gross amount of any dividends paid by Micro Focus to such shareholders at a rate of 30% (subject to any exemption or reduced rate available under an applicable tax treaty).
Regardless of any application of Section 7874 of the Code, Micro Focus is expected to be treated as a tax resident of the United Kingdom for United Kingdom tax purposes. Consequently, if Micro Focus were to be treated as a U.S. corporation for U.S. federal income tax purposes under Section 7874 of the Code, it could be liable for taxes as both a U.S. corporation and a United Kingdom resident, which could have a material adverse effect on its business, financial condition, results of operations and prospects.
The remaining discussion assumes that Micro Focus will be treated as a non-U.S. corporation for purposes of Section 7874 of the Code.
60 Percent Ownership Test
Following the acquisition of a U.S. corporation by a non-U.S. corporation, Section 7874 of the Code can limit the ability of the acquired U.S. corporation and its U.S. affiliates to utilize U.S. tax attributes (including net operating losses and certain tax credits) to offset U.S. taxable income resulting from certain transactions, and the Temporary Section 7874 Regulations and certain other Treasury Regulations can result in certain other adverse consequences. Specifically, if
• | the non-U.S. corporation acquires, directly or indirectly, or is treated as acquiring under the applicable Treasury Regulations, substantially all of the assets held, directly or indirectly, by a U.S. corporation; |
• | after the acquisition, the former shareholders of the acquired U.S. corporation hold at least 60 percent (by vote or value) of the shares of the non-U.S. corporation by reason of holding shares of the U.S. acquired corporation (the 60 percent ownership test); and |
• | the non-U.S. corporation does not satisfy the substantial business activities test, |
the taxable income of the U.S. corporation (and any U.S. person related to the U.S. corporation) for any given year, within a ten-year period beginning on the last date the U.S. corporations properties were acquired, will be no less than that persons inversion gain for that taxable year. A persons inversion gain for each year within that ten-year period includes gain from the transfer of shares or any other property (other than property held for sale to customers) and income from the license of any property that is either transferred or licensed as part of the acquisition, or, if after the acquisition, is transferred or licensed to a non-U.S. related person.
For purposes of Section 7874 of the Code, after Closing, the former shareholders of Seattle are expected to be treated as owning more than 60 percent (by vote and value) of Micro Focus by reason of their ownership of Seattle Shares (based on the rules, including the Temporary Section 7874 Regulations, for determining share ownership under Section 7874 of the Code and certain factual assumptions, as described above). Accordingly, the limitations on the utilization of certain tax attributes (including net operating losses and certain tax credits), and the adverse consequences under the Temporary Section 7874 Regulations, are expected to apply to Micro Focus and its U.S. affiliates (including SpinCo and its U.S. affiliates and historical U.S. affiliates of Micro Focus). Neither Seattle nor its U.S. affiliates expects to recognize any inversion gain as part of the Merger, however, there can be no assurance that future transactions undertaken by Micro Focus will not implicate these limitations and trigger adverse consequences. If, however, Seattle or its U.S. affiliates were to engage in any transaction that would generate any inversion gain in the future, such transaction may be fully taxable to Seattle or its U.S. affiliates notwithstanding that such entity may have certain deductions and other U.S. tax attributes which, but for the application of Section 7874 of the Code, would be available to offset some or all of such gain.
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Additionally, the Temporary Section 7874 Regulations, and certain related temporary regulations issued under other provisions of the Code, may limit Micro Focus ability to engage in certain restructuring transactions or access cash held or earned by certain of its (and Seattles) non-U.S. affiliates, in each case, without incurring substantial U.S. tax liabilities.
These rules, additional changes to the rules in Section 7874 of the Code or the Treasury Regulations promulgated thereunder, or other changes in law, could adversely affect Micro Focus effective tax rate or future planning for Micro Focus that is based on current law.
The summary set forth above is included for general information only. U.S. Holders are urged to consult their own tax advisors to determine the particular tax consequences to them of the Transactions, including the applicability and effect of U.S. state, local and non-U.S. tax laws.
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The Micro Focus Groups Business
The Micro Focus Group, headquartered in Newbury, U.K., is a global enterprise software company supporting the technology needs and challenges of the Global 2000. Its solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements while protecting corporate information at all times. The Micro Focus Groups product portfolios are titled Micro Focus and SUSE. The Micro Focus Product Portfolio comprises the sub-portfolios of COBOL Development and Mainframe Solutions, Host Connectivity, Identity, Access and Security, Development and IT Operations Management Tools, and Collaboration and Networking. SUSE, a pioneer in Open Source software, provides reliable, interoperable Linux, Cloud infrastructure and storage solutions that give enterprises greater control and flexibility. Micro Focus has also announced plans to add a Container-as-a-Service Platform (CaaSP) product and a Platform-as-a-Service (PaaS) product.
The Micro Focus Board believes that over time, most corporate organizations have developed complex IT systems and technology applications that lie at the heart of their operational effectiveness. In most cases, these applications have been developed in-house over a period of many years and reside on proprietary technology platforms and systems, becoming increasingly complex, inflexible and expensive to maintain. The Micro Focus Groups solutions offer cost effective ways for such organizations to avoid replacing their mission critical applications with expensive, risky and lengthy package software implementations or rewriting custom upgrades. The Micro Focus Board believes that the key value proposition to clients is that they are enabled to achieve significant incremental benefits from their prior investments in IT by addressing the technical challenges that link the old and the new such as cloud, big data or virtualization.
The proliferation of mobile devices and the emergence of the internet of things is driving significant growth in transaction volumes which most often occur on the old large COBOL and PL/I transaction systems where the Micro Focus Group has deep, often decades-long experience. These increasing volumes of data drive complexity (in development and testing) and cost (in terms of load and volume), often result in these old mature systems becoming ever bigger and more embedded, thereby increasing opportunities for the Micro Focus Group.
To be able to meet its customers needs, the Micro Focus Group has a number of partnerships and relationships worldwide with system integrators, independent software vendors and independent hardware vendors as well as other leading technology firms to assist it further in reaching its target markets.
Since May 2005, the Micro Focus Shares have been admitted to listing on the Official List and to trading on the main market of the LSE. As of July 25, 2017 (the latest practicable date prior to the date of this information statement/prospectus), Micro Focus had a market capitalization of £5.2 billion ($6.7 billion). As reported in and extracted without material adjustment from the audited consolidated results of the Micro Focus Group for the financial year ended April 30, 2017, the Micro Focus Group reported revenues of $1,380.7 million, an operating profit of $293.4 million and an Underlying Adjusted EBITDA of $640.9 million. For relevant definitions and additional information, see Managements Discussion and Analysis of the Financial Condition and Results of Operations of Micro Focus—EBITDA, Facility EBITDA, Adjusted EBITDA and Underlying Adjusted EBITDA.
Seasonality
Micro Focus quarterly revenues have historically been affected by a variety of seasonal factors typical of an enterprise software business with a license fee model and the industry in which it operates. In each fiscal year, Micro Focus total revenues are typically weighted towards its fourth fiscal quarter (in line with its financial year end) and third fiscal quarter (in line with calendar year end). The operating margins of its businesses are generally affected by seasonal factors in a similar manner because its base of largely fixed costs remains consistent throughout the year. Micro Focus believes that this trend will continue in the future and that its total revenue will continue to peak in the fourth fiscal quarter of each year. In aligning the financial year end of the Enlarged Group to October 31 following Closing, Micro Focus anticipates that the fourth quarter licence fee peak will move from April 30, 2018 to October 31, 2018. Maintenance and subscription fee renewals are spread throughout the financial year, however, there is a seasonal peak in the quarter ending January 31 as a result of the calendar year end, which coincides with the financial year-end of a large number of other companies. This results in operating cash flows being weighted to the second half of the current financial year ending April 30.
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The Micro Focus Groups Strategy
Following the integration review post-completion of the acquisition of the Attachmate Group, the Micro Focus Group has operated as two product portfolios, Micro Focus and SUSE, and the business has been reported this way since May 1, 2015. Each product portfolio has a chief executive officer and management team.
The software products offered by Micro Focus enable organizations to achieve improved functionality and performance from their enterprise applications and middleware, whilst lowering their ongoing cost of IT operations. The Micro Focus Group allocates capital and HR to achieve its core objective of delivering Total Shareholder Returns of 15 to 20% per annum over the long term. The Micro Focus Group executes this strategy with a strong discipline around the uses of cash and optimizes Total Shareholder Returns with a combination of organic execution, financial leverage and acquisitions. The Micro Focus Group has a base case model which estimates the returns to Micro Focus Shareholders from organic execution and the return of excess cash. Acquisitions are only made if the Micro Focus Board believes that they will generate risk adjusted returns greater than the base case. In the absence of material acquisitions, the Micro Focus Groups practice has been to return excess cash to Micro Focus Shareholders through an appropriate mechanism.
The Micro Focus Group has a successful track record of executing and integrating selected strategic acquisitions. The Micro Focus Groups acquisitions, in addition to delivering shareholder value through cash generation, have supplemented its organic growth strategy by broadening its technology proposition and extending the addressable market and customer base whilst also expanding the geographic reach of the business.
Since its admission to listing on the Official List on May 17, 2005, the Micro Focus Group has made the following acquisitions:
• | November 3, 2006: the acquisition of HAL Knowledge Solutions SpA, a provider of application portfolio management software products and services that provide business intelligence to drive information technology governance. |
• | May 4, 2007: the acquisition of Acucorp, Inc., an application modernization vendor with particular strengths in the small and medium sized markets. This acquisition brought a solid customer base and revenue stream and enhanced the Micro Focus Group’s core COBOL tools offering. |
• | June 17, 2008: the acquisition of NetManage, Inc., a software vendor providing technologies to transform core applications into internet-based business solutions. NetManage, Inc. provided the Micro Focus Group with terminal emulation technology to broaden the Micro Focus Group’s core legacy modernization capabilities. |
• | July 11, 2008: the acquisition of Liant Software Corporation, a provider of software tools for developing business information systems and solutions to help transform existing business applications and processes into modern distributed application software systems tools. Liant Software Corporation’s PL/I tools complemented the Micro Focus Group’s own COBOL tools and, by allowing the Micro Focus Group to address another core programming language, extended the Micro Focus Group’s addressable market. |
• | December 30, 2008: the acquisition of Relativity Technologies, Inc., which offered application modernization and application portfolio management software. This was the Micro Focus Group’s second acquisition in the assessment space and, coupled with HAL Knowledge Solutions SpA, strengthened the Micro Focus Group’s position in this market. |
• | May 29, 2009: the acquisition from Compuware Corporation of the suite of ASQ and all related sales, support and development infrastructure. This was the Micro Focus Group’s first extension into this market. |
• | July 27, 2009: the acquisition of Borland which, when combined with the ASQ business acquired from Compuware Corporation, helped the Micro Focus Group consolidate its position in the ASQ market and was consistent with its strategy of extending into logically adjacent market segments in order to expand its addressable market and further develop its customer proposition. |
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• | February 15, 2013: the purchase of the Iona CORBA assets (Orbacus, Orbix and Artix) from Progress Software strengthening the Micro Focus Group’s offering to customers around this technology. |
• | October 9, 2013: the acquisition of SoforTe GmbH, which enabled the Micro Focus Group to complete its vision of supporting the full application life cycle from maintenance through to full modernization for mainframe COBOL applications. |
• | November 29, 2013: the purchase of OpenFusion CORBA assets from PrismTech. By adding OpenFusion to an extensive portfolio that already included Orbacus, Orbix, VisiBroker and Artix, the Micro Focus Group was further able to consolidate its position as one of the leading global providers of CORBA software in the middleware market. |
• | December 31, 2013: the acquisition of AccuRev Inc. which extended the Borland portfolio of tools further and improved the Micro Focus Group’s execution capability enabling coverage of more of the market opportunity and offering a compelling value-add for existing customers of both companies. |
• | November 20, 2014: the transformational acquisition of the Attachmate Group, one of the leading global providers of enterprise infrastructure software solutions to businesses, governments and other large organizations in order to extend, manage and secure complex IT environments. The Attachmate Group comprised four principal software product portfolios: Attachmate, which delivers advanced software for terminal emulation, legacy modernization, managed file transfer and enterprise fraud management; NetIQ, which helps organizations tackle information protection challenges cost-effectively and manage the complexity of dynamic, highly-distributed application environments; Novel, which helps businesses work more efficiently and collaborate more effectively; and SUSE Linux, which offers a family of software products centered around SUSE Linux Enterprise, an interoperable platform for core computing needs supported by a shared global support and services organization. |
• | July 17, 2015: the acquisition of Authasas BV, a Dutch entity providing Multi Factor Authentication for the security market which is embedded in Identity Access and Security products acquired with TAG. |
• | May 2, 2016: the acquisition of the Serena Group, a leading provider of enterprise software focused on providing Application Lifecycle Management products for both mainframe and distributed systems. The Serena Group’s customers are typically highly regulated large enterprises, across a variety of sectors including banking, insurance, telco, manufacturing and retail, healthcare and government. The Serena Group’s position in the Source Code Change Management segment complements the Micro Focus product portfolio in COBOL Development and Host Connectivity. |
• | September 30, 2016: the acquisition of Gwava Inc., a leading company in email security and enterprise information archiving. In addition to GWAVA’s award winning product Retain, GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise. |
• | November 1, 2016: the acquisition by SUSE of specific software-defined storage management assets including openATTIC together with a team of highly talented engineers (all of whom have strong Open Source development skills and experience). |
• | March 9, 2017: the acquisition by SUSE of certain assets and employees relating to HPE’s Helion OpenStack and Stackato businesses. The acquisition included HPE naming SUSE as its preferred Open Source partner for Linux, OpenStack and Cloud Foundry solutions. |
In each case, the Micro Focus Groups management team has successfully integrated the new business into the Micro Focus Groups then existing operations and executed a program of targeted cost cutting and/or restructuring in order to improve operational efficiencies and group profitability.
In any acquisition, there are integration challenges and risks to varying degrees according to the size and complexity of the transaction. The Micro Focus Group has faced challenges relating to the incorporation of acquired technologies or products into its existing product lines and relating to the integration of the operations, facilities, personnel and commission plans of acquired businesses into the Micro Focus Group. The Micro Focus Group has also faced difficulties coordinating and consolidating the services and operations of acquired businesses across different service areas, regulatory systems and business cultures, including coordinating communications and service offerings with newly acquired customers. Additionally, the senior management team
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of Micro Focus has periodically experienced unexpected and occasionally burdensome demands on its attention due to these integration challenges. Historically, the Micro Focus Group believes that it has successfully worked through these integration challenges and has not seen a material impact on its ability to obtain the desired integration results or improvements in operations and profitability. See Risk Factors—Risks Related to the Business of the Group—The Groups strategy may involve the making of further acquisitions to protect or enhance its competitive position and failure to identify, manage, complete and integrate acquisitions, divestitures and other significant transactions successfully could have a material adverse effect on the Groups business and Risk Factors—Risks Related to the Transactions.
Organizational Structure and Business Overview
The chart below illustrates the current organizational structure for the Micro Focus Group:
In creating this organizational model, the SUSE portfolio was separated and Micro Focus brought together the original Micro Focus business units with Net IQ, Attachmate and Novell business units from the Attachmate Group acquisition to create the Micro Focus product portfolio. This resulted in one business with two product portfolios (SUSE and Micro Focus) each built around clear business logic and a recognition that effective execution requires that the need for specialization and focus is balanced with the need for efficiency and effectiveness overall. For example, sales, marketing, product development, product management and professional services are managed separately for each of the Micro Focus and SUSE portfolios to ensure the correct focus and to reflect the collaborative nature of the Open Source community but the infrastructure for each of the Micro Focus and SUSE portfolios (including systems and facilities) is managed together by the Micro Focus Group. This approach to finding the right balance between specialization and collaboration is a continuous process and wherever compromise is required the Micro Focus Group favors specialization.
From within the Micro Focus product portfolio there is also managed, for the Micro Focus Group overall, the corporate support functions of HR, IT, facilities, finance, legal and the project management office for acquisitions and integration. In addition, the Micro Focus product portfolio manages the delivery of a shared service for other elements of infrastructure support to the SUSE portfolio. The Micro Focus Board believes that this enables the Micro Focus Group to operate effectively and SUSE to directly control what they need to execute with speed and flexibility whilst leveraging the larger Micro Focus Group where effective.
The Micro Focus Group operates in approximately 39 countries. Customers span multiple industry vertical sectors and range from small to large enterprises.
The Micro Focus Groups Business Model – Strong and Established Technology Franchises
The Micro Focus product portfolio specializes in managing mature infrastructure software assets which have been delivering value to significant numbers of customers over long periods of time. Both product portfolios have some or all of the following attributes:
• | broad based – covering all industrial sectors; |
• | significant numbers of customers; |
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• | significant maintenance streams; |
• | relatively high switching costs; and |
• | significant market positions. |
In any IT system the customers business logic and data remain critical to their competitive advantage. The key to Micro Focus approach is unlocking this competitive advantage through exploitation of the latest technology innovation such as OpenStack, Software-defined Distributed Storage, mobility, Big Data, virtualization and Cloud. All of this needs to be done with the appropriate security to ensure customer data, company data and intellectual property are protected at all times. Typically customers would be forced into costly, disruptive and risky change to make this possible but with the Micro Focus Groups products, customers can take a different approach that bridges the old and the new.
By enabling its customers to link their investments in established technology with the latest innovation, the Micro Focus Group helps customers gain incremental returns on investments they have already made and to preserve and protect their data and business logic. The most striking example of this is that an application written in Micro Focus COBOL 39 years ago—before anyone had thought of Linux, Windows, virtualization, Cloud or wireless communications—will work today in all of those environments. By contrast, if a COBOL application had been rewritten in another language, to execute in Java or .NET the customer would have to undertake additional incremental re-writes and incur significant costs every time there was a major technology change.
The Micro Focus Groups acquisitions broaden the range and depth of its core infrastructure software solutions and bring outstanding new capabilities in Linux, OpenStack Cloud Infrastructure and security, the combination of which enables it to further extend the philosophy of bridging the old and the new across much more of its customers IT footprints.
As the Linux market and Open Source business have unique characteristics, the Micro Focus Group has a dedicated focus on the SUSE product portfolio. The Micro Focus Board believes that this focus is essential if it is to capitalize on the growth potential of these offerings and be responsive to the Open Source community and strong heritage of SUSE.
Current Portfolio – Underpinning the Business Model with Clear Execution and Investment Discipline
The typical stages of a product life cycle are from new product introduction through to high growth to broad adoption and maturity, to decline and ultimately obsolescence.
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When considering investment priorities, both organic and inorganic, the Micro Focus Group evaluates its options against a set of characteristics mapped to each stage of this adoption cycle enabling the categorization of its product portfolio into one of the four quadrants represented in the chart below.
Portfolio Management
New Models
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Growth Drivers
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Products or consumption models (cloud and subscription) that open new opportunities could become growth drivers or represent emerging use cases that we need to be able to embrace
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Products with consistent growth performance and market opportunity to build the future revenue foundations of the Group
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Optimize
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Core
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Products with declining revenue performance driven by the market or execution where the trajectory must be corrected to move back to the core category or investments focused to optimize long-term returns
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Products that have maintained broadly flat revenue performance but represent the current foundations of the Group and must be protected and extended
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The Micro Focus Groups approach to each category is summarized below:
• | New Models: Here the focus is on identifying new innovation in the marketplace that is applicable to the Micro Focus Group’s core and growth driver propositions. This is the case where new innovation is needed to connect or leverage existing IT or application assets to deliver returns or open new opportunities. An example of this is Silk Performer Cloudburst; a Cloud based implementation of the well-established on-premise Silk Performer product. This combination enables customers to execute a hybrid on premise/Cloud solution ensuring day to day operations are handled effectively on premise but offering broadly unlimited additional capacity as and when needed to support business operational peaks, underpinned by the flexibility and ease of use of a common solution in both cases. In SUSE, the investments in OpenStack Cloud Infrastructure, Software-defined Distributed Storage, SUSE CaaSP and SUSE PaaS are also clear examples. |
• | Growth Drivers and Core: These categories represent the majority of the Micro Focus Group’s revenue and investment focus. They look to identify critical technologies that have delivered significant value for customers and where the costs and risks of replacement or re-write are high and the returns from such activities are questionable. They determine how to enable these technologies for the latest IT innovations whether new operating environments such as Linux, OpenStack, Java or .NET or new use cases such as the Cloud or mobile. For example, Visual COBOL enables customers to take COBOL applications forward with confidence into the next phase of IT industry innovation, specifically Cloud and mobile, whilst protecting their investments in business logic and data built up through prior investments. Security is a major focus area for customers as they seek to balance being open and accessible to their customers with the need to protect confidential data and intellectual property. Through the Micro Focus Group’s suite of identity, access and security solutions the Micro Focus Group offers wide-ranging capabilities to help customers find this balance. These capabilities span multiple portfolios and significant opportunities for leverage and cross portfolio synergies exist. |
• | Optimize: As the IT landscape shifts in response to new opportunities or challenges, some technologies require repositioning or to be re-focused to identify and exploit remaining or new growth potential. This requires much more granular analysis and targeted investment. The Micro Focus Group’s model forces this discipline. Inevitably, some technologies eventually approach end of life as some customers replace them with new solutions. For the remaining customers they still represent significant value. The Micro Focus Group’s approach is to continue to offer flexible commercial and support models to enable customer access to the intellectual property and capabilities of these technologies for extended periods, again ensuring protection of customer investment for as long as possible technically and commercially. |
Within this overall portfolio the Micro Focus Group has some products that are growing significantly and others that are stable or in decline. The Micro Focus Groups business model means the way it manages the portfolio is analogous to a fund of funds with the objective of generating moderate growth over the medium-term, delivering high levels of profitability and strong cash generation and cash conversion ratio with a balanced
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portfolio approach. The Micro Focus Group will continue to focus investment in growth and core products and will not dispose of declining products unless it can achieve greater than the discounted cash flow they would generate in its ownership.
In addition to strengthening and developing strong franchises across the product portfolio, the Micro Focus Group is well positioned to help customers solve key challenges as they seek to be more effective, more competitive and more efficient. Decades of technology innovation has opened up tremendous opportunities for companies in almost every market but typically this has resulted in very complex IT environments. Most organizations operate infrastructure and applications which have emerged over time, often years apart, such that core legacy platforms sit alongside distributed systems, which more recently have been extended further again with web, Cloud and mobile technologies.
This is set to continue as todays business environment is characterized by unprecedented levels of change. The Micro Focus Board believes that companies need to embrace this change in a way that protects their most prized assets—their intellectual property, their business logic and their business data.
Micro Focus Product Portfolio
Products in the Micro Focus portfolio are organized into five sub-portfolios:
• | COBOL Development and Mainframe Solutions (CDMS); |
• | Host Connectivity (HC); |
• | Identity, Access and Security (IAS); |
• | Development & IT Operations Management Tools (Dev and ITOM); and |
• | Collaboration & Networking (C&N). |
Details of the five sub-portfolios are provided below.
CDMS
Micro Focus has continued to invest in its core CD products that primarily target the off-mainframe distributed development market. The CD products enable programmers to develop and deploy applications written in COBOL across multiple platforms including Windows, UNIX, Linux and the Cloud. Visual COBOL provides the fastest way for customers to move enterprise mainframe application workloads partially or wholly to Java Virtual Machine, .NET or Cloud environments whilst protecting their existing investments and intellectual property.
COBOL applications continue to be at the heart of the worlds business transactions and to power the majority of large organizations key business operations. Maintaining a leadership position in CD is at the core of Micro Focus value proposition. By embedding its products in industry standard development environments specifically Visual Studio and Eclipse, it has addressed the perceived skill issues, and expects that COBOL will provide a stable base and strong cash flow for the Micro Focus Group over the coming decades.
Micro Focus mainframe solutions product set addresses a customers need to get the most value out of its mainframe environment. These technologies allow customers flexibility in deciding the platform choice for development, testing and deployment of their business applications. Various business and technical drivers would determine if it is best to do these functions either within the mainframe environment or outside of it on distributed Windows, UNIX and Linux machines. Micro Focus offers customers the choice to do either or both, enabling the optimum balance of cost, risk and speed of execution across their mainframe and distributed computing platforms. Increasingly businesses are seeking to re-use existing business logic and data, while also looking to exploit new innovations in technology such as mobile and Cloud. The Micro Focus Groups mainframe solutions allow customers to accomplish both by enabling the re-deployment of enterprise mainframe applications to distributed systems, virtualized mobile platforms, and the Cloud. The Micro Focus Board estimates that the mainframe CD market opportunity is approximately three times as large as that for off-mainframe distributed CD.
The Micro Focus Board believes that Micro Focus will maintain its strong position in CDMS through products such as Visual COBOL and Enterprise Developer.
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Host Connectivity
The Host Connectivity solution set is the combination of the Attachmate products from the Attachmate Group and the Micro Focus Rumba products. The Micro Focus Board believes that this combination gives the Micro Focus Group the second largest market share, in the provision of host connectivity solutions. Micro Focus specializes in environments with heterogeneous systems or platforms and this product set has, in one form or another, assisted in these tasks for over 30 years.
At the core of the product set are the Reflection and Rumba terminal emulation product families that enable IT organizations to modernize and secure access to their host-based applications. Micro Focus products help IT improve user productivity as they extend host access to new web and mobile use cases while ensuring that modern security practices around encryption, authorization, and authentication can be enforced. During the financial year ended April 30, 2016, Micro Focus delivered capabilities from Reflection to the Rumba customers and vice versa. In addition it has built on its strengths in security to add capabilities from the rest of the Micro Focus portfolio to deliver even more value for customers who have invested in its Host Connectivity products.
The Host Connectivity capabilities are extended by other products that provide legacy integration technologies that enable businesses to put their mainframe assets to work in new ways by exposing applications and data to modern development environments and business analytics systems. There are additional SSH based file transfer solutions that solve a range of tactical and strategic problems for securely transferring files of any size, enabling businesses to work seamlessly with partners and customers.
In Host Connectivity, Micro Focus will seek to build on its existing strengths in terms of technology and customer base combined with its innovations in security to establish a true leadership position.
IAS
This product set offers a broad set of well-established solutions for Identity Governance and Administration, Access Management and Authentication, and Security Management. The Micro Focus Groups customers span all sectors with particular strength in regulated industries, including healthcare, finance, government, retail, manufacturing, and energy. In addition, companies in non-regulated industries also implement its IAS products as a best practice for protecting intellectual property or other sensitive information, and to make their organizations more efficient.
Customers use the Identity Governance and Access, Identity Management and Authentication solutions to apply integrated policies across local, mobile, and Cloud environments to govern access to information, administer and manage the identity and access lifecycle of users, and demonstrate compliance with regulations or mandates. Micro Focus provides solutions that address identity lifecycle management, risk-based authentication, SSO, access governance, and multi-factor authentication.
The Security Management solutions build upon this identity-centric approach by integrating identity and other contextual information with security monitoring, ensuring organizations have the security intelligence they need, when they need it, to detect and respond to abnormal activity that signals a data breach or compliance gap. The Security Management solutions provide privileged user management, secure configuration management and visibility and control over user activities, security events, and critical systems across an organization to enable them to quickly address evolving threats.
Key trends driving growth in this area include the continued expansion and diversity of security threats to organizations and the growth of the resulting financial risk, the increasing demand for organizations to demonstrate that they have the processes in place to manage access, and the continued expansion of virtualization and Cloud deployments increasing the level of complexity of the applications and information over which organizations need to manage access and monitor activity. Additionally organizations have an opportunity to cost-effectively implement stronger authentication methods than traditional username/password to help minimize data breaches.
The IAS solutions are well suited to address these trends, using well-established identity-powered technologies to help organizations govern and manage user privileges, facilitate and control access to applications and data, and monitor user and system activities. Through helping its customers balance between innovation and risk and by sharpening its focus in IAS, the directors of Micro Focus believe that Micro Focus is well positioned for growth over the longer term.
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Development & IT Operations Management Tools
This product set is the combination of the Application Development and Testing products from the original Micro Focus product portfolio, the Data Center Management and Workload Migration products from the heritage NetIQ brand; and the Endpoint Management software from the heritage Novell brand and the Serena Product Portfolio.
The Application Development and Testing products offer a range of DevOps solutions which span an organizations software supply chain - from definition (requirements capture) through to delivery (testing and change management). Organizations competing in a global marketplace must deliver innovative applications that meet customer expectations anytime, anywhere. Greater agility is required as software teams rapidly adapt to the volume and velocity of evolving business requirements and the demand to work in more diverse environments including mobile and Cloud. Micro Focus Application Development and Testing solutions improve communication and collaboration between business, test, and development teams for continuous delivery of a superior applications and user experience across all its device and platform combinations.
The Data Center Management solutions integrate service management, application management and systems management to give organizations a holistic view of their IT environment and business services, enabling companies to manage increased complexity and capacity with the right balance of cost, risk and speed of execution. Micro Focus provides application performance management, IT process automation, business service management and systems management solutions.
The Workload Migration and Disaster Recovery product suite help organizations complete data center transformation and migration projects quickly and efficiently with automatic, unattended high-speed Physical-to-Virtual, Virtual-to-Virtual, or Anywhere-to-Cloud workload migrations. Additionally, its high-performance disaster recovery solutions offer warm-standby recovery speeds similar to mirroring but at low costs similar to tape backup for all server workloads: physical and virtual, Windows and Linux.
Additionally, the IT Operations Management Tools include the endpoint management products that enable IT staff to handle the complexities of securing and managing a large footprint of personal computers, Macs, tablets and smartphones to provide the proper working environment for each employee.
Using a unified management console, these tools help enable all devices to be patched, compliant, secure and properly equipped. Due to the multifarious and complex nature of the user and system endpoints within todays large organizations, this can be a burdensome and costly undertaking, and accordingly the toolset is both broad and deep. The capabilities include service desk; application virtualization; asset management; configuration management; software distribution; full disk encryption; mobile device management; and patch management.
The Micro Focus Group offers a broad set of solutions and capabilities for customers. The Micro Focus Groups focus is on delivering the targeted innovation its customers need as they seek to solve complex, real world and ever changing challenges in building, operating and securing complex IT applications and infrastructure.
Collaboration & Networking
This product set has the balance of the Novell products together with CORBA from the original business of the Micro Focus Group and the GWAVA product portfolio.
Micro Focus collaboration products enable organizations to build and operate work environments that are more secure and easier to manage, regardless of how or where people work. The products form a complete collaboration solution that has long been praised by customers and industry watchers for security and reliability. Key capabilities include email, calendaring, instant messaging, contact management, task management; team workspaces with document management and workflows.
Collaboration brings people, projects, and processes together in one secure place to enhance team productivity and this fits closely with additional products that offer file, print, and networking services designed to enable organizations to securely print and share files both inside and outside their organization. The products can automate the configuration and management of high availability collaboration and networking servers, that are simple to resource, manage and maintain. Suitable for small workgroups right through to global enterprise deployments, the end-user value proposition includes dynamic file services which automates policies data storage, file access, secure file sharing, file reporting, mobile access and online, offline and mobile printing.
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Fully distributed networking services such as centralized server management, secure file storage, and storage management, provide full enterprise distributed networking environment suitable for small workgroups right through to global enterprise deployments.
This product set also includes the CORBA-based network and data transport products which provide outstanding functionality and performance to companies with a requirement for high speed and secure transfer of data between systems on their multi-platform networks. This technology is deployed across thousands of customers.
The Micro Focus Group has delivered value to its customer base with these products for decades and is committed to delivering the practical innovation and support its customers want and need to continue to leverage these investments.
The Micro Focus Group expects to maintain its strong positions in CDMS through products such as Visual COBOL and Enterprise Developer. In Host Connectivity, it will seek to build on its existing strengths in terms of technology and customer base combined with its innovations in security to establish a true leadership position. In Development & ITOM and Collaboration & Networking the strength of its existing franchises can be built upon through targeted innovation and customer engagement. By sharpening its focus in IAS the directors of Micro Focus believe that the Micro Focus Group is well positioned to drive for growth over the longer term.
SUSE Product Portfolio
SUSE provides and supports enterprise-grade Linux and Open Source solutions with exceptional service, value and flexibility. For over 20 years SUSE has collaborated with partners and Open Source communities to innovate, adapt and secure Open Source technologies and create solutions for the worlds most compute-intensive and data intensive IT environments across physical, virtual, containerized and Cloud platforms.
Thousands of customers around the world rely on SUSE for their Open Source, software-defined infrastructure needs ranging from enterprise Linux to OpenStack private Cloud to software defined, distributed storage – all combined with comprehensive management capabilities.
By harnessing the power, reliability and flexibility of SUSE solutions, the directors of Micro Focus believe that SUSE customers and partners are able to operate more efficiently, create new products and services faster and ultimately to compete better.
In a world of rapid and continuous technology change, SUSE customers can confidently embrace new development and operational models such as DevOps, Containers, IaaS and PaaS solutions while simultaneously leveraging the benefits of well-established mission critical paradigms and platforms.
The SUSE product portfolio comprises:
• | Open Source Software; |
• | Enterprise Linux; |
• | OpenStack Private Cloud; |
• | Software-defined Storage; and |
• | Systems Management. |
Details of the five sub-portfolios are provided below.
Open Source Software
SUSE products and solutions are developed from Open Source technologies and brought to market with an Open Source business model. Open Source software source code is made available in the public domain under a number of different licensing models which fosters collaboration and rapid innovation by developers around the world working both as private individuals and from within many of the industrys largest IT companies.
SUSE actively utilizes and engages in a wide range of Open Source projects and related industry initiatives where it works together with communities and partners to drive the new innovation and create meaningful industry standards. These projects include the Linux Foundation, OpenStack, Ceph, CloudFoundry, openHPC, OPNFV, Open Mainframe Project, Open Container Initiative and many more.
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Enterprise Linux
Linux is one of the first and most successful Open Source software projects in the industry and has now become a well-established choice in the enterprise operating system market but also in numerous other use cases including mobile devices, IoT, Cloud computing, Big Data analytics and more. All of the industrys major software-defined infrastructure innovations are being developed on and for the Linux operating system.
SUSE was the industrys first provider of an enterprise distribution of the Linux operating system and is the preferred choice on platforms such as IBM z Systems and for workloads such as SAP applications and SAP HANA.
Some of the key drivers behind the continued demand for enterprise Linux solutions such as SUSE Linux Enterprise Server include:
• | UNIX to Linux migrations—the movement of workloads from proprietary UNIX operating systems on specialized hardware to Linux on industry standard hardware platforms but also IBM z Systems and Power; |
• | Data center consolidation and virtualization—maximizing hardware investments by running multiple operating system instances on the same physical server; |
• | Cloud computing infrastructure—the most prevalent OS for the Cloud infrastructure and also widely used as the OS for the workloads running on the private and public Clouds; |
• | High performance computing—the world’s top supercomputing clusters and the growing use of high performance computing systems leverage the flexibility and performance of Linux operating systems; and |
• | Software-defined innovations—Linux has become the de-facto standard OS for the industry’s infrastructure software innovations from IoT, Big Data analytics and software-defined storage, IaaS and private Cloud, containers and orchestration, PaaS, network functions virtualization and software-defined networking. |
OpenStack Private Cloud
OpenStack has become the industrys clear Open Source standard for IaaS Cloud with active engagement from a number of leading IT companies and enterprises. This technology provides a flexible alternative to proprietary solutions which both commercial companies and end-customer enterprises can directly engage with through the OpenStack project in addition to utilizing distributions such as SUSE OpenStack Cloud.
SUSE was a founding platinum member of the OpenStack Foundation and has held the Foundations board chair position since its creation. SUSE OpenStack Clouds streamlined installation capabilities, unattended upgrades, high availability features and support for all leading hyper-visors makes it an ideal choice for enterprise private Cloud.
Some of the key drivers creating demand for OpenStack private Cloud solutions such as SUSE OpenStack Cloud include:
• | Data center evolution to Serial Digital Interface—the next step beyond data center consolidation and virtualization is to embrace the flexibility and agility of Cloud capabilities such as self-service, direct integration with software-defined storage and networking; |
• | On demand services and business agility—in a world that expects instant access to everything, the ability to rapidly stand up new products and services for both internal and external customers is essential to competing effectively; and |
• | Cost and value—traditional solutions lag in innovation and do not bring the economic scalability in both capital expenditure and operating costs needed to support modern business models the way Open Source solutions can. |
Software-defined Storage
Enterprises across most industry segments and sizes are struggling to control and manage the impact of rapid data growth at a time when effectively using information is rapidly becoming the key to competitive differentiation. With more data to store in increasingly large and complex formats for longer periods of time, traditional storage solutions are not able to adequately address all the use cases and needs.
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SUSE Storage, built on Ceph technology, is a well-positioned solution with resilient self-managing and self-correcting capabilities combined with flexibility to dynamically utilize both existing hardware as well as todays latest industry standard hardware components.
Some of the key drivers creating demand for Open Source software-defined storage solutions like SUSE Storage include:
• | Large data growth—more data volume, complex, large data formats and requirements to keep data for longer periods of time for analytics and regulatory compliance; |
• | Need for flexibility and elasticity—replacing traditional static storage appliances when more capacity is needed is simply not tenable in many cases. Enterprises require the ability to dynamically add capacity using industry standard hardware; and |
• | Cost and value—traditional storage solutions are often not economically scalable when faced with the massive data growth, larger complex data formats and need for longer term storage. |
Systems Management
For mid-sized or larger computing environments, comprehensive systems management is a critical factor that many enterprises still struggle to address. Considering the complexity of multiple hardware platforms, a wide variety of infrastructure technologies and the increasing use of combinations of on premise, hosted and public Cloud resources, the business challenges are significant as are the potential benefits.
SUSE Manager is designed with a deep understanding of todays Linux-based, Open Source enterprise infrastructure technologies whether those are used on premise, virtualized or in a Cloud deployment. SUSE Manager is a powerful tool for integrated management and orchestrations of system provisioning, monitoring, configuration management, automated patching – all designed to support the most complex enterprise and supercomputing scale deployments.
The key drivers behind the demand for systems management solutions like SUSE Manager include:
• | Managing complexity—growth in systems (physical, virtual and Cloud) and new infrastructure technologies like IaaS, Containers, PaaS creates needs for new management methodologies (Development/Operations) and new tooling to manage effectively; |
• | Maintaining security, SLAs and uptime—to be most effective, systems and servers, wherever they are deployed, must be secure and able to meet stringent SLAs with maximum uptime; |
• | Reducing operating costs—the days of manual systems management processes are past for any enterprise that needs to also innovate and compete. Automation is essential to free up resources and control operating expenditure systems management costs; and |
• | Meeting regulatory compliance requirements—to stay compliant, enterprises must have comprehensive monitoring, configuration management controls and remediation capabilities in place. |
Product Research and Development
The Micro Focus Group invests heavily in product development and has seen significant enhancements to existing products and has accelerated the development of new products. New versions of products have been released each sub-portfolio in the past year. Through its market knowledge and close contact with customers, Micro Focus has sought to refine products to respond to the changing needs of the Micro Focus Groups customers.
During the financial years ended April 30, 2015, April 30, 2016 and April 30, 2017, an aggregate of $113.3 million, $164.6 million and $180.1 million, respectively, were charged to the consolidated statement of comprehensive income of the Micro Focus Group in respect of research and development expenditure. The Micro Focus Board intends to continue to focus investment in growth and core products and do not intend to dispose of declining products unless such products can achieve greater than the discounted cash flow they would generate in the ownership of the Enlarged Group.
Micro Focus has 90 operational properties with a total of 1.287 million square feet of space worldwide. Micro Focus believes that its existing properties are in good condition and are suitable for the conduct of its business.
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HPE, a Delaware corporation formed in 2015, has its principal executive offices at 3000 Hanover Street, Palo Alto, California 94304.
HPE is a leading global provider of the technology solutions customers need to optimize their traditional IT while helping them build the secure, cloud-enabled, mobile-ready future that is uniquely suited to their needs. HPE conducts its business through its Enterprise Group, Software, Financial Services and Corporate Investments segments. The Enterprise Group provides a broad portfolio of enterprise technology solutions to address customer needs in building the foundation for the next generation of applications, web services and user experiences. HPE Software, which will be transferred to Seattle in the Reorganization and which is further described in the section entitled Information on HPE Software, provides big data platform analytics, application testing and delivery management, security and information governance and IT operations management solutions for businesses and other enterprises of all sizes. Financial Services provides flexible investment solutions for HPEs customers—such as leasing, financing, IT consumption and utility programs—and asset management services that facilitate unique technology deployment models and the acquisition of complete IT solutions, including hardware, software and services from HPE and others. Corporate Investments includes Hewlett Packard Labs and certain business incubation projects, among others. As of April 1, 2017, HPE owned or leased approximately 18.5 million square feet of space worldwide, had operations in approximately 111 countries and employed approximately 81,000 people.
HPEs internet address is www.hpe.com. The information contained on HPEs website is not incorporated by reference into this information statement/prospectus and should not be considered part of this information statement/prospectus. HPE makes available on this website, free of charge, its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after it electronically files or furnishes such materials with or to the SEC. Investors may access these filings in the Investor Relations section of HPEs website.
For a more detailed description of the business of HPE, please see HPEs Annual Report on Form 10-K for the fiscal year ended October 31, 2016 filed with the SEC. The information contained on HPEs filings and reports is not incorporated by reference into this information statement/prospectus and should not be considered part of this information statement/prospectus.
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Pursuant to the Reorganization and prior to the Distribution and the Merger, HPE will transfer HPE Software to Seattle, a wholly owned subsidiary of HPE, as further described elsewhere herein.
HPE Software provides big data platform analytics, application testing and delivery management, security and information governance and IT operations management solutions for businesses and other enterprises of all sizes. HPE Softwares offerings include licenses, support, professional services and SaaS.
Business Segments, Products and Services
HPE Software consists of one reportable segment which engages in the development and sale of software solutions. HPE Software organizes its business into the following four product groups:
Big Data Platform Analytics
HPE Softwares Big Data Platform Analytics product group provides a full suite of software designed to help organizations capture, store, explore, analyze, protect and share information and insights within and outside their organizations to improve business outcomes. HPE Softwares Big Data suite includes HPE Vertica, an analytics database technology for machine, structured and semi-structured data; and HPE IDOL, an analytics tool for unstructured information, including audio, video and text.
Application Testing and Delivery Management
HPE Softwares Application Testing and Delivery Management product group provides software that enables organizations to deliver high-performance applications, accelerating the application delivery life cycle and automating the testing processes to ensure the quality and scalability of desktop, web, mobile and cloud-based applications.
Security and Information Governance
HPE Softwares Security and Information Governance product group provides comprehensive solutions that span security and risk management, with a focus on protecting users, applications and data, while also enabling customers to manage risks and meet legal obligations. HPEs Security software is designed to disrupt fraud, hackers and cyber criminals by testing and scanning software for security vulnerabilities, improving network defenses and security, implementing security controls, safeguarding data at rest, in motion and in use (regardless of where software and data reside) and providing security intelligence, analytics and information management to identify threats and manage risk. HPE Softwares Information Governance software provides solutions for archiving, data protection, eDiscovery and enterprise content management. HPE Softwares Security software as well as Information Governance offerings allow it to deliver unique offerings that address its customers evolving data needs.
IT Operations Management
HPE Softwares IT Operations Management product group provides the software required to automate routine IT tasks and to pinpoint IT problems as they occur, helping enterprises to reduce operational costs and improve the reliability of applications running in a traditional, cloud or hybrid environment.
Sales, Marketing and Distribution
HPE Software has over 30,000 customers worldwide, including 98 of the Fortune 100 companies. HPE Softwares customers are organized by commercial and large enterprise groups, including business and public sector enterprises, and purchases of solutions and services may be fulfilled directly by HPE Software or indirectly through a variety of partners, including:
• | resellers that sell HPE Software’s products and services, frequently with their own value-added products or services, to targeted customer groups; |
• | distribution partners that supply HPE Software’s solutions to resellers; |
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• | original equipment manufacturers (OEMs) that integrate HPE Software’s services with their own products and services, and sell the integrated solution; |
• | independent software vendors that provide their clients with specialized software products and often assist HPE Software in selling its products and services to clients purchasing their products; |
• | systems integrators that provide expertise in designing and implementing custom IT solutions and often partner with HPE Software to extend their expertise or influence the sale of HPE Software’s products and services; and |
• | advisory firms that provide various levels of management and IT consulting, including systems integration work, and typically partner with HPE Software on client solutions that require HPE Software’s products and services. |
The mix of HPE Softwares business conducted by direct sales or channel differs substantially by customer type and region. HPE Software believes that customer buying patterns and different regional market conditions require HPE Software to tailor sales and marketing efforts accordingly. HPE Software is focused on driving the depth and breadth of its coverage, in addition to identifying efficiencies and productivity gains, in both direct and indirect businesses.
HPE Softwares products are available worldwide. HPE Software believes this geographic diversity allows HPE Software to meet demand on a worldwide basis for customers, draws on business and technical expertise from an international workforce, provides stability to operations, provides revenue streams that may offset geographic economic trends and offers HPE Software an opportunity to access new markets for its maturing products. HPE Software believes that its broad geographic presence gives HPE Software a solid base on which to build future growth.
Approximately 51% of HPE Softwares overall net revenue in the financial year ended October 31, 2016 came from outside the United States.
HPE Softwares research and development efforts are focused on designing and developing products, services and solutions that anticipate customers changing needs and desires and emerging technological trends. These efforts are also focused on identifying the areas where HPE Software believes it can make a unique contribution and where partnering with other leading technology companies will leverage HPE Softwares cost structure and maximize customers experiences.
Expenditures for research and development were $603 million in the financial year ended October 31, 2016, $670 million in the financial year ended October 31, 2015 and $673 million in the financial year ended October 31, 2014.
HPE Softwares general policy is to seek patent protection for those inventions likely to be incorporated into products and services or where obtaining such proprietary rights will improve HPE Softwares competitive position. HPE Softwares worldwide patent portfolio includes approximately 2,000 granted patents and pending patent applications.
Patents generally have a term of up to 20 years from the date they are filed. As HPE Softwares patent portfolio has been built over time, the remaining terms of the individual patents across the patent portfolio vary. HPE Software believes that its patents and patent applications are important for maintaining the competitive differentiation of its products and services, enhancing its freedom of action to sell products and services in markets in which HPE Software chooses to participate, and maximizing its return on research and development investments. No single patent is in itself essential to the business as a whole.
HPE Software defines backlog as current software license product orders which have not been shipped to customers. Since HPE Software's practice is to ship products promptly upon receipt of purchase orders from
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customers, backlog is zero or negligible at the end of any quarterly or annual reporting period. Therefore, HPE Software believes that backlog information is not material to an understanding of its overall business.
General economic conditions have an impact on HPE Softwares business and financial results. From time to time, the markets in which HPE Software sells services and solutions experience weak economic conditions that may negatively affect sales. HPE Software experiences some seasonal trends in the sale of services and solutions. For example, European sales are often weaker in the summer months.
As is typical in the public sector space in the United States, the U.S. government has the unilateral right, with respect to HPE Softwares contracts with the U.S. government, to exercise option years extending the period of performance as well as the right to terminate for convenience, with recovery of HPE Softwares costs available through termination settlement provisions under applicable federal regulations. HPE Softwares fiscal 2016 revenue derived from contracts with the U.S. government which are subject to such rights was approximately $164 million.
HPE Software has a broad portfolio of enterprise software and solutions. HPE Software believes it is among the leaders in the industry. Nevertheless, HPE Software encounters strong competition. HPE Software competes primarily on the basis of technology, innovation, performance, price, quality, reliability, brand, reputation, distribution, range of services, account relationships, customer training, service and support, security and the availability of its offerings.
The markets in which HPE Software operates are characterized by rapidly changing customer requirements and technologies. HPE Software designs and develops enterprise IT operations management software in competition with IBM, CA Technologies, Inc., VMware, BMC Software, Inc. and others. HPE Softwares application testing and delivery management software competes with products from companies like IBM, Microsoft, CA Technologies, and Atlassian Corporation Plc. HPE Softwares big data platform analytics solutions compete with products from companies like IBM, Dell, Open Text Corporation, Oracle and Symantec Corporation. HPE Software also delivers enterprise security/risk intelligence solutions that compete with products from Dell, IBM, Cisco and Splunk Inc. HPE Softwares information governance offerings, incorporating both structured and unstructured data, compete with products from companies like Veritas Technologies and Dell. As customers are becoming increasingly comfortable with newer delivery mechanisms such as SaaS, HPE Software is facing competition from smaller, less traditional competitors, particularly for customers with smaller IT organizations. HPE Software differentiates itself from such competitors based on the breadth and depth of its software and services portfolio and the scope of HPE Softwares market coverage.
HPE Softwares operations are subject to regulation under various U.S. federal, state and local laws and foreign laws concerning the environment, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, and the clean-up of contaminated sites. HPE Software could incur substantial costs, including clean-up costs, fines and civil or criminal sanctions, and third-party damage or personal injury claims, if HPE Software were to violate or become liable under environmental laws.
HPE Software is committed to maintaining compliance with all environmental laws applicable to its operations and services and to reducing the environmental impact of its business. HPE Software meets this commitment with a comprehensive environmental, health and safety policy and management of its operations and services.
Environmental costs and accruals are presently not material to HPE Softwares operations, cash flows or financial position. Although there is no assurance that existing or future environmental laws will not have a material adverse effect on HPE Softwares operations, cash flows or financial condition, HPE Software does not currently anticipate material capital expenditures for environmental control facilities.
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HPE Software had approximately 12,200 regular active employees as of October 31, 2016. Upon Closing, HPE Softwares total headcount will also include certain staff transferring from HPEs global marketing team and central corporate functions in the Separation. Including these employees, HPE Software would have had approximately 16,900 employees as of October 31, 2016.
As of July 12, 2017, HPE Software owned or leased approximately 2 million square feet of space worldwide, including areas occupied by staff in central functions supporting HPE Software. HPE Software believes that its existing properties are in good condition and are suitable for the conduct of its business.
HPE Softwares principal executive offices are located at 3000 Hanover Street, Palo Alto, California, 94304, United States of America.
Product Development, Services and Manufacturing
The locations of HPE Softwares major and significant facilities are as follows:
Major Facilities
Americas
• | Sunnyvale, CA, United States |
• | Austin, TX, United States |
Asia Pacific
• | Bangalore, India |
• | Shanghai, China |
Europe, Middle East, Africa
• | Yehud, Israel |
Significant Facilities
Americas
• | Heredia, Costa Rica |
• | Cambridge, MA, United States |
Asia Pacific
• | Bangalore, India |
• | Chennai, India |
Europe, Middle East, Africa
• | Prague, Czech Republic |
• | Cluj-Napoca, Romania |
• | Sofia, Bulgaria |
• | Boeblingen, Germany |
• | Bracknell, United Kingdom |
Litigation, Proceedings and Investigations
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise Company
This purported class and collective action was filed on August 18, 2016 and an amended (and operative) complaint was filed on December 19, 2016 in the United States District Court for the Northern District of
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California, against HP Inc. and Hewlett Packard Enterprise Company alleging defendants violated the Federal Age Discrimination in Employment Act (ADEA), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction (WFR) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012.
Wall v. Hewlett Packard Enterprise Company and HP Inc.
This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January 17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and Hewlett Packard Enterprise Company on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. Trial is set to begin on January 22, 2018.
Realtime Data LLC
Realtime Data LLC (Realtime) filed three patent infringement actions in the Eastern District of Texas against HPE. The first was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services and Oracle (Oracle matter) and accuses HPs Proliant servers running Oracles Solaris, HPEs StoreOnce, and HPEs Vertica. Oracle has agreed to indemnify HPE for all claims against HPE related to Oracles Solaris, including databases running Solaris with the ZFS file system on HP ProLiant servers. Following a March 23, 2017 mediation, Oracle and Realtime reached a settlement, and on May 15, 2017, the court ordered all claims between Oracle and Realtime dismissed with prejudice. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (SAP matter) and accuses HPs Converged Systems running SAP Hana. SAP agreed to indemnify HPE and HPES for the SAP related products. On June 16, 2016, SAP reached a settlement agreement with Realtime, which led to the dismissal of all claims relating to HPEs products indemnified by SAP. The third lawsuit was filed on February 26, 2016 (amended on August 15, 2016) against Hewlett Packard Enterprise Company, HP Enterprise Services, and Silver Peak Systems, Inc. (Silver Peak), and accuses HPEs StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtimes joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuits. The patents generally relate to data compression techniques used to conserve storage space. HPE and the joint defense group have filed several inter partes review petitions with the Patent Trial and Appeal Board on all seven asserted patents. On February 3, 2017, the Magistrate Judge granted HPEs Motion to Stay Pending Inter Partes Review.
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BOARD OF DIRECTORS AND MANAGEMENT OF MICRO FOCUS AFTER THE MERGER
Following Closing, Kevin Loosemore and Mike Phillips will continue as Executive Chairman and Chief Financial Officer, respectively, of the Enlarged Group. Chris Hsu, who is currently Executive Vice President and General Manager of HPE Software as well as Chief Operating Officer at HPE, will become the Chief Executive Officer of the Enlarged Group at Closing and Stephen Murdoch, who is the current Chief Executive Officer of Micro Focus, will become the Chief Operating Officer of the Enlarged Group at Closing. Nils Brauckmann will continue as Chief Executive Officer of SUSE following Closing.
With effect from Closing until the second annual general meeting of the Micro Focus Shareholders that occurs after Closing, HPE will have the right to nominate (i) one new Non-Executive Director who is a serving executive of HPE to the Micro Focus Board and (ii) one-half of the Micro Focus Boards independent Non-Executive Directors, in each case, subject to approval of the Nomination Committee. The current Nomination Committee has approved the appointments of John Schultz (as the HPE Nominated Director who is a serving executive of HPE and is not independent) with effect from Closing, and Silke Scheiber and Darren Roos as independent Non-Executive Directors with effect from May 15, 2017. In accordance with the Merger Agreement, a further independent HPE Nominated Director will be appointed following Closing.
Until Micro Focus second annual general meeting following Closing, any HPE Nominated Director who ceases to be a director of Micro Focus may be replaced by HPE, subject to approval of the Nomination Committee and (except in the case of the HPE Nominated Director who is a serving executive of HPE) such replacement being able to be classified as independent under the U.K. Corporate Governance Code.
As a result of the proposed appointments to the Micro Focus Board, immediately following Closing it is expected the Micro Focus Board will comprise 10 directors, five of whom will be independent Non-Executive Directors under the U.K. Corporate Governance Code. Once an additional independent HPE Nominated Director is appointed following Closing, this will increase the total number of directors to 11 and the number of independent Non-Executive Directors to six. The Non-Executive Directors possess a wide range of skills and experience relevant to the development of the Micro Focus Group and the Enlarged Group, which complement those of the Executive Directors.
Members of the Board of Directors and Executive Officers of the Enlarged Group
Name
|
Age
|
Position
|
Kevin Loosemore
|
58
|
Executive Chairman, Director
|
Christopher Hsu
|
47
|
Chief Executive Officer, Director
|
Mike Phillips
|
54
|
Chief Financial Officer, Director
|
Stephen Murdoch
|
50
|
Chief Operating Officer
|
Nils Brauckmann
|
53
|
Chief Executive Officer, SUSE, Director
|
Sue Barsamian
|
57
|
Sales and Marketing
|
John Delk
|
56
|
Head of Product Development
|
Jane Smithard
|
63
|
Group General Counsel and Company Secretary
|
Martin Taylor
|
63
|
Chief Information Officer
|
Rob Ebrey
|
43
|
Head of Tax and Treasury
|
Suzanne Chase
|
55
|
Director of Internal Audit and Risk
|
Paul Rodgers
|
53
|
Group Business Operations and Integration Director
|
Karen Slatford
|
60
|
Senior Independent Non-Executive Director
|
Richard Atkins
|
65
|
Independent Non-Executive Director
|
Amanda Brown
|
48
|
Independent Non-Executive Director
|
Silke Scheiber
|
44
|
Independent Non-Executive Director
|
Darren Roos
|
42
|
Independent Non-Executive Director
|
John Schultz
|
53
|
Non-Executive Director (Non-Independent)
|
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Profiles of the Executive Directors and Executive Officers
Kevin Loosemore, Executive Chairman and Director: Kevin is our Executive Chairman and a member of the Micro Focus Board. He was appointed non-executive Chairman of Micro Focus in 2005 and Executive Chairman in April 2011.
Mr. Loosemore was previously non-executive Chairman of Morse plc, a non-executive director of Nationwide Building Society and a non-executive director of the Big Food Group plc. His most recent executive roles were as Chief Operating Officer of Cable & Wireless plc, President of Motorola Europe, Middle East and Africa and before that, he was Chief Executive of IBM U.K. Limited.
He has a degree in politics and economics from Oxford University.
Christopher Hsu, Chief Executive Officer: Mr. Hsu will be Chief Executive Officer of the Enlarged Group following Closing. Mr. Hsu has served as Executive Vice President and Chief Operating Officer for HPE since November 2015 and General Manager, HPE Software since September 2016. Prior to that, he served as Senior Vice President, Organizational Performance and Hewlett Packard Enterprise Separation Leader at Hewlett-Packard Company from May 2014 to November 2015. Prior to joining Hewlett-Packard Company, he served as Managing Director at Kohlberg Kravis Roberts (KKR), an investment firm, from December 2013 to May 2014 and as Director of KKR Capstone, a consulting firm, from November 2008 to December 2013.
Mike Phillips, Chief Financial Officer: Mr. Phillips is our Chief Financial Officer and a member of the Micro Focus Board, positions he has held since joining Micro Focus on September 7, 2010.
Mr. Phillips was previously Chief Executive Officer at Morse plc, following his initial role as Group Finance Director. Mr. Phillips left Morse plc in July 2010 following the turnaround and successful corporate sale to 2e2 in June 2010.
From 1998 to 2007, Mr. Phillips was Group Finance Director at Microgen plc and played a lead role in its transformation to an international software and services business with sustainable and profitable growth.
Earlier roles include seven years of corporate finance work at Smith & Williamson, as well as two years at PricewaterhouseCoopers where he led the U.K. technology team, reporting to the global Head of Corporate Finance for the Technology Sector. Mr. Phillips began his career at Peat Marwick Mitchell & Co (now KPMG). Mr. Phillips was a non-executive director of Parity Group plc from November 2011 to September 2013.
Stephen Murdoch, Chief Operating Officer: Mr. Murdoch will be Chief Operating Officer of the Enlarged Group following Closing. Mr. Murdoch is currently our Chief Executive Officer, Micro Focus and a member of the Micro Focus Board, positions he has held since February 1, 2016. Before his appointment as CEO, Micro Focus Mr. Murdoch served as General Manager of Products and Marketing Strategy from November 2012 to April 2014 and then as Chief Operating Officer from April 2014 to February 2016.
Mr. Murdoch has a 25-year track record of success in the IT industry, spanning hardware, software, and services. He has held senior executive positions in general management, sales, and strategy with IBM and Dell. Most recently, he was the General Manager of Europe, Middle East, & Africa for Dells Public Sector and Large Commercial Enterprise business unit until August 2012.
Nils Brauckmann, Chief Executive Officer, SUSE division: Mr. Brauckmann is our Chief Executive Officer, SUSE and a member of the Micro Focus Board. Nils has led SUSE since May 2011 and was appointed to the Micro Focus Board on February 1, 2016.
Prior to this, Mr. Brauckmann gained more than 20 years of management and leadership experience in the IT industry, serving in cross-functional and international management positions in companies such as WRQ (acquired by the Attachmate Group in 2004), Novell, and Siemens Nixdorf, where he started his technology career.
Sue Barsamian, Sales and Marketing: Sue Barsamian joined HPE in 2006 and is currently the Chief Sales and Marketing Officer at HPE Software and previously served as SVP & General Manager of Enterprise Security Products. Ms. Barsamian served as Vice President of Go to Market at Mercury which was acquired by HPE in 2006. Ms. Barsamian graduated with a Bachelor of Science degree with honors in electrical engineering from Kansas State University and completed her post-graduate studies at the Swiss Federal Institute of Technology.
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John Delk, Head of Product Development: Mr. Delk has been responsible for Product Development at Micro Focus since February 2015. He joined Micro Focus as part of the acquisition of the Attachmate Group where he was Vice President of Product Management and Marketing at NetIQ. Prior to that he spent seven years in various leadership positions at Novell in Product Management, Sales and Services. Mr. Delk has over 32 years of experience in the IT industry working for various companies, including roles as a Managing Partner at BearingPoint/KPMG Consulting and a Vice President at EDS. He holds a Masters Degree in Computer Science from Georgia Institute of Technology and a Bachelors Degree from Furman University with a double major in Mathematics and Computer Science.
Jane Smithard, Group General Counsel and Company Secretary: Ms. Smithard is Company Secretary of Micro Focus and was named General Counsel of Micro Focus in May 2006. She has worked with Micro Focus for over 15 years providing a wide range of legal services. Ms. Smithard qualified as a barrister, having been called to the Bar of England and Wales in 1982. She also has a BA (Honours) in Law, a postgraduate diploma in European Law from Kings College London and is a Fellow of the Chartered Institute of Arbitrators.
Martin Taylor, Chief Information Officer: Mr. Taylor has over 35 years experience in leading global companies through IT driven change in a wide variety of business sectors and geographies. He started his career with British Airways, then worked 10 years with Mars, followed by a series of Global CIO positions with Courtaulds plc, EMI Music, Cable & Wireless, LCH Clearnet, and G4S. He has also worked in senior advisory roles for the U.K. Governments Home Office, Tata Consulting Services and Barclaycard. He has a degree in English Literature from Cambridge University.
Suzanne Chase, Director of Internal Audit and Risk: Mrs Chase is our Director of Internal Audit and Risk. She is a Solicitor with over 30 years expertise in M&A, governance, compliance, risk and assurance. Previous positions held have been Group General Counsel at Wickes plc, Group General Counsel and Company Secretary at The Big Food Group plc, General Counsel and Company Secretary at Morse plc, General Counsel and Company Secretary at Parity Group plc and Compliance Partner at King Sturge LLP (now part of JLL). She has a B.A. Hons degree in Combined Arts from University of Leicester, attended The College of Law, worked in private practice at D J Freeman and is a member of The Law Society of England and Wales.
Rob Ebrey, Head of Tax and Treasury: Mr. Ebrey has been responsible for the Tax and Treasury functions of Micro Focus since June 2009 and was also responsible for the internal audit and risk function until December 2016. Mr. Ebrey joined the group in June 2006 as Group Financial Controller, having previously been Group Financial Controller of Fibernet Group plc for 5 years. Mr. Ebrey trained as a Chartered Accountant in the audit practice of Chantrey Vellacott DFK, before subsequently joining the audit practice of Arthur Andersen, focussing on the technology sector. He holds a BA (Honors) in Business Economics from Durham University.
Paul Rodgers, Group Business Operations and Integration Director: Mr. Rodgers became the Micro Focus Group Business Operations and Integration Director in February 2016 and was previously HR Director for Micro Focus since April 2008. Prior to joining the Micro Focus Group, Mr. Rodgers was the Managing Director of a successful executive HR consultancy business for 4 years, with clients such as Dell, Unilever, Yahoo, and Sainsburys. He has further large corporate experience, including having previously been the Group HR Director for Cable & Wireless and spending 17 years in IBM covering various senior roles, such as HR Director for U.K. & Ireland; Sales Operations Director for the European PC Division and Project Management Executive within the Global Services Division. He holds a BSc (Honors) in Computer Science from the University of Ulster and a Masters of Business Administration.
Profiles of the Non-Executive Directors
Karen Slatford, Senior Independent Non-Executive Director: Mrs. Slatford is Chair of Draper Esprit plc, an AIM listed venture capital firm, The Foundry, a leading special effects software Company, and Citation Ltd, which provides HR and Health and Safety support to small and medium-sized enterprises. Mrs. Slatford is also non-executive director of Intelliflo Ltd and Accesso Technology Group plc. Mrs. Slatford began her career at ICL before spending 20 years at Hewlett-Packard Company, where in 2000 she became Vice President and General Manager Worldwide Sales & Marketing for the Business Customer Organization, responsible for sales of all Hewlett-Packard products, services and software to business customers globally. Mrs. Slatford holds a BA Honours degree in European Studies from Bath University and a Diploma in Marketing.
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Richard Atkins, Independent Non-Executive Director: Mr. Atkins is Chairman of Acora, an IT Services outsourcing company; Entanet International, a wholesale voice and data communications company; and Miles 33, a publishing software company. He is also a non-executive director at Aon, the U.K.s largest insurance broker.
He has spent the majority of his career within the IT industry. Previously, he was a Director at Data Sciences where he led its leveraged buyout from Thorn EMI in 1991 and then managed its successful sale to IBM in 1996. His final role at IBM was as General Manager for IBM Global Services Northern Europe where he was also a member of the IBM worldwide Senior Leadership Team. Since leaving IBM in 2005 he has acted as a non-executive director for several companies including Compel, Message Labs, Global Crossing, Morse and Easynet. Mr. Atkins qualified as a Chartered Accountant with EY.
Amanda Brown, Independent Non-Executive Director: Ms. Brown is currently Group Human Resources Director at Hiscox Ltd, a FTSE 250 business and specialist insurer with offices in 14 countries.
Ms. Brown has more than 20 years of international HR experience in a variety of industries, including consumer goods, leisure, hospitality, and financial services. Prior to Hiscox, Ms. Brown held a number of leadership roles with Mars, PepsiCo, and Whitbread plc. She has expertise in human resources, remuneration strategy, and managing organizations through periods of significant change.
Silke Scheiber, Independent Non-Executive Director: Ms. Scheiber was an investment professional at Kohlberg Kravis Roberts & Co. Partners LLP, London, UK from July 1999 and became a member in 2012. She retired from KKR in 2015. Prior to KKR, Ms. Scheiber worked at Goldman, Sachs & Company oHG, Frankfurt, Germany from 1996 to 1999. Silke, who is Austrian, graduated from the University of St. Gallen, Switzerland. Ms. Scheiber was previously a former director of Kion Group AG, Germany and WMF AG, Germany and is a current director of CNH Industrial N.V., the Netherlands.
Darren Roos, Independent Non-Executive Director: Mr. Roos is a technology leader who has spent nearly 20 years building businesses worldwide. Mr. Roos, who is South African, spent nine years with Software AG and served on its board. Over the past three years with SAP, he has been responsible for the SAP Northern European business. Mr Roos is currently the President of SAPs S/4HANA ERP Cloud business, where he guides SAPs customers on their journey to innovation through digital transformation.
John Schultz, Non-Executive Director (Non-Independent): Mr. Schultz has served as Executive Vice President, General Counsel and Secretary of HPE since November 2015. Prior to that, Mr. Schultz performed a similar role at Hewlett-Packard Company from April 2012 to November 2015. Previously, he served as Deputy General Counsel for Litigation, Investigations and Global Functions at Hewlett-Packard Company from September 2008 to April 2012. From March 2005 to September 2008, Mr. Schultz was a partner in the litigation practice at Morgan, Lewis & Bockius LLP, a law firm, where, among other clients, he supported Hewlett-Packard Company as external counsel on a variety of litigation and regulatory matters.
Through its commitment to the highest standards of corporate governance, the Micro Focus Board endorses and supports the essential elements of the U.K. Corporate Governance Code. Apart from a limited exception as explained below, Micro Focus complies with the U.K. Corporate Governance Code and, subject to such exception, the Micro Focus Board intends to continue to comply with U.K. Corporate Governance Code following Closing.
In accordance with the U.K. Corporate Governance Code, all directors are subject to election by the Micro Focus Shareholders at the first annual general meeting of Micro Focus after their appointment, and, thereafter, are subject to election on an annual basis. The Micro Focus Board has agreed procedures for directors to follow if they believe they require independent professional advice in the furtherance of their duties and these procedures allow the directors to take such advice at Micro Focus expense. In addition, all the directors have direct access to the advice and services of the Micro Focus Group Company Secretary. The Company Secretary is accountable to the Micro Focus Board through the Chairman on governance matters. It is the responsibility of the Company Secretary to ensure that the Micro Focus Board procedures are followed and all rules and regulations are complied with. Any new director receives a comprehensive, formal and tailored induction into Micro Focus
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operations. The directors can request that appropriate training is available as required. New directors inductions include briefings on Micro Focus business, strategy, constitution and decision making process, the roles and responsibilities of a director and the legislative framework for action by the Micro Focus Board. New directors also meet with senior product and other managers.
As part of its leadership and control of Micro Focus, the Micro Focus Board has agreed a list of items that are specifically reserved for its consideration. These include business strategy, financing arrangements, material acquisitions and divestments, approval of the annual budget, major capital expenditure projects, risk management, treasury policies and establishing and monitoring internal controls. At each meeting, the Micro Focus Board reviews progress of the Micro Focus Group (and following Closing, will review progress of the Enlarged Group) towards its objectives and monitors financial progress against budget.
The Micro Focus Board schedules meetings on a regular basis approximately every two months, with additional meetings when circumstances and business dictate. In the financial year ended April 30, 2017, there were 14 formally scheduled board meetings.
All directors receive an agenda and board papers in advance of meetings to help them make an effective contribution at the meetings. The Micro Focus Board makes use of appropriate technology as a means of updating and informing all its members. Board papers are circulated electronically to a tablet device, allowing directors to access documentation more easily and securely. The Executive Directors ensure regular informal contact is maintained with Non-Executive Directors.
The Micro Focus Board undertakes a formal and rigorous process for the evaluation of its own performance and that of its committees and individual directors (including the Executive Chairman), as required by the U.K. Corporate Governance Code.
Micro Focus has established audit, nomination and remuneration committees, with written terms of reference for each that deal with their respective authorities and duties. The full terms of reference of all the committees are available upon request from the Micro Focus Group Company Secretary or can be viewed on Micro Focus website at http://investors.microfocus.com/corporate-governance.
Audit Committee
The Audit Committee is comprised entirely of independent Non-Executive Directors. Prior to Closing, it is chaired by Richard Atkins and the other members are Karen Slatford and Amanda Brown. Following Closing, the Audit Committee will be chaired by Richard Atkins and the other members will be Amanda Brown, Silke Scheiber and the additional HPE Nominated Director, who will be an independent Non-Executive Director, to be appointed following Closing.
The Audit Committee is expected to meet not less than four times in each financial year and met eight times during the financial year to April 30, 2017.
The Audit Committee is responsible for, among other things:
• | reviewing the annual accounts and interim reports prior to submission to the full Micro Focus Board for approval; |
• | overseeing the relationship with Micro Focus’ auditor, ensuring the independence and objectivity of the auditor (taking into account U.K. professional and regulatory requirements and the relationship with the audit firm as a whole) and considering audit fees and fees for other non-audit work; |
• | reporting to the Micro Focus Board on its proceedings, identifying any matters in respect of which it considers that action or improvement is needed and making recommendations as to the steps to be taken; |
• | monitoring the integrity of the financial statements of Micro Focus and ensuring that the interests of shareholders are properly protected in relation to financial reporting and internal control; |
• | reviewing the effectiveness of Micro Focus’ internal controls and risk management systems; |
95
• | reviewing Micro Focus’ procedures for preventing and detecting fraud, Micro Focus’ systems and controls for the prevention of bribery, the adequacy and effectiveness of Micro Focus’ anti money laundering systems and Micro Focus’ arrangements for its employees to raise concerns about possible wrongdoing in financial reporting or other matters; and |
• | monitoring and reviewing the need for, and the effectiveness of, Micro Focus’ internal audit function in the context of Micro Focus’ overall risk management system. |
Nomination Committee
The Nomination Committee is comprised of entirely independent Non-Executive Directors. Prior to Closing, it is chaired by Karen Slatford and the other members are Richard Atkins and Amanda Brown. Following Closing, the Nomination Committee will be chaired by Karen Slatford and the other members will be Richard Atkins, Darren Roos and the additional HPE Nominated Director, who will be an independent Non-Executive Director, to be appointed following Closing.
The Nomination Committee is expected to meet not less than twice in each financial year and met 12 times during the financial year ended April 30, 2017.
The Nomination Committee is responsible for, among other things:
• | reviewing the structure, size and composition (including the skills, knowledge and experience) required of the Micro Focus Board and making recommendations to the Micro Focus Board with regard to any changes; |
• | identifying and nominating, for the approval of the Micro Focus Board, candidates to fill Micro Focus Board vacancies as and when they arise; |
• | giving full consideration to succession planning for directors and other senior executives of Micro Focus; |
• | keeping under review the leadership needs of Micro Focus, both executive and non- executive, with a view to ensuring the continued ability of the organization to compete effectively in the market place; and |
• | reviewing annually the time required from Non-Executive Directors and evaluating whether they are spending enough time to fulfil their duties. |
Remuneration Committee
The Remuneration Committee is comprised entirely of independent Non-Executive Directors. Prior to Closing, it is chaired by Amanda Brown and the other members are Richard Atkins and Karen Slatford. Following Closing, the Remuneration Committee will be chaired by Amanda Brown and the other members will be Karen Slatford, Darren Roos and Silke Scheiber.
The Remuneration Committee is expected to meet not less than four times in each financial year and met eight times during the financial year ended April 30, 2017.
The Remuneration Committee is responsible for, among other things:
• | determining and agreeing with the Micro Focus Board the framework or broad policy for the remuneration of Micro Focus’ and SUSE’s Chief Executive Officers, Executive Chairman, the Executive Directors, Group Company Secretary and other members of the executive management team; |
• | determining the total individual remuneration package of each Executive Director and other senior executives including bonuses, incentive payments and share options or other share awards; |
• | determining the policy for, and scope of, pension arrangements for each Executive Director and other senior executives; |
• | approving the design of, and determining targets for any performance-related pay schemes operated by Micro Focus, and approving the total annual payments made under such schemes; |
• | reviewing the design of all share incentive plans for approval by the Micro Focus Board and Micro Focus Shareholders; |
• | overseeing any major changes in employee benefit structures throughout the Micro Focus Group (and, following Closing, the Enlarged Group); and |
96
• | reviewing the ongoing appropriateness and relevance of the Remuneration Policy. |
Micro Focus policy on the remuneration of Executive Directors is established by the Remuneration Committee and approved by Micro Focus Shareholders every three years in line with U.K. remuneration disclosure rules. The individual remuneration packages of each Executive Director are determined by the Remuneration Committee in accordance with the Remuneration Policy.
The remuneration of Non-Executive Directors is a matter for the Chairman and the Executive Directors. No Director or employee participates in discussions relating to the setting of their own remuneration.
The objective of Micro Focus remuneration policies is that all employees, including Executive Directors, should receive appropriate remuneration for their performance, responsibility, skills and experience. Remuneration packages are designed to enable the Micro Focus Group (and, following Closing, the Enlarged Group) to attract and retain key employees by ensuring they are remunerated appropriately and competitively and that they are motivated to achieve the highest level of performance for Micro Focus in line with the best interests of Micro Focus Shareholders.
It is intended that an appropriate and significant proportion of remuneration of the Executive Directors will continue to be performance-related.
Compliance with the U.K. Corporate Governance Code
Micro Focus complies with the provisions of the U.K. Corporate Governance Code, except that, as of the date of this information statement/prospectus, Kevin Loosemore exercises the role of Executive Chairman alongside Stephen Murdoch who is Chief Executive Officer of Micro Focus and Nils Brauckmann who is Chief Executive Officer of SUSE. Stephen Murdoch will become Chief Operating Officer with effect from Closing and Nils Brauckmann will continue as Chief Executive Officer of SUSE.
Kevin Loosemore (formerly Non-Executive Chairman) was appointed to the role of Executive Chairman on April 14, 2011. It was previously announced that Kevin Loosemore would continue as Executive Chairman until April 2018 with responsibility for the delivery of strategy; the benefits to Micro Focus Shareholders of the Transactions; mergers and acquisitions activities and investor relations. Should the Merger be consummated and the appointment of Chris Hsu as the new Chief Executive Officer become effective, Kevin Loosemore will remain as Executive Chairman until at least the delivery of the first full financial year results following Closing (anticipated to be January 2019) to ensure continuity and an orderly transition of all executive responsibilities.
The Nomination Committee and the Micro Focus Board consider that the combined role of an Executive Chairman is in the interests of Micro Focus Shareholders in order to utilize the proven leadership qualities and significant experience of Kevin Loosemore to ensure the ongoing commercial success of Micro Focus. Furthermore, Kevin Loosemore has been with Micro Focus since its flotation in 2005 and can therefore provide stability and continuity through his detailed understanding of the Micro Focus Groups operations and the markets in which it operates.
Following Kevin Loosemores appointment as Executive Chairman, the role of Executive Chairman was agreed by the Micro Focus Board and can be viewed on http://investors.microfocus.com/corporate-governance.
Kevin Loosemore leads the Micro Focus Board and Micro Focus in its relationships with all stakeholders and customers. Alongside the Chief Executive Officer, he is responsible for all aspects of executive management including business strategy and its successful achievement. He is also responsible for chairing the Micro Focus Board and general meetings, facilitating the effective contribution of Non-Executive Directors, ensuring effective communication with Micro Focus Shareholders and upholding a high standard of integrity and probity.
Karen Slatford chairs the Nomination Committee and is therefore responsible for succession planning, governance issues, including the annual review of board effectiveness, and acting as an intermediary, if necessary, between Non-Executive Directors and the Executive Chairman and between Micro Focus and Micro Focus Shareholders.
Following Closing, the Micro Focus Board will comprise 10 directors, five of whom will be independent. Once a further independent HPE Nominated Director is appointed following Closing, this will increase the total number of directors to 11 and the number of independent Non-Executive Directors to six.
97
Executive Directors service contracts
The Executive Directors have service contracts with Micro Focus on the following terms:
Name
|
Date of service
contract |
Expiry date
|
Kevin Loosemore(1)
|
April 14, 2011
|
The agreement is terminable by either party on six months’ notice.
|
Mike Phillips
|
September 7, 2010
|
The agreement is terminable by either party on six months’ notice.
|
Stephen Murdoch
|
April 16, 2014
|
The agreement is terminable by either party on six months’ notice.
|
Nils Brauckmann
|
January 27, 2016
|
The agreement is terminable by either party on six months’ notice.
|
(1) | Subject to the below, Kevin Loosemore’s notice period decreases by one month for each complete month served after October 31, 2017 until it reaches zero on May 1, 2018. |
If an executive director commits any crime or act of dishonesty or, other than Kevin Loosemore, commits any material breach of their service contract or any act of gross misconduct, the Company is entitled to summarily terminate the service contract without notice or payment in lieu of notice or other compensation. In the case of Kevin Loosemore, his employment may be terminated by the Company without notice if, in the opinion of the Board acting reasonably and after giving Kevin Loosemore reasonable opportunity to comment before such opinion is reached, it is determined that he has committed any serious breach of his service contract which is incapable of remedy or he is guilty of any gross misconduct, or gross incompetence, in the discharge of his duties of his employment. Any such contract terms cannot however, as a rule of law, affect the executive director's statutory rights such as rights in respect of unfair dismissal.
Should an Executive Director, other than Nils Brauckmann, be dismissed in different circumstances to the above, Micro Focus may pay him, in lieu of notice, a sum equal to his basic pay over his notice period. In respect of Kevin Loosemore, such sum is equal to £735,000 in the event his appointment is terminated prior to May 1, 2018. Nils Brauckmanns service contract does not contain such a contract term.
Subject to Kevin Loosemore being granted an additional share grant over at least 947,140 Micro Focus Shares within one week of Closing (or within one week of Micro Focus being permitted to grant such additional share grants), his existing notice provisions (including any right to a payment in lieu of notice of £735,000) as detailed above, will be replaced in their entirety with a six month notice period. If the Company and Kevin Loosemore are not able to mutually agree the terms of an ASG deed such that the ASG is issued within the required time frame, then Kevin Loosemore's notice period will not change and as at May 1, 2018 his notice period will be down to zero.
Each of the Executive Directors is subject to a confidentiality undertaking without limitation in time and, save for Kevin Loosemore, to non-competition, non-solicitation, non-dealing and non-hiring restrictive covenants for a period of between six and 12 months after the termination of their respective employment arrangements. Kevin Loosemore is subject to six month non-hiring and non-interference with suppliers restrictive covenants.
Each of the Executive Directors has the benefit of a qualifying third-party indemnity from Micro Focus (the terms of which are in accordance with the Companies Act) and appropriate directors and officers liability insurance.
The Executive Chairman receives a payment in lieu of pension of 20% of base salary whilst the other Executive Directors receive a contribution of up to 15%.
Proposed Directors (Chris Hsu) service contract
Chris Hsu has entered into a service agreement with Micro Focus (U.S.) Inc. dated January 16, 2017, pursuant to which, with effect from Closing, Chris Hsu will become Chief Executive Officer of the Enlarged Group. The service agreement is terminable on six months notice by either party and contains summary termination provisions similar to the Executive Directors. Chris Hsu is also subject to confidentiality undertakings without limitation in time and to non-solicitation restrictive covenants for a period of 12 months after termination.
Chris Hsus salary on commencement of employment will be $1,000,000 and he will be eligible for benefits consistent with other Executive Directors and a bonus of up to 150% of base salary. Chris will also be eligible to
98
participate in Micro Focus LTIP (it being anticipated that Chris will be granted an award of two times his base salary on commencement of his employment) and it is anticipated that he will also be granted an additional share grant following Closing.
Non-Executive Directors letters of appointment
The Non-Executive Directors have letters of appointment with Micro Focus on the following terms:
Name
|
Effective date of
letter of appointment |
Fees (per annum)
|
Karen Slatford
|
July 5, 2016
|
£120,000
|
Richard Atkins
|
April 16, 2014
|
£90,000
|
Amanda Brown
|
July 1, 2016
|
£90,000
|
Darren Roos
|
May 15, 2017
|
£70,000
|
Silke Scheiber
|
May 15, 2017
|
£70,000
|
Each of the Non-Executive Directors is appointed by a letter of appointment for a fixed term of three years or less subject to earlier termination by either the Non-Executive Director or Micro Focus on 90 days notice. Each Non-Executive Director still serving at the end of his or her term will have his or her appointment reviewed by the Micro Focus Board and the reappointment of that Non-Executive Director may be agreed.
Each Non-Executive Director is entitled to reimbursement of reasonable expenses.
Non-Executive Directors do not participate in the Micro Focus Groups share incentives or otherwise receive performance related pay, and do not receive any pension contributions or benefits in kind.
The Non-Executive Directors are subject to confidentiality undertakings without limitation in time.
Each of the Non-Executive Directors has the benefit of a qualifying third-party indemnity from Micro Focus (the terms of which are in accordance with the Companies Act 2006) and appropriate directors and officers liability insurance.
Amanda Browns fees are paid directly to her employer, Hiscox Limited.
Proposed Non-Executive Directors letter of appointment
The letter of appointment between John Schultz, the HPE Nominated Director who is a serving executive of HPE, and Micro Focus is on substantially the same terms as the existing Non-Executive Directors, save that there shall be no fee payable to John Schultz.
99
Details of the compensation paid to the nine directors including their salary and/or fees, bonus, pension and other benefits for the financial year ended April 30, 2017, are shown below (based on the £:$ exchange rate as of April 30, 2017):
Executive Directors
|
|
Base Salary, ARA
and fees(1)($000) |
Benefits in
kind(2)($000) |
annual
Bonus(3) $0 |
LTIP(4)
$0 |
Pension(5)
$0 |
Total
$0 |
||||||||||||||
Kevin Loosemore
|
|
2017
|
|
|
968
|
|
|
41
|
|
|
653
|
|
|
3,597
|
|
|
194
|
|
|
5,453
|
|
|
2016
|
|
|
968
|
|
|
40
|
|
|
1,451
|
|
|
2,806
|
|
|
194
|
|
|
5,459
|
|
|
Mike Phillips
|
|
2017
|
|
|
606
|
|
|
25
|
|
|
409
|
|
|
1,913
|
|
|
92
|
|
|
3,045
|
|
|
2016
|
|
|
606
|
|
|
21
|
|
|
606
|
|
|
1,263
|
|
|
76
|
|
|
2,572
|
|
|
Stephen Murdoch(6)
|
|
2017
|
|
|
645
|
|
|
23
|
|
|
436
|
|
|
1,761
|
|
|
97
|
|
|
2,962
|
|
|
2016
|
|
|
161
|
|
|
6
|
|
|
161
|
|
|
787
|
|
|
25
|
|
|
1,140
|
|
|
Nils Brauckmann(6)
|
|
2017
|
|
|
546
|
|
|
15
|
|
|
368
|
|
|
799
|
|
|
81
|
|
|
1,809
|
|
|
2016
|
|
|
126
|
|
|
22
|
|
|
126
|
|
|
—
|
|
|
—
|
|
|
274
|
|
|
Non-executive directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tom Skelton
|
|
2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2016
|
|
|
32
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
Karen Slatford(7)
|
|
2017
|
|
|
133
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
133
|
|
|
2016
|
|
|
106
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
Tom Virden
|
|
2017
|
|
|
80
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
80
|
|
|
2016
|
|
|
65
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
65
|
|
|
Richard Atkins
|
|
2017
|
|
|
101
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101
|
|
|
2016
|
|
|
77
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
Karen Geary
|
|
2017
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2016
|
|
|
62
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
62
|
|
|
Steve Schuckenbrock(8)
|
|
2017
|
|
|
92
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
92
|
|
|
2016
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
Amanda Brown(9)
|
|
2017
|
|
|
88
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88
|
|
|
2016
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total
|
|
2017
|
|
|
3,259
|
|
|
104
|
|
|
1,866
|
|
|
8,070
|
|
|
464
|
|
|
13,763
|
|
|
2016
|
|
|
2,225
|
|
|
89
|
|
|
2,344
|
|
|
4,856
|
|
|
295
|
|
|
9,809
|
|
(1) | Base salary, ARA and fee: amount earned for the year. |
(2) | Taxable benefits: include car benefits, private medical insurance, permanent health insurance and life assurance. |
(3) | Annual bonus: payment for performance during the year. For executive directors other than the Executive Chairman, one-third of the annual bonus is deferred into shares for three years. |
(4) | LTIP: the value at vesting of awards vesting on performance over the three year periods ended April 30, 2017 and April 30, 2016. The 2016 figures are based on the share price on the date of vesting (June 26, 2016) of 1,530 pence (1,974 cents). The 2017 figures are based on the share price on the date of vesting (June 27, 2017) of 2,420 pence (3,122 cents). |
(5) | Pension: the Company’s pension contribution or cash allowance during the year. |
(6) | Stephen Murdoch and Nils Brauckmann were appointed to the Micro Focus Board on February 1, 2016. Their 2016 remuneration includes salary, pension and benefits in respect of service as executive directors, their full-year bonus and full-year LTIP. |
(7) | Karen Slatford’s 2016 fees include $103,000 in respect of the year and $3,000 back-dated fees. |
(8) | Steve Schuckenbrock was appointed to the Micro Focus Board on February 1, 2016 and resigned on April 25, 2017. |
(9) | Amanda Brown was appointed to the Micro Focus Board on July 1, 2016. |
For the financial year ended April 30, 2017, the aggregate total remuneration paid (including contingent or deferred compensation) and benefits in kind granted (under any description whatsoever) to the Senior Management by Micro Focus was $17.4 million.
All employees of the Micro Focus Group, including Executive Directors, are invited to participate in a Micro Focus Group personal pension plan. Executive Directors will continue to receive a pension contribution or payment in lieu of pension. All major schemes are money purchase in nature and have no defined benefits.
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Defined benefit schemes are operated in Japan and France, but, given the number of members, are insignificant for the purposes of the Micro Focus Group. The Micro Focus Group has no obligation to the Micro Focus Group personal pension scheme beyond the payment of contributions.
The Micro Focus Group currently operates the following employee share plans:
• | the Micro Focus Incentive Plan 2005 (the LTIP); |
• | the Additional Share Grants Program (the ASG Program); |
• | the Micro Focus International plc Leadership Stock Incentive Plan 2007 (the Leadership Plan); |
• | the Micro Focus Sharesave Plan 2006 (the Sharesave Scheme); |
• | the Micro Focus International Sharesave Plan 2010, adopted as a sub-plan of the Sharesave Scheme (the Sharesave Plan 2010); |
• | the Micro Focus Sharesave Plan Ireland 2013, adopted as a sub-plan of the Sharesave Scheme (the Ireland Sharesave Scheme); |
• | the Micro Focus Employee Stock Purchase Plan 2006 (ESPP); and |
• | the Micro Focus International plc Deferred Share Bonus Plan (DSBP). |
Prior to Closing, Seattle will adopt a plan for the purposes of assuming HPE awards.
The LTIP
In April 2005, prior to Micro Focus admission to the LSE, Micro Focus adopted the LTIP. The LTIP was amended by the Micro Focus Shareholders on September 25, 2014 to extend the LTIP until April 27, 2025. The LTIP provides a flexible framework to allow Micro Focus to make awards of free Micro Focus Shares, in the form of nil-cost options, conditional awards or forfeitable shares, or to grant market value options over Micro Focus Shares (Awards). Market value options may be designated as tax favored options and granted pursuant to Schedule 4 to the Income Tax (Earning and Pensions) Act 2003 (options with particular income tax relief on exercise).
Awards may be granted to employees of the Micro Focus Group and certain associated companies and directors. Currently, Micro Focus on-going policy is to make annual awards of nil-cost options to the Executive Directors and other members of the senior management team, and market value options or options with a nominal exercise price to other senior and key employees.
The LTIP can be summarized as follows:
Eligibility
All employees (including Executive Directors) of the Micro Focus Group are eligible to participate in the LTIP. Unless the Remuneration Committee decides otherwise, Awards may not be granted to an employee who, on the Award date, has given or received notice of termination of employment.
Awards
The Remuneration Committee must approve all Awards to be made under the LTIP.
The number of Micro Focus Shares subject to an Award will be determined by reference to the number of Micro Focus Shares already held or purchased by a participant, or the gross equivalent of an amount invested by or on behalf of a participant in Micro Focus Shares.
Awards may generally only be made within 42 days following the announcement of Micro Focus results for any period or the date of Micro Focus annual general meeting. The Remuneration Committee may, however, grant Awards at other times in exceptional circumstances.
Awards cannot be granted after April 27, 2025.
101
Performance conditions and vesting
Awards are normally subject to performance conditions, determined by the Remuneration Committee for each Award. Performance conditions must be objective and must be specified at the date of the Award and may provide that an Award will lapse to the extent they are not satisfied.
However, Awards made on an all-employee basis may not be subject to performance conditions.
The Remuneration Committee determines, at the end of the relevant performance period, whether and to what extent any performance condition has been satisfied and how many Micro Focus Shares vest for each Award.
If no performance conditions are set, the Awards will vest on the third anniversary of the Award date.
Personal Limits
The maximum aggregate value of Awards in any financial year under the LTIP to an employee will not exceed two times annual base salary. For these purposes, the value of the Awards is deemed to be equal to the market value of free Micro Focus Shares at the time of award or in the case of market value options, 50% of the market value of Micro Focus Shares under option at the time of Award. This limit may be exceeded only where the Remuneration Committee determines that there are exceptional circumstances.
LTIP limits
In any 10-year period, not more than 10% of the issued ordinary share capital of Micro Focus may be issued or be issuable under any employee share plans operated by Micro Focus (including, for the avoidance of doubt, the Micro Focus ASG Awards). These limits do not include rights to Micro Focus Shares which have lapsed or been surrendered or those granted before Micro Focus was listed on the Official List and admitted to trading on the LSE.
Treasury shares and share appreciation rights
Rights under the LTIP may be satisfied using treasury shares. If such treasury shares are used Micro Focus will, so long as required under the Investment Association Principles of Remuneration, count them towards the dilution limits set out above. In addition, Micro Focus Shareholders have approved a resolution allowing Micro Focus to satisfy option Awards via the use of share appreciation rights. This is intended to allow Micro Focus additional flexibility to manage dilution. Consistent with the Investment Association Principles of Remuneration, all the Micro Focus Shares potentially subject to an outstanding Award will count towards the dilution limits until such time as a smaller number of Micro Focus Shares are actually issued on exercise.
Leaving employment
Generally an Award will lapse on the date a person holding an Award ceases to be an employee or member of the Micro Focus Group. Micro Focus Shares may be acquired early if an employee leaves employment due to redundancy, ill health, injury or disability, death, retirement at normal retirement age or early retirement with the agreement of Micro Focus, a sale of the employees employing business or company or any other reason if the Remuneration Committee so decides. The number of Micro Focus Shares will also be reduced pro rata to take account of the period between the start of the performance period and the date of leaving as a proportion of the whole performance period. The number of Micro Focus Shares will also depend on the extent to which the performance conditions have been satisfied.
Takeovers and restructurings
On a takeover, scheme of arrangement, merger or certain other corporate reorganizations, Awards will normally vest to the extent that any performance conditions are then satisfied and the number of Micro Focus Shares acquired will be reduced pro rata to reflect the early vesting of the Awards.
Adjustment of Awards on a variation of share capital
Awards may be adjusted following a rights issue or certain variations in share capital including capitalizations, subdivisions, consolidations or reductions of capital.
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Tax
Micro Focus or any employing company of the Micro Focus Group may withhold such amount and make such arrangements as it considers necessary to meet any liability to taxation or social security contributions in respect of an Award, including the sale of Micro Focus Shares on behalf of a participant.
A participant must, if required by Micro Focus, enter into an election to transfer to it the liability to employers national insurance contributions in respect of an Award.
Amendments to the rules of the LTIP
Provisions relating to eligibility, individual and dilution limits, option price, rights attaching to Awards and Micro Focus Shares, adjustment of Awards and other rights in the event of a variation in share capital and the amendment powers cannot be altered to the advantage of participants without the prior approval of Micro Focus Shareholders in general meeting.
However, Micro Focus Shareholder approval is not required for minor changes intended to benefit the administration of the LTIP, or to comply with or take account of existing or proposed legislation or any changes in legislation, or to secure or maintain favorable tax exchange control or regulatory treatment for Micro Focus, members of the Micro Focus Group or participants.
Malus and Clawback
Awards granted to Executive Directors from July 2016 are subject to malus and clawback provisions which provide that, at any time before an Award vests, the number of Micro Focus Shares that would otherwise vest shall be reduced (to nil if appropriate) (Malus), or within two years of the vesting of the Award, the vested Award shall be repaid in whole or in part (Clawback), or the vesting of an Award may be delayed if there is an ongoing investigation or other procedure being carried on to determine whether circumstances exist that may warrant Malus or Clawback.
Malus and/or Clawback may apply as a result of: (i) in the reasonable opinion of the Remuneration Committee, there is any material misstatement in the audited consolidated accounts of the Micro Focus Group or any member of the Micro Focus Group; (ii) any error in the calculation of the extent of vesting of any Award; (iii) the participants actions or conduct having, in the reasonable opinion of the Remuneration Committee, amounted to fraud or gross misconduct; (iv) the participants conduct during the applicable vesting period having, in the reasonable opinion of the Remuneration Committee, caused serious harm to the reputation of the Micro Focus Group and/or significant financial loss to any member of the Micro Focus Group; or (v) in the reasonable opinion of the Remuneration Committee, a material failure of risk management which caused serious harm to the reputation of the Micro Focus Group.
General
Awards granted under the LTIP are not transferable (except with the consent of the Remuneration Committee).
Any Micro Focus Shares issued in the LTIP will rank equally with Micro Focus Shares of the same class in issue on that date of allotment, except in respect of rights arising by reference to a prior record date.
The laws of England and Wales govern the LTIP and all Awards.
ASG Program
In October 2014, the ASG Program was adopted by Micro Focus in connection with the acquisition by the Micro Focus Group of the Attachmate Group and provided for the grant of Micro Focus ASG Awards in the form of nil cost options (an ASG) to certain Executive Directors and senior managers of the Micro Focus Group. On September 22, 2016, Shareholders approved the implementation of the ASG Program in respect of further grants thereunder.
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The ASG Program can be summarized as follows:
Eligibility
All employees (including any officer or director) of any company within the Micro Focus Group are eligible to receive an ASG, however, participation is at the discretion of the Remuneration Committee. ASGs are only awarded in relation to a material acquisition (by whatever means) of an entity or business by the Micro Focus Group.
Awards
ASGs are nil cost options over Micro Focus Shares.
Performance condition and vesting
ASGs become exercisable, subject to the satisfaction of the performance condition (see below) on the third anniversary of the date of grant or such earlier date as shall be determined by the Remuneration Committee (the Vesting Date) and will remain exercisable until the tenth anniversary of the date of grant. If the ASGs are not exercised within the 30 days ending on the tenth anniversary of the date of grant because of any regulatory restrictions, the ASGs may be exercised within 14 days of such restrictions ceasing to apply.
The performance condition is that the percentage of Micro Focus Shares subject to the ASG which may be acquired on exercise on or after the Vesting Date is as follows:
(i) | 0% if the Shareholder Return Percentage (as defined below) is 50% or less; |
(ii) | 100% if the Shareholder Return Percentage is 100% or more; and |
(iii) | a percentage determined on a straight-line basis between (i) and (ii) above. |
The Shareholder Return Percentage is calculated by deducting a Reference Price (fixed at, or following, the commencement of discussions relating to the relevant transaction) from the sum of the Vesting Price (calculated as the average closing share price over the period of 20 days ending on the day prior to the Vesting Date) plus the total of all dividends per share between the date of grant and the Vesting Date. This is divided by the Reference Price and the resulting figure multiplied by 100 to obtain the Shareholder Return Percentage.
Holders of ASGs are required, subject to holding employment or a directorship with any member of the Micro Focus Group on the Vesting Date, to hold the ASGs or the Micro Focus Shares acquired on exercise for a minimum of 12 months following the Vesting Date.
Micro Focus reserves the right to settle all or part of the ASGs in cash (calculated on the basis of the average closing Micro Focus Share price for the 20 day period ending on the date of exercise). If the Micro Focus Shares are not listed the cash amount shall be the greater of such value as the Remuneration Committee in its sole discretion shall determine acting fairly and reasonably or the average closing Micro Focus Share price over the last 20 days on which Micro Focus Shares were traded multiplied by the number of Micro Focus Shares subject to the ASGs, whichever is the greater.
Individual and dilution limits
The number of Micro Focus Shares issued or issuable pursuant to ASGs granted pursuant to a single ASG program may not exceed 2.5% of the issued ordinary share capital of Micro Focus at the time of completion of the relevant acquisition. Within this limit, the number of Micro Focus Shares that can be awarded to any individual under the relevant ASG program may not exceed 0.5% of the issued ordinary share capital of Micro Focus at the time of completion of the relevant acquisition. The ASG program will also be contained within the overall limit on dilution which provides that in any 10 year period, not more than 10% of the issued ordinary share capital of Micro Focus may be issued or be issuable under any employee share plans operated by Micro Focus. These limits do not include rights to Micro Focus Shares which have lapsed or been surrendered or those granted before Micro Focus was listed on the Official List and admitted to trading on the LSE.
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Leaving employment
The leaver provisions attaching to ASGs may be no more favorable for holders of ASGs (although may be less favorable at the discretion of the Remuneration Committee) than the terms set out in this section. If the employment of a holder of an ASG ceases before the Vesting Date:
(i) | as a result of the individual’s voluntary resignation, the ASG will lapse. However, the Remuneration Committee may determine in its discretion that the ASG will become exercisable in part or in whole on the normal Vesting Date; |
(ii) | as a result of the individual’s material breach of contract, gross misconduct or gross incompetence, the ASG will lapse. However, the Remuneration Committee may determine in its discretion that the ASG will become exercisable in part or in whole on the normal Vesting Date; |
(iii) | as a result of the individual being fairly dismissed within the meaning of Part XI of the Employment Rights Act 1996 for a reason other than one within (ii) above and other than that which would amount to a dismissal under clause 95(1)(c) of the Employment Rights Act 1996, the ASG will become exercisable on the normal Vesting Date for a period of six months. The percentage of Micro Focus Shares subject to the ASG which may be acquired on exercise (subject also to the application of the performance condition) in these circumstances depends on the date on which the employment or directorship ceases (the Termination Date). The relevant percentage is 0% if the Termination Date is within six months of the date of grant, and 50%, 70% or 90% if the Termination Date is on or before the first, second or third anniversary of the date of grant respectively; and |
(iv) | in all other circumstances, the ASG will vest, subject to the performance condition referred to above, and become exercisable on the normal Vesting Date for a period of six months. |
Takeovers and restructurings
On a takeover, scheme of arrangement, or disposal of a business or assets contributing to 75% or more of Micro Focus turnover or on a change of control of Micro Focus (in each case other than as a result of an internal reorganization) prior to the Vesting Date, the ASGs will not automatically vest in full but instead the extent to which they vest will (i) be time apportioned (reflecting the time elapsed between the effective date of grant to the date of any change of control as a proportion of the normal vesting period of three years) and (ii) be subject to satisfaction of any performance conditions.
Adjustment of awards on a variation of share capital
In the event of a capitalization issue, rights issue or open offer, sub-division or consolidation of shares or reduction of capital or any other variation of capital/or demerger of all or part of Micro Focus business the ASGs will be adjusted to ensure that it delivers the value originally contemplated.
Amendments to the ASGs
Provisions relating to:
(i) | the persons to whom, or for whom, securities, cash or other benefits are provided under the ASGs; |
(ii) | limitations on the number or amount of the securities, cash or other benefits subject to the scheme; |
(iii) | the maximum entitlement for any one participant; and |
(iv) | the basis for determining a participant’s entitlement to, and the terms of, securities, cash or other benefits to be provided and for the adjustment thereof (if any) if there is a capitalization issue, rights issue or open offer, sub-division or consolidation of shares or reduction of capital or any other variation of capital, cannot be altered to the advantage of participants without the prior approval of Micro Focus Shareholders in general meeting (except for minor amendments to benefit the administration of the program, to take account of a change in legislation or to obtain or maintain favorable tax, exchange control or regulatory treatment for participants in the program or for any member of the Micro Focus Group). |
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Tax
Exercise is conditional on the holder of the ASG providing relevant members of the Micro Focus Group with sufficient funds, or appropriate deductions being made by Micro Focus (including through the sale of Micro Focus Shares) to meet any withholding liability of any members of the Micro Focus Group.
Malus and clawback
The Remuneration Committee will have discretion to include a malus and clawback clause to the effect that malus may be applied up to the Vesting Date and clawback may be applied during the 12 month period post the Vesting Date in the case of a material misstatement of the financial statements in respect of the performance period.
General
ASGs are not transferable and are governed by the laws of England and Wales. Benefits provided under the ASGs are not pensionable.
The Leadership Plan
The Leadership Plan was adopted by the Micro Focus Board on December 5, 2007 and amended by the Remuneration Committee on June 21, 2011.
The terms of the Leadership Plan are identical to the terms of the LTIP, except for minor changes to benefit the administration of the plan and the changes summarized below:
Eligibility
Directors are not eligible to participate in the Leadership Plan.
Awards
Awards may be granted at any time, subject to any restrictions under applicable law and regulations. Awards may not be settled using newly issued or treasury shares.
Market value options over Micro Focus Shares cannot be granted under the Leadership Plan. The Leadership Plan does not provide for the grant of tax advantaged options to U.K. taxpayers.
The Remuneration Committee may determine that no performance condition should attach to an award under the Leadership Plan.
Limits
The Remuneration Committee may determine, from time to time, limits applicable to the Leadership Plan.
Leaving Employment
Micro Focus Shares may be acquired early due to retirement with the agreement of Micro Focus.
Amendments to the rules of the Leadership Plan
The Remuneration Committee may amend the Leadership Plan by resolution, provided that any amendment to the material disadvantage of participants (other than a minor change to a performance condition) must be approved by a majority of participants.
Sharesave Scheme
In July 2006, Micro Focus adopted the Sharesave Scheme. The Sharesave Scheme is an all-employee tax favored plan intended to meet the requirements of Schedule 3 to the Income Tax (Earnings and Pensions) Act 2003. The Sharesave Scheme was amended by Micro Focus Shareholders on September 24, 2015 to extend the Sharesave Scheme until July 24, 2026.
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Under the Sharesave Scheme, U.K. employees of the Micro Focus Group are eligible to receive options to acquire Micro Focus Shares at a discount of up to 20% of the market value of Micro Focus Shares at the date of grant. Participants enter into a savings contract with a savings provider for a specified period determined at the outset by Micro Focus. At the end of the savings period, the savings can be used to exercise the option and acquire Micro Focus Shares or the cash can be refunded to the participant. If options are exercised, then provided the Sharesave Scheme remains approved by HM Revenue & Customs at that time, no income tax is chargeable on any gain made on exercise.
No performance conditions apply to the grant or exercise of options under the Sharesave Scheme.
The Sharesave Scheme can be summarized as follows:
Eligibility
All employees of the Micro Focus Group who are subject to U.K. income tax are eligible to participate in the Sharesave Scheme provided they have met a qualifying period of service and do not have material interest in Micro Focus. Directors who work at least 25 hours per week are also eligible to participate in the Sharesave Scheme.
Limits
No option may be granted in any calendar year which would, at the time it is granted, cause the number of Micro Focus Shares allocated on or after May 17, 2005 and in the prior ten years under the Sharesave Scheme or any other employee share plan adopted by Micro Focus to exceed such number as represents 10% of the issued ordinary share capital of Micro Focus at that time.
Exercise of options
Options are normally exercisable for a period of six months following the expiry of the relevant savings period. If options have not been exercised during that six month period, they lapse.
The exceptions to this rule are if an employee dies or ceases employment due to injury, disability, redundancy, retirement or transfer out of the Micro Focus Group or if there is a takeover or other corporate restructuring. In these circumstances, options become exercisable for a defined period following such event happening notwithstanding the savings period may not have expired.
Amendments to the rules of the Sharesave Scheme
Certain amendments to the Sharesave Scheme to the advantage of an option holder require prior approval by ordinary resolution of Micro Focus Shareholders in general meeting. Other minor amendments require Micro Focus Board approval.
General
Benefits provided under the Sharesave Scheme are not pensionable. English law governs the Sharesave Scheme and all options granted under it.
International Sharesave Scheme
The International Sharesave Scheme was adopted by the Micro Focus Board on August 5, 2010 as a sub-plan to the Sharesave Scheme. The terms of the International Sharesave Scheme are identical to the terms of the Sharesave Scheme, except for minor changes to benefit the administration of the plan and changes relating to the lack of a requirement for approval from HM Revenue & Customs.
Ireland Sharesave Scheme
The Ireland Sharesave Scheme was adopted by the Micro Focus Board on August 5, 2010 as a sub-plan to the Sharesave Scheme. The terms of the Ireland Sharesave Scheme are identical to the terms of the Sharesave Scheme, except for minor changes to obtain favorable tax treatment for participants (including to provide for approval of the Ireland Sharesave Scheme by the Revenue Commissioners of Ireland).
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ESPP
In July 2006, Micro Focus adopted the ESPP for employees of the Micro Focus Group based in the United States and Canada. The ESPP was amended by Micro Focus Shareholders on September 24, 2015 to extend to ESPP until July 24, 2026. The ESPP operates in a broadly similar way to the Sharesave Scheme in that options are granted by Micro Focus to acquire Micro Focus Shares at a discount to the fair market value using savings accumulated over a defined period) but with some differences.
The ESPP is intended to constitute an employee stock purchase plan within the meaning of section 423(b) of the Code. This means that awards made under the ESPP qualify for favorable tax treatment in the United States.
Eligibility
All employees (including any officer or director) of any Micro Focus Group company are eligible to participate in the ESPP, provided they have met a qualifying period of employment as determined by the ESPP committee.
Dilution limits
No option may be granted in any calendar year which would, at the time it is granted, cause the number of Micro Focus Shares allocated on or after May 17, 2005 and in the prior ten years under the ESPP or any other employee share plan adopted by Micro Focus to exceed such number as represents 10% of the issued ordinary share capital of Micro Focus at that time.
In addition, unless increased with the approval of Micro Focus Shareholders, the maximum number of Micro Focus Shares that may be issued pursuant to the ESPP is 29,922,924 Micro Focus Shares.
Offer periods and exercise of options
Participants are granted an option to acquire a specified number of Micro Focus Shares at a specified option price using proceeds saved through payroll deductions over a period of 24 months, or such other period determined by the ESPP committee. The period of the offer may not exceed 27 months unless the option price is determined by reference to the fair market value of a Micro Focus Share at the date of exercise of the option, in which case the offer period may not exceed 60 months.
At the end of the payroll period, the amount authorized is deducted from the pay of each participant and held to the credit of the participant by Micro Focus as part of its general funds and may, at the discretion of Micro Focus, accrue interest.
At the end of the offer period, participants decide to either use the proceeds saved to exercise the option and acquire Micro Focus Shares, or to elect to have the savings (and any applicable interest) refunded.
On a takeover or other corporate restructuring, options may be exercised within one month of notification of the event happening, following which the option shall lapse.
Individual limits
Micro Focus Shareholders holding or deemed to hold 5% or more of Micro Focus Shares (including Micro Focus Shares held under options) are ineligible to participate in the ESPP.
No employee shall be granted an option under the ESPP if such grant would allow the employee to acquire in any calendar year, under the ESPP and any other employee share purchase plan, Micro Focus Shares with an aggregate fair market value in excess of $25,000.
Option price
The option price is determined by the ESPP committee but shall be not less than the lower of 85% of the fair market value of a Micro Focus Share on the date of grant of the option and 85% of the fair market value of a Micro Focus Share on the date of exercise of the option.
Amendments to the rules of ESPP
Certain amendments to the ESPP to the advantage of an option holder require prior approval by ordinary resolution of Micro Focus Shareholders in general meeting. Other minor amendments require Micro Focus Board approval.
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Governing law
English law governs the ESPP to the extent not pre-empted by U.S. federal law (including the Code).
The DSBP
Effective from the financial year ended April 30, 2016 for all Executive Directors there is a mandatory conversion of one-third of any cash bonus earned into awards over Ordinary Shares subject to the terms of the DSBP. Kevin Loosemore is exempt as his annual bonus has been 150% since 2011 and its treatment was covered in his service contract which predates the Remuneration Policy. The terms of the DSBP can be summarised as follows:
Eligibility
All employees (including Executive Directors) of the Micro Focus Group are eligible to participate in the DSBP. Awards may not be granted to an employee who, on the Award date, has given or received notice of termination of employment. Awards granted to Executive Directors will be granted in accordance with the published remuneration policy of the Company at the time of grant (as amended from time to time).
Awards
An award under the DSBP can comprise an option to acquire Ordinary Shares, a conditional right to receive Ordinary Shares or an award of Ordinary Shares that must be given back if the award lapses.
Awards can be granted at any time.
Vesting
Awards will normally vest in full after three years, subject to continued employment with the Company.
Personal Limits
The maximum market value of Shares over which an award may be granted to any employee in respect of any financial year of the Company shall not exceed the total cash value of the bonus that has been deferred by the same employee in respect of the same financial year in order to become eligible to receive the awards under the DSBP.
Source of shares
Awards under the DSBP will be satisfied by the transfer of existing Ordinary Shares (other than treasury shares) or ADSs that represent existing Ordinary Shares.
Leaving employment
An award under the DSBP will lapse on the date a person holding an award ceases to be an employee of the Micro Focus Group. However, if the award holder ceases to be an employee of the Micro Focus Group by reason of redundancy, ill-health, injury or disability, death, retirement, a sale of the award holder's employing business or company or any other reason if the Remuneration Committee so decides, then (except where cessation occurs within 12 months of the award date, unless the Remuneration Committee determines otherwise) the award will not lapse but will vest on the date of cessation of employment and the number of Ordinary Shares in respect of which the award vests shall be reduced pro rata to reflect the early vesting of the award.
Takeovers and restructurings
On a takeover, scheme of arrangement, demerger or certain other corporate reorganisations, awards under the DSBP will normally vest and, unless the Remuneration Committee determines otherwise, the number of Ordinary Shares in respect of which an award vests shall be reduced pro rata to reflect the early vesting of the award.
Adjustment of awards on a variation of share capital
Awards may be adjusted following a rights issue or certain variations in share capital including capitalisations, subdivisions, consolidations or reductions of capital.
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Tax
The Company or any member of the Micro Focus Group may withhold such amount and make such arrangements as it considers necessary to meet any liability to taxation or social security contributions that arises in respect of an award, including the sale of Ordinary Shares on behalf of a participant.
A participant must, if required to do so, enter into an election to transfer the liability to employer's national insurance contributions in respect of an award.
Amendments to the rules of the DSBP
The Remuneration Committee may amend the terms of the DSBP by resolution. However, no alteration can be made to the material disadvantage of participants in respect of existing awards unless a majority of relevant participants indicate that they approve the alteration.
Malus and Clawback
Awards granted to Executive Directors are subject to Malus and Clawback on substantially the same terms as summarised in respect of the LTIP, save that the Remuneration Committee may operate ‘Clawback within one year of the vesting of an award only.
General
The laws of England and Wales govern all awards under the DSBP.
Seattle Employee Share Incentive Plan
Seattle expects to establish the Seattle 2017 Share Incentive Plan (the Seattle Plan) under which converted awards in the form of share awards, (collectively, the Converted Awards) will be granted. Converted Awards are awards issued to satisfy the automatic adjustment and conversion of awards with respect to HPE Shares into awards with respect to the number of Micro Focus Shares (or Micro Focus ADSs) contemplated by the Employee Matters Agreement in connection with the Transactions. The Seattle Plan will be effective as of immediately prior to Closing. The Seattle Plan is to be adopted by board of directors of Seattle (the Seattle Board) and is subject to the approval of the sole stockholder of Seattle prior to its effective date. The Seattle Plan will continue in effect for a term of ten years from the date of the approval of the sole stockholder of Seattle.
Eligibility. Awards may be made under the Seattle Plan to employees. The Administrator (as defined below), in its discretion, will select the employees to whom grants may be made, the time or times at which grants are made, and the terms of the grants.
Administration.The Seattle Plan may be administered by the Seattle Board, a committee appointed by the Seattle Board or its delegate (as applicable, the Administrator).
Shares Available. The Seattle Plan authorizes the delivery of a number of shares, which number shall be reduced to reflect such actual number of HPE Shares subject to the Converted Awards as of immediately prior to Closing. The shares subject to the Seattle Plan will include Seattle Shares and, with respect to Converted Awards assumed in connection with the Merger that are settled following Closing, Micro Focus Shares (or Micro Focus ADSs). With respect to Converted Awards, following Closing, the Micro Focus Shares (or Micro Focus ADSs) issued pursuant to the Seattle Plan will be fully paid and, to the extent permitted by the laws of England and Wales, will be made available from Micro Focus Shares (or Micro Focus ADSs) acquired by or gifted to Seattle, newly allowed and issued Micro Focus Shares (or Micro Focus ADSs), or Micro Focus Shares (or Micro Focus ADSs) acquired by or issued or gifted to the trustee of an employee benefit trust established by Micro Focus.
Converted Awards. Converted Awards will be governed by the provisions of the original HPE award agreement applicable to such award, except as modified under the Seattle Plan to conform to the requirements of the Companies Act 2006 and to permit issuance of Micro Focus Shares (or Micro Focus ADSs) to employees in satisfaction of awards following Closing.
Terms and Conditions of Share Grants. Each share grant agreement will contain provisions regarding (1) the number of Micro Focus Shares (or Micro Focus ADSs) subject to the share grant or a formula for determining
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that number, (2) the purchase price of the Micro Focus Shares (or Micro Focus ADSs), if any, and the means of payment for the Micro Focus Shares (or Micro Focus ADSs), (3) the performance criteria, if any, and level of achievement versus these criteria that will determine the number of Micro Focus Shares (or Micro Focus ADSs) granted, issued, transferred, retainable or vested, as applicable, (4) the terms and conditions on the grant, issuance, transfer, and forfeiture of the Micro Focus Shares (or Micro Focus ADSs), as applicable, as may be determined by the Administrator, (5) restrictions on the transferability of the share grant, and (6) any further terms and conditions, in each case not inconsistent with the Seattle Plan and applicable law, as may be determined by the Administrator.
Termination of Employment. In the case of share grants, including share units, unless the Administrator determines otherwise, the restricted share or restricted share units will be forfeited upon the grantees termination of employment for any reason.
Vesting. The vesting of a share grant may be subject to performance criteria, continued service of the grantee, or both, as determined by the Administrator.
Dividends. The Administrator may provide that dividends will accrue in respect of unvested share grants (including share units) and be paid in connection with the vesting of the grants. However, under no circumstances will accrued dividends be paid in connection with unvested share grants (including share units) that fail to vest.
Nontransferability. Unless otherwise determined by the Administrator, grants made under the Seattle Plan are not transferable other than by will or the laws of descent and distribution and may be exercised during the grantees lifetime only by the grantee. The Administrator will have the sole discretion to permit the transfer of a grant.
Adjustments Upon Changes in Capitalization, Merger or Sale of Assets. Subject to any required action by holders of Seattle Shares, or with respect to Converted Awards following the Merger, Micro Focus Shareholders or Micro Focus ADS holders, as applicable, (1) the number and kind of shares covered by each outstanding grant, (2) the price per share subject to each outstanding grant, and (3) the number of shares available pursuant to the Seattle Plan (and the related grant limits) will be proportionately adjusted by the Administrator for any increase or decrease in the number or kind of issued shares resulting from a share split, reverse share split, extraordinary dividend, alteration of capital, capitalization of profits, bonus issue, combination or reclassification of the shares, any other increase or decrease in the number of shares effected without receipt of consideration or any other variation of share capital affecting the shares.
In the event of a liquidation or dissolution of Micro Focus, any unexercised options, share appreciation rights or share grants will terminate. The Administrator, in its discretion, may provide that each grantee shall be fully vested in any share grants.
In the event of a change in control, as defined in the Seattle Plan, the Administrator in its discretion may provide for (a) the assumption, substitution or adjustment of each outstanding grant and (b) the acceleration of the vesting of Converted Awards.
Amendment and Termination of the Plan. The Administrator may amend, alter, suspend or terminate the Seattle Plan, or any part thereof, at any time and for any reason subject to the approval of the holders of Seattle Shares, or with respect to Converted Awards following the Merger, Micro Focus Shareholders or Micro Focus ADS holders, as applicable, for any amendment to the Seattle Plan to the extent required by applicable law or share exchange rules. In addition, without limiting the foregoing, unless approved by holders of Seattle Shares, or with respect to Converted Awards following the Merger, Micro Focus Shareholders, or Micro Focus ADS holders, as applicable, no amendment shall be made that would: (1) materially increase the maximum number of shares for which grants may be made under the Seattle Plan, other than an increase pursuant to a change in Micro Focus capitalization; (2) reduce the minimum exercise price for options or share appreciation rights granted under the Seattle Plan; (3) reduce the exercise price of outstanding options and share appreciation rights; or (4) materially expand the class of persons eligible to receive grants under the Seattle Plan. No action by the Administrator or shareholders may alter or impair any grant previously made under the Seattle Plan without the written consent of the grantee.
Effect of the Transactions on Micro Focus Share Plans
It is anticipated that there will not be any adjustments made as a result of the Transactions to the number of Micro Focus Shares subject to Micro Focus options and awards granted prior to the Transactions.
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF MICRO FOCUS
The following discussion and analysis is intended to provide investors with an understanding of the historical performance of Micro Focus International plc (the Group) and its financial condition. This discussion and analysis presents the factors that had a material effect on the results of operations of Micro Focus for the fiscal years ended April 30, 2017, 2016 and 2015. The following should be read in conjunction with the Groups audited consolidated financial statements and the notes thereto included elsewhere in this information statement/prospectus. The following discussion and analysis contains forward-looking statements. See Risk Factors and Cautionary Statement on Forward-Looking Statements for a discussion of the uncertainties, risks and assumptions associated with these statements.
Business Overview
Micro Focus is listed on the London Stock Exchange and is a member of the FTSE 100 index. More details, including its published annual reports, can be found on the Groups website, www.microfocus.com.
The Group is a global enterprise software provider supporting the technology needs and challenges of the Forbes Global 2000. The Groups solutions help organizations leverage existing IT investments, enterprise applications and emerging technologies to address complex, rapidly evolving business requirements, including the protection of corporate information at all times.
The Group has more than 4,800 employees in over 90 global locations and has over 20,000 customers, including 91 of the Fortune 100 companies.
The Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio. The Micro Focus Product Portfolio contains our mature infrastructure software products that are managed on a portfolio basis akin to a fund of funds investment portfolio. This portfolio is managed with a single product development group that makes and maintains the software, while the software is sold and supported through a geographic Go-to-Market (GTM) organization. Products are organized into five sub-portfolios based on industrial logic, COBOL Development and Mainframe Solutions (“CDMS”), Host Connectivity, Identity and Access Security (“IAS”), Development and IT Operations Management “ITOM” Tools, and Collaboration and Networking. Through SUSE, a pioneer in Open Source software, we provide reliable, interoperable Linux, cloud infrastructure and storage solutions. The SUSE Product Portfolio comprises SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Manager, and SUSE Linux Enterprise Desktop and Workstation Extension.
The Group has a clear strategy and business model that has been in place since 2011. This strategy and business model are focused on the way in which we believe that mature infrastructure software businesses should be managed and that the market for these businesses is going to consolidate. We believe that the consolidator in this market place needs to have scale and needs to operate efficiently. The Group has set out to be an effective company at managing a portfolio of mature infrastructure software assets. We believe that our proven ability to execute not only delivers significant amounts of cash and consequently great flexibility, but also a competitive advantage in the acquisition of other similar assets. The aims of our portfolio focus and operational strategy are:
1. | Revenue growth; |
2. | Operating leverage; and |
3. | Significant cash generation. |
Our key areas of operational focus to achieve our core objective are financial discipline in mergers and acquisitions, GTM (including indirect channels) and product development. The Group has a strong financial discipline around the uses of cash. We seek to acquire businesses in the mature infrastructure software space and improve the operational efficiency of those businesses by applying the Micro Focus business model. Industry and market dynamics mean that there are significant numbers of potential assets that could fit with our business model. These are either bolt-on transactions like those completed in fiscal 2014 and 2013, larger transactions such as the acquisition of Serena Software Inc. (Serena), or transformational deals such as the acquisition of The Attachmate Group (TAG). We believe that there will be an increasing opportunity to help clients derive value from their existing and often highly complex IT investments.
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Absent any new acquisitions, our business is managed with the expectation that total Group revenues will remain flat or decline slightly year over year. The Micro Focus Product Portfolio has historically experienced flat to negative revenue growth while achieving growth in adjusted operating profit margin driven by financial discipline and generation of operating efficiencies. This historical trend is the result of the mature nature of the products within the portfolio. In comparison, we manage our SUSE Product Portfolio as a growth business and have experienced historical increases in revenues. We expect these revenue trends to continue in future years.
The Group is affected by many challenges and risks which are continuously monitored by its executives. The Group operates a global business and is exposed to a variety of external economic and political risks which may affect the Groups business operations and execution of the Groups strategy. The Groups executives focus on the following areas when managing the business:
• | Ensuring the Group’s products continue to meet the requirements of its customers. The Group has a large number of products, at differing stages of their life cycle, and each requiring varying levels of investment and a tailored strategic approach. The extent of investment in each product set needs to be managed and prioritized considering expected future prospects, to ensure an effective balance between growth and legacy products. |
• | The adoption of an effective go-to-market model. For the Group to succeed in meeting revenue and growth targets it requires successful go-to-market models across the full product portfolio, with effective strategies and plans to exploit channel opportunities and focus the sales force on all types of customer categories. |
• | Changes in the competitive landscape. The Group’s major competitors are expanding their product and service offerings with integrated products and solutions. Comprehensive information about the markets in which the Group operates is required for it to assess competitive risks effectively and to perform successfully. |
• | Challenges in relation to the retention of key employees. The retention and recruitment of highly skilled and motivated employees, at all levels of the Group, is critical to the success and future growth of the Group in all countries in which it operates. Employees require clear business objectives, and a well communicated vision and values, for the Group to achieve alignment and a common sense of corporate purpose among the workforce. |
• | A number of major change projects including acquisitions to grow the business by strengthening the Group’s portfolio of products and capabilities, and projects to standardize systems and processes. The successful integration of acquired businesses will build a solid base for further expansion. |
• | The Group’s operations, as is the case with most businesses, are dependent on maintaining and protecting the integrity and security of the IT systems and management of information. The Group may experience a major breach of its system security or cyber-attack. |
Combination with Seattle
On September 7, 2016, we entered into the Merger Agreement with HPE and HPE entered into the Separation and Distribution Agreement to separate and combine the Seattle Business with Micro Focus in a Reverse Morris Trust transaction, which is generally expected to be tax-free to HPE for U.S. federal income tax purposes. The first step of the Transactions will be the distribution of all outstanding Seattle Shares to HPE Stockholders in the Distribution, and the second step will be the combination of Seattle with Micro Focus in a stock-for-stock merger transaction in the Merger. For more information regarding the transaction steps, see The Transactions.
Recent Business Acquisitions
The Group has grown significantly in recent years through acquiring a number of businesses.
On November 20, 2014, we completed the acquisition of TAG in exchange for share consideration of $1.4 billion. Pursuant to the terms of the merger agreement, we acquired all the issued share capital of TAG in exchange for the issue of approximately 86.6 million Micro Focus Shares to TAGs parent company, Wizard Parent LLC. TAG is a software holding company, comprising distinct IT brands dedicated to the long-term success of customers and delivering enterprise solutions to extend, manage and secure increasingly complex IT environments.
113
On May 2, 2016, the Group completed the acquisition of Serena in exchange for cash consideration of $277.6 million. Serena is a leading provider of Application Lifecycle Management products. Serenas product offerings have been integrated into the existing Micro Focus Development and IT Operations Management Tools (Development & ITOM) portfolio, further enhancing both our expertise in mainframe computing and distributed software change management. Consistent with our strategy of adding value through targeted, customer driven innovation we have continued developing the full portfolio of Serenas products and we will aim to identify how additional customer value and capability can be realized for Serena customers, leveraging related Micro Focus software development and software quality solutions.
On September 30, 2016, the Group acquired the entire share capital of GWAVA Inc. (GWAVA) and its subsidiaries in exchange for cash consideration of $16.4 million. The acquisition is highly consistent with the Groups established acquisition strategy and focus on the efficient management of mature infrastructure software products. GWAVA is a leading company in email security and enterprise information archiving (EIA). GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise.
On November 1, 2016, the Groups SUSE Product Portfolio acquired specific software-defined storage management assets including OpenAttic together with a team of highly talented engineers (all of whom have strong Open Source development skills and experience).
On March 8, 2017, we completed the acquisition of certain assets and employees relating to HPEs Helion OpenStack and Stackato businesses. The acquisition which will form part of the SUSE Product Portfolio involved HPE naming SUSE as its preferred Open Source partner for Linux, OpenStack and Cloud Foundary solutions.
Factors and Trends that affect our Results of Operations
The underlying premise behind our business strategy is that the Group should consistently and over the long-term deliver shareholder returns of at least 15% to 20% per annum. To deliver this objective the Group has adopted an operational and financial strategy underpinned by consistent and effective management and reward systems. This strategy is capable of execution over the long-term. When considering investment priorities, both organic and inorganic, we evaluate our options against a set of characteristics enabling the categorization of our product portfolio into one of the following:
• | New Models – Products or consumption models (cloud and subscription) that open new opportunities could become growth drivers or represent emerging use cases that we need to be able to embrace; |
• | Growth Drivers – Products with consistent growth performance and market opportunity to build the future revenue foundations of the Group; |
• | Optimize – Products with declining revenue performance driven by the market or execution where the trajectory must be corrected to move back to the core category or investments focused to optimize long-term returns; and |
• | Core – Products that have maintained broadly flat revenue performance but represent the current foundations of the Group and must be protected and extended. |
Within this overall portfolio we have some products that are growing significantly and others that are stable or in decline. Our business model means the way we manage the portfolio is analogous to a fund of funds with the objective of generating moderate growth over the medium-term, delivering high levels of profitability and strong cash generation and cash conversion ratio with a balanced portfolio approach. We will continue to focus investment in growth and core products and will not dispose of declining products unless we can achieve greater than the discounted cash flow they would generate in our ownership.
Results of Operations
The following discussion provides an analysis of our results of operations and should be read in conjunction with our audited and unaudited consolidated financial statements included elsewhere in this information statement/prospectus.
We include certain non-IFRS financial measures which assist management in comparing our performance on a consistent basis for purposes of business decision-making by removing the impact of certain items that
114
management believes do not directly reflect our underlying operations. Included in the following discussion is our Adjusted Operating Profit and Underlying Adjusted EBITDA, both of which are non-IFRS financial measures. Adjusted Operating Profit is used to monitor segmental results while Underlying Adjusted EBITDA, on a pro forma constant currency basis, is the metric that determines the payout of our Group annual bonus plan. Also, Underlying Adjusted EBITDA is used by sell-side equity analysts who write research on the Group and how institutional investors consider the performance of the Group. For additional information on Adjusted Operating Profit and Underlying Adjusted EBITDA see Non-IFRS Measures.
In addition, the following discussion also provides a supplemental analysis of pro forma revenue and our non-IFRS financial measures, prepared on a constant currency basis, where management believes that discussing pro forma results provides a better understanding of the Groups performance and trends because it allows for more meaningful comparisons of current period to that of prior periods. Pro forma results are prepared when there has been an acquisition which management believes has a material impact on the Groups performance and trends on one or more of our product groups. Pro forma results have only been prepared for the most recent fiscal year prior to the acquisition occurring. The pro forma revenue and non-IFRS financial measures are presented for informational purposes only and are not necessarily indicative of the combined results of operations that would have been realized had the acquisition occurred at the beginning of a reporting period, nor is it meant to be indicative of any anticipated combined future results of operations that the Group will experience after the completion of the acquisition. For additional information on pro forma revenue and our non-IFRS financial measures see Non-IFRS Measures.
Fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016
The following table sets forth the components of profit for the fiscal years ended April 30, 2017 and 2016.
|
Fiscal year ended April 30, 2017
|
Fiscal year ended April 30, 2016*
|
|
||||||||||||||||||
|
Before
exceptional items $’000 |
Exceptional
items $’000 |
Total
$’000 |
Before
exceptional items $’000 |
Exceptional
items $’000 |
Total
$’000 |
Total
(Decline) / Growth % |
||||||||||||||
Revenue
|
|
1,380,702
|
|
|
—
|
|
|
1,380,702
|
|
|
1,245,049
|
|
|
—
|
|
|
1,245,049
|
|
|
10.9
|
%
|
Cost of sales
|
|
(234,220
|
)
|
|
(2,949
|
)
|
|
(237,169
|
)
|
|
(228,002
|
)
|
|
(2,172
|
)
|
|
(230,174
|
)
|
|
3.0
|
%
|
Gross profit
|
|
1,146,482
|
|
|
(2,949
|
)
|
|
1,143,533
|
|
|
1,017,047
|
|
|
(2,172
|
)
|
|
1,014,875
|
|
|
12.7
|
%
|
Selling and distribution costs
|
|
(461,605
|
)
|
|
(5,479
|
)
|
|
(467,084
|
)
|
|
(411,961
|
)
|
|
(4,372
|
)
|
|
(416,333
|
)
|
|
12.2
|
%
|
Research and development expenses
|
|
(173,312
|
)
|
|
(6,792
|
)
|
|
(180,104
|
)
|
|
(163,388
|
)
|
|
(1,258
|
)
|
|
(164,646
|
)
|
|
9.4
|
%
|
Administrative expenses
|
|
(120,864
|
)
|
|
(82,038
|
)
|
|
(202,902
|
)
|
|
(118,911
|
)
|
|
(20,051
|
)
|
|
(138,962
|
)
|
|
46.0
|
%
|
Operating profit
|
|
390,701
|
|
|
(97,258
|
)
|
|
293,443
|
|
|
322,787
|
|
|
(27,853
|
)
|
|
294,934
|
|
|
(0.5
|
%)
|
Share of results of associates
|
|
(1,254
|
)
|
|
—
|
|
|
(1,254
|
)
|
|
(2,190
|
)
|
|
—
|
|
|
(2,190
|
)
|
|
42.7
|
%
|
Finance costs
|
|
(96,824
|
)
|
|
—
|
|
|
(96,824
|
)
|
|
(98,357
|
)
|
|
—
|
|
|
(98,357
|
)
|
|
1.6
|
%
|
Finance income
|
|
979
|
|
|
—
|
|
|
979
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
(3.0
|
%)
|
Profit before tax
|
|
293,602
|
|
|
(97,258
|
)
|
|
196,344
|
|
|
223,249
|
|
|
(27,853
|
)
|
|
195,396
|
|
|
0.5
|
%
|
Taxation
|
|
(50,174
|
)
|
|
11,633
|
|
|
(38,541
|
)
|
|
(39,259
|
)
|
|
6,835
|
|
|
(32,424
|
)
|
|
18.9
|
%
|
Profit for the year
|
|
243,428
|
|
|
(85,625
|
)
|
|
157,803
|
|
|
183,990
|
|
|
(21,018
|
)
|
|
162,972
|
|
|
(3.2
|
%)
|
* | In the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and as a result re-classified both “Amortization of Capitalized Development Costs” and “Amortization of acquired technology intangibles” from Research and Development Expenses to Costs of Sales. The years ended April 30, 2016 and 2015 comparatives have also been re-classified. |
The Group acquired Serena on May 2, 2016. The Group results for the fiscal year ended April 30, 2017 contain the post-acquisition results for Serena (12 months), while the Group results for the fiscal year ended April 30, 2016 do not contain any results for Serena. In addition the Group acquired GWAVA on September 30, 2016, OpenATTIC on November 1, 2016, and OpenStack on 8 March 2016. The Group results for the fiscal year ended April 30, 2017 contain the post-acquisition results for GWAVA (7 months), Open ATTIC (5 months) and OpenStack (2 months), while the Group results for the fiscal year ended April 30, 2016 do not contain any results for GWAVA, OpenATTIC, or OpenStack.
115
Revenues. Revenues grew by $135.7 million, or 10.9%, ($12.0 million decrease, or 0.9% on a pro-forma constant currency basis) to $1,380.7 million in the fiscal year ended April 30, 2017 as compared to $1,245.0 million in the fiscal year ended April 30, 2016. The increase in revenues was primarily driven by the acquisition of Serena and GWAVA, contributing an additional $144.8 million and $5.8 million of revenues, respectively.
The breakdown in revenue of our two operating segments, Micro Focus and SUSE, by revenue type in the fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016 and pro forma constant currency revenues in the fiscal year ended April 30, 2016 is shown in the table below:
|
Fiscal year
ended April 30, 2017 Actual $m |
Fiscal year
ended April 30, 2016 Actual $m |
Fiscal year
ended April 30, 2017 Actual (Decline)/ Growth $m |
Fiscal year
ended April 30, 2017 Actual (Decline)/ Growth % |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency $m |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency (Decline)/ Growth $m |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency (Decline)/ Growth % |
||||||||||||||
Micro Focus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
308.4
|
|
|
304.8
|
|
|
3.6
|
|
|
1.2
|
%
|
|
333.0
|
|
|
(24.6
|
)
|
|
(7.4
|
%)
|
Maintenance
|
|
720.7
|
|
|
644.5
|
|
|
76.2
|
|
|
11.8
|
%
|
|
754.5
|
|
|
(33.8
|
)
|
|
(4.5
|
%)
|
Subscription
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consultancy
|
|
48.2
|
|
|
41.9
|
|
|
6.3
|
|
|
15.0
|
%
|
|
54.8
|
|
|
(6.6
|
)
|
|
(12.0
|
%)
|
Total
|
|
1,077.3
|
|
|
991.2
|
|
|
86.1
|
|
|
8.7
|
%
|
|
1,142.3
|
|
|
(65.0
|
)
|
|
(5.7
|
%)
|
SUSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Maintenance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subscription
|
|
298.7
|
|
|
248.9
|
|
|
49.8
|
|
|
20.0
|
%
|
|
245.5
|
|
|
53.2
|
|
|
21.7
|
%
|
Consultancy
|
|
4.7
|
|
|
4.9
|
|
|
(0.2
|
)
|
|
(4.1
|
%)
|
|
4.9
|
|
|
(0.2
|
)
|
|
(4.1
|
%)
|
Total
|
|
303.4
|
|
|
253.8
|
|
|
49.6
|
|
|
19.5
|
%
|
|
250.4
|
|
|
53.0
|
|
|
21.2
|
%
|
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
308.4
|
|
|
304.8
|
|
|
3.6
|
|
|
1.2
|
%
|
|
333.0
|
|
|
(24.6
|
)
|
|
(7.4
|
%)
|
Maintenance
|
|
720.7
|
|
|
644.5
|
|
|
76.2
|
|
|
11.8
|
%
|
|
754.5
|
|
|
(33.8
|
)
|
|
(4.5
|
%)
|
Subscription
|
|
298.7
|
|
|
248.9
|
|
|
49.8
|
|
|
20.0
|
%
|
|
245.5
|
|
|
53.2
|
|
|
21.7
|
%
|
Consultancy
|
|
52.9
|
|
|
46.8
|
|
|
6.1
|
|
|
13.0
|
%
|
|
59.7
|
|
|
(6.8
|
)
|
|
(11.4
|
%)
|
Total Revenue
|
|
1,380.7
|
|
|
1,245.0
|
|
|
135.7
|
|
|
10.9
|
%
|
|
1,392.7
|
|
|
(12.0
|
)
|
|
(0.9
|
%)
|
The following discussion is based on pro forma constant currency revenue movements. For additional information on pro forma and constant currency see Pro Forma and Constant Currency.
On a pro forma constant currency basis, revenues decreased by $12.0 million, or 0.9% to $1,380.7 million for the fiscal year ended April 30, 2017 as compared to $1,392.7 million in the fiscal year ended April 30, 2016. SUSE experienced strong growth in the period, with revenues increasing $53.0 million, or 21.2%, offsetting an overall decline in the Micro Focus Product Portfolio revenues of $65.0 million, or 5.7%.
The Micro Focus Product Portfolio decreased by 5.7% on a pro forma constant currency basis in the fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016.
Licence revenue declined by 7.4% (2016: 4.8%) on a pro-forma constant currency basis. There was year-on-year Licence revenue growth in CDMS and Collaboration & Network offset by declines in all the other portfolios.
Maintenance revenues declined by 4.5% (2016: 6.1%) on a pro-forma constant currency basis. This was primarily in Development & ITOM Tools and Collaboration & Networking which is marginally better than last year. The fair value deferred revenue haircut that was applied as part of the Serena and GWAVA acquisitions reduced maintenance revenues by $6.9 million (2016: $10.2 million). Excluding this, underlying maintenance revenues fell by 4.9% (2016: 6.2%).
116
Consultancy revenues declined by 12.0% (2016: 15.2%) on a pro-forma constant currency basis as the Group completed the implementation of the established Micro Focus policy of focusing only on consulting business that supports our licence business.
SUSE Product Portfolio revenues increased by 21.2% to $303.4 million compared with the pro forma constant currency revenues for the fiscal year ended April 30, 2016 of $250.4 million, with the Subscription revenue increasing by 21.7% to $298.7 million (2016: pro forma constant currency $245.5 million). Subscription revenue is presented net of the fair value deferred revenue haircut of $3.2 million (2016: $6.4 million). Excluding this Subscription revenues grew by 19.8%.
The breakdown in revenue of our two operating segments, Micro Focus and SUSE, by region in the fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016 and pro forma constant currency revenues in the fiscal year ended April 30, 2016 is shown in the table below:
|
Fiscal year
ended April 30, 2017 Actual $m |
Fiscal year
ended April 30, 2016 Actual $m |
Fiscal year
ended April 30, 2017 Actual (Decline)/ Growth $m |
Fiscal year
ended April 30, 2017 Actual (Decline)/ Growth % |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency $m |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency (Decline)/ Growth $m |
Fiscal year
ended April 30, 2016 Pro forma Constant Currency (Decline)/ Growth % |
||||||||||||||
Micro Focus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
591.4
|
|
|
525.2
|
|
|
66.2
|
|
|
12.6
|
%
|
|
627.1
|
|
|
(35.7
|
)
|
|
(5.7
|
%)
|
International
|
|
389.7
|
|
|
377.0
|
|
|
12.7
|
|
|
3.4
|
%
|
|
415.0
|
|
|
(25.3
|
)
|
|
(6.1
|
%)
|
Asia Pacific & Japan
|
|
96.2
|
|
|
89.0
|
|
|
7.2
|
|
|
8.1
|
%
|
|
100.2
|
|
|
(4.0
|
)
|
|
(4.0
|
%)
|
Total
|
|
1,077.3
|
|
|
991.2
|
|
|
86.1
|
|
|
8.7
|
%
|
|
1,142.3
|
|
|
(65.0
|
)
|
|
(5.7
|
%)
|
SUSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
121.8
|
|
|
108.6
|
|
|
13.2
|
|
|
12.2
|
%
|
|
108.7
|
|
|
13.1
|
|
|
12.1
|
%
|
International
|
|
142.8
|
|
|
115.6
|
|
|
27.2
|
|
|
23.5
|
%
|
|
111.6
|
|
|
31.2
|
|
|
28.0
|
%
|
Asia Pacific & Japan
|
|
38.8
|
|
|
29.6
|
|
|
9.2
|
|
|
31.1
|
%
|
|
30.1
|
|
|
8.7
|
|
|
28.9
|
%
|
Total
|
|
303.4
|
|
|
253.8
|
|
|
49.6
|
|
|
19.5
|
%
|
|
250.4
|
|
|
53.0
|
|
|
21.2
|
%
|
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
713.2
|
|
|
633.8
|
|
|
79.4
|
|
|
12.5
|
%
|
|
735.8
|
|
|
(22.6
|
)
|
|
(3.1
|
%)
|
International
|
|
532.5
|
|
|
492.6
|
|
|
39.9
|
|
|
8.1
|
%
|
|
526.6
|
|
|
5.9
|
|
|
1.1
|
%
|
Asia Pacific & Japan
|
|
135.0
|
|
|
118.6
|
|
|
16.4
|
|
|
13.8
|
%
|
|
130.3
|
|
|
4.7
|
|
|
3.6
|
%
|
Total revenue
|
|
1,380.7
|
|
|
1,245.0
|
|
|
135.7
|
|
|
10.9
|
%
|
|
1,392.7
|
|
|
(12.0
|
)
|
|
(0.9
|
%)
|
While the Micro Focus Product Portfolio did decline 5.7% on a pro forma constant currency basis in the fiscal year ended April 30, 2017 as compared to the fiscal year ended April 30, 2016, it delivered performance in line with management expectations.
North America started the year promisingly but had a disappointing third quarter which resulted in a year on year revenue decline of 5.7% (2016: 6.4% decline) for the full year. The Federal business performed very well and CDMS execution improved throughout the year to deliver year on year growth within which Mainframe Solutions won exciting new customers and projects. Host Connectivity was down significantly mostly due to the disruption and impact of losing an entire sales team and management structure to a competitor causing both performance and pipeline development issues. Within North America, IAS executes in a very competitive market against both niche and Global players and our performance was impacted by the lack of major projects this year versus prior year on product transitions underway to improve our competitiveness in high growth areas of this market.
International had a challenging year with revenues decline year on year of 6.1% (2016: 4.6% decline). This region like in North America experienced challenges in the Host Connectivity and IAS markets. CDMS was broadly flat. France performed well and Germany and Nordics improved significantly in the second half of the year but this was not enough to make up for weaknesses in the other territories.
117
Asia Pacific & Japan saw a 4.0% year on year revenue decline (2016: 10.6% decline). Licence revenues were marginally ahead of last year and maintenance revenues were in line with trend. Strength in Japan and Australia was offset by weakness in India & Asia. The Australia business was rebuilt to ensure that the correct teams were in place to execute consistently and improve the overall capabilities locally and these changes started to deliver improvements from very early in FY17. There were some excellent wins in IAS that demonstrate what can be delivered when skill and execution levels are maintained.
For the SUSE Product Portfolio, International and Asia Pacific & Japan regions have shown strong growth in revenue of 28.0% and 28.9% respectively. Growth in these regions was derived across all routes to market together with securing new business with large enterprise accounts. The Group is pleased to note that the change to specializing and aligning the field sales and marketing resources to SUSE in the Asia Pacific & Japan has enabled setting the foundation for sustained profitable revenue growth. Revenue growth in North America was lower than expected, with some of the larger transactions not closing within the fiscal year as expected. We expect to see continuing growth in FY18.
Total operating costs.
Total operating costs for the period increased by $137.2 million, or 14.4% ($119.0 million, or 12.3% on a constant currency basis) to $1,087.3 million in the fiscal year ended April 30, 2017 as compared to $950.1 million in the fiscal year ended April 30, 2016.
As described below in the individual cost categories, the increase is primarily in relation to the acquisitions of Serena and GWAVA, combined with an increase in exceptional operating costs primarily in relation to the Transactions. However offsetting the increase resulting from these acquisitions, across the various cost categories there are cost reductions which have resulted from integration efficiencies achieved including the benefits of restructuring, rationalizing mainframe infrastructure, and closing the Serena head office property in San Mateo. Cost savings have also been achieved from further restructuring initiatives taken at the end of the last financial year in the Micro Focus Product Portfolio and ongoing focus on tightly controlling discretionary costs. These cost savings have been partially offset by ongoing investments in the SUSE Product Portfolio to support growth.
Cost of goods sold.
Costs of goods sold in the year increased by $7.0 million, or 3.0% ($5.5 million, or 2.4%, on a constant currency basis) to $237.2 million compared to $230.2 million in year ended April 30, 2016. Cost of sales increased primarily due to the acquisition of Serena and GWAVA ($17.7 million and $0.7 million respectively) and an increase of exceptional items of $0.7 million to $2.9m (2016: reported $2.2 million) These increases were partially offset by a reduction in staff related costs of $8.6 million. Exceptional items are discussed later in this section.
Selling and distribution costs.
Selling and distribution costs in the year increased by $50.8 million, or 12.2% ($45.6 million, or 10.8%, on a constant currency basis) to $467.1 million as compared to $416.3 million in the year ended April 30, 2016. The acquisition of Serena and GWAVA increased selling and distribution costs by $21.7 million and $1.4 million respectively. Excluding the acquisitions in the year, selling and distribution costs increased by $27.7 million to $444.0m (2016: $416.3 million). This increase in selling and distribution costs includes an increase in exceptional items of $1.1 million to $5.5 million (2016: reported $4.4 million), an increase in the amortization of purchased intangibles of $37.1 million to $143.8 million (2016: $106.7 million) offset by a reduction in staff related costs of $6.2m and a reduction in marketing costs of $2.0 million and exchange rate differences of $5.2 million. Exceptional items are discussed later in this section.
Research and development expenses.
Research and development expenses in the year increased by $15.5 million to $180.1 million, or 9.4%, ($12.7 million, or 7.6% on a constant currency basis) as compared to $164.6 million for the year ended April 30, 2016. The acquisition of Serena and GWAVA increased research and development costs by $17.3 million and $1.1 million respectively. Excluding acquisitions in the year research and development expenses decreased by $2.9 million to $161.7 million (2016: $164.6 million). The decrease related to a reduction in staff related costs of $8.6 million offset by an increase in exceptional items of $5.5 million to $6.8 million (2016: reported $1.3 million) and a decrease in the capitalization of product development costs of $3.2 million to $27.7 million (2016: $30.9 million). Exceptional items are discussed later in this section.
118
Administrative expenses.
Administrative expenses in the year increased by $63.9 million to $202.9 million, or 46.0% ($55.2 million, or 37.3% on a constant currency basis) as compared to $139.0 million in the year ended April 30, 2016. The acquisition of Serena and GWAVA increased administrative expenses by $10.4 million and $2.2 million respectively. Exceptional items included in administrative expenses increased $61.9 million to $82.0 million (2016: reported $20.1 million), share-based payments increased by $5.7 million to $34.5 million (2016: reported $28.8 million) and exchange gains increased by $2.0 million to $4.9 million (2016: reported $2.9 million). Excluding acquisitions in the year, the increase in exceptional items, share-based payments and exchange gains, administrative expenses decreased by $14.3 million to $78.7 million (2016: reported $93.0 million). The decrease relates primarily to a reduction in staff related costs of $12.2 million. Exceptional items are discussed later in this section.
Amortization of purchased intangibles for the year was $236.4 million (2016: reported $203.3 million). This growth is as a result of the acquisition of Serena and GWAVA during the year.
Exceptional items:
Exceptional items increased by $69.4 million, or 248.7% to $97.3 million in the year ended April 30, 2017 (2016: $27.9 million). The increase was as a result of an increase in pre-acquisition costs of $52.4 million relating to the proposed combination with HPE Software, an increase in integration costs of $4.1 million in bringing acquired businesses together with the heritage Micro Focus business, an increase in severance costs of $8.3 million primarily related to the Serena acquisition, an increase in acquisition costs of $2.1 million, the non-recurrence of the $3.0 million royalty provision release, offset by a decrease in property costs of $0.5 million.
The pre-acquisition costs relate to the acquisition of HPE Software which was announced in September 2016 and is currently due to complete during the third quarter of the 2017 calendar year. These costs relate to accounting, legal and commercial due diligence work, legal work on the various agreements, professional advisors fees and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.
The integration costs relate to work done in bringing together the base Micro Focus, TAG, Serena and GWAVA organizations into one organization. Other activities included the development of a new Group intranet and website and system integration costs.
The acquisition costs relate to due diligence work, legal work on the acquisition agreements and professional advisors fees on the acquisition of Serena and GWAVA.
Share of results of associates. Share of results of associates remained consistent with a loss of $2.2 million in the fiscal year ended April 30, 2017, offset by a gain on the dilution of the investment of $1.0 million, as compared to a loss of $2.2 million in the fiscal year ended April 30, 2016.
Finance costs. Finance costs decreased by $1.5 million, or 1.6 %, to $96.8 million in the fiscal year ended April 30, 2017 as compared to $98.4 million in the fiscal year ended April 30, 2016. This decrease in finance costs is primarily attributable to a $1.5 million reduction in loan interest and commitment fees, a $0.5 million increase in the amortization of prepaid facility arrangements, original issue discounts and facility fees, offset by a $0.5 million decrease in other interest costs.
Finance income. Finance income remained flat at $1.0 million in the fiscal year ended April 30, 2017 as compared to $1.0 million in the fiscal year ended April 30, 2016.
Taxation. The tax charge increased by $6.1 million, or 18.8%, to $38.5 million in the fiscal year ended April 30, 2017 as compared to $32.4 million in the fiscal year ended April 30, 2016. The impact of exceptional items on the tax charge increased by $4.8 million to $11.6 million in the fiscal year ended April 30, 2017 compared to $6.8 million in the fiscal year ended April 30, 2016.
Excluding exceptional items, the tax charge increased by $23.8 million to $124.0 million (tax rate of 22.9%) for the fiscal year ended April 30, 2017 as compared to $100.2 million (tax rate of 23.1%) for the fiscal year ended April 30, 2016.
119
Underlying Adjusted EBITDA. Underlying Adjusted EBITDA increased by $108.4 million, or 20.4%, to $640.9 million in the fiscal year ended April 30, 2017 as compared to $532.5 million in the fiscal year ended April 30, 2016. This increase in Underlying Adjusted EBITDA was primarily driven by an increase of $78.7 million due to the Serena acquisition, cost savings from continuing efficiencies including property and employee rationalization initiatives, and a favorable impact on operating costs from movements in our key foreign currency exchange rates.
On a pro forma constant currency basis, Underlying Adjusted EBITDA increased by $25.6 million, or 4.2%, to $640.9 million (margin of 46.4%) in the fiscal year ended April 30, 2017 as compared to $615.3 million (margin of 44.2%) in the fiscal year ended April 30, 2016. The increase is as a result of the decrease in pro forma constant currency revenue of $12.0 million, or 0.9%, and an increase in pro forma constant currency operating costs as set out above.
Adjusted Operating Profit. Adjusted Operating Profit increased $104.6 million, or 19.6% to $638.1 million in the fiscal year ended April 30, 2017 as compared to $533.5 million in the fiscal year ended April 30, 2016. On a pro forma constant currency basis, Adjusted Operating Profit increased $21.6 million, or 3.5%, to $638.1 million in the fiscal year ended April 30, 2017 as compared to $616.5 million in the fiscal year ended April 30, 2016.
The Micro Focus Product Portfolio Adjusted Operating Profit in the fiscal year ended April 30, 2017 was $539.4 million, delivering a margin of 50.1% which compares with the margin on a pro forma constant currency basis in the fiscal year ended April 30, 2016 of 47.0%. The increase in margin arises because of the reduction in costs that have been achieved in the period due to operating efficiencies achieved through the integration of Serena and ongoing cost management initiatives in the core business.
The SUSE Product Portfolio Adjusted Operating Profit in the fiscal year ended April 30, 2017 was $98.7 million at a margin of 32.5%. Compared to the pro forma constant currency Adjusted Operating Profit of $79.9 million in the fiscal year ended April 30, 2016, this is an increase of $18.8 million (23.5%) and a profit margin improvement of 1.9%. We have seen a significant increase in directly managed costs in SUSE that is consistent with the investment being made to deliver the SUSE growth charter. We are also seeing the benefit of a reduced allocation of centrally managed costs which is being delivered from the efficiencies within the Micro Focus Product Portfolio.
Fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015
The following table sets forth the components of profit for the fiscal years ended April 30, 2016 and 2015.
|
Fiscal year ended April 30,
2016* |
Fiscal year ended April 30,
2015* |
|
||||||||||||||||||
|
Before
exceptional items $’000 |
Exceptional
items $’000 |
Total
$’000 |
Before
exceptional items $’000 |
Exceptional
items $’000 |
Total
$’000 |
(Decline) /
Growth % |
||||||||||||||
Revenue
|
|
1,245,049
|
|
|
—
|
|
|
1,245,049
|
|
|
834,539
|
|
|
—
|
|
|
834,539
|
|
|
49.2
|
%
|
Cost of sales
|
|
(228,002
|
)
|
|
(2,172
|
)
|
|
(230,174
|
)
|
|
(135,918
|
)
|
|
(4,629
|
)
|
|
(140,547
|
)
|
|
63.8
|
%
|
Gross profit
|
|
1,017,047
|
|
|
(2,172
|
)
|
|
1,014,875
|
|
|
698,621
|
|
|
(4,629
|
)
|
|
693,992
|
|
|
46.2
|
%
|
Selling and distribution costs
|
|
(411,961
|
)
|
|
(4,372
|
)
|
|
(416,333
|
)
|
|
(270,864
|
)
|
|
(19,611
|
)
|
|
(290,475
|
)
|
|
43.3
|
%
|
Research and development
expenses |
|
(163,388
|
)
|
|
(1,258
|
)
|
|
(164,646
|
)
|
|
(110,223
|
)
|
|
(3,069
|
)
|
|
(113,292
|
)
|
|
45.3
|
%
|
Administrative expenses
|
|
(118,911
|
)
|
|
(20,051
|
)
|
|
(138,962
|
)
|
|
(73,620
|
)
|
|
(69,369
|
)
|
|
(142,989
|
)
|
|
(2.8
|
)%
|
Operating profit
|
|
322,787
|
|
|
(27,853
|
)
|
|
294,934
|
|
|
243,914
|
|
|
(96,678
|
)
|
|
147,236
|
|
|
100.3
|
%
|
Share of results of associates
|
|
(2,190
|
)
|
|
—
|
|
|
(2,190
|
)
|
|
(788
|
)
|
|
—
|
|
|
(788
|
)
|
|
(177.9
|
)%
|
Finance costs
|
|
(98,357
|
)
|
|
—
|
|
|
(98,357
|
)
|
|
(53,847
|
)
|
|
(2,384
|
)
|
|
(56,231
|
)
|
|
74.9
|
%
|
Finance income
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
1,210
|
|
|
—
|
|
|
1,210
|
|
|
(16.6
|
)%
|
Profit before tax
|
|
223,249
|
|
|
(27,853
|
)
|
|
195,396
|
|
|
190,489
|
|
|
(99,062
|
)
|
|
91,427
|
|
|
113.7
|
%
|
Taxation
|
|
(39,259
|
)
|
|
6,835
|
|
|
(32,424
|
)
|
|
(15,729
|
)
|
|
25,753
|
|
|
10,024
|
|
|
423.5
|
%
|
Profit for the fiscal year
|
|
183,990
|
|
|
(21,018
|
)
|
|
162,972
|
|
|
174,760
|
|
|
(73,309
|
)
|
|
101,451
|
|
|
60.6
|
%
|
* | In the year ended April 30, 2017, the Company reviewed its consolidated statement of comprehensive income presentation and as a result re-classified both “Amortization of Capitalized Development Costs” and “Amortization of acquired technology intangibles” from Research and Development Expenses to Costs of Sales. The years ended April 30, 2016 and 2015 comparatives have also been re-classified. |
120
The Group acquired TAG on November 20, 2014. The Group results for the fiscal year ended April 30, 2015 contain the post-acquisition results for TAG (5 months and 10 days), while the Group results for the fiscal year ended April 30, 2016 contain a full years results for TAG.
Revenues. Revenues grew by $410.5 million, or 49.2% ($440.9 million, or 52.8% on a constant currency basis) to $1,245.0 million in the fiscal year ended April 30, 2016 as compared to $834.5 million in the fiscal year ended April 30, 2015. Revenue growth was primarily driven by an increase of $445.8 million due to the full year impact and of the TAG acquisition (six months and 20 days). This increase was partially offset by a decrease of $12.7 million in the Micro Focus Product Portfolio based on revenue trends within the sub-portfolios.
The breakdown in revenues of our two operating segments, Micro Focus and SUSE, by revenue type in the fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015 and pro forma constant currency revenues in the fiscal year ended April 30, 2015 is shown in the table below:
|
Fiscal year
ended April 30, 2016 Actual $m |
Fiscal year
ended April 30, 2015 Actual $m |
Fiscal year
ended April 30, 2016 Actual (Decline)/ Growth $m |
Fiscal year
ended April 30, 2016 Actual (Decline)/ Growth % |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency $m |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency (Decline)/ Growth $ |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency (Decline)/ Growth % |
||||||||||||||
Micro Focus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
304.8
|
|
|
261.0
|
|
|
43.8
|
|
|
16.8
|
%
|
|
320.3
|
|
|
(15.5
|
)
|
|
(4.8
|
%)
|
Maintenance
|
|
644.5
|
|
|
440.6
|
|
|
203.9
|
|
|
46.3
|
%
|
|
686.3
|
|
|
(41.8
|
)
|
|
(6.1
|
%)
|
Subscription
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Consultancy
|
|
41.9
|
|
|
31.8
|
|
|
10.1
|
|
|
31.8
|
%
|
|
49.4
|
|
|
(7.5
|
)
|
|
(15.2
|
%)
|
Total
|
|
991.2
|
|
|
733.4
|
|
|
257.8
|
|
|
35.2
|
%
|
|
1,056.0
|
|
|
(64.8
|
)
|
|
(6.1
|
%)
|
SUSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Maintenance
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Subscription
|
|
248.9
|
|
|
98.2
|
|
|
150.7
|
|
|
153.5
|
%
|
|
210.5
|
|
|
38.4
|
|
|
18.2
|
%
|
Consultancy
|
|
4.9
|
|
|
2.9
|
|
|
2.0
|
|
|
69.0
|
%
|
|
4.2
|
|
|
0.7
|
|
|
16.7
|
%
|
Total
|
|
253.8
|
|
|
101.1
|
|
|
152.7
|
|
|
151.0
|
%
|
|
214.7
|
|
|
39.1
|
|
|
18.2
|
%
|
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Licence
|
|
304.8
|
|
|
261.0
|
|
|
43.8
|
|
|
16.8
|
%
|
|
320.3
|
|
|
(15.5
|
)
|
|
(4.8
|
%)
|
Maintenance
|
|
644.5
|
|
|
440.6
|
|
|
203.9
|
|
|
46.3
|
%
|
|
686.3
|
|
|
(41.8
|
)
|
|
(6.1
|
%)
|
Subscription
|
|
248.9
|
|
|
98.2
|
|
|
150.7
|
|
|
153.5
|
%
|
|
210.5
|
|
|
38.4
|
|
|
18.2
|
%
|
Consultancy
|
|
46.8
|
|
|
34.7
|
|
|
12.1
|
|
|
34.9
|
%
|
|
53.6
|
|
|
(6.8
|
)
|
|
(12.7
|
%)
|
Total Revenue
|
|
1,245.0
|
|
|
834.5
|
|
|
410.5
|
|
|
49.2
|
%
|
|
1,270.7
|
|
|
(25.7
|
)
|
|
(2.0
|
%)
|
The following discussion is based on pro forma constant currency revenue movements. For additional information on pro forma and constant currency see Pro Forma and Constant Currency.
On a pro forma constant currency basis, revenues decreased by $25.7 million, or 2.0%, to $1,245.0 million in the fiscal year ended April 30, 2016 as compared to $1,270.7 million in the fiscal year ended April 30, 2015. This decrease was primarily due to declines in the Micro Focus Product Portfolio of $64.8 million, partially offset by growth in the SUSE Product Portfolio of $39.1 million, both of which are consistent with the revenue trends in the Micro Focus Product Portfolio and the SUSE Product Portfolio.
SUSE revenues increased by 18.2% to $253.8 million compared with the pro forma constant currency revenues in the fiscal year ended April 30, 2015 of $214.7 million, with the Subscription revenue increasing by 18.2% to $248.9 million (2015: pro forma constant currency $210.5 million). The Subscription revenues are presented net of the fair value deferred revenue haircut of $6.4 million that was applied as part of the TAG acquisition (2015: $5.1 million). Excluding this Subscription revenues grew by 18.4%.
121
The breakdown in revenue of our two operating segments, Micro Focus and SUSE, by regional revenues in the fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015 and the pro forma constant currency revenue for the fiscal year ended April 30, 2015 is show in the table below:
|
Fiscal year
ended April 30, 2016 Actual $m |
Fiscal year
ended April 30, 2015 Actual $m |
Fiscal year
ended April 30, 2016 Actual (Decline)/ Growth $m |
Fiscal year
ended April 30, 2016 Actual (Decline)/ Growth % |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency $m |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency (Decline)/ Growth $m |
Fiscal year
ended April 30, 2015 Pro forma Constant Currency (Decline)/ Growth % |
||||||||||||||
Micro Focus
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
525.2
|
|
|
367.3
|
|
|
157.9
|
|
|
43.0
|
%
|
|
561.4
|
|
|
(36.2
|
)
|
|
(6.4
|
%)
|
International
|
|
377.0
|
|
|
289.8
|
|
|
87.2
|
|
|
30.1
|
%
|
|
395.1
|
|
|
(18.1
|
)
|
|
(4.6
|
%)
|
Asia Pacific & Japan
|
|
89.0
|
|
|
76.3
|
|
|
12.7
|
|
|
16.6
|
%
|
|
99.5
|
|
|
(10.5
|
)
|
|
(10.6
|
%)
|
Total
|
|
991.2
|
|
|
733.4
|
|
|
257.8
|
|
|
35.2
|
%
|
|
1,056.0
|
|
|
(64.8
|
)
|
|
(6.1
|
%)
|
SUSE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
108.6
|
|
|
41.2
|
|
|
67.4
|
|
|
163.6
|
%
|
|
87.4
|
|
|
21.2
|
|
|
24.3
|
%
|
International
|
|
115.6
|
|
|
47.2
|
|
|
68.4
|
|
|
144.9
|
%
|
|
98.4
|
|
|
17.2
|
|
|
17.5
|
%
|
Asia Pacific & Japan
|
|
29.6
|
|
|
12.7
|
|
|
16.9
|
|
|
133.1
|
%
|
|
28.9
|
|
|
0.7
|
|
|
2.4
|
%
|
Total
|
|
253.8
|
|
|
101.1
|
|
|
152.7
|
|
|
151.0
|
%
|
|
214.7
|
|
|
39.1
|
|
|
18.2
|
%
|
Group
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
633.8
|
|
|
408.5
|
|
|
225.3
|
|
|
55.2
|
%
|
|
648.8
|
|
|
(15.0
|
)
|
|
(2.3
|
%)
|
International
|
|
492.6
|
|
|
337.0
|
|
|
155.6
|
|
|
46.2
|
%
|
|
493.5
|
|
|
(0.9
|
)
|
|
(0.2
|
%)
|
Asia Pacific & Japan
|
|
118.6
|
|
|
89.0
|
|
|
29.6
|
|
|
33.3
|
%
|
|
128.4
|
|
|
(9.8
|
)
|
|
(7.6
|
%)
|
Total revenue
|
|
1,245.0
|
|
|
834.5
|
|
|
410.5
|
|
|
49.2
|
%
|
|
1,270.7
|
|
|
(25.7
|
)
|
|
(2.0
|
%)
|
Regionally, Micro Focus Product Portfolio revenues declined 6.4%, 4.6% and 10.6% in North America, International, and Asia Pacific and Japan respectively.
Progress in North America was encouraging with execution levels improving through the strengthening of leadership talent and associated improvements in execution and discipline. Host Connectivity delivered a strong performance throughout the year while IAS was challenged overall but delivered significant new customer wins and much improved alignment and engagement with partner channels. Development & ITOM suffered from significant levels of attrition that took time to stabilize and begin to correct. Collaboration & Networking was down consistent with prior performance and trends. CDMS execution improved throughout the year to deliver an acceptable performance overall with Mainframe Solutions delivering exciting new customer wins and improving pipeline.
International region (EMEA and LATAM) had a challenging year. EMEA took a significant time to stabilize as the restructuring actions worked through local legislative and consultation requirements. This was compounded by attrition in the key market of Germany and some portfolios leading to increased levels of disruption overall. Despite this IAS delivered a strong performance and there were notable wins in Development & ITOM and CDMS. LATAM was impacted by the economic situation in Brazil and in the rest of LATAM we moved to a distribution led model rather than direct sales resulting in an additional level of transition and disruption to be managed. Execution levels across International improved throughout the year.
Asia Pacific & Japan was mixed. Strength in Japan broadly across the board was offset by weakness in Asia. In Australia it was necessary to rebuild the business to ensure that the correct teams were in place to execute consistently the Micro Focus approach and improve the overall capabilities locally.
122
For the SUSE Product Portfolio, North America and International have had successful years in terms of subscription revenues, growing at 24.3% and 17.5% respectively compared with the pro forma constant currency revenues for the fiscal year ended April 30, 2015. Asia Pacific & Japan, whilst showing a small increase of 2.4% compared with the pro forma constant currency revenues for the fiscal year ended April 30, 2015, has a solid foundation to grow in the coming years.
Total operating costs. Total operating costs for the period have increased $262.8 million, or 38.2% ($283.2 million, or 41.2% on a constant currency basis) to $950.1 million for the period ended April 30, 2016 as compared to $687.3 million in the year ended April 30, 2015. As described below in the individual cost categories, the increase is primarily in relation to the acquisitions of TAG. However offsetting the increase resulting from this acquisition were cost savings which arose mostly from efficiencies from the restructuring exercise taken at the end of the last financial year, the rationalization of the property portfolio rationalisation, capitalization of some of TAGs development costs following the introduction of a suitable time recording system and a tighter control over discretionary costs. These cost savings have been partially offset by ongoing investments in the SUSE Product Portfolio to support growth.
Cost of sales. Cost of sales increased $89.7 million, or 63.8% ($96.1 million, or 71.7% on a constant currency basis) to $230.2 million as compared to $140.5 million in the year ended April 30, 2015. The overall increase in cost of sales was primarily driven by the full year impact of the TAG acquisition ($49.8 million excluding exceptional items of $3.7 million). Exceptional items included in cost of sales decreased $2.4 million to $2.2 million (2015: $4.6 million). Exceptional items are discussed later in this section.
Selling and distribution costs. Selling and distribution costs increased $125.9 million, or 43.3% ($134.8 million, or 47.9% on a constant currency basis) to $416.3 million as compared to $290.5 million in the year ended April 30, 2015. The increase in selling and distribution costs was primarily driven by the full year impact of the TAG acquisition on operating costs ($94.1 million excluding exceptional items of $2.5 million) and the associated increase in the amortization for acquired customer relationships and tradename intangible assets ($48.9 million). Exceptional items included in selling and distribution expenses decreased $15.2 million to $4.4 million (2015: $19.6 million) with many of the acquisition costs related to TAG being incurred in the prior year. Exceptional items are discussed later in this section.
Research and development expenses. Research and development expenses increased $51.3 million, or 45.3% ($80.7 million, or 96.2% on a constant currency basis) to $164.6 million as compared to $113.3 million in the year ended April 30, 2015. The increase in research and development expenses was primarily driven by the full year impact of the TAG acquisition on operating costs ($56.2 million excluding exceptional items of $2.7 million) and the associated increase in the amortization for acquired technology assets ($44.8 million). Research and development expenses benefited from a net increase of $10.8 million in capitalized development expenditure as TAG adopted Micro Focus research and development accounting policy. Exceptional items included in research and development expenses decreased $1.8 million to $1.3 million (2015: $3.1 million). Exceptional items are discussed later in this section.
Administrative expenses. Administrative expenses decreased by $4.0 million, or 2.8% (increased by $1.1 million, or 0.8% on a constant currency basis) to $139.0 million as compared to $143.0 million in the year ended April 30, 2015. The overall increase in administrative expenses was primarily driven by the full year impact of the TAG acquisition ($21.8 million excluding exceptional items of $13.5 million). Share based payment charges increased $13.2 million to $28.8 million (2015: $15.6 million) with the full year impact of awards and incentives in relation to the acquisition of TAG and exchange gain decreased $6.5 million to $2.9 million (2015: $9.4 million). Exceptional items included in administrative expenses decreased $49.3 million to $20.1 million (2015: $69.4 million) with many of the acquisition costs related to TAG being incurred in the prior year. Exceptional items are discussed later in this section.
Exceptional items:
Exceptional items within operating profit decreased by $68.8 million, or 71.1% to $27.9 million in the fiscal year ended April 30, 2016 as compared to $96.7 million in the fiscal year ended April 30, 2015. The decrease was as a result of a reduction in costs related to the acquisition and integration including acquisition costs of
123
$26.3 million, property rationalization costs of $12.2 million, severance costs of $35.6 million, intangible asset and prepayment impairment costs of $13.3 million, and a royalty provision release of $3.0 million, partially offset by an increase in integration costs of $16.0 million and pre-acquisition costs relating to Serena of $5.6 million.
Share of results of associates. Share of results of associates decreased by $1.4 million, or 177.9%, to a loss of $2.2 million in the fiscal year ended April 30, 2016 as compared to a loss of $0.8 million in the fiscal year ended April 30, 2015.
Finance costs. Finance costs increased by $42.1 million, or 74.9%, to $98.4 million in the fiscal year ended April 30, 2016 as compared to $56.2 million in the fiscal year ended April 30, 2015. The increase in the finance costs was due to an additional $38.8 million of finance costs incurred on new bank borrowings to fund the acquisition of TAG and an additional $7.4 million of amortization of facility costs and original issue discounts, offset by a $2.1 million reduction in interest on tax provisions and reduction of $2.4 million of exceptional finance costs incurred in the fiscal year ended April 30, 2015 relating to the acceleration of the amortization of facility fees as a result of incurring new borrowings to finance the acquisition of TAG.
Finance income. Finance income decreased by $0.2 million, or 16.6%, to $1.0 million in the fiscal year ended April 30, 2016 as compared to $1.2 million in the fiscal year ended April 30, 2015.
Taxation. The tax charge increased by $42.4 million, or 423.5%, to an expense of $32.4 million (16.6% tax rate) in the fiscal year ended April 30, 2016 as compared to a benefit of $10.0 million (-11.0% tax rate) in the fiscal year ended April 30, 2015. The tax rate for the fiscal year ended April 30, 2016 is higher as the Groups profit in 2016 includes a full year of profit from TAG, which is taxed at higher rates, particularly in the US, and the tax rate in 2015 included significant one-time benefits, specifically a prior year benefit relating to the U.K. patent box regime and benefits arising from the recognition of tax credits in the US following the acquisition of TAG.
Underlying Adjusted EBITDA. Underlying Adjusted EBITDA increased by $184.2 million, or 52.9%, to $532.5 million in fiscal year ended April 30, 2016 as compared to $348.3 million in the fiscal year ended April 30, 2015. This increase in Underlying Adjusted EBITDA was primarily driven by an increase of $201.1 million due to the full year effect of the TAG acquisition completed on November 20, 2015. The remainder of the increase in Underlying Adjusted EBITDA is as a result of a reduction in operating costs which arose mostly from efficiencies from restructuring taken at the end of the 2015 fiscal year, the rationalization of the property portfolio and tighter control over discretionary costs.
On a pro forma constant currency basis, Underlying Adjusted EBITDA increased by $45.7 million, or 9.4%, to $532.5 million (margin of 42.8%) in the fiscal year ended April 30, 2016 as compared to $486.8 million (margin of 38.3%) in the fiscal year ended April 30, 2015.
Adjusted Operating Profit. Adjusted Operating Profit increased $185.7 million, or 53.4% to $533.5 million in the fiscal year ended April 30, 2016 as compared to $347.8 million in the fiscal year ended April 30, 2015. On a pro forma constant currency basis, Adjusted Operating Profit increased $50.1 million, or 10.4%, to $533.5 million in the fiscal year ended April 30, 2016 as compared to $483.4 million in the fiscal year ended April 30, 2015.
The Micro Focus Product Portfolio Adjusted Operating Profit was $453.7 million in the fiscal year ended April 30, 2016, delivering a margin of 45.8% which compares with the margin in the pro forma constant currency Adjusted Operating Profit for the fiscal year ended April 30, 2015 of 40.2%. The increase in margin arises because of the cost saving actions that were taken at the end of the 2015 fiscal year when we integrated the original Micro Focus business with TAG. These savings were mostly in staff and property costs.
The SUSE Product Portfolio Adjusted Operating Profit was $79.8 million in the fiscal year ended April 30, 2016 at a profit margin of 31.4%. Compared to the pro forma constant currency Adjusted Operating Profit for the fiscal year ended April 30, 2015, this is an increase of $21.1 million (35.9%) and a profit margin improvement of 4.1%. We have seen a significant increase in directly managed costs in the SUSE Product Portfolio that is consistent with the investment being made to deliver the SUSE growth charter. We are also seeing the benefit of a reduced allocation of centrally managed costs which is being delivered from the efficiencies in the Micro Focus Product Portfolio.
124
Liquidity and Capital Resources
Our principal ongoing uses of cash are to meet working capital requirements to fund debt obligations and to finance our capital expenditures and acquisitions.
Cash flows from operating activities
Fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016
Net cash generated from operating activities increased by $169.2 million, or 60.0%, to $452.4 million in the fiscal year ended April 30, 2017 as compared to $283.2 million in the fiscal year ended April 30, 2016.
This was primarily due to an increase in operating profit of $69.5 million after adding back the effect of non-cash items, a reduction in tax paid of $54.6 million, a reduction in interest paid of $10.7 million and an inflow from working capital of $39.2 million, which was partially offset by an increase in loan issue costs of $4.9 million.
Fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015
Net cash generated from operating activities increased by $82.9 million, or 41.4%, to $283.2 million in the fiscal year ended April 30, 2016 as compared to $200.3 million in the fiscal year ended April 30, 2015.
This was primarily due to an increase in operating profit of $205.7 million after adding back the effect of non-cash items and a decrease in loan issue costs of $38.4 million, which was offset by an increase in tax paid of $81.1 million, an increase in interest paid of $41.3 million and an outflow from working capital of $38.7 million. The acquisition of TAG part way through the year ended April 30, 2015 contributed $105.0 million to the increase in operating profit of $205.7 million after adding back the effect of non-cash items.
Cash flows from investing activities
Fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016
Net cash used in investing activities increased by $536.1 million, or 1,000%, to $589.7 million in the fiscal year ended April 30, 2017 as compared to $53.6 million in the fiscal year ended April 30, 2016. This increase in net cash used in investing activities was primarily due to an increase in cash outflows for acquisitions of $299.1 million associated with Serena and GWAVA slightly offset by the acquisition of Authasas BV, and the repayment of $316.7 million of bank borrowings on the acquisition of Serena in the fiscal year ended April 30, 2017, which was partially offset by an increase in cash acquired with acquisitions of $68.2 million and a decrease of $1.6 million in payments for intangible assets and property, plant and machinery in the fiscal year ended April 30, 2017.
Fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015
Net cash used in investing activities decreased by $1,101.8 million, or 95.4%, to $53.6 million in the fiscal year ended April 30, 2016 as compared to $1,155.4 million in the fiscal year ended April 30, 2015. This decrease in net cash used in investing activities was primarily due to the acquisition of TAG which resulted in $165.9 million cash acquired and the repayment of TAG borrowings of $1,294.7 million in the fiscal year ended April 30, 2015, which was partially offset by an increase of $18.6 million in payments for intangible assets and property, plant and machinery, and the cost of the acquisition of Authasas BV of $10.0 million in the fiscal year ended April 30, 2016. Bank interest received also increased by $0.7 million between the fiscal years ended April 30, 2015 and 2016.
Cash flows from financing activities
Fiscal year ended April 30, 2017 compared to the fiscal year ended April 30, 2016
Net cash used in financing activities increased by $581.1 million, or 282.4%, to $375.3 million in the fiscal year ended April 30, 2017 as compared to an inflow of $205.8 million in the fiscal year ended April 30, 2016. This increase in net cash used in financing activities was primarily due to an increase of $279.3 million in cash
125
outflows from bank borrowings, an increase in dividends paid to shareholders of $72.4 million, an increase of $1.0 million in relation to share capital issues and the non-reoccurrence of the $222.7 million of inflow from the share capital placement in the year ended April 30, 2017.
Fiscal year ended April 30, 2016 compared to the fiscal year ended April 30, 2015
Net cash generated from financing activities decreased by $973.2 million, or 82.5%, to $205.8 million in the fiscal year ended April 30, 2016 as compared to $1,178.9 million in the fiscal year ended April 30, 2015. This decrease in net cash generated from financing activities was primarily due to a decrease in proceeds from bank borrowings of $1,658.6 million, an increase in dividends paid to shareholders of $32.5 million, partially offset by a $364.3 million decrease in the repayment of bank borrowings, a net cash inflow of $223.7 million from a share placement made to fund the purchase of Serena in the fiscal year ended April 30, 2016 and the $131.6 million of Return of Value payment made in the fiscal year ended April 30, 2015.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements, aside from those outlined in the contractual cash obligations table below, that have, or are reasonably likely to have, a current or future material effect on the Groups financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Commitments
The previous debt facilities of the Micro Focus Group were put in place at the time of the acquisition of TAG on November 20, 2014 and totaled $2,000.0 million under a credit agreement comprising a $1,275.0 million seven year Term Loan B, a $500.0 million five year Term Loan C and a $225.0 million Revolving Facility.
During the year ended April 30, 2017 the Group renegotiated its debt facilities.
On August 1, 2016 the Company allocated a re-pricing of its senior secured Term Loan B which reduced its ongoing interest payments. The interest rate was reduced from 4.25% to 3.75% and the LIBOR floor was reduced from 1.00% to 0.75%, up from 0.75%. All other terms of the Groups Credit Facilities remained the same. The terms of the Micro Focus debt facilities from August 1, 2016 to 28 April 2017 were as follows:
• | Syndicated senior secured tranche B term loan facility (Term Loan B) , with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 1.00% per annum, with an original issue discount of 1.00% and a seven year term; |
• | A syndicated senior secured tranche C term loan facility (Term Loan C), with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 10.00% per annum, with an original issue discount of 1.50% and a five year term; and |
• | A senior secured revolving credit facility of $375.0 million, (Revolving Facility), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.50% on amounts undrawn) thereunder and an original issue discount of 0.50%. |
The Revolving Facility was increased from $225.0 million to $375.0m on May 2, 2016 as part of the funding for the Serena acquisition.
New Facilities
The Company announced on April 21, 2017 the successful syndication of the new credit facilities (the New Facilities) on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo, Inc., a wholly owned subsidiary of HPE that will hold HPE Software. Post April 30, 2017, Seattle SpinCo Inc. will be merged with a wholly owned subsidiary of Micro Focus in the Transaction.
The New Facilities comprise a $500.0 million Revolving Credit Facility effective at Closing at LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions and $5,000.0 million of term loans. The new term loans are priced as follows:
• | In relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5m due November 2019 were offered a cashless roll of their investment into the |
126
existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7 million to $1,515.2 million, effective from 28 April 2017.
Facilities not drawn down as at April 30, 2017 were as follows:
HPE Software facilities:
• | The new $2,600.0 million senior secured seven year term loan B issued by Seattle SpinCo, Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; |
Micro Focus facilities:
• | The new $385.0 million senior secured seven year term loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and |
• | The new Euro 470.0 million (equivalent to approximately $500.0 million) senior secured seven year term loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%. |
The above new facilities result in debt issue costs of $206.5 million (including the original issue discounts) which will be amortized over the length of the terms set out above.
The new facilities are a modification only of the existing facilities and the unamortized prepaid facility arrangement fees and original issue discounts have not been accelerated as a result. The remaining unamortized prepaid facility arrangement fees and original issue discounts will be recognized over the life of the new debt.
As part of the HPE Software merger, due to complete in the third quarter of calendar year 2017, the New Facilities will be used to:
(i) | Fund the pre-Completion cash payment by Seattle SpinCo Inc. to HPE of $2,500.0 million (subject to certain adjustments in limited circumstances); |
(ii) | Fund the Return of Value to Micro Focus' existing Shareholders of $500.0 million; and |
(iii) | Pay transaction costs relating to the acquisition of HPE Software. |
The balance will be used for general corporate and working capital purposes.
Micro Focus is already benefitting from the reduced interest rate margin and repayment terms on the existing term loans. The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At April 30, 2017, $80.0 million of the available Revolving Facility of $375.0 million was drawn, representing 21.3%. The facility was less than 35% drawn at April 30, 2017 and therefore no covenant test is applicable.
The following table reflects a summary of obligations and commitments outstanding as of April 30, 2017:
|
Payments due by Period
|
||||||||||||||
|
Less than
1 year |
1 - 3 years
|
3 -5 years
|
After
5 years |
Total
|
||||||||||
Contractual cash obligations:
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
Long-term debt
|
|
83,788
|
|
|
30,304
|
|
|
1,481,096
|
|
|
—
|
|
|
1,595,188
|
|
Operating leases
|
|
28,330
|
|
|
48,154
|
|
|
36,854
|
|
|
28,749
|
|
|
142,087
|
|
Interest payments
|
|
60,168
|
|
|
111,646
|
|
|
86,824
|
|
|
—
|
|
|
258,638
|
|
Total
|
|
172,286
|
|
|
190,104
|
|
|
1,604,774
|
|
|
28,749
|
|
|
1,995,913
|
|
The interest payments within the above table are presented based on the prevailing one-month LIBOR and foreign exchange rates as of April 21, 2017.
127
Critical Accounting Estimates and Policies
The consolidated financial statements of the Group have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), interpretations issued by the IFRS Interpretations Committee and the Companies Act 2006 applicable to companies reporting under IFRS. The consolidated financial statements have been prepared on a going concern basis under the historical cost convention. The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Groups accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below in the Notes to the Financial Statements.
In preparing the consolidated financial statements, the Group has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Group regularly reviews these estimates and updates them as required. Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that it is likely that materially different amounts would be reported related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates, which require the Group to make subjective and complex judgments, and matters that are inherently uncertain.
Revenue recognition
The Group recognizes revenues from sales of software Licences (including Intellectual Property and Patent rights, to end-users, resellers and Independent Software Vendors (“ISV”)), software maintenance, subscription, technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training are bundled with the Licence fee, they are unbundled using the Groups objective evidence of the fair value of the elements represented by the Groups customary pricing for each element in separate transactions. If evidence of fair value exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that there is evidence of delivery.
If the arrangement includes acceptance criteria, revenue is not recognized until the Group can objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever is earlier.
The Group recognizes Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria are met; otherwise revenue is deferred and recognized upon delivery of the product to the end-user. Where the Group sells access to a Licence for a specified period of time and collection of a fixed or determinable fee is reasonably assured, Licence revenue is recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations are committed to. Where these future performance obligations are specified in the Licence agreement, and fair value can be attributed to those upgrades, revenue for the future performance obligations is deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations are unspecified in the Licence agreement, revenue is deferred and recognized ratably over the specified period.
For Subscription revenue where access and performance obligations are provided evenly over a defined term, the revenue is deferred and recognized ratably over the specified period.
Maintenance revenue is recognized on a straight-line basis over the term of the contract, which in most cases is one year. Revenue from consulting and training services is recognized on a percentage of completion basis as the services are performed. The stage of completion is measured on the basis of services performed to date as a percentage of the total services to be performed. Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred income.
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Rebates paid to partners as part of a contracted program are netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner, unless the Company receives an identifiable good or service from the partner that is separable from the sales transaction and for which the Group can reasonably estimate fair value.
Exceptional Items and Integration / Restructuring Provisions
Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Groups financial performance. Management of the Group first evaluates group strategic projects such as acquisitions, divestitures and integration activities, company tax restructuring and other one off events such as restructuring programs. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favorable and unfavorable transactions impacting revenue, income and expense for all periods presented. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions or the cost of integrating acquired businesses.
The classification of these items as an exceptional is a matter of judgement. This judgement is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.
Business Combinations
When making acquisitions, the Group has to make judgments and best estimates about the fair value allocation of the purchase price. Where acquisitions are significant, appropriate advice is sought from professional advisors before making such allocations otherwise valuations are done by management using consistent methodology used on prior year acquisitions where appropriate professional advice was sought. The valuation of goodwill and other intangibles is tested annually or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable. These tests require the use of estimates.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill.
Where new information is obtained within the measurement period (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.
Foreign currency translation
Functional and presentation currency
The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Groups entities are measured in the functional currency of each entity. The Group uses the local currency as the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited) and the parent company, where the functional currency is the US dollar.
Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income.
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Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
• | Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that consolidated statement of financial position; |
• | Income and expenses for each consolidated statement of comprehensive income item are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and |
• | All resulting exchange differences are recognized as a separate component of equity. |
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.
Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Groups investment in each area of operation by each primary reporting segment.
The Group tests annually whether goodwill has suffered any impairment. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. Details of the Groups impairment review and sensitivities to changes in assumptions are disclosed in Notes to the Financial Statements.
Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs to sell and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.
Development expenditure
The Group invests in the development of future products. The assessment as to whether this expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit. Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.
Taxation
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for
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anticipated settlement of tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
The Group carries appropriate provision, based on best estimates, until tax computations are agreed with the taxation authorities.
Current and deferred tax are recognized in the consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the consolidated statement of financial position date.
Loss Contingencies
Loss contingencies for onerous leases, restructuring costs and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be required to settle the obligation; and the amount has been reliably estimated. Restructuring contingencies comprise lease termination penalties and employee termination payments. Contingencies are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A loss contingency is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Loss contingencies are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the loss contingency due to the passage of time is recognized as an interest expense.
Recently Issued Accounting Standards
Other than as described below, the accounting policies adopted are consistent with those of the Groups annual consolidated financial statements for the year ended April 30, 2016, as described in those financial statements.
(a) | The following standards, interpretations and amendments to existing standards are now effective and have been adopted by the Group: |
• | Amendment to IAS 16, ‘Property, plant and equipment’ and IAS 38, ‘Intangible assets’, on depreciation and amortization applies for periods beginning on or after January 1, 2016. In this amendment the IASB has clarified that the use of revenue based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. |
• | Annual Improvements 2014 includes amendments to IFRS 5, ‘Non-current Assets Held For Sale and Discontinued Operations’, IFRS 7, ‘Financial Instruments: Disclosures’, IAS 19, ‘Employee Benefits’ and IAS 34, ‘Interim Financial Reporting’ applies for periods beginning on or after January 1, 2016. |
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• | Amendment to IAS 1, ‘Presentation of financial statements’ as part of the IASB initiative to improve presentation and disclosure in financial reports, effective for annual periods beginning on or after January 1, 2016. |
The amendments above do not have a material impact to the consolidated financial statements.
(b) | The following standards, interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group: |
• | IFRS 15 ‘Revenue from contracts with customers’ establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from January 1, 2018 onwards. Earlier application is permitted. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretation clarifications. Please refer to below for a more detailed assessment to-date on implementing this standard. |
• | IFRS 9 ‘Financial instruments’. This standard replaces the guidance in IAS 39 and applies to periods beginning on or after January 1, 2018. It includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit losses model that replaces the current incurred loss impairment model. |
• | Amendments to IAS 7, ‘Statement of cash flows’ on disclosure initiative are effective on periods beginning on or after January 1, 2017. This amendment introduces an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities and is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. |
• | Amendments to IAS 12, ‘Income taxes’ on recognition of deferred tax assets for unrealized losses are effective on periods beginning on or after January 1, 2017. These amendments clarify how to account for deferred tax assets originated from unrealized loss in debt instruments measured at fair value. |
• | Amendments to IFRS 2, ‘Share-based payments’ on clarifying how to account for certain types of share-based payment transactions are effective on periods beginning on or after January 1, 2018. These amendments clarify the measurement basis for cash-settled share-based payments and the accounting for modifications that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share-based payment and pay that amount to the tax authority. |
• | IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 ‘Leases’, and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2019 and earlier application is permitted if the entity is adopting IFRS 15 ‘Revenue from contracts with customers’ at the same time. |
• | Annual improvements 2014–2016 include amendments to IFRS 1, ‘First-time adoption of IFRS’, IFRS 12, ‘Disclosure of interests in other entities’ and IAS 28, ‘Investments in associates and joint ventures’ regarding measuring an associate or joint venture at fair value applies for periods beginning on or after January 1, 2018. |
• | IFRIC 22, ‘Foreign currency transactions and advance consideration’ addresses foreign currency transactions or parts of transactions where there is consideration that is denominated or priced in a foreign currency. The interpretation provides guidance for when a single payment/receipt is made as well as for situations where multiple payments/receipts are made, effective for annual periods beginning on or after January 1, 2018. |
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• | Clarifications to IFRS 15 ‘Revenue from Contracts with Customers’ are effective on periods beginning on or after 1 January 2018, subject to EU endorsement. These amendments comprise clarifications of the guidance on identifying performance obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus net revenue presentation). |
• | IFRIC 23, ‘Uncertainty over Income Tax Treatments’ clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. This interpretation is effective for annual periods beginning on or after 1 January 2019, subject to EU endorsement. |
The directors do not believe the adoption of the above accounting standards will have a material impact on the reported results and financial position of the Group with the exception of IFRS 15, IFRS 9, IFRS 16, and IFRIC 22. The adoption of IFRS 15 and the impact this will have on the Groups financial statements has been set out below. The financial impact of IFRS 9, IFRS 16 and IFRIC 22 has not yet been fully assessed by the directors and therefore it is too early to conclude on the potential impact these standards and interpretations may have on the reported results and financial position may have.
Impact of IFRS 15 ‘Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers. The new revenue recognition standard will be effective for us starting November 1, 2018, following the announcement of the new year-end date. We do not plan to adopt IFRS 15 early. The standard permits two possible transition methods for the adoption of the new guidance:
• | Retrospectively to each prior reporting period presented in accordance with IAS-8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, or |
• | Retrospectively with the cumulative effect of initially applying the standard recognized on the date of the initial application (cumulative catch-up approach). |
We currently plan to adopt the new standard using the cumulative catch-up approach. We are in the process of assessing the impact, developing our future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. We have established a project across Micro Focus business to review the impacts of IFRS 15 and as part of this effort, the most notable difference to date is in relation to certain incremental costs of obtaining a contract. IFRS 15 requires the capitalization and amortization of certain in-scope sales commissions and third party costs to match the recognition of the associated revenue. An evaluation study is underway to determine the potential impact to the consolidated financial statements in the year of adoption. There will be no impact to cash flows.
IFRS 15 may change the way we allocate a transaction price to individual performance obligations which can impact the classification and timing of revenues. Further analysis of the requirements is currently being undertaken to understand the possible impact, if any.
In addition to the effects on our consolidated statement of comprehensive income, we expect changes to our consolidated statements of financial position (in particular due to the recognition of contract assets/contract liabilities, the differentiation between contract assets and trade receivables, the capitalization and amortization of costs of obtaining a contract and an impact in retained earnings from the initial adoption of IFRS 15) and changes in quantitative and qualitative disclosure to be added.
We will continue to assess all of the impacts that the application of IFRS 15 will have on our consolidated financial statements in the period of initial application. The impacts, if material, will be disclosed, including statements on if and how we apply any of the practical expedients available in the standard.
Quantitative and Qualitative Disclosures about Market Risk
Financial risk factors
Micro Focus Groups multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of directors. Group treasury identifies and
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evaluates financial risks alongside the Groups operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds. In accordance with the treasury policy, the Group does not typically hold or issue derivative financial instruments.
Credit risk
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with predominately high-credit quality financial institutions. The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers financial conditions are performed. The Group maintains a provision for impairment based upon the expected collectability of accounts receivable. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.
Foreign currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to UK Sterling, Yen and the Euro. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognized assets and liabilities are denominated in a currency that is not the entitys functional currency. There were no hedging transactions in place at April 30, 2017 or 2016. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
Interest rate risk
The Groups income and cash generated from operations are substantially independent of changes in market interest rates. The Groups interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group does not use interest rate swaps to manage its cash flow interest rate risk at the present time due to low market rates.
Liquidity risk
Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facility. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts. Trade payables arise in the normal course of business and are all current. Onerous lease provisions are expected to mature between less than 12 months and nine years.
At April 30, 2017 gross borrowings of $1,595.2 million (2016: $1,787.3 million) related to our senior secured debt facilities. $142.8 million (2016: $287.8 million) is current of which $80.0 million (2016: $225.0 million) is the revolving credit facility. The borrowings disclosed in the balance sheet are net of pre-paid facility costs. See note 21 to our accompanying financial statements included elsewhere in this information statement/prospectus.
Non-IFRS measures
The Group uses certain measures to assess the financial performance of its business. Certain of these measures are termed non-IFRS measures because they exclude amounts that are included in, or include amounts that are excluded from, the most directly comparable measure calculated and presented in accordance with IFRS, or are calculated using financial measures that are not calculated in accordance with IFRS.
The Group uses such measures to measure operating performance and liquidity, in presentations to the Board and as a basis for strategic planning and forecasting, as well as monitoring certain aspects of its operating cash flow and liquidity. The Group believes that these and similar measures are used widely by certain investors, securities analysts and other interested parties as supplemental measures of performance and liquidity.
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The non-IFRS measures may not be comparable to other similarly titled measures used by other companies and have limitations as analytical tools and should not be considered in isolation or as a substitute for analysis of the Groups operating results as reported under IFRS.
An explanation of the relevance of each of the non-IFRS measures, a reconciliation of the non-IFRS measures to the most directly comparable measures calculated and presented in accordance with IFRS and a discussion of their limitations is set out below. The Group does not regard these non-IFRS measures as a substitute for, or superior to, the equivalent measures calculated and presented in accordance with IFRS or those calculated using financial measures that are calculated in accordance with IFRS.
EBITDA, Facility EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA
EBITDA is defined as net earnings before finance costs, finance income, taxation, depreciation of property, plant and equipment, and amortization of intangible assets. The Group presents EBITDA because it is widely used by securities analysts, investors and other interested parties to evaluate the profitability of companies. EBITDA eliminates potential differences in performance caused by variations in capital structures (affecting net finance costs), tax positions (such as the availability of net operating losses against which to relieve taxable profits), the cost and age of tangible assets (affecting relative depreciation expense) and the extent to which intangible assets are identifiable (affecting relative amortization expense).
Facility EBITDA is comprised of EBITDA (as defined above), adjusted for share of results of associates, exceptional items (integration costs, acquisition costs, pre-acquisition costs, property costs, severance costs, royalty provision release, impairment of intangible assets, and impairment of prepayments), and share based compensation. Facility EBITDA is used as a compliance measure within the Groups debt covenants. Adjusted EBITDA is comprised of Facility EBITDA (as defined above), adjusted for amortization and impairment of development costs. Underlying Adjusted EBITDA is comprised of Adjusted EBITDA (as defined above), adjusted for foreign exchange gains/losses and net capitalization/amortization of product development costs. These items are excluded from Facility EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA because they are individually or collectively material items that are not considered to be representative of the trading performance of the Group. Management believes that Facility EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA should, therefore, be made available to securities analysts, investors and other interested parties to assist in their assessment of the trading performance of our business.
Adjusted EBITDA Margin and Underlying Adjusted EBITDA Margin refers to each measure defined above as a percentage of actual revenue recorded in accordance with IFRS for the period.
EBITDA, Facility EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA have limitations as analytical tools. Some of these limitations are:
• | they do not reflect the Group’s cash expenditures or future requirements for capital expenditure or contractual commitments; |
• | they do not reflect changes in, or cash requirements for, the Group’s working capital needs; |
• | they do not reflect the significant interest expense, or the cash requirements necessary to service interest or principal payments, on the Group’s debt; |
• | they are not adjusted for all non-cash income or expense items that are reflected in the Group’s statements of cash flows; |
• | the further adjustments made in calculating Adjusted EBITDA and Underlying Adjusted EBITDA are those that management consider are not representative of the underlying operations of the Group and therefore are subjective in nature; and |
• | although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA do not reflect any cash requirements for such replacements. |
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The following table is a reconciliation from profit for the year excluding exceptional items to EBITDA, Facility EBITDA, Adjusted EBITDA, and Underlying Adjusted EBITDA:
|
Year Ended April 30,
|
||||||||
|
2017
|
2016
|
2015
|
||||||
|
$m
|
$m
|
$m
|
||||||
Profit for the year
|
|
157.8
|
|
|
163.0
|
|
|
101.4
|
|
Finance costs
|
|
96.8
|
|
|
98.4
|
|
|
56.2
|
|
Finance income
|
|
(1.0
|
)
|
|
(1.0
|
)
|
|
(1.2
|
)
|
Taxation
|
|
38.5
|
|
|
32.4
|
|
|
(10.0
|
)
|
Share of results of associates
|
|
1.4
|
|
|
2.2
|
|
|
1.0
|
|
Depreciation of property, plant and equipment
|
|
11.8
|
|
|
11.4
|
|
|
7.7
|
|
Amortization of intangible assets
|
|
236.4
|
|
|
203.3
|
|
|
109.1
|
|
EBITDA
|
|
541.7
|
|
|
509.7
|
|
|
264.2
|
|
Integration costs(a)
|
|
27.7
|
|
|
23.6
|
|
|
7.6
|
|
Acquisition costs(a)
|
|
2.6
|
|
|
0.5
|
|
|
26.9
|
|
Pre-acquisition costs(a)
|
|
58.0
|
|
|
5.5
|
|
|
—
|
|
Property costs(a)
|
|
5.5
|
|
|
6.0
|
|
|
18.2
|
|
Severance and legal costs(a)
|
|
3.4
|
|
|
(4.8
|
)
|
|
30.7
|
|
Royalty provision release(a)
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
Impairment of intangible assets(a)
|
|
—
|
|
|
—
|
|
|
11.6
|
|
Impairment of prepayments(a)
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Share-based compensation charge
|
|
34.5
|
|
|
28.8
|
|
|
15.5
|
|
Facility EBITDA
|
|
673.4
|
|
|
566.3
|
|
|
377.2
|
|
Amortization and impairment of product development
costs |
|
(22.3
|
)
|
|
(19.5
|
)
|
|
(19.6
|
)
|
Adjusted EBITDA
|
|
651.1
|
|
|
546.8
|
|
|
357.6
|
|
Foreign exchange (gain)/loss
|
|
(4.9
|
)
|
|
(2.9
|
)
|
|
(9.4
|
)
|
Net (capitalization)/amortization of product development costs
|
|
(5.2
|
)
|
|
(11.4
|
)
|
|
0.1
|
|
Underlying Adjusted EBITDA
|
|
640.9
|
|
|
532.5
|
|
|
348.3
|
|
Adjusted EBITDA Margin
|
|
47.2
|
%
|
|
43.9
|
%
|
|
42.9
|
%
|
Underlying Adjusted EBITDA Margin
|
|
46.4
|
%
|
|
42.8
|
%
|
|
41.7
|
%
|
(a) | Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. These items are collectively totaled and identified as exceptional items. |
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Adjusted Operating Profit
Adjusted Operating Profit is defined as operating profit before share-based compensation, the amortization of purchased intangible assets, and exceptional items. Adjusted Operating Profit is also the measure used by the Executive Committee to assess the trading performance of our business and is therefore the measure of segment profit that the Group presents under IFRS. Adjusted Operating Profit is also presented on a consolidated basis because management believes it is important to consider our profitability on a basis consistent with that of our operating segments. When presented on a consolidated basis, Adjusted Operating Profit is a non-IFRS measure. The following table is a reconciliation from operating profit for the year excluding exceptional items to Adjusted Operating Profit:
|
Year Ended April 30,
|
||||||||
|
2017
|
2016
|
2015
|
||||||
|
$m
|
$m
|
$m
|
||||||
Operating profit
|
|
293.4
|
|
|
294.9
|
|
|
147.2
|
|
Integration costs(a)
|
|
27.7
|
|
|
23.6
|
|
|
7.6
|
|
Acquisition costs(a)
|
|
2.6
|
|
|
0.5
|
|
|
26.9
|
|
Pre-acquisition costs(a)
|
|
58.0
|
|
|
5.5
|
|
|
—
|
|
Property costs(a)
|
|
5.5
|
|
|
6.0
|
|
|
18.2
|
|
Severance and legal costs(a)
|
|
3.4
|
|
|
(4.8
|
)
|
|
30.7
|
|
Royalty provision release(a)
|
|
—
|
|
|
(3.0
|
)
|
|
—
|
|
Impairment of intangible assets(a)
|
|
—
|
|
|
—
|
|
|
11.6
|
|
Impairment of prepayments(a)
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Share-based compensation charge
|
|
34.5
|
|
|
28.8
|
|
|
15.5
|
|
Amortization of purchased intangible assets
|
|
212.9
|
|
|
182.0
|
|
|
88.4
|
|
Adjusted Operating Profit
|
|
638.0
|
|
|
533.5
|
|
|
347.8
|
|
(a) | Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Group’s financial performance. These items are collectively totaled and identified as exceptional items. |
Constant Currency
The Groups reporting currency is the U.S. dollar. However, the Groups significant international operations give rise to fluctuations in foreign exchange rates. To neutralize foreign exchange impact and to better illustrate the underlying change in revenue and profit from one year to the next, the Group has adopted the practice of discussing results in both reportable currency (local currency results translated into US dollars at the prevailing foreign exchange rate) and constant currency.
The Group uses US dollar-based, constant currency models to measure performance. These are calculated by restating (1) the results of the Group for the year ended April 30, 2016 at the same average exchange rates as those used in reported results for the year ended April 30, 2017 and (2) the results of the Group for the year ended April 30, 2015 at the same average exchange rates as those used in reported results for the year ended April 30, 2016. This gives a US-dollar denominated statement of comprehensive income which excludes any variances attributable to foreign exchange rate movements.
Pro Forma
Management believes that discussing pro forma results provides a better understanding of the Groups performance and trends because it allows for more meaningful comparisons of current period to that of prior periods. Pro forma comparisons are calculated as follows: current year actual results (which include acquisitions from the relevant date of completion) are compared with prior year, constant currency actual results, adjusted to include the results of acquisitions for the commensurate year in the prior year.
In respect of the Serena acquisition which completed on May 2, 2016, which was incorporated into our Development and IT Operations Management Tools product group, we believe that the results for the fiscal year ended April 30, 2017 are better understood by comparing the actual results in the fiscal year ended April 30, 2017 with the pro forma constant currency results of the combination of Serena and Micro Focus for the fiscal
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year ended April 30, 2016. Similar to other software companies with a perpetual license model, Serenas revenues were weighted to the end of each financial quarter and were weighted to the final financial quarter of the year. Serena had a January 31 year end date prior to the acquisition. The Groups experience is that when the financial year end is changed following acquisition the weighting of financial performance moves to the new financial year end. Consequently, in order to provide a meaningful comparison in the pro forma constant currency results for the fiscal year ended April 30, 2016, we have combined the unaudited internal management information for Serena for the twelve month period from February 1, 2015 to January 31, 2016 with the Micro Focus results for the fiscal year ended April 30, 2016 converted at the same average monthly exchange rates experienced in the fiscal year ended April 30, 2017.
Due to the significant size of the acquisition of TAG which completed on November 20, 2014, we believe that the results for the fiscal year ended April 30, 2016 are better understood by comparing the actual results in the fiscal year ended April 30, 2016 with the pro forma constant currency results of the combination of TAG and Micro Focus for the fiscal year ended April 30, 2015. In arriving at pro forma constant currency results for the comparable period of the fiscal year ended April 30, 2015, we combined the unaudited internal management information for TAG for the period from May 1, 2014 to November 19, 2014 and the Micro Focus results for the fiscal year ended April 30, 2015, which include the TAG results from November 20, 2014 to April 30, 2015, converted at the same average monthly exchange rates experienced in the fiscal year ended April 30, 2016.
The directors do not consider the GWAVA, OpenStack or OpenAttic acquisitions to be material to the Group and therefore have not presented the results of these acquisitions within the pro forma comparatives.
The following tables reconcile reported revenue and our non-IFRS financial measures (Adjusted Operating Profit and Underlying Adjusted EBITDA) for the fiscal year ended April 30, 2016 and the fiscal year ended April 30, 2015 to a pro forma constant currency measure for the same period.
Pro forma constant currency revenue
|
Year ended
April 30, 2016 |
Year ended
April 30, 2015 |
||||
|
$m
|
$m
|
||||
Revenue
|
|
1,245.0
|
|
|
834.5
|
|
Acquisitions
|
|
162.4
|
|
|
456.0
|
|
Impact of exchange rates
|
|
(14.7
|
)
|
|
(19.8
|
)
|
Pro Forma Constant Currency Revenue
|
|
1,392.7
|
|
|
1,270.7
|
|
Pro forma constant currency Adjusted Operating Profit
|
Year ended
April 30, 2016 |
Year ended
April 30, 2015 |
||||
|
$m
|
$m
|
||||
Adjusted Operating Profit
|
|
533.5
|
|
|
347.8
|
|
Acquisitions
|
|
80.5
|
|
|
142.7
|
|
Impact of exchange rates
|
|
2.5
|
|
|
(7.1
|
)
|
Pro Forma Constant Currency Adjusted Operating Profit
|
|
616.5
|
|
|
483.4
|
|
Pro forma constant currency Underlying Adjusted EBITDA
|
Year ended
April 30, 2016 |
Year ended
April 30, 2015 |
||||
|
$m
|
$m
|
||||
Underlying Adjusted EBITDA
|
|
532.5
|
|
|
348.3
|
|
Acquisitions
|
|
80.9
|
|
|
145.8
|
|
Impact of exchange rates
|
|
1.9
|
|
|
(7.3
|
)
|
Pro Forma Constant Currency Underlying Adjusted EBITDA
|
|
615.3
|
|
|
486.8
|
|
138
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS OF SEATTLE
Pursuant to the Reorganization and prior to the Distribution and the Merger, HPE will transfer HPE Software to Seattle, a wholly owned subsidiary of HPE, as further described elsewhere herein. See the sections entitled The Transactions—Transaction Steps, The Merger Agreement and The Separation and Distribution Agreement for more information. For purposes of this Managements Discussion and Analysis of Financial Condition and Results of Operations of Seattle (this MD&A), references to Seattle refer to the Software Segment of HPE, which was owned and operated by HPE (or HP Inc., HPEs former parent company, prior to the separation of HPE from HP Inc. on November 1, 2015) during all periods presented. See —Basis of Presentation below.
This MD&A is organized as follows:
• | Overview. A discussion of Seattle’s business and overall analysis of financial and other highlights affecting Seattle to provide context for the remainder of this MD&A. The overview analysis compares (a) the six months ended April 30, 2017 to the six months ended April 30, 2016 and (b) fiscal 2016 to fiscal 2015. |
• | Critical Accounting Policies and Estimates. A discussion of accounting policies and estimates that Seattle believes are important to understanding the assumptions and judgments incorporated in its reported financial results. |
• | Results of Operations. An analysis of Seattle’s financial results comparing (a) the six months ended April 30, 2017 to the comparable prior-year period and (b) fiscal 2016 and fiscal 2015 to the prior year period, respectively. |
• | Liquidity and Capital Resources. An analysis of changes in Seattle’s cash flows and a discussion of Seattle’s financial condition and liquidity. |
• | Contractual and Other Obligations. An overview of contractual obligations, restructuring plans, uncertain tax positions and off-balance sheet arrangements. |
Seattle intends the discussion of its financial condition and results of operations that follows to provide information that will assist the reader in understanding its Combined and Condensed Combined Financial Statements, the changes in certain key items in those financial statements from period to period, and the primary factors that accounted for those changes, as well as how certain accounting principles, policies and estimates affect Seattles Combined and Condensed Combined Financial Statements. This discussion should be read in conjunction with Seattles Combined and Condensed Combined Financial Statements and the related notes that appear elsewhere in this information statement/prospectus. See Index to Financial Statements.
The following Overview, Results of Operations and Liquidity discussions and analyses compare the six months ended April 30, 2017 to the six months ended April 30, 2016, fiscal 2016 to fiscal 2015 and fiscal 2015 to fiscal 2014, unless otherwise noted. The Capital Resources and Contractual and Other Obligations discussions present information as of October 31, 2016, unless otherwise noted.
Background
Seattle consists of the Software segment of HPE. Seattle provides big data platform analytics, application testing and delivery management, security and information governance, and IT operations management solutions for businesses and other enterprises of all sizes. Seattles offerings include licenses, support, professional services and SaaS. Seattle consists of one reportable segment, the development and sale of software solutions.
HPE was spun off by Hewlett-Packard Company on November 1, 2015 in a transaction in which HP Inc. (former Parent), formerly known as Hewlett-Packard Company separated into two independent publicly traded companies. Accordingly, the term Parent as used in this MD&A refers to the Hewlett-Packard Company for periods prior to November 1, 2015 and to HPE from November 1, 2015 onward.
September 2016 Announcement of Spin-Merge Transaction
On September 7, 2016, HPE announced plans for a spin-off and merger of Seattle with Micro Focus, which will create a pure-play infrastructure software company. Upon the completion of the Transactions, which are currently
139
anticipated to close on September 1, 2017, HPE Stockholders will own both HPE Shares and Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares as of immediately following Closing. The Transactions are subject to certain closing conditions as described in the section entitled The Merger Agreement—Conditions to the Merger.
Business Transferred to Parent
Prior to HP Inc.s spin-off of HPE, HP Inc. conducted a strategic review of Seattle and decided that the marketing optimization software product group, which has historically been managed by Seattle and included in Seattles results of operations, no longer aligned with Seattles strategic charter, as it was outside Seattles go-to-market focus of selling to IT departments. However, HP Inc. determined that these software assets primarily aligned with a document management and solutions ecosystem that would complement its printing business. As a result of this strategic review process, the marketing optimization software product group was realigned to become a part of HP Inc. as of the beginning of the fourth quarter of the fiscal year ended October 31, 2015. This realignment is reflected in Seattles Combined Financial Statements as a transfer of the marketing optimization software product group from Seattle to its Parent during the fiscal year ended October 31, 2015. (See Note 12, Related Party Transactions and Parent Company Investment to Seattles Combined Financial Statements). The following table presents the carrying value of the marketing optimization software product groups assets and liabilities at the date of transfer:
|
In millions
|
||
Goodwill(1)
|
$
|
512
|
|
Amortizable intangible assets
|
|
91
|
|
Net liabilities transferred
|
|
(37
|
)
|
Parent company investment
|
$
|
566
|
|
(1) | Goodwill was allocated on a relative fair value basis. |
Net revenue and Earnings before taxes related to the marketing optimization software product group included in Seattles Combined Statements of Operations for fiscal 2015 and 2014 were as follows:
|
For the fiscal years ended
October 31 |
|||||
|
2015
|
2014
|
||||
|
In millions
|
|||||
Net revenue
|
$
|
163
|
|
$
|
232
|
|
Earnings before taxes
|
$
|
7
|
|
$
|
9
|
|
There was no impact to Seattles fiscal 2016 Combined Financial Statements from the fiscal 2015 transfer of the marketing optimization software product group to HP Inc.
Acquisitions and Divestitures
Acquisitions
In fiscal 2016, Seattle acquired Trilead, a provider of backup solutions targeted for virtualized environments, for a purchase price of $12 million. In connection with this acquisition, Seattle recorded $10 million of goodwill (which is not deductible for tax purposes), $4 million of amortizable intangible assets, and assumed $2 million of net liabilities.
In fiscal 2015, Seattle acquired Voltage Security, a data-centric security software solutions company, for a purchase price of $160 million. In connection with this acquisition, Seattle recorded $96 million of goodwill (which is not deductible for tax purposes), $48 million of amortizable intangible assets and acquired $16 million of net assets.
Divestitures
In fiscal 2016, Seattle completed the sale of its TippingPoint business to Trend Micro International for approximately $300 million. TippingPoint is a provider of next-generation intrusion prevention systems and related network security solutions. Cash proceeds from the sale of Seattles TippingPoint business included a $25
140
million deposit received in fiscal 2015, and $254 million, offset by $5 million of transaction costs, received in fiscal 2016. The remaining amount of approximately $21 million is related to inventory and tooling assets retained by Seattle in connection with a transition services agreement with Trend Micro International under which Seattle will produce products for the divested business through an initial 12 month term ending in Seattles fiscal quarter ending April 30, 2017. Upon termination of the transition services agreement, Trend Micro International became obligated to purchase any remaining TippingPoint related inventory and tooling. As of April 30, 2017, substantially all remaining Tipping Point related inventory and tooling had been shipped to Trend Micro International. The $82 million gain related to the divestiture of TippingPoint was included in Selling, general and administrative expense in the Combined Statement of Operations and in Other, net in Net cash provided by operating activities in the Combined Statement of Cash Flows.
In fiscal 2015, Seattle completed the sales of its LiveVault and iManage businesses for combined proceeds of $149 million. The total gain of $7 million associated with these divestitures was included in Selling, general and administrative expense in the Combined Statement of Operations and in Other, net in Net cash provided by operating activities in the Combined Statement of Cash Flows.
Fiscal 2015 net cash proceeds from the 2015 divestitures of LiveVault and iManage combined with the deposit for the 2016 sale of TippingPoint totaled $174 million.
Basis of Presentation
The Combined and Condensed Combined Financial Statements of Seattle discussed in this MD&A were derived from the Consolidated and Combined Financial Statements and accounting records of Parent as if Seattle were operated on a standalone basis during the periods presented and were prepared in accordance with U.S. GAAP.
The Combined and Condensed Combined Statements of Operations and Comprehensive Income (Loss) of Seattle reflect allocations of general corporate expenses from Parent including, but not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of Seattle and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Seattle. The allocations may not, however, reflect the expenses Seattle would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if Seattle had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
The Combined and Condensed Combined Balance Sheets of Seattle include Parent assets and liabilities that were specifically identifiable or otherwise attributable to Seattle, including subsidiaries and affiliates in which Parent has a controlling financial interest or is the primary beneficiary. Parents cash has not been assigned to Seattle for any of the periods presented because those cash balances are not directly attributable to Seattle. Seattle reflects transfers of cash to and from Parents cash management system as a component of Parent company investment in the Combined and Condensed Combined Balance Sheets. Parents long-term debt has not been attributed to Seattle for any of the periods presented because Parents borrowings are not the legal obligation of Seattle.
Parent maintains various benefit and stock-based compensation plans. Seattles employees participate in those programs and a portion of the cost of those plans is included in Seattles Combined and Condensed Combined Financial Statements. However, Seattles Combined and Condensed Combined Balance Sheets do not include any net benefit plan obligations as no Parent benefit plan included only active, retired and other former Seattle employees. Seattles Combined and Condensed Combined Balance Sheets also do not include any equity related to stock-based compensation plans. See Note 3, Retirement and Post-Retirement Benefit Plans and Note 4, Stock-Based Compensation to Seattles Combined Financial Statements for a further description of the accounting for Seattles benefit plans and stock-based compensation plans, respectively.
141
Overview
Six Months ended April 30, 2017
The following provides an overview of Seattles key financial metrics for the six months ended April 30, 2017 as compared to the six months ended April 30, 2016:
|
Seattle Combined
|
||
Net revenue for the six months ended April 30, 2017
|
$
|
1,406
|
|
Year-over-year change %
|
|
(9.5
|
)%
|
Loss from operations for the six months ended April 30, 2017
|
$
|
(48
|
)
|
Loss from operations as a % of net revenue
|
|
(3.4
|
)%
|
Year-over-year change percentage points
|
|
(10.4
|
)pts
|
Net loss for the six months ended April 30, 2017
|
$
|
(39
|
)
|
Seattles net revenue decreased 9.5% (decreased 8.6% on a constant currency basis) for the six months ended April 30, 2017 as compared to the prior-year period. Seattle incurred a loss from operations of $48 million for the six months ended April 30, 2017 due primarily to increased separation costs arising from the planned Transactions. See Results of Operations – Six Months Ended April 30, 2017 and 2016 below for a further discussion of Seattles financial performance for the six months ended April 30, 2017.
As of April 30, 2017, cash and cash equivalents were $167 million, representing an increase of $37 million from the October 31, 2016 balance of $130 million. For the six months ended April 30, 2017, Seattle generated $176 million of cash flows from operations and invested $16 million in property, plant and equipment.
Fiscal Year ended October 31, 2016
The following provides an overview of Seattles key financial metrics for fiscal 2016 as compared to fiscal 2015:
|
Seattle
Combined |
||
Net revenue for the fiscal year ended October 31, 2016
|
$
|
3,195
|
|
Year-over-year change %
|
|
(11.8
|
)%
|
Earnings from operations for the fiscal year ended October 31, 2016
|
$
|
238
|
|
Earnings from operations as a % of net revenue
|
|
7.5
|
%
|
Year-over-year change percentage points
|
|
(1.4
|
)pts
|
Net earnings for the fiscal year ended October 31, 2016
|
$
|
80
|
|
Seattles net revenue decreased 11.8% (decreased 9.3% on a constant currency basis) in fiscal 2016 as compared to fiscal 2015. Seattles fiscal 2016 earnings from operations declined by 1.4 percentage points as compared to fiscal 2015 due primarily to lower gross profit and increased restructuring charges. See Results of Operations – Fiscal Years Ended October 31, 2016, 2015 and 2014 below for a further discussion of Seattles financial performance for the fiscal year ended October 31, 2016.
As of October 31, 2016, cash and cash equivalents were $130 million, representing a decrease of $20 million from the October 31, 2015 balance of $150 million. For fiscal 2016, Seattle generated $123 million of cash flows from operations, received net proceeds of $249 million from business divestitures, invested $27 million in property, plant and equipment, net of proceeds from sales, and paid $12 million in connection with business acquisitions, net of cash acquired.
Trends and Uncertainties
Seattle is in the process of addressing many challenges facing its business. One set of challenges relates to dynamic market trends, such as the market shift to cloud-related software. Another set of challenges relates to changes in the competitive landscape. Seattles major competitors are expanding their product and service offerings with integrated products and solutions, Seattles business-specific competitors are exerting increased competitive pressure in targeted areas and are entering new markets, Seattles emerging competitors are introducing new technologies and business models, and Seattles alliance partners in some businesses are increasingly becoming competitors in others. A third set of challenges relates to business model changes and Seattles go-to-market execution.
142
The macroeconomic weakness Seattle has experienced in some geographic regions has moderated but remains an overall challenge. Seattle is facing challenges, including the market shift to SaaS and go-to-market execution challenges. The market shift to SaaS has caused Seattle and other more mature enterprise software companies to face increased competition from smaller, less traditional competitors. Certain of these smaller, less traditional competitors are successfully growing their revenues while Seattle and other more mature enterprise software companies are generally experiencing flat to declining license revenues with a resulting impact on support and professional services revenues. To be successful in addressing these challenges, Seattle must improve its go-to-market execution with multiple product delivery models, including SaaS, which better address customer needs and achieve broader integration across its overall product portfolio as it works to capitalize on important market opportunities in cloud, big data and security. The transition Seattle is undergoing as it prepares for the Transactions, including the formation of a new legal entity structure, a global sales transformation to enable a digital and partner model in certain geographies, and a ramping up of the partnership with DXC Technology Company, is having an unfavorable impact on Seattles revenue growth.
For a further discussion of trends, uncertainties and other factors that could impact Seattles operating results, see the section entitled Risk Factors.
Critical Accounting Policies and Estimates
General
The Combined and Condensed Combined Financial Statements of Seattle were prepared in accordance with U.S. GAAP, which requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, net revenue and expenses, and the disclosure of contingent liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying amounts of assets and liabilities that are not readily apparent from other sources. Management has discussed the development, selection and disclosure of these estimates with the Audit Committee of Parents Board of Directors. Management believes that the accounting estimates employed and the resulting amounts are reasonable; however, actual results may differ from these estimates. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond Seattles control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on Seattles results of operations, financial position and cash flows.
A summary of significant accounting policies is included in Note 1, Overview and Summary of Significant Accounting Policies, to the Combined Financial Statements. An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of the Combined Financial Statements.
Revenue Recognition
Seattle recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable, and collectability is reasonably assured. Seattle generally recognizes revenue for its standalone software sales to channel partners on receipt of evidence that the software has been sold to a specific end user. Seattle limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified refund or return rights.
Seattle reports revenue net of any taxes collected from customers for remittance to government authorities. The collected taxes are recorded as current liabilities until they are remitted to the relevant government authority.
When a sales arrangement contains multiple elements or deliverables, Seattle allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) if VSOE of selling price is not available, or estimated selling price (ESP) if neither VSOE of selling price nor TPE is available. Seattle establishes VSOE of selling price using the price charged for a deliverable when sold separately and, in rare
143
instances, using the price established by management having the relevant authority. Seattle establishes TPE of selling price by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. Seattle establishes ESP based on management judgment considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life-cycle. Consideration is also given to market conditions such as competitor pricing strategies and technology industry life-cycles. In most arrangements with multiple elements, Seattle allocates the transaction price to the individual units of accounting at inception of the arrangement based on their relative selling price.
Seattle evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value to the customer. For elements with no standalone value, Seattle recognizes revenue consistent with the pattern of the undelivered elements. If the arrangement includes a customer-negotiated refund or return right or other contingency relative to the delivered items, and the delivery and performance of the undelivered items is considered probable and substantially within Seattles control, the delivered element constitutes a separate unit of accounting. In arrangements with combined units of accounting, changes in the allocation of the transaction price among elements may impact the timing of revenue recognition for the contract but will not change the total revenue recognized for the contract.
Seattle recognizes revenue from perpetual software licenses at the inception of the license term, assuming all revenue recognition criteria have been satisfied. Term-based software license revenue is generally recognized ratably over the term of the license. Seattle uses the residual method to allocate revenue to software licenses at inception of the arrangement when VSOE of fair value for all undelivered elements, such as post-contract customer support, exists and all other revenue recognition criteria have been satisfied. Seattle recognizes revenue for SaaS arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, Seattle considers the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement includes the sale of a software license. In SaaS arrangements where software licenses are sold, license revenue is generally recognized according to whether perpetual or term licenses are sold, when all other revenue recognition criteria are satisfied.
Seattle recognizes revenue from fixed-price support or maintenance contracts, including software post-contract customer support agreements, ratably over the contract period and recognizes the costs associated with these contracts as incurred. For time and material-based professional services contracts, Seattle recognizes revenue as services are rendered and recognizes costs as they are incurred. Seattle recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a proportional performance basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract.
Restructuring
Seattle has engaged in restructuring actions which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction and enhanced early retirement programs, the fair value of assets made redundant or obsolete, and the fair value of lease cancellation and other exit costs. Seattle accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements. For a full description of Seattles restructuring actions, refer to Seattles discussions of restructuring in —Results of Operations below and in Note 2, Restructuring, to Seattles Combined Financial Statements.
Taxes on Earnings
Seattles operations have historically been included in the tax returns filed by the respective Parent entities of which Seattles businesses are a part. The (Provision for) benefit from taxes and other income tax related information contained in Seattles Combined and Condensed Combined Financial Statements are presented on a separate return basis as if Seattle filed its own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if Seattle were a separate taxpayer and a
144
standalone enterprise for the periods presented. The calculation of Seattles income taxes on a separate return basis requires a considerable amount of judgment and use of both estimates and allocations. Current income tax liabilities related to entities which file jointly with Parent are assumed to be immediately settled with Parent and are relieved through the Parent company investment account and the Net transfers to Parent in Seattles Combined Statements of Cash Flows.
Seattle calculates its current and deferred tax (provisions) benefits based on estimates and assumptions that could differ from the final positions reflected in Parents income tax returns. Seattle adjusts its current and deferred tax (provisions) benefits based on Parents income tax returns which are generally filed in the third or fourth quarters of the subsequent fiscal year.
Seattle recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year in which Seattle expects the differences to reverse.
Seattle records a valuation allowance to reduce deferred tax assets to the amount that Seattle is more likely than not to realize. In determining the need for a valuation allowance, Seattle considers future market growth, forecasted earnings, future sources of taxable income, the mix of earnings in the jurisdictions in which Seattle operates and prudent and feasible tax planning strategies. In the event Seattle were to determine that it is more likely than not that Seattle will be unable to realize all or part of its deferred tax assets in the future, Seattle would increase the valuation allowance and recognize a corresponding charge to earnings or other comprehensive income in the period in which Seattle makes such a determination. Likewise, if Seattle later determines that Seattle is more likely than not to realize the deferred tax assets, Seattle would reverse the applicable portion of the previously recognized valuation allowance. In order for Seattle to realize its deferred tax assets, Seattle must be able to generate sufficient taxable income in the jurisdictions in which the deferred tax assets are located.
Seattles effective tax rate includes the impact of certain undistributed foreign earnings for which Seattle has not provided for U.S. federal taxes because Seattle plans to reinvest such earnings indefinitely outside the U.S. Seattle plans distributions of foreign earnings based on projected cash flow needs as well as the working capital and long-term investment requirements of Seattles foreign subsidiaries and Seattles domestic operations. Based on these assumptions, Seattle estimates the amount Seattle expects to indefinitely invest outside the U.S. and the amounts Seattle expects to distribute to the U.S. and provides for the U.S. federal taxes due on amounts expected to be distributed to the U.S. Material changes in Seattles estimates of cash, working capital and long-term investment requirements in the various jurisdictions in which Seattle does business could impact how future earnings are repatriated to the U.S. and Seattles related future effective tax rate.
Seattle is subject to income taxes in the U.S. and approximately 70 other countries, and Seattle is subject to routine corporate income tax audits in many of these jurisdictions. Seattle believes that positions taken on Parents tax returns are fully supported, but tax authorities may challenge these positions, which may not be fully sustained on examination by the relevant tax authorities. Accordingly, Seattles income tax provision includes amounts intended to satisfy assessments that may result from these challenges. Determining the income tax provision for these potential assessments and recording the related effects requires management judgments and estimates. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in Seattles income tax provision and, therefore, could have a material impact on Seattles income tax provision, net income and cash flows. Seattles accrual for uncertain tax positions is attributable primarily to uncertainties concerning the tax treatment of Seattles international operations, including the allocation of income among different jurisdictions, intercompany transactions and related interest.
Business Combinations
Seattle allocates the fair value of purchase consideration to the assets acquired, including in-process research and development (IPR&D), and liabilities assumed in the acquired entity generally based on their fair values at the acquisition date. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Seattle will record a charge for the value of the related intangible asset to its Combined Statement of Operations in the period it is abandoned. The excess of the fair value of purchase consideration over the fair value of the assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill.
145
When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows, which includes consideration of future growth rates and margins, attrition rates, future changes in technology and brand awareness, loyalty and position, and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability.
Goodwill
Seattle reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Seattle is permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test.
Goodwill is tested for impairment at the reporting unit level. Seattle consists of one reporting unit consistent with Seattles reportable segment. In the first step of the goodwill impairment test, Seattle compares the fair value of its reporting unit to its carrying amount. Seattle estimates the fair value of its reporting unit using a weighting of fair values derived from the income approach and the market approach. Under the income approach, Seattle estimates the fair value of the reporting unit based on the present value of estimated future cash flows. Cash flow projections are based on managements estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. The discount rate used is based on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting units ability to execute on the projected cash flows. Under the market approach, Seattle estimates the fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with operating and investment characteristics similar to the reporting unit. Seattle weights the fair value derived from the market approach depending on the level of comparability of these publicly traded companies to its reporting unit.
Estimating the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and operating margins used to calculate projected future cash flows, risk adjusted discount rates, future economic and market conditions and the determination of appropriate comparable publicly traded companies.
If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to the reporting unit, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying amount, then Seattle performs the second step of the goodwill impairment test to measure the amount of impairment loss, if any. In the second step, the reporting units assets, including any unrecognized intangible assets and liabilities are measured at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting units goodwill is less than its carrying amount, the difference is recorded as an impairment loss.
At its annual goodwill impairment test, performed as of the first day of the fourth quarter of fiscal 2016, Seattle conducted a qualitative assessment and determined no quantitative goodwill impairment test was necessary. The qualitative assessment considered, among other things, the Transactions.
Intangible Assets and Long-Lived Assets
Seattle reviews intangible assets with finite lives and long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of Seattles assets is assessed based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is considered to be impaired. The amount of the impairment loss, if any, is measured as the difference between the carrying amount of the asset and its fair value. Seattle estimates the fair value of assets by using an income approach or, when available and appropriate, using a market approach.
Loss Contingencies
Seattle is involved in various lawsuits, claims, investigations and proceedings including intellectual property, commercial, employment, employee benefits and environmental matters, which arise in the ordinary course of
146
business. Seattle records a liability when Seattle believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Seattle reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular case. Based on Seattles experience, Seattle believes that any damage amounts claimed in the specific litigation and contingency matters further discussed in Note 14, Litigation and Contingencies, to Seattles Combined Financial Statements are not a meaningful indicator of Seattles potential liability. Litigation is inherently unpredictable; however, Seattle believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Seattle believes it has recorded adequate provisions for any such matters and, as of October 31, 2016, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in Seattles Combined Financial Statements.
Accounting Pronouncements
For a summary of recent accounting pronouncements applicable to Seattles Combined Financial Statements, see Note 1, Overview and Summary of Significant Accounting Policies, to Seattles Combined Financial Statements.
Results of Operations
Revenue from Seattles international operations has historically represented, and is expected to continue to represent, a significant portion of Seattles overall net revenue. As a result, Seattles revenue growth has been impacted, and Seattle expects it will continue to be impacted, by fluctuations in foreign currency exchange rates.
In order to provide a framework for assessing performance excluding the impact of foreign currency fluctuations, Seattle presents the year-over-year percentage change in revenue on a constant currency basis, which assumes no change in foreign currency exchange rates from the prior-year period and doesnt adjust for any repricing or demand impact from changes in foreign currency exchange rates. This change in revenue on a constant currency basis is calculated as the quotient of (a) current year revenues converted to U.S. dollars using the prior year periods foreign currency exchange rates divided by (b) prior year reported revenues. This information is provided so that revenue can be viewed without the effect of fluctuations in foreign currency exchange rates, which is consistent with how management evaluates Seattles revenue results and trends. This constant currency disclosure is provided in addition to, and not as a substitute for, the year-over-year percentage change in revenue on a U.S. GAAP basis. Other companies may calculate and define similarly labeled items differently, which may limit the usefulness of this measure for comparative purposes.
147
Results of Operations – Six Months Ended April 30, 2017 and 2016
Results of operations in dollars and as a percentage of net revenue were as follows:
|
Six months ended April 30
|
|||||||||||
|
2017
|
2016
|
||||||||||
|
Dollars in millions
|
|||||||||||
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
$
|
311
|
|
|
22.1
|
%
|
$
|
385
|
|
|
24.8
|
%
|
Support
|
|
773
|
|
|
55.0
|
%
|
|
828
|
|
|
53.3
|
%
|
Professional services
|
|
174
|
|
|
12.4
|
%
|
|
198
|
|
|
12.7
|
%
|
Software-as-a-service
|
|
148
|
|
|
10.5
|
%
|
|
143
|
|
|
9.2
|
%
|
Total net revenue
|
|
1,406
|
|
|
100.0
|
%
|
|
1,554
|
|
|
100.0
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenue
|
|
24
|
|
|
7.7
|
%
|
|
45
|
|
|
11.7
|
%
|
Cost of support revenue
|
|
124
|
|
|
16.0
|
%
|
|
141
|
|
|
17.0
|
%
|
Cost of professional services revenue
|
|
157
|
|
|
90.2
|
%
|
|
179
|
|
|
90.4
|
%
|
Cost of software-as-a-service revenue
|
|
82
|
|
|
55.4
|
%
|
|
82
|
|
|
57.3
|
%
|
Total cost of revenue
|
|
387
|
|
|
27.5
|
%
|
|
447
|
|
|
28.8
|
%
|
Gross profit
|
|
1,019
|
|
|
72.5
|
%
|
|
1,107
|
|
|
71.2
|
%
|
Research and development
|
|
240
|
|
|
17.1
|
%
|
|
320
|
|
|
20.6
|
%
|
Selling, general and administrative
|
|
490
|
|
|
34.8
|
%
|
|
526
|
|
|
33.8
|
%
|
Amortization of intangible assets
|
|
70
|
|
|
5.0
|
%
|
|
79
|
|
|
5.1
|
%
|
Restructuring charges
|
|
83
|
|
|
5.9
|
%
|
|
53
|
|
|
3.4
|
%
|
Acquisition and other related charges
|
|
1
|
|
|
0.1
|
%
|
|
2
|
|
|
0.1
|
%
|
Defined benefit plan remeasurement benefit
|
|
(5
|
)
|
|
(0.4
|
)%
|
|
—
|
|
|
—
|
|
Separation costs
|
|
188
|
|
|
13.4
|
%
|
|
18
|
|
|
1.2
|
%
|
(Loss) earnings from operations
|
|
(48
|
)
|
|
(3.4
|
)%
|
|
109
|
|
|
7.0
|
%
|
Interest and other, net
|
|
(1
|
)
|
|
(0.1
|
)%
|
|
(2
|
)
|
|
(0.1
|
)%
|
(Loss) earnings before taxes
|
|
(49
|
)
|
|
(3.5
|
)%
|
|
107
|
|
|
6.9
|
%
|
Benefit from taxes
|
|
10
|
|
|
0.7
|
%
|
|
17
|
|
|
1.1
|
%
|
Net (loss) earnings
|
$
|
(39
|
)
|
|
(2.8
|
)%
|
$
|
124
|
|
|
8.0
|
%
|
Net Revenue
Net revenue and the change in net revenue for the six months ended April 30, 2017 as compared to the six months ended April 30, 2016 were as follows:
|
Six months ended
April 30 |
|
||||||||||
|
2017
|
2016
|
Change
|
|||||||||
|
Dollars in millions
|
|||||||||||
License
|
$
|
311
|
|
$
|
385
|
|
$
|
(74
|
)
|
|
(19.2
|
)%
|
Support
|
|
773
|
|
|
828
|
|
|
(55
|
)
|
|
(6.6
|
)%
|
Professional services
|
|
174
|
|
|
198
|
|
|
(24
|
)
|
|
(12.1
|
)%
|
Software-as-a-service
|
|
148
|
|
|
143
|
|
|
5
|
|
|
3.5
|
%
|
Total net revenue
|
$
|
1,406
|
|
$
|
1,554
|
|
$
|
(148
|
)
|
|
(9.5
|
)%
|
For the six months ended April 30, 2017, Seattles total net revenue decreased by $148 million or 9.5% (decreased 8.6% on a constant currency basis) as compared to the prior-year period. The decrease in Seattles total net revenue was due primarily to business disruptions as Seattle prepares for the Transactions, an ongoing decline in license and support revenue which partially reflects the overall market shift to SaaS solutions, the divestiture of the TippingPoint business in the second quarter of fiscal 2016 and unfavorable foreign currency
148
fluctuations. The impact of the divestiture of the TippingPoint business was a $55 million decrease in Seattles total net revenue for the six months ended April 30, 2017 as compared to the prior-year period.
License revenue for the six months ended April 30, 2017 decreased by $74 million or 19.2% as compared to the prior-year period. The decrease in license revenue was due primarily to a decline in large deals in the Americas and Europe, Middle East and Africa regions, the continuing market shift to SaaS solutions particularly for IT operations management and information governance products, and the divestiture of the TippingPoint business during the second quarter of fiscal 2016. The divestiture of the TippingPoint business resulted in a $17 million decrease in license revenue for the six months ended April 30, 2017.
Support revenue for the six months ended April 30, 2017 decreased by $55 million or 6.6% as compared to the prior-year period. The decrease in support revenue was due primarily to the divestiture of the TippingPoint business, ongoing declines in license revenue and unfavorable currency fluctuations. The divestiture of the TippingPoint business resulted in a $38 million decrease in support revenue for the current-year period as compared to the prior-year period.
Professional services revenue decreased by $24 million or 12.1% during the six months ended April 30, 2017 as compared to the prior-year period due primarily to lower revenue from IT operations management products. SaaS revenue increased by $5 million or 3.5% during the six months ended April 30, 2017 as compared to the prior-year period driven primarily by growth in IT operations management products, reflecting the overall market shift to SaaS solutions.
Gross Profit
Seattles gross profit increased 1.3 percentage points for the six months ended April 30, 2017 as compared to the prior-year period due primarily to a $60 million decline in cost of sales driven by cost reduction efforts ($43 million) and lower variable compensation expense ($17 million).
Operating Expenses
Research and Development (R&D)
R&D expense decreased by $80 million or 25.0% for the six months ended April 30, 2017 as compared to the prior-year period due primarily to reduced costs ($53 million) as a result of lower headcount, the divestiture of the TippingPoint business ($14 million) in the second quarter of fiscal 2016 and lower variable compensation expense ($13 million). As a percentage of net revenue, R&D expense decreased by 3.5 percentage points to 17.1% for the six months ended April 30, 2017 from 20.6% for the prior-year period as the percentage decline in R&D expense was greater than the percentage decline in revenue.
Selling, General and Administrative (SG&A)
SG&A expense decreased by $36 million or 6.8% for the six months ended April 30, 2017 as compared to the prior-year period. The decrease in SG&A expense in absolute dollars was due primarily to reductions in field selling costs ($49 million), marketing costs ($37 million), TippingPoint SG&A expense ($15 million), administrative costs ($9 million), and variable compensation expense ($8 million) partially offset by a prior year gain of $82 million from the divestiture of the TippingPoint business in the second quarter of fiscal 2016. As a percentage of net revenue, SG&A expenses increased by 1.0 percentage points to 34.8% for the six months ended April 30, 2017 from 33.8% for the prior-year period as the percentage decline in SG&A expense was less than the percentage decline in revenue.
Amortization of Intangible Assets
Amortization expense decreased by $9 million for the six months ended April 30, 2017, as compared to the prior-year period due primarily to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods ($8 million). In addition, the sale of the TippingPoint business in the second quarter of fiscal 2016 resulted in an approximately $1 million reduction in amortization of intangible assets for the six months ended April 30, 2017 as compared to the prior-year period.
Restructuring Charges
Restructuring charges increased for the six months ended April 30, 2017 as compared to the prior-year period due to higher charges in the current period from the restructuring plan announced in September 2015 (the 2015 Plan).
149
Acquisition and Other Related Charges
Acquisition and other related charges were substantially unchanged for the six months ended April 30, 2017 as compared to the prior-year period.
Defined Benefit Plan Remeasurement Benefit
Defined benefit plan remeasurement benefit represents an adjustment to net periodic pension cost resulting from the remeasurement of certain Parent pension plans.
Separation Costs
Separation costs include allocated costs resulting from the separation of Seattles Parent, HPE, from HP Inc., formerly Hewlett-Packard Company, and all such costs resulting from the planned Transactions.
Separation costs for the six months ended April 30, 2017 consisted primarily of third-party consulting, contractor fees and other incremental costs arising from the planned Transactions.
Separation costs for the six months ended April 30, 2016 consisted of allocated third-party consulting, contractor fees and other incremental costs arising from the separation of Seattles Parent, HPE, from HP Inc., formerly Hewlett-Packard Company.
Interest and Other, Net
Interest and other, net, expense was substantially unchanged for the six months ended April 30, 2017 as compared to the prior-year period.
Benefit from Taxes
Seattles effective tax rate was 20.4% and (15.9%) for the six months ended April 30, 2017 and 2016, respectively. Seattle's effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from Seattles operations in lower tax rate jurisdictions throughout the world. Seattle has not provided U.S. taxes for all foreign earnings because Seattle plans to reinvest some of those earnings indefinitely outside the U.S. Additionally, Seattles effective tax rate may vary from period to period as a result of specific transactions and the impact of uncertain tax positions.
For the six months ended April 30, 2017, Seattle recorded $59 million of net income tax benefits related to items unique to that period. These amounts included $74 million of income tax benefits related to restructuring and separation costs and $18 million of income tax benefits related to other items, the effects of which were partially offset by $33 million of income tax charges related to uncertain tax positions.
For the six months ended April 30, 2016, Seattle recorded $65 million of net income tax benefits related to items unique to that period. These amounts included $20 million of income tax benefits related to uncertain tax positions, $14 million of income tax benefits related to restructuring and separation costs and $31 million of income tax benefits related to other items.
150
Results of Operations – Fiscal Years Ended October 31, 2016, 2015 and 2014
Results of operations in dollars and as a percentage of net revenue were as follows:
|
For the fiscal years ended
October 31 |
|||||||||||||||||
|
2016
|
2015
|
2014
|
|||||||||||||||
|
Dollars in millions
|
|||||||||||||||||
Net revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
|
$
|
884
|
|
|
27.7
|
%
|
$
|
1,008
|
|
|
27.8
|
%
|
$
|
1,163
|
|
|
29.6
|
%
|
Support
|
|
1,621
|
|
|
50.7
|
%
|
|
1,878
|
|
|
51.9
|
%
|
|
1,980
|
|
|
50.3
|
%
|
Professional services
|
|
396
|
|
|
12.4
|
%
|
|
424
|
|
|
11.7
|
%
|
|
465
|
|
|
11.8
|
%
|
Software-as-a-service
|
|
294
|
|
|
9.2
|
%
|
|
312
|
|
|
8.6
|
%
|
|
325
|
|
|
8.3
|
%
|
Total net revenue
|
|
3,195
|
|
|
100.0
|
%
|
|
3,622
|
|
|
100.0
|
%
|
|
3,933
|
|
|
100.0
|
%
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of license revenue
|
|
88
|
|
|
10.0
|
%
|
|
120
|
|
|
11.9
|
%
|
|
137
|
|
|
11.8
|
%
|
Cost of support revenue
|
|
270
|
|
|
16.7
|
%
|
|
308
|
|
|
16.4
|
%
|
|
304
|
|
|
15.4
|
%
|
Cost of professional services revenue
|
|
360
|
|
|
90.9
|
%
|
|
366
|
|
|
86.3
|
%
|
|
417
|
|
|
89.7
|
%
|
Cost of software-as-a-service revenue
|
|
160
|
|
|
54.4
|
%
|
|
177
|
|
|
56.7
|
%
|
|
188
|
|
|
57.8
|
%
|
Total cost of revenue
|
|
878
|
|
|
27.5
|
%
|
|
971
|
|
|
26.8
|
%
|
|
1,046
|
|
|
26.6
|
%
|
Gross profit
|
|
2,317
|
|
|
72.5
|
%
|
|
2,651
|
|
|
73.2
|
%
|
|
2,887
|
|
|
73.4
|
%
|
Research and development
|
|
603
|
|
|
18.9
|
%
|
|
670
|
|
|
18.5
|
%
|
|
673
|
|
|
17.1
|
%
|
Selling, general and administrative
|
|
1,101
|
|
|
34.4
|
%
|
|
1,305
|
|
|
36.0
|
%
|
|
1,493
|
|
|
38.0
|
%
|
Amortization of intangible assets
|
|
153
|
|
|
4.8
|
%
|
|
224
|
|
|
6.2
|
%
|
|
248
|
|
|
6.3
|
%
|
Restructuring charges
|
|
113
|
|
|
3.5
|
%
|
|
35
|
|
|
1.0
|
%
|
|
48
|
|
|
1.2
|
%
|
Acquisition and other related charges
|
|
3
|
|
|
0.1
|
%
|
|
5
|
|
|
0.1
|
%
|
|
10
|
|
|
0.2
|
%
|
Separation costs
|
|
106
|
|
|
3.3
|
%
|
|
91
|
|
|
2.5
|
%
|
|
—
|
|
|
—
|
|
Earnings from operations
|
|
238
|
|
|
7.5
|
%
|
|
321
|
|
|
8.9
|
%
|
|
415
|
|
|
10.6
|
%
|
Interest and other, net
|
|
(3
|
)
|
|
(0.1
|
)%
|
|
(3
|
)
|
|
(0.1
|
)%
|
|
(3
|
)
|
|
(0.1
|
)%
|
Earnings before taxes
|
|
235
|
|
|
7.4
|
%
|
|
318
|
|
|
8.8
|
%
|
|
412
|
|
|
10.5
|
%
|
(Provision for) benefit from taxes
|
|
(155
|
)
|
|
(4.9
|
)%
|
|
73
|
|
|
2.0
|
%
|
|
(51
|
)
|
|
(1.3
|
)%
|
Net earnings
|
$
|
80
|
|
|
2.5
|
%
|
$
|
391
|
|
|
10.8
|
%
|
$
|
361
|
|
|
9.2
|
%
|
Net Revenue
Net revenue and the change in net revenue for fiscal 2016 as compared to fiscal 2015 and fiscal 2015 as compared to fiscal 2014 were as follows:
|
For the fiscal years ended
October 31, |
Change compared to prior fiscal year
|
|||||||||||||||||||
|
2016
|
2015
|
2014
|
2016
|
2015
|
2016
|
2015
|
||||||||||||||
|
Dollars in millions
|
||||||||||||||||||||
License
|
$
|
884
|
|
$
|
1,008
|
|
$
|
1,163
|
|
$
|
(124
|
)
|
$
|
(155
|
)
|
|
(12.3
|
)%
|
|
(13.3
|
)%
|
Support
|
|
1,621
|
|
|
1,878
|
|
|
1,980
|
|
|
(257
|
)
|
|
(102
|
)
|
|
(13.7
|
)%
|
|
(5.2
|
)%
|
Professional services
|
|
396
|
|
|
424
|
|
|
465
|
|
|
(28
|
)
|
|
(41
|
)
|
|
(6.6
|
)%
|
|
(8.8
|
)%
|
Software-as-a-service
|
|
294
|
|
|
312
|
|
|
325
|
|
|
(18
|
)
|
|
(13
|
)
|
|
(5.8
|
)%
|
|
(4.0
|
)%
|
Total net revenue
|
$
|
3,195
|
|
$
|
3,622
|
|
$
|
3,933
|
|
$
|
(427
|
)
|
$
|
(311
|
)
|
|
(11.8
|
)%
|
|
(7.9
|
)%
|
Fiscal 2016 compared to Fiscal 2015
In fiscal 2016, Seattles total net revenue decreased by $427 million or 11.8% (decreased 9.3% on a constant currency basis) as compared to fiscal 2015. U.S. net revenue decreased by $217 million or 12.1% to $1.6 billion, while net revenue from outside of the U.S. decreased by $210 million or 11.5% to $1.6 billion. The decrease in
151
Seattles total net revenue was due primarily to the impact of the transfer of the marketing optimization and HPPA Teleform product groups to former Parent in fiscal 2015, as well as the divestiture of other businesses including the divestiture of the TippingPoint business in fiscal 2016 and the divestiture of the LiveVault and iManage businesses in fiscal 2015. The total impact of these transfers and divestitures was a $366 million decrease in Seattles total net revenue for fiscal 2016. Seattles net revenue for fiscal 2016 was also negatively impacted by the continued overall market shift to SaaS solutions and related go-to-market sales execution challenges. Seattle also experienced unfavorable foreign currency fluctuations, led primarily by weakness in the euro.
License revenue for fiscal 2016 decreased by $124 million or 12.3% as compared to fiscal 2015. The decrease in license revenue was due primarily to the impact of the transfer of the marketing optimization product group to former Parent and the divestiture of other businesses, which resulted in a decrease of $81 million in license revenue in fiscal 2016 compared to fiscal 2015. License revenue for fiscal 2016 was also negatively impacted by the overall market shift to SaaS solutions and related sales execution challenges, which resulted in lower revenue, particularly from IT operations management products, as well as the impact of unfavorable foreign currency fluctuations.
Support revenue for fiscal 2016 decreased by $257 million or 13.7% as compared to fiscal 2015. The decrease in support revenue was due primarily to the impact of the transfer of the marketing optimization product group to former Parent and the divestiture of other businesses, which resulted in a decrease of $212 million in support revenue in fiscal 2016 compared to fiscal 2015. Support revenue for fiscal 2016 was also negatively impacted by lower license revenue levels in fiscal 2016 and 2015, which has a carry over impact on support revenue, as well as the impact of unfavorable currency fluctuations.
Professional services net revenue decreased by $28 million or 6.6% in fiscal 2016 as compared to fiscal 2015, due primarily to the transfer of the marketing optimization product group to former Parent. SaaS net revenue decreased by $18 million or 5.8% in fiscal 2016 as compared to fiscal 2015, due primarily to the divestiture of businesses, partially offset by an increase in SaaS revenue from continuing products reflecting the overall market transition from license to SaaS solutions.
Fiscal 2015 compared to Fiscal 2014
In fiscal 2015, Seattles total net revenue decreased by $311 million or 7.9% (decreased 4.1% on a constant currency basis) as compared to fiscal 2014. U.S. net revenue decreased by $192 million or 9.7% to $1.8 billion, while net revenue from outside of the U.S. decreased by $119 million or 6.1% to $1.8 billion. The decrease in Seattles net revenue was due primarily to unfavorable foreign currency fluctuations across all regions, led primarily by weakness in the euro, and an overall shift in the market to SaaS solutions and related go-to-market sales execution challenges. In addition, net revenue for fiscal 2015 was negatively impacted by the transfer of the marketing optimization product group to former Parent as of the beginning of the fourth quarter of fiscal 2015 and the divestiture of the iManage and LiveVault businesses during fiscal 2015, which collectively resulted in a total decrease of $99 million in net revenue for fiscal 2015 compared to fiscal 2014.
License revenue for fiscal 2015 decreased by $155 million or 13.3% as compared to fiscal 2014. The decrease in license revenue was due primarily to unfavorable foreign currency fluctuations and to the market shift to SaaS solutions and related sales execution challenges, which resulted in lower license revenue from IT operations management products. The transfer of the marketing optimization product group to former Parent as of the beginning of the fourth quarter of fiscal 2015 and the divestiture of other businesses during 2015 resulted in a $25 million decrease in license revenue for fiscal 2015 compared to fiscal 2014.
Previous declines in license revenue resulted in lower support revenue in fiscal 2015, which decreased by $102 million or 5.2% as compared to fiscal 2014. Support revenue for fiscal 2015 was also negatively impacted by the transfer of the marketing optimization product group to former Parent as of the beginning of the fourth quarter of fiscal 2015 and the divestiture of other businesses during fiscal 2015, which resulted in a total decrease of $55 million in support revenue for fiscal 2015 compared to fiscal 2014. Unfavorable currency fluctuations also contributed to the decline in support revenue for fiscal 2015. These reductions in support revenue for fiscal 2015 were partially offset by increased revenue from the support of security and information governance products in fiscal 2015 as compared to fiscal 2014.
Professional services revenue for fiscal 2015 decreased by $41 million or 8.8% as compared to fiscal 2014, due primarily to unfavorable currency impacts and a continued focus on higher-margin engagements that resulted in
152
lower revenue from professional services related to big data platform analytics solutions, partially offset by an increase in professional services revenue related to security and information governance products. SaaS revenue for fiscal 2015 decreased by $13 million or 4.0% as compared to fiscal 2014, due primarily to sales execution challenges.
Gross Margin
Fiscal 2016 compared to Fiscal 2015
Seattles gross margin decreased by 0.7 percentage points for fiscal 2016 as compared to fiscal 2015 due primarily to the decline in support revenue in fiscal 2016 as compared to fiscal 2015.
Fiscal 2015 compared to Fiscal 2014
Seattles gross margin decreased by 0.2 percentage points for fiscal 2015 as compared to fiscal 2014 due to a decline in license revenue.
Operating Expenses
Research and Development
R&D expense decreased by $67 million, or 10.0%, in fiscal 2016 as compared to fiscal 2015 due primarily to the transfer of the marketing optimization product group to former Parent ($26 million), the divestiture of other businesses ($29 million) and the impact of favorable currency fluctuations ($10 million). As a percentage of net revenue, R&D expense increased to 18.9% in fiscal 2016 from 18.5% in fiscal 2015 due to lower revenue in fiscal 2016 compared to fiscal 2015.
R&D expense for fiscal 2015 was substantially unchanged as compared to fiscal 2014. R&D expenses increased as a percentage of net revenue in fiscal 2015 by 1.4 percentage points to 18.5% from 17.1% in fiscal 2014. The increase in R&D expense for fiscal 2015 as a percentage of net revenue was due to lower revenue in fiscal 2015 compared to fiscal 2014.
Selling, General and Administrative
SG&A expense decreased by $204 million, or 15.6%, in fiscal 2016 as compared to fiscal 2015. As a percentage of net revenue, SG&A expenses decreased by 1.6 percentage points to 34.4% of net revenue in fiscal 2016 from 36.0% of net revenue in fiscal 2015. The decrease in SG&A expense in absolute dollars and as a percentage of net revenue in fiscal 2016 as compared to fiscal 2015 was due primarily to a one-time $82 million gain from the divestiture of the TippingPoint business, lower administrative costs ($54 million) largely driven by lower headcount, the transfer of the marketing optimization product group to former Parent ($66 million), the divestiture of other businesses ($17 million), and the impact of favorable foreign currency fluctuations ($24 million).
SG&A expense decreased by $188 million, or 12.6%, in fiscal 2015 as compared to fiscal 2014. As a percentage of net revenue, SG&A expense decreased by 2.0 percentage points to 36.0% in fiscal 2015 from 38.0% in fiscal 2014. The decrease in SG&A expense in absolute dollars and as a percentage of net revenue was due primarily to favorable currency impacts ($61 million), lower field selling expenses ($92 million) driven by lower headcount and lower commissions expense and the transfer of the marketing optimization product group to former Parent during fiscal 2015 ($24 million). In addition, SG&A expense in fiscal 2015 included a $7 million gain from the divestiture of the LiveVault and iManage businesses.
Amortization of Intangible Assets
Amortization expense decreased by $71 million and $24 million in fiscal 2016 and fiscal 2015, respectively, as compared to the prior fiscal year due primarily to certain intangible assets associated with prior acquisitions reaching the end of their respective amortization periods ($33 million impact on fiscal 2016 and $24 million impact on fiscal 2015). In addition, the sale of the TippingPoint business ($15 million) and the transfer of the marketing optimization product group to former Parent ($23 million) resulted in lower amortization of intangible assets in fiscal 2016 as compared to fiscal 2015.
153
Restructuring Charges
Restructuring charges increased in fiscal 2016 as compared to fiscal 2015 due primarily to higher charges from the 2015 Plan.
Restructuring charges decreased in fiscal 2015 as compared to fiscal 2014 due primarily to lower charges from the 2012 Plan, partially offset by charges from the 2015 Plan.
Acquisition and Other Related Charges
Acquisition and other related charges decreased in each of fiscal 2016 and fiscal 2015 as compared to the prior fiscal year due primarily to a reduction in the level of merger and acquisition activity.
Separation Costs
Separation costs for fiscal 2016 consisted of allocated third-party consulting, contractor fees and other incremental costs totaling $41 million, arising from the separation of Seattles Parent, HPE, from HP Inc., formerly Hewlett-Packard Company, and all such costs, totaling $65 million, arising from the planned Transactions.
Separation costs for fiscal 2015 consisted of allocated third-party consulting, contractor fees and other incremental costs arising from the separation of Seattles Parent, HPE, from HP Inc., formerly Hewlett-Packard Company.
Interest and Other, Net
Interest and other, net, expense was substantially unchanged as compared to the prior fiscal year in each of fiscal 2016 and fiscal 2015.
Provision for (Benefit from) Taxes
Seattles effective tax rates were 66.0%, (23.0)% and 12.4% in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Seattles effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from Seattles operations in lower tax jurisdictions throughout the world. Seattle plans to reinvest certain earnings of these jurisdictions indefinitely outside the U.S. and therefore has not provided for U.S. taxes on those indefinitely reinvested earnings. Additionally, Seattle's effective tax rate may vary from year to year as the result of specific transactions and the impact of uncertain tax positions.
In fiscal 2016, Seattle recorded $61 million of net income tax benefits related to items unique to that year. These amounts included $139 million of income tax benefits related to restructuring and separation costs, $3 million of income tax benefits related to state income tax and $15 million of income tax benefits related to other items, the effects of which were partially offset by $96 million of income tax charges related to uncertain tax positions. These net income tax benefits were more than offset by the taxable gain resulting from the fiscal 2016 divestiture of TippingPoint, which accounted for 29.5 percentage points of the 66.0% effective tax rate for fiscal 2016.
In fiscal 2015, Seattle recorded $6 million of net income tax charges related to items unique to that year. These amounts included $59 million of income tax charges related to uncertain tax positions and $1 million of income tax charges related to state income tax, the effects of which were partially offset by $31 million of income tax benefits on restructuring and separation related costs and $23 million of income tax benefits related to other items. These net income tax charges were more than offset by $115 million of net income tax benefits recognized by Seattle under the separate return method related to changes in taxable income in connection with the separation of HPE from its former Parent.
In fiscal 2014, Seattle recorded $29 million of net income tax charges related to items unique to that year. These amounts included $13 million of income tax charges related to state income tax impacts, $8 million of income tax charges related to uncertain tax positions, and $38 million of income tax charges related to other items, the effects of which were partially offset by $24 million of income tax benefits related to restructuring costs and $6 million of income tax benefits related to provision to return adjustments.
For a reconciliation of Seattles effective tax rate to the U.S. federal statutory rate of 35% and further explanation of Seattles provision for taxes, see Note 5, Taxes on Earnings, to Seattles Combined Financial Statements.
154
Liquidity and Capital Resources
Historical Liquidity
Seattle has historically used cash generated by operations as its primary source of liquidity. Seattle has historically participated in cash management and funding arrangements managed by Parent. Cash flows used in financing activities primarily reflect changes in Parents investment in Seattle. Parents cash has not been assigned to Seattle for any of the periods presented because those cash balances are not directly attributable to Seattle.
Future Liquidity
On June 21, 2017, Seattle Borrower borrowed $2.6 billion in the form of a 7-year term loan (Term Loan) due June 21, 2024 under its senior secured credit facility. The Term Loan bears interest at a rate per annum of LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%). Proceeds from the Term Loan will primarily be used to fund a $2.5 billion payment to HPE prior to the closing of the Transactions and to pay expenses associated with the borrowing.
For further details, see the sections entitled The Transactions—Transaction Steps and Debt Financing.
Cash and Capital Lease Obligations
Seattles cash and cash equivalents and capital lease obligations were as follows:
|
As of
April 30, |
As of October 31
|
||||||||||
|
2017
|
2016
|
2015
|
2014
|
||||||||
|
In millions
|
|||||||||||
Cash and cash equivalents
|
$
|
167
|
|
$
|
130
|
|
$
|
150
|
|
$
|
197
|
|
Total capital lease obligations
|
$
|
39
|
|
$
|
36
|
|
$
|
32
|
|
$
|
21
|
|
Cash Flow
Seattles key cash flow metrics were as follows:
|
Six months ended
April 30 |
Fiscal years ended
October 31 |
|||||||||||||
|
2017
|
2016
|
2016
|
2015
|
2014
|
||||||||||
|
In millions
|
||||||||||||||
Net cash provided by operating activities
|
$
|
176
|
|
$
|
253
|
|
$
|
123
|
|
$
|
235
|
|
$
|
708
|
|
Net cash (used in) provided by investing activities
|
|
(17
|
)
|
|
222
|
|
|
211
|
|
|
40
|
|
|
(16
|
)
|
Net cash used in financing activities
|
|
(122
|
)
|
|
(455
|
)
|
|
(354
|
)
|
|
(322
|
)
|
|
(813
|
)
|
Net increase (decrease) in cash and cash equivalents
|
$
|
37
|
|
$
|
20
|
|
$
|
(20
|
)
|
$
|
(47
|
)
|
$
|
(121
|
)
|
Operating Activities
Net cash provided by operating activities decreased by $77 million for the six months ended April 30, 2017 as compared to the six months ended April 30, 2016 due primarily to the net loss recorded in the current year period, less cash provided by accounts receivable and more cash used by other assets and liabilities primarily due to a decrease in the employee compensation and benefits liability. These decreases in cash provided by operating activities were partially offset by a cash inflow from deferred taxes on earnings versus a payment for deferred taxes on earnings in the prior year period. Net cash provided by operating activities decreased by $112 million for fiscal 2016 as compared to fiscal 2015 due primarily to lower earnings, partially offset by lower payments for deferred taxes on earnings and a reduction in cash used for other operating assets and liabilities. Net cash provided by operating activities decreased by $473 million for fiscal 2015 as compared to fiscal 2014 primarily due to increased payments for deferred taxes on earnings, less cash provided by accounts receivable and more cash used by other assets and liabilities primarily due to decreases in deferred revenue and the employee compensation and benefits liability.
155
Investing Activities
Net cash used in investing activities of $17 million for the six months ended April 30, 2017 consisted primarily of purchases of property, plant and equipment. Net cash provided by investing activities was $211 million for fiscal 2016, consisting primarily of net cash proceeds from the divestiture of the TippingPoint business. Net cash provided by investing activities of $40 million in fiscal 2015 primarily consisted of $174 million of net proceeds from business divestitures, offset by $138 million of payments made in connection with business acquisitions, net of cash acquired. Net cash used in investing activities was $16 million in fiscal 2014 due primarily to payments made in connection with business acquisitions, net of cash acquired.
Financing Activities
Cash flows used in financing activities primarily represent Net transfers to Parent. As cash and the financing of Seattles operations have historically been managed by Parent, the components of Net transfers to Parent include cash transfers from Seattle to Parent and payments by Parent to settle Seattles obligations. These transactions are considered to be effectively settled for cash at the time the transaction is recorded.
Contractual and Other Obligations
Seattles contractual and other obligations as of October 31, 2016, which have not changed materially as of April 30, 2017 except as discussed below, were as follows:
|
Payments Due by Period
|
||||||||||||||
|
Total
|
1 Year
or Less |
1-3 Years
|
3-5 Years
|
More than
5 Years |
||||||||||
|
In millions
|
||||||||||||||
Operating lease obligations (net of sublease rental income)
|
$
|
186
|
|
$
|
37
|
|
$
|
62
|
|
$
|
48
|
|
$
|
39
|
|
Purchase obligations(1)
|
|
8
|
|
|
2
|
|
|
3
|
|
|
2
|
|
|
1
|
|
Capital lease obligations (includes interest)
|
|
40
|
|
|
17
|
|
|
21
|
|
|
2
|
|
|
—
|
|
Total(2)(3)
|
$
|
234
|
|
$
|
56
|
|
$
|
86
|
|
$
|
52
|
|
$
|
40
|
|
(1) | Purchase obligations increased from $8 million at October 31, 2016 to $15 million at April 30, 2017 as a result of newly executed contracts. Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Seattle and that specify all significant terms, including fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the transaction. These purchase obligations are related principally to software license agreements and other items. Purchase obligations exclude agreements that are cancelable without penalty. Purchase obligations also exclude open purchase orders that are routine arrangements entered into in the ordinary course of business as they are difficult to quantify in a meaningful way. Even though open purchase orders are considered enforceable and legally binding, the terms generally allow Seattle the option to cancel, reschedule, and adjust terms based on business needs prior to the delivery of goods or performance of services. |
(2) | As of October 31, 2016, Seattle expected future cash payments of approximately $99 million in connection with Seattle’s approved restructuring plans. As of April 30, 2017, Seattle expects future cash payments of approximately $71 million in connection with Seattle’s approved restructuring plans which includes approximately $55 million expected to be paid in fiscal 2017 with the remaining cash payments of approximately $16 million to be made through fiscal 2021. Payments for restructuring have been excluded from the contractual obligations table, because they do not represent contractual cash outflows and there is uncertainty as to the timing of these payments. For more information on Seattle’s restructuring activities, see Note 2, Restructuring, to Seattle’s Combined Financial Statements. |
(3) | As of October 31, 2016, Seattle had approximately $455 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $1 million expected to be paid within one year. As of April 30, 2017, Seattle had approximately $508 million of recorded liabilities and related interest and penalties pertaining to uncertain tax positions. These liabilities and related interest and penalties include $245 million expected to be paid within one year. For the remaining amount, Seattle is unable to make a reasonable estimate as to when cash settlement with the tax authorities might occur due to the uncertainties related to these tax matters. Payments of these obligations would result from settlements with taxing authorities. For more information on Seattle’s uncertain tax positions, see Note 5, Taxes on Earnings, to Seattle’s Combined Financial Statements. |
Off-Balance Sheet Arrangements
As part of Seattles ongoing business, Seattle has not participated in transactions that generate material relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
156
Quantitative and Qualitative Disclosures About Market Risk
In the normal course of business, Seattle is exposed to foreign currency exchange rate and interest rate risks that could impact Seattles financial position and results of operations. Seattles risk management strategy with respect to these market risks may include the use of derivative financial instruments. Seattle uses derivative contracts only to manage existing underlying exposures. Accordingly, Seattle does not use derivative contracts for speculative purposes. Seattles risks, risk management strategy and a sensitivity analysis estimating the effects of changes in fair value for each of these exposures is outlined below. Seattles exposure to market risk as of April 30, 2017 has not changed materially since October 31, 2016.
Actual gains and losses in the future may differ materially from the sensitivity analyses based on changes in the timing and amount of foreign currency exchange rate and interest rate movements and Seattles actual exposures and derivatives in place at the time of the change, as well as the effectiveness of the derivative to hedge the related exposure.
Foreign Currency Exchange Rate Risk
Seattle is exposed to foreign currency exchange rate risk inherent in Seattles sales commitments, anticipated sales, anticipated purchases and assets and liabilities denominated in currencies other than the U.S. dollar. Seattle transacts business in approximately 70 currencies worldwide, of which the most significant foreign currencies to Seattles operations for fiscal 2016 were the euro, the British pound, the Australian dollar and the Canadian dollar. For most currencies, Seattle is a net receiver of the foreign currency and therefore benefits from a weaker U.S. dollar and is adversely affected by a stronger U.S. dollar relative to the foreign currency. Even where Seattle is a net receiver of the foreign currency, a weaker U.S. dollar may adversely affect certain expense figures, if taken alone.
Seattle uses a combination of forward contracts and, from time to time, options designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in Seattles forecasted net revenue and, to a lesser extent, cost of sales, operating expenses and intercompany loans denominated in currencies other than the U.S. dollar. In addition, when debt is denominated in a foreign currency, Seattle may use swaps to exchange the foreign currency principal and interest obligations for U.S. dollar-denominated amounts to manage the exposure to changes in foreign currency exchange rates. Seattle also uses other derivatives not designated as hedging instruments consisting primarily of forward contracts to hedge foreign currency balance sheet exposures. Alternatively, Seattle may choose not to hedge the risk associated with Seattles foreign currency exposures, primarily if such exposure acts as a natural hedge for offsetting amounts denominated in the same currency or if the currency is too difficult or too expensive to hedge.
Seattle has performed sensitivity analyses as of October 31, 2016 and 2015 using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of foreign currency exchange rates relative to the U.S. dollar, with all other variables held constant. The analyses cover all of Seattles foreign currency derivative contracts offset by underlying exposures. The foreign currency exchange rates Seattle used in performing the sensitivity analysis were based on market rates in effect at October 31, 2016 and 2015. The sensitivity analyses indicated that a hypothetical 10% adverse movement in foreign currency exchange rates would result in foreign currency exchange fair value losses of less than $1 million for each of the fiscal years ended October 31, 2016 and 2015.
Interest Rate Risk
Seattle is also exposed to interest rate risk related to Seattles investment portfolio.
Seattle has performed sensitivity analyses as of October 31, 2016 and 2015 using a modeling technique that measures the change in the fair values arising from a hypothetical 10% adverse movement in the levels of interest rates across the entire yield curve, with all other variables held constant. The analyses cover Seattles investments. The analyses use actual or approximate maturities for the investments. The discount rates used were based on the market interest rates in effect at October 31, 2016 and 2015. The sensitivity analyses indicated that a hypothetical 10% adverse movement in interest rates would result in losses in the fair values of Seattles investments of less than $1 million for each of the fiscal years ended October 31, 2016 and 2015.
157
SELECTED HISTORICAL FINANCIAL DATA
Selected Historical Consolidated Financial Data of Micro Focus
The following table sets forth certain of Micro Focus consolidated financial data, prepared in accordance with IFRS. The selected historical consolidated financial data as of and for the years ended April 30, 2015, 2016 and 2017 are derived from Micro Focus audited consolidated financial statements, which are included elsewhere in this information statement/prospectus. The selected historical consolidated financial data as of and for the years ended April 30, 2013 and 2014 were derived from audited financial statements not included in this information statement/prospectus. The historical results are not necessarily indicative of results to be expected in any future period.
The selected historical consolidated financial data presented below should be read in conjunction with the section entitled Managements Discussion and Analysis of the Financial Condition and Results of Operations of Micro Focus and Micro Focus consolidated financial statements and the related notes thereto, which are included elsewhere in this information statement/prospectus. The selected historical consolidated financial data in this section are not intended to replace Micro Focus financial statements and the related notes thereto.
|
As of and for the Year Ended April 30,
|
||||||||||||||
(in thousands)
|
2013
|
2014
|
2015
|
2016
|
2017
|
||||||||||
Statement of Comprehensive Income Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
$
|
412,167
|
|
$
|
433,058
|
|
$
|
834,539
|
|
$
|
1,245,049
|
|
|
1,380,702
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
$
|
(60,986
|
)
|
$
|
(58,116
|
)
|
$
|
(140,547
|
)
|
$
|
(230,174
|
)
|
|
(237,169
|
)
|
Selling and distribution costs
|
|
(117,558
|
)
|
|
(120,669
|
)
|
|
(290,475
|
)
|
|
(416,333
|
)
|
|
(467,084
|
)
|
Research and development expenses
|
|
(25,682
|
)
|
|
(29,629
|
)
|
|
(113,292
|
)
|
|
(164,646
|
)
|
|
(180,104
|
)
|
Administrative expenses
|
|
(48,503
|
)
|
|
(68,924
|
)
|
|
(142,989
|
)
|
|
(138,962
|
)
|
|
(202,902
|
)
|
|
|
252,729
|
|
|
277,338
|
|
|
687,303
|
|
|
950,115
|
|
|
1,087,259
|
|
Operating profit
|
|
159,438
|
|
|
155,720
|
|
|
147,236
|
|
|
294,934
|
|
|
293,443
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share of results of associates
|
|
—
|
|
|
—
|
|
|
(788
|
)
|
|
(2,190
|
)
|
|
(1,254
|
)
|
Net finance costs
|
|
(7,894
|
)
|
|
(7,879
|
)
|
|
(55,021
|
)
|
|
(97,348
|
)
|
|
(95,845
|
)
|
Profit before tax
|
|
151,544
|
|
|
147,841
|
|
|
91,427
|
|
|
195,396
|
|
|
196,344
|
|
Income tax benefit (expense), net
|
|
(29,767
|
)
|
|
(25,759
|
)
|
|
10,024
|
|
|
(32,424
|
)
|
|
(38,541
|
)
|
Net income
|
$
|
121,777
|
|
$
|
122,082
|
|
$
|
101,451
|
|
$
|
162,972
|
|
|
157,803
|
|
Statement of Financial Position Data:
|
|||||||||||||||
Total current assets
|
$
|
130,583
|
|
$
|
140,072
|
|
$
|
460,967
|
|
$
|
954,361
|
|
|
442,193
|
|
Total noncurrent assets
|
$
|
437,596
|
|
$
|
464,945
|
|
$
|
3,879,634
|
|
$
|
3,681,332
|
|
|
4,203,764
|
|
Total assets
|
$
|
568,179
|
|
$
|
605,017
|
|
$
|
4,340,601
|
|
$
|
4,635,693
|
|
|
4,645,957
|
|
Total current liabilities
|
$
|
459,725
|
|
$
|
568,433
|
|
$
|
988,030
|
|
$
|
1,061,797
|
|
|
944,697
|
|
Total noncurrent liabilities
|
$
|
48,697
|
|
$
|
52,835
|
|
$
|
2,074,510
|
|
$
|
1,980,168
|
|
|
2,087,770
|
|
Total liabilities
|
$
|
508,422
|
|
$
|
621,268
|
|
$
|
3,062,540
|
|
$
|
3,041,965
|
|
|
3,032,467
|
|
Total equity (deficit)
|
$
|
59,757
|
|
$
|
(16,251
|
)
|
$
|
1,278,061
|
|
$
|
1,593,728
|
|
|
1,613,490
|
|
158
Selected Historical Combined Financial Data of Seattle
The following table presents the selected historical combined financial data of Seattle prepared in accordance with U.S. GAAP. The Combined Statements of Operations data for the six months ended April 30, 2016 and 2017 and the Combined Balance Sheets data as of April 30, 2017 are derived from Seattles unaudited Condensed Combined Financial Statements included elsewhere in this information statement/prospectus. The Combined Statements of Operations data for each of the three fiscal years ended October 31, 2016 and the Combined Balance Sheets data as of October 31, 2015 and 2016 set forth below are derived from Seattles audited Combined Financial Statements included elsewhere in this information statement/prospectus. The Combined Statements of Operations data for the fiscal year ended October 31, 2013 and the Combined Balance Sheet data as of October 31, 2013 and 2014 are derived from Seattles audited Combined Financial Statements that are not included in this information statement/prospectus. The Combined Statement of Operations data for the fiscal year ended October 31, 2012 and the Combined Balance Sheet data as of October 31, 2012 are derived from Seattles unaudited Condensed Combined Financial Statements that are not included in this information statement/prospectus.
The selected historical combined financial data set forth below should be read in conjunction with Seattles Combined and Condensed Combined Financial Statements and accompanying notes and Managements Discussion and Analysis of Financial Condition and Results of Operations of Seattle included elsewhere in this information statement/prospectus. Seattles selected historical combined financial data presented below may not be indicative of its future performance and does not necessarily reflect what Seattles financial position and results of operations would have been had it been operating as a standalone public company during the periods presented, and the results for the six months ended April 30, 2017 are not necessarily indicative of the results that may be expected for the full fiscal year. The selected historical combined financial data in this section are not intended to replace Seattles Combined and Condensed Combined Financial Statements and the accompanying notes thereto.
|
As of and for the Fiscal Years Ended October 31
|
As of and for the
Six Months Ended April 30 |
|||||||||||||||||||
(in millions)
|
2012
|
2013
|
2014
|
2015
|
2016
|
2016
|
2017
|
||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net revenue
|
$
|
4,127
|
|
$
|
4,036
|
|
$
|
3,933
|
|
$
|
3,622
|
|
$
|
3,195
|
|
$
|
1,554
|
|
$
|
1,406
|
|
(Loss) earnings from operations(1)
|
|
(8,949
|
)
|
|
318
|
|
|
415
|
|
|
321
|
|
|
238
|
|
|
109
|
|
|
(48
|
)
|
Net (loss) earnings(1)
|
|
(7,599
|
)
|
|
152
|
|
|
361
|
|
|
391
|
|
|
80
|
|
|
124
|
|
|
(39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
$
|
12,693
|
|
$
|
12,038
|
|
$
|
11,634
|
|
$
|
10,979
|
|
$
|
10,647
|
|
|
|
|
$
|
10,460
|
|
Total capital lease obligations
|
|
—
|
|
|
6
|
|
|
21
|
|
|
32
|
|
|
36
|
|
|
|
|
|
39
|
|
(1) | Loss from operations and net loss for the fiscal year ended October 31, 2012 included charges for the impairment of goodwill and intangible assets totaling $8,847 million. |
159
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
On September 7, 2016, Micro Focus and HPE entered into the Merger Agreement with Seattle, Holdings and Merger Sub, and HPE and Seattle entered into the Separation and Distribution Agreement, which together provide for the combination of Micro Focus and HPE Software, as further described elsewhere herein. See the sections entitled The Transactions—Transaction Steps, The Merger Agreement and The Separation and Distribution Agreement.
The Merger is expected to result in HPE Stockholders as of the close of business on the Distribution Record Date receiving Micro Focus ADSs representing an aggregate number of newly issued Micro Focus Shares equal to 50.1% of the Micro Focus Fully Diluted Shares as of immediately following Closing.
The Merger will be accounted for as a business combination using the acquisition method of accounting in accordance with IFRS under IFRS 3, Business Combinations (IFRS 3). IFRS requires that one of the two companies in the Merger be designated as the acquirer for accounting purposes based on the evidence available. Micro Focus will be treated as the acquiring entity for accounting purposes, and accordingly, the Seattle assets acquired and liabilities assumed have been adjusted based on preliminary estimates of fair value. See the section entitled The Transactions—Accounting Treatment. Any excess of the purchase price over the fair value of identified assets acquired and liabilities assumed will be recognized as goodwill. The actual fair values will be determined following Closing and may vary from these preliminary estimates.
The following unaudited pro forma condensed combined financial information and related notes (the Pro Forma Financial Information) are based on the historical consolidated financial statements of Micro Focus and the historical combined financial statements of Seattle, and have been prepared to reflect the Merger. The pro forma adjustments related to the Merger include:
• | The merger of Merger Sub with and into Seattle pursuant to the Merger Agreement, and the issuance of approximately 222.39 million Micro Focus ADSs valued (based on Micro Focus’ closing share price on July 27, 2017) at $6.6 billion in the Merger to HPE Stockholders in respect of Seattle Shares; |
• | The $5.0 billion borrowings comprised of the Micro Focus Term Loan Facilities, Seattle Term Loan Facility, and the Revolving Credit Facility, each as further described in the section entitled Summary—Debt Financing; |
• | The Seattle Payment of $2.5 billion to be paid by Seattle to HPE in connection with the Contribution, which will be funded by the Seattle Term Loan Facility; |
• | The conversion of Seattle financial information from U.S. GAAP to the Micro Focus accounting policies in accordance with IFRS as issued by the International Accounting Standards Board (IASB); |
• | The Micro Focus Return of Value of an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs or proceeds) to the Micro Focus Shareholders and Share Capital Consolidation prior to Closing; |
• | The reflection of the assets and liabilities which will be transferred to or from, or retained by, as the case may be, the Seattle Group in the Reorganization, and which are expected to be held by the Seattle Group at the time of the Merger, and their related statement of comprehensive income impacts; and |
• | The impact of preliminary fair value adjustments to the underlying assets and liabilities of Seattle. |
The unaudited pro forma condensed combined statement of comprehensive income for the year ended April 30, 2017 (the Pro Forma Statement of Comprehensive Income) gives effect to the Merger as if it had occurred on May 1, 2016, the first day of Micro Focus fiscal year ended April 30, 2017, while the unaudited pro forma condensed combined statement of financial position as of April 30, 2017 (the Pro Forma Statement of Financial Position) gives effect to the Merger as if it had occurred on that date. The Pro Forma Financial Information does not include adjustments for other acquisitions completed by Micro Focus or Seattle during the periods presented, as these acquisitions were not considered significant individually or in the aggregate.
160
The Pro Forma Financial Information should be read in conjunction with:
• | Micro Focus’ audited consolidated financial statements and related notes as of and for the year ended April 30, 2017 (Micro Focus’ financial statements), as well as the section entitled Management’s Discussion and Analysis of the Financial Condition and Results of Operations of Micro Focus in each case included elsewhere in this information statement/prospectus; and |
• | Seattle’s audited combined financial statements and related notes as of October 31, 2016 and 2015 and for the fiscal years ended October 31, 2016, 2015 and 2014, and Seattle’s unaudited condensed combined financial statements and related notes as of and for the six months ended April 30, 2017 (collectively, Seattle’s financial statements), as well as the section entitled Management’s Discussion and Analysis of Financial Condition and Results of Operations of Seattle, in each case included elsewhere in this information statement/prospectus. See Index to Financial Statements. |
Micro Focus financial statements are prepared in accordance with IFRS, which differs in certain respects from Seattles financial statements which are prepared in accordance with U.S. GAAP. Adjustments were made to Seattles financial statements to convert them from U.S. GAAP to IFRS as well as reclassifications to conform Seattles historical accounting presentation to Micro Focus' accounting presentation. The Pro Forma Financial Information also includes adjustments to reflect the financing arrangements to fund the Seattle Payment, the Micro Focus Return of Value, financing and transaction costs and other transactions as described elsewhere in this information statement/prospectus. These adjustments reflect Micro Focus best estimates based upon the information available to date and are preliminary and subject to change once more detailed information is obtained.
The pro forma adjustments are based upon the best available information and certain assumptions that Micro Focus believes to be reasonable. There can be no assurance that the final allocation of the purchase price and the fair values will not materially differ from the preliminary amounts reflected in the Pro Forma Financial Information. Adjustments included in the Pro Forma Financial Information are based on items that are factually supportable and directly attributable to the Merger, and for the purposes of the Pro Forma Statement of Comprehensive Income, are expected to have a continuing impact on the combined results of the Enlarged Group following the Merger. The Pro Forma Financial Information is presented for informational purposes only and is not necessarily indicative of the combined financial position or results of operations that would have been realized had the Merger occurred as of the dates indicated, nor is it meant to be indicative of any anticipated combined financial position or future results of operations that the Enlarged Group will experience after the completion of the Merger. The Pro Forma Financial Information does not reflect the cost of any integration activities or benefits from the Merger including potential synergies that may be derived in future periods.
161
MICRO FOCUS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF COMPREHENSIVE INCOME
FOR THE YEAR ENDED APRIL 30, 2017
(In millions of U.S. dollars, except for per share data)
|
Historical Micro
Focus for the year ended April 30, 2017 |
Adjusted Seattle
for the twelve months ended April 30, 2017 (Note 2) |
Pro forma
merger adjustments (Note 3) |
Note 3
references |
Total
pro forma combined |
||||||||||
Revenue
|
$
|
1,381
|
|
$
|
3,053
|
|
$
|
—
|
|
|
|
|
$
|
4,434
|
|
Cost of sales comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales (excluding amortization of capitalized development costs and acquired technology intangibles)
|
|
(146
|
)
|
|
(823
|
)
|
|
—
|
|
|
|
|
|
(969
|
)
|
Amortization of product development costs
|
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
(22
|
)
|
Amortization of acquired technology intangibles
|
|
(69
|
)
|
|
(97
|
)
|
|
(62
|
)
|
(c)(iv)
|
|
(228
|
)
|
||
Cost of sales
|
|
(237
|
)
|
|
(920
|
)
|
|
(62
|
)
|
|
|
(1,219
|
)
|
||
Gross profit
|
$
|
1,144
|
|
$
|
2,133
|
|
$
|
(62
|
)
|
|
$
|
3,215
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Selling and distribution costs
|
|
(467
|
)
|
|
(994
|
)
|
|
(437
|
)
|
(c)(iv)
|
|
(1,898
|
)
|
||
Research and development expenses comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Expenditure incurred in the year
|
|
(208
|
)
|
|
(526
|
)
|
|
—
|
|
|
|
(734
|
)
|
||
Capitalization of product development costs
|
|
28
|
|
|
—
|
|
|
—
|
|
|
|
28
|
|
||
Research and development expenses
|
|
(180
|
)
|
|
(526
|
)
|
|
—
|
|
|
|
(706
|
)
|
||
Administrative expenses
|
|
(203
|
)
|
|
(546
|
)
|
|
321
|
|
(a)
|
|
(428
|
)
|
||
Operating profit
|
$
|
294
|
|
$
|
67
|
|
$
|
(178
|
)
|
|
$
|
183
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share of results of associates and gain on dilution of investment
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
|
(1
|
)
|
||
Finance costs
|
|
(97
|
)
|
|
(72
|
)
|
|
(148
|
)
|
(b)
|
|
(317
|
)
|
||
Finance income
|
|
1
|
|
|
13
|
|
|
—
|
|
|
|
14
|
|
||
Profit (loss) before tax
|
|
197
|
|
|
8
|
|
|
(326
|
)
|
|
|
(121
|
)
|
||
Taxation
|
|
(39
|
)
|
|
(123
|
)
|
|
108
|
|
(g)
|
|
(54
|
)
|
||
Profit (loss) for the period
|
$
|
158
|
|
$
|
(115
|
)
|
$
|
(218
|
)
|
|
$
|
(175
|
)
|
||
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Equity shareholders of the parent
|
|
158
|
|
|
(115
|
)
|
|
(218
|
)
|
|
|
(175
|
)
|
||
Noncontrolling interests
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
||
Profit (loss) for the period
|
$
|
158
|
|
$
|
(115
|
)
|
$
|
(218
|
)
|
|
$
|
(175
|
)
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Earnings (loss) per share attributable to equity shareholders of the parent (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Basic
|
$
|
0.69
|
|
|
|
|
|
|
|
|
$
|
(0.40
|
)
|
||
Diluted
|
$
|
0.67
|
|
|
|
|
|
|
|
|
$
|
(0.40
|
)
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Weighted average shares outstanding (Note 4):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Basic
|
|
229
|
|
|
|
|
|
206
|
|
|
|
435
|
|
||
Diluted
|
|
237
|
|
|
|
|
|
198
|
|
|
|
435
|
|
The accompanying notes are an integral part of the Pro Forma Financial Information.
162
MICRO FOCUS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF FINANCIAL POSITION
AS OF APRIL 30, 2017
(In millions of U.S. dollars)
|
Historical Micro
Focus as of April 30, 2017 |
Adjusted Seattle
as of April 30, 2017 (Note 2) |
Pro forma
merger adjustments (Note 3) |
Note 3
references |
Total
pro forma combined as of April 30, 2017 |
||||||||||
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
2,829
|
|
$
|
8,095
|
|
$
|
(4,081
|
)
|
(c)(vii)
|
$
|
6,843
|
|
||
Other intangible assets
|
|
1,089
|
|
|
339
|
|
|
6,196
|
|
(c)(iv)
|
|
7,624
|
|
||
Property, plant and equipment
|
|
41
|
|
|
147
|
|
|
44
|
|
(d)(i)
|
|
232
|
|
||
Investments in associates
|
|
12
|
|
|
—
|
|
|
—
|
|
|
|
12
|
|
||
Long-term pension assets
|
|
22
|
|
|
—
|
|
|
—
|
|
|
|
22
|
|
||
Other non-current assets
|
|
3
|
|
|
139
|
|
|
—
|
|
|
|
142
|
|
||
Deferred tax assets
|
|
208
|
|
|
964
|
|
|
—
|
|
|
|
1,172
|
|
||
|
|
4,204
|
|
|
9,684
|
|
|
2,159
|
|
|
|
16,047
|
|
||
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Inventories
|
|
—
|
|
|
5
|
|
|
—
|
|
|
|
5
|
|
||
Trade and other receivables
|
|
289
|
|
|
604
|
|
|
—
|
|
|
|
893
|
|
||
Current tax receivables
|
|
2
|
|
|
—
|
|
|
—
|
|
|
|
2
|
|
||
Cash and cash equivalents
|
|
151
|
|
|
167
|
|
|
285
|
|
(f)
|
|
603
|
|
||
Assets classified as held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
||
|
|
442
|
|
|
776
|
|
|
285
|
|
|
|
1,503
|
|
||
Total assets
|
$
|
4,646
|
|
$
|
10,460
|
|
$
|
2,444
|
|
|
$
|
17,550
|
|
||
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Trade and other payables
|
$
|
170
|
|
$
|
499
|
|
$
|
6
|
|
(d)(ii)
|
$
|
675
|
|
||
Borrowings
|
|
71
|
|
|
16
|
|
|
—
|
|
|
|
87
|
|
||
Provisions
|
|
20
|
|
|
43
|
|
|
—
|
|
|
|
63
|
|
||
Current tax liabilities
|
|
43
|
|
|
153
|
|
|
—
|
|
|
|
196
|
|
||
Deferred income
|
|
641
|
|
|
750
|
|
|
(57
|
)
|
(c)(v)
|
|
1,334
|
|
||
|
|
945
|
|
|
1,461
|
|
|
(51
|
)
|
|
|
2,355
|
|
||
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Deferred income
|
|
224
|
|
|
164
|
|
|
(27
|
)
|
(c)(v)
|
|
361
|
|
||
Borrowings
|
|
1,490
|
|
|
23
|
|
|
3,278
|
|
(b)
|
|
4,791
|
|
||
Retirement benefit obligations
|
|
31
|
|
|
80
|
|
|
—
|
|
|
|
111
|
|
||
Long-term provisions
|
|
12
|
|
|
6
|
|
|
—
|
|
|
|
18
|
|
||
Other non-current liabilities
|
|
4
|
|
|
31
|
|
|
—
|
|
|
|
35
|
|
||
Deferred tax liabilities
|
|
327
|
|
|
5
|
|
|
1,865
|
|
(c)(vi)
|
|
2,197
|
|
||
|
|
2,088
|
|
|
309
|
|
|
5,116
|
|
|
|
7,513
|
|
||
Total liabilities
|
|
3,033
|
|
|
1,770
|
|
|
5,065
|
|
|
|
9,868
|
|
||
Net assets
|
|
1,613
|
|
|
8,690
|
|
|
(2,621
|
)
|
|
|
7,682
|
|
||
Capital and reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share capital
|
|
40
|
|
|
—
|
|
|
22
|
|
(e)(iv)
|
|
62
|
|
||
Share premium account
|
|
192
|
|
|
—
|
|
|
—
|
|
|
|
192
|
|
||
Parent company investment
|
|
—
|
|
|
8,720
|
|
|
(8,720
|
)
|
(e)(ii),(e)(iii)
|
|
—
|
|
||
Merger reserve
|
|
338
|
|
|
—
|
|
|
6,607
|
|
(e)(iv)
|
|
6,945
|
|
||
Capital redemption reserve
|
|
163
|
|
|
—
|
|
|
—
|
|
|
|
163
|
|
||
Retained earnings/(deficit)
|
|
902
|
|
|
—
|
|
|
(560
|
)
|
(e)(i),(e)(v)
|
|
342
|
|
||
Foreign currency translation reserve/(deficit)
|
|
(23
|
)
|
|
(30
|
)
|
|
30
|
|
(e)(iii)
|
|
(23
|
)
|
||
Total equity attributable to owners of the parent
|
|
1,612
|
|
|
8,690
|
|
|
(2,621
|
)
|
|
|
7,681
|
|
||
Non-controlling interests
|
|
1
|
|
|
—
|
|
|
—
|
|
|
|
1
|
|
||
Total equity
|
$
|
1,613
|
|
$
|
8,690
|
|
$
|
(2,621
|
)
|
|
$
|
7,682
|
|
The accompanying notes are an integral part of the Pro Forma Financial Information.
163
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Note 1. Basis of presentation
The Pro Forma Financial Information set forth herein is based upon the historical financial statements of Micro Focus and Seattle and has been prepared to illustrate the effects of the Merger, as if it had occurred on May 1, 2016 in respect of the Pro Forma Statement of Comprehensive Income and as if it had occurred on April 30, 2017 in respect of the Pro Forma Statement of Financial Position. The Pro Forma Financial Information is presented for illustrative purposes only and does not necessarily reflect the results of operations or the financial position of Micro Focus that actually would have resulted had the Merger occurred at the dates indicated, or project the results of operations or financial position of Micro Focus for any future dates or periods.
In addition, throughout the periods presented in the Pro Forma Financial Information, the operations of Seattle were conducted and accounted for as part of HPE using accounting conventions applicable to HPE, which are different from those of Micro Focus. The audited historical combined financial statements and unaudited historical condensed combined financial statements of Seattle have been derived from HPEs historical accounting records (and its former parents, HP Inc. (formerly known as Hewlett-Packard Company), from which HPE was spun off on November 1, 2015) and reflect certain allocations of direct costs and expenses. All of the allocations and estimates in such financial statements are based on assumptions that HPEs management believes are reasonable. The historical combined and condensed combined financial statements of Seattle do not necessarily represent the financial position or results of operations of Seattle had it been operated as a standalone company during the periods or at the dates presented.
The Pro Forma Financial Information is based on the Seattle and Micro Focus financial statements included elsewhere in this information statement/prospectus. See Index to Financial Statements. The fiscal year end of Micro Focus is April 30 and the fiscal year end of Seattle is October 31. Since the fiscal year ends of Micro Focus and Seattle differ by more than 93 days, Seattles financial information has been recast to be within 93 days of Micro Focus financial reporting periods.
The Pro Forma Statement of Comprehensive Income is derived from Micro Focus audited consolidated statement of comprehensive income for the year ended April 30, 2017. Seattles income statement information for the twelve months ended April 30, 2017 has been calculated by taking the historical audited combined income statement of Seattle for the year ended October 31, 2016, subtracting the unaudited condensed combined income statement of Seattle for the six months ended April 30, 2016, and adding the unaudited condensed combined income statement of Seattle for the six months ended April 30, 2017. The Pro Forma Statement of Financial Position has been derived from the historical financial information for Micro Focus and Seattle as of April 30, 2017.
The estimated income tax impacts of the pre-tax adjustments that are reflected in the Pro Forma Financial Information are calculated using an assumed estimated blended statutory rate, which is based on preliminary assumptions related to the jurisdictions in which the income (expense) adjustments will be recorded. The blended statutory rate and the effective tax rate of the Enlarged Group following the Merger could be significantly different depending on post-Merger activities and geographical mix of profit before taxes.
Note 2. Pro forma adjustments to Seattles financial statements
The financial information below illustrates the impact of adjustments made to Seattles financial statements, presented in accordance with U.S. GAAP and included elsewhere in this information statement/prospectus, in order to present them on a basis consistent with the Micro Focus financial statements prepared under IFRS. The adjustments include reclassifications to conform the Seattle historical accounting presentation to the Micro Focus accounting presentation. These adjustments reflect best estimates of Micro Focus based on information currently available and are subject to change once more detailed information is obtained.
164
Unaudited Adjusted Seattle Statement of Comprehensive Income
Twelve months ended April 30, 2017
(In millions of U.S. dollars)
|
Historical
Seattle (U.S. GAAP) |
U.S. GAAP to
IFRS adjustments (a) |
Note 2(a)
references |
Reclassifications
(b) |
Note 2(b)
references |
Adjusted
Seattle (IFRS) |
||||||||||
Revenue
|
$
|
3,047
|
|
$
|
6
|
|
(iv),(v)
|
$
|
—
|
|
|
|
|
$
|
3,053
|
|
Cost of sales
|
|
(818
|
)
|
|
(5
|
)
|
(iii),(vii)
|
|
(97
|
)
|
|
(i
|
)
|
|
(920
|
)
|
Gross profit
|
|
2,229
|
|
|
1
|
|
|
|
(97
|
)
|
|
|
|
|
2,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and distribution costs
|
|
—
|
|
|
(4
|
)
|
(iii),(vii)
|
|
(990
|
)
|
(vi)
|
|
(994
|
)
|
||
Research and development expenses
|
|
(523
|
)
|
|
(3
|
)
|
(iii),(vii)
|
|
—
|
|
|
|
(526
|
)
|
||
Administrative expenses
|
|
—
|
|
|
(11
|
)
|
(ii),(iii),(vi),(vii)
|
|
(535
|
)
|
(vi)
|
|
(546
|
)
|
||
Research and development
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||
Selling, general and administrative
|
|
(1,065
|
)
|
|
—
|
|
|
|
1,065
|
|
(i),(ii),(iii),
(iv),(v),(vi) |
|
—
|
|
||
Amortization of intangible assets
|
|
(144
|
)
|
|
—
|
|
|
|
144
|
|
(i)
|
|
—
|
|
||
Restructuring charges
|
|
(143
|
)
|
|
3
|
|
(vii)
|
|
140
|
|
(ii)
|
|
—
|
|
||
Acquisition and other related charges
|
|
(2
|
)
|
|
—
|
|
|
|
2
|
|
(iii)
|
|
—
|
|
||
Defined benefit plan remeasurement benefit
|
|
5
|
|
|
—
|
|
|
|
(5
|
)
|
(iv)
|
|
|
|
||
Separation costs
|
|
(276
|
)
|
|
—
|
|
|
|
276
|
|
(v)
|
|
—
|
|
||
Total operating expenses
|
|
(2,148
|
)
|
|
(15
|
)
|
|
|
97
|
|
|
|
(2,066
|
)
|
||
Operating profit
|
|
81
|
|
|
(14
|
)
|
|
|
—
|
|
|
|
67
|
|
||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Share of results of associates
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||
Finance costs
|
|
—
|
|
|
(69
|
)
|
(vi),(vii)
|
|
(3
|
)
|
(vii)
|
|
(72
|
)
|
||
Finance income
|
|
—
|
|
|
12
|
|
(vi)
|
|
1
|
|
(vii)
|
|
13
|
|
||
Interest and other, net
|
|
(2
|
)
|
|
—
|
|
|
|
2
|
|
(vii)
|
|
—
|
|
||
Profit before tax
|
|
79
|
|
|
(71
|
)
|
|
|
—
|
|
|
|
8
|
|
||
Taxation
|
|
(162
|
)
|
|
39
|
|
(vi)
|
|
|
|
|
|
(123
|
)
|
||
Loss for the period
|
$
|
(83
|
)
|
$
|
(32
|
)
|
|
$
|
—
|
|
|
$
|
(115
|
)
|
||
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||
Noncontrolling interests
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||
Loss attributable to equity shareholders of the parent
|
|
(83
|
)
|
|
(32
|
)
|
|
|
—
|
|
|
|
(115
|
)
|
||
Loss for the period
|
$
|
(83
|
)
|
$
|
(32
|
)
|
|
$
|
—
|
|
|
$
|
(115
|
)
|
165
Unaudited Adjusted Seattle Statement of Financial Position
As of April 30, 2017
(In millions of U.S. dollars)
|
Historical
Seattle (U.S. GAAP) |
U.S. GAAP to
IFRS adjustments (a) |
Note 2(a)
references |
Reclassifications
(b) |
Note 2(b)
references |
Adjusted
Seattle (IFRS) |
||||||||||||
Non-current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
8,089
|
|
$
|
6
|
|
(iv),(vi)
|
$
|
—
|
|
|
$
|
8,095
|
|
||||
Other intangible assets
|
|
339
|
|
|
—
|
|
|
|
—
|
|
|
|
339
|
|
||||
Property, plant and equipment
|
|
147
|
|
|
—
|
|
|
|
—
|
|
|
|
147
|
|
||||
Investments in associates
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Long-term pension assets
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Other non-current assets
|
|
—
|
|
|
(4
|
)
|
(vi)
|
|
143
|
|
(i)
|
|
139
|
|
||||
Deferred tax assets
|
|
956
|
|
|
8
|
|
(vi)
|
|
—
|
|
|
|
964
|
|
||||
Other assets
|
|
143
|
|
|
—
|
|
|
|
(143
|
)
|
(i)
|
|
—
|
|
||||
Total non-current assets
|
|
9,674
|
|
|
10
|
|
|
|
—
|
|
|
|
9,684
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Inventories
|
|
—
|
|
|
—
|
|
|
|
5
|
|
(ii)
|
|
5
|
|
||||
Trade and other receivables
|
|
—
|
|
|
—
|
|
|
|
604
|
|
(ii),(iii)
|
|
604
|
|
||||
Accounts receivable
|
|
508
|
|
|
—
|
|
|
|
(508
|
)
|
(iii)
|
|
—
|
|
||||
Current tax receivables
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Cash and cash equivalents
|
|
167
|
|
|
—
|
|
|
|
—
|
|
|
|
167
|
|
||||
Other current assets
|
|
111
|
|
|
(10
|
)
|
(vi)
|
|
(101
|
)
|
(ii)
|
|
—
|
|
||||
Assets classified as held for sale
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Total other assets
|
|
786
|
|
|
(10
|
)
|
|
|
—
|
|
|
|
776
|
|
||||
Total assets
|
$
|
10,460
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,460
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Trade and other payables
|
$
|
—
|
|
$
|
145
|
|
(vi)
|
$
|
354
|
|
(iv)
|
$
|
499
|
|
||||
Borrowings
|
|
—
|
|
|
—
|
|
|
|
16
|
|
(v)
|
|
16
|
|
||||
Provisions
|
|
—
|
|
|
—
|
|
|
|
43
|
|
(vi)
|
|
43
|
|
||||
Current tax liabilities
|
|
—
|
|
|
13
|
|
(vi)
|
|
140
|
|
(iv)
|
|
153
|
|
||||
Deferred income
|
|
746
|
|
|
(5
|
)
|
(v)
|
|
9
|
|
(vii)
|
|
750
|
|
||||
Capital lease obligations, short-term
|
|
16
|
|
|
—
|
|
|
|
(16
|
)
|
(v)
|
|
—
|
|
||||
Accounts payable
|
|
75
|
|
|
—
|
|
|
|
(75
|
)
|
(iv)
|
|
—
|
|
||||
Employee compensation and benefits
|
|
175
|
|
|
—
|
|
|
|
(175
|
)
|
(iv)
|
|
—
|
|
||||
Taxes on earnings
|
|
142
|
|
|
—
|
|
|
|
(142
|
)
|
(iv)
|
|
—
|
|
||||
Accrued restructuring
|
|
42
|
|
|
—
|
|
|
|
(42
|
)
|
(vi)
|
|
—
|
|
||||
Other accrued liabilities
|
|
112
|
|
|
—
|
|
|
|
(112
|
)
|
(iv),(vi),(vii)
|
|
—
|
|
||||
Total current liabilities
|
|
1,308
|
|
|
153
|
|
|
|
—
|
|
|
|
1,461
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Deferred income
|
|
—
|
|
|
(11
|
)
|
(ii)
|
|
175
|
|
(viii)
|
|
164
|
|
||||
Borrowings
|
|
—
|
|
|
—
|
|
|
|
23
|
|
(ix)
|
|
23
|
|
||||
Retirement benefit obligations
|
|
—
|
|
|
53
|
|
(vii)
|
|
27
|
|
(viii)
|
|
80
|
|
||||
Long-term provisions
|
|
—
|
|
|
—
|
|
|
|
6
|
|
(viii)
|
|
6
|
|
||||
Other non-current liabilities
|
|
—
|
|
|
(327
|
)
|
(vi)
|
|
358
|
|
(viii)
|
|
31
|
|
||||
Deferred tax liabilities
|
|
—
|
|
|
3
|
|
(vi)
|
|
2
|
|
(viii)
|
|
5
|
|
||||
Capital lease obligations, long-term
|
|
23
|
|
|
—
|
|
|
|
(23
|
)
|
(ix)
|
|
—
|
|
||||
Other liabilities
|
|
568
|
|
|
—
|
|
|
|
(568
|
)
|
(viii)
|
|
—
|
|
||||
Commitments and contingencies
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Total other liabilities
|
|
591
|
|
|
(282
|
)
|
|
|
—
|
|
|
|
309
|
|
||||
Total liabilities
|
|
1,899
|
|
|
(129
|
)
|
|
|
—
|
|
|
|
1,770
|
|
||||
Net assets
|
|
8,561
|
|
|
129
|
|
|
|
—
|
|
|
|
8,690
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital and reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Share capital
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Share premium account
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Merger reserve
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Capital redemption reserve
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Retained earnings/(deficit)
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Foreign currency translation reserve/(deficit)
|
|
—
|
|
|
23
|
|
(i)
|
|
(53
|
)
|
(x)
|
|
(30
|
)
|
||||
Parent company investment
|
|
8,608
|
|
|
106
|
|
(i),(ii),(iv),(v),(vi),(vii)
|
|
6
|
|
(x)
|
|
8,720
|
|
||||
Accumulated other comprehensive loss
|
|
(47
|
)
|
|
—
|
|
|
|
47
|
|
(x)
|
|
—
|
|
||||
Total equity attributable to owners of the parent
|
|
8,561
|
|
|
129
|
|
|
|
—
|
|
|
|
8,690
|
|
||||
Non-controlling interests
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
||||
Total equity
|
|
8,561
|
|
|
129
|
|
|
|
—
|
|
|
|
8,690
|
|
||||
Total liabilities, redeemable non-controlling interests and equity
|
$
|
10,460
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,460
|
|
166
Note 2. Pro forma adjustments to Seattles financial statements (continued)
(a) | Pro forma IFRS conversion adjustments |
The classification of certain items presented by Seattle under U.S. GAAP has been modified in order to align with the presentation used by Micro Focus under IFRS:
i. | Upon the date of transition to IFRS, a first-time adopter may elect to reset the cumulative translation adjustment (known as CTA) reserve to zero. This election has been applied and is reflected as an adjustment to Foreign currency translation reserve/(deficit) on the Pro Forma Statement of Financial Position of $23 million. |
ii. | Under U.S. GAAP, the gain on a sale-leaseback was deferred and amortized over the lease term. Under IFRS, only the excess of the transaction proceeds above the fair value of the assets has been deferred and amortized over the lease term. The remaining gain is recognized upfront. To reflect this difference, an adjustment was made to Deferred income (long-term) on the Pro Forma Statement of Financial Position of ($11) million. An adjustment was made to Administrative expenses on the Pro Forma Statement of Comprehensive Income of ($4) million. |
iii. | Stock-based compensation expense was recalculated under IFRS to reflect the use of graded vesting methodology rather than straight-line vesting methodology that had been applied under U.S. GAAP, the difference in the grant date and respective fair value under IFRS, recognition of payroll tax expense at each reporting period under IFRS as opposed to the date of a triggering event under U.S. GAAP, and inclusion of employee share purchase plan awards as compensation expense under IFRS. To reflect this difference, an adjustment was made to Cost of sales of ($3) million, Selling and distribution costs of ($5) million, Research and development expenses of ($4) million and Administrative expenses of $1 million on the Pro Forma Statement of Comprehensive Income. |
iv. | The fair value of deferred income assumed in business combinations calculated by Micro Focus using its historical estimation methodology and accounting policy under IFRS was higher than the deferred income fair value calculated by Seattle using its historical estimation methodology and accounting policy under U.S. GAAP. Thus, revenue and goodwill are greater under IFRS. To reflect this difference, an adjustment was made to Goodwill of $10 million on the Pro Forma Statement of Financial Position and to Revenue on the Pro Forma Statement of Comprehensive Income of $2 million. |
v. | Under U.S. GAAP, revenue is deferred for software arrangements where vendor specific objective evidence of fair value (VSOE) cannot be established. IFRS includes a broader range of acceptable measures of fair value for software arrangements and, therefore, revenue deferred under U.S. GAAP solely due to the lack of VSOE may be recognized under IFRS. In certain instances where Seattle’s revenue was deferred under U.S. GAAP due to the lack of VSOE for a contractual element, fair value was established utilizing customary pricing practices, which is an alternative acceptable measure under IFRS. An adjustment was made to Deferred income (short-term) on the Pro Forma Statement of Financial Position of ($5) million and to Revenue on the Pro Forma Statement of Comprehensive Income of $4 million. |
vi. | The adjusted Seattle (IFRS) income taxes for the twelve months ended April 30, 2017 were computed in accordance with the requirements of International Accounting Standard 12 Income Taxes and the separate return method. The Pro Forma Statement of Comprehensive Income reflects the IFRS tax provision for Seattle’s fiscal year ended October 31, 2016 plus the interim IFRS tax provision for the six month period ended April 30, 2017 less the interim IFRS tax provision for the six month period ended April 30, 2016. The Pro Forma Statement of Financial Position reflects tax assets and liabilities as of April 30, 2017 as determined in accordance with IFRS. Seattle’s effective tax rate generally differs from the U.S. federal statutory rate of 35% due to favorable tax rates associated with certain earnings from Seattle’s operations in lower tax rate jurisdictions throughout the world. Seattle has not provided U.S. taxes for all foreign earnings because Seattle plans to reinvest some of those earnings indefinitely outside the U.S. Additionally, Seattle’s effective tax rate may vary from period to period as a result of specific transactions and the impact of uncertain tax positions. The adjusted Seattle (IFRS) taxation of $123 million on Profit before tax of $8 million (an effective tax rate of 1538%) for the twelve months ended April 30, 2017 primarily results from $98 million of taxation related to uncertain tax positions and $24 million of taxation related to movements in deferred tax which are not recognized since they are not expected to be realized. |
167
Differences in the amount of income taxes reported under U.S. GAAP and IFRS result from a number of factors including the tax effect of U.S. GAAP to IFRS pre-tax adjustments, the difference in accounting for the deferred tax asset related to share-based payments and the classification of tax interest and penalties as finance costs under IFRS. Additionally, a tax reclassification adjustment has been recorded to transfer Seattles liability for uncertain tax positions from non-current liabilities to current liabilities as required by IFRS. To reflect these differences, adjustments were made to Goodwill of ($4) million, Deferred tax assets of $8 million, Other current assets of $(10) million, Other non-current assets of ($4) million, Trade and other payables of $145 million, Current tax liabilities of $13 million, Other non-current liabilities of ($327) million, and Deferred tax liabilities of $3 million on the Pro Forma Statement of Financial Position. An adjustment was made to Administrative expenses of $3 million, Finance costs of ($67) million, Finance income of $12 million and to Taxation of $39 million on the Pro Forma Statement of Comprehensive Income.
vii. | Seattle employee participation in HPE pension plans had historically been accounted for by Seattle as multi-employer plans under U.S. GAAP, with expense recognition in Seattle’s combined statement of comprehensive income, and with no recognition of pension assets and obligations on the combined statement of financial position. Adjustments have thus been made to adjust the statement of financial position to reflect all applicable plan assets and liabilities, and to reflect the impact of differences between U.S. GAAP and IFRS measurement approaches. To reflect this difference, an adjustment was made to Retirement benefit obligations on the Pro Forma Statement of Financial Position of $53 million and to Cost of sales of ($2) million, Research and development expenses of $1 million, Selling and distribution costs of $1 million, Administrative expenses of ($11) million, Restructuring charges of $3 million, and Finance costs of ($2) million in the Pro Forma Statement of Comprehensive Income. |
Summary of pro forma IFRS conversion adjustments:
(In millions of U.S. dollars)
|
Twelve months ended April 30, 2017
|
|||||||||||||||||||||||
|
Cost
of sales |
Selling and
distribution costs |
Research and
development expenses |
Administrative
expenses |
Restructuring
charges |
Finance
costs |
Finance
income |
Taxation
|
||||||||||||||||
Gain on sale-leaseback transaction
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
(4
|
)
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
Stock-based compensation expense
|
|
(3
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Accounting for taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
(67
|
)
|
|
12
|
|
|
39
|
|
Pension plan expense
|
|
(2
|
)
|
|
1
|
|
|
1
|
|
|
(11
|
)
|
|
3
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Total of pro forma IFRS conversion adjustments
|
$
|
(5
|
)
|
$
|
(4
|
)
|
$
|
(3
|
)
|
$
|
(11
|
)
|
$
|
3
|
|
$
|
(69
|
)
|
$
|
12
|
|
$
|
39
|
|
(b) | Pro forma financial statement reclassifications and accounting policy adjustments |
The classification of certain items presented by Seattle has been modified in order to align with the financial statement presentation used by Micro Focus:
Seattle statement of comprehensive income items for the twelve months ended April 30, 2017 were reclassified as follows:
i. | Amortization of intangible assets of $144 million reclassified $97 million to Cost of sales and $47 million to Selling, general and administrative costs; |
ii. | Restructuring charges of $140 million reclassified to Selling, general and administrative expenses; |
iii. | Acquisition and other related charges of $2 million reclassified to Selling, general and administrative expenses; |
iv. | Defined benefit plan remeasurement benefit of $5 million reclassified to Selling, general and administrative expenses; |
v. | Separation costs of $276 million reclassified to Selling, general and administrative expenses; |
vi. | Selling, general and administrative expenses of $1,525 million reclassified $990 million to Selling and distribution costs and $535 million to Administrative expenses; |
vii. | Interest and other, net of $2 million reclassified $3 million to Finance costs and $1 million to Finance income. |
168
Seattle statement of financial position items were reclassified as follows:
i. | Other assets of $143 million reclassified to Other non-current assets; |
ii. | Other current assets of $5 million reclassified to Inventories and $96 million to Trade and other receivables; |
iii. | Accounts receivable reclassified $508 million to Trade and other receivables; |
iv. | Other accrued liabilities of $102 million, Taxes on earnings of $142 million, Employee compensation and benefits of $175 million, and Accounts payable of $75 million reclassified to Trade and other payables of $354 million and Current tax liabilities of $140 million; |
v. | Capital lease obligations, short-term of $16 million reclassified to Borrowings (current); |
vi. | Other accrued liabilities of $1 million and Accrued restructuring of $42 million reclassified to Provisions; |
vii. | Other accrued liabilities of $9 million reclassified into Deferred income (current); |
viii. | Other liabilities of $568 million reclassified into $175 million of Deferred income (non-current), $27 million of Retirement benefit obligations, $6 million of Long-term provisions, $358 million of Other non-current liabilities and $2 million of Deferred tax liabilities; |
ix. | Capital lease obligations, long-term of $23 million reclassified to Borrowings (non-current); and |
x. | Accumulated other comprehensive loss of ($47) million reclassified to Foreign currency translation deficit of ($53) million and Parent company investment of $6 million. |
Note 3. Pro forma adjustments related to the Merger
(a) | Transaction and separation costs |
Micro Focus incurred transaction related costs of $45 million for the twelve months ended April 30, 2017. An adjustment has been made to remove these expenses from the Pro Forma Statement of Comprehensive Income as they are not expected to have a continuing impact on the results of operations following Closing.
Seattle incurred separation costs (inclusive of both costs specifically related to the Separation and transaction costs related to the Merger) of $276 million for the twelve months ended April 30, 2017. These costs primarily represent costs paid to third party providers and are eliminated as they are not expected to have a continuing impact on the results of operations following Closing. Allocated separation costs related to the November 1, 2015 separation of HPE from its former parent, HP Inc. (formerly known as Hewlett-Packard Company), have not been eliminated as they do not specifically relate to the Merger.
Micro Focus and Seattle expect to incur additional transaction costs of $15 million and $45 million, respectively. An adjustment of $60 million has been presented in the Pro Forma Statement of Financial Position as a reduction to cash and a corresponding reduction to retained earnings to represent the estimated total transaction costs yet to be incurred by Micro Focus and Seattle as of April 30, 2017. These amounts have not been tax effected as the tax deductibility of these items has not been determined.
(b) | Financing adjustments |
In connection with the Merger, Seattle Borrower will incur new indebtedness in an aggregate principal amount of $2.6 billion pursuant to the Seattle Term Loan Facility. Seattle will use $2.5 billion of the proceeds of this loan to pay the Seattle Payment to HPE. The remaining proceeds will be used to pay for fees related to the indebtedness and general corporate purposes.
Prior to the Merger, Micro Focus amended its existing $1.103 billion Facility B-2 term loan due 2019 and $412.5 million Facility C term loan due 2021 by combining the two tranches into one $1,515 million Facility B-2 term loan due 2021 which was re-priced at 2.50% above LIBOR, as well as provided for the incremental borrowing of a new USD-denominated Facility B-3 term loan and euro-denominated Euro Facility term loan. The Facility B-2 term loan and the Facility C term loan were previously priced at 3.75% above LIBOR (subject to a floor of 0.75%). The revised structure totals $5.0 billion and is comprised of four tranches with the below terms:
• | Amended Micro Focus Term Loan Facilities of $1,515 million which shall bear interest at 2.50% above LIBOR (subject to a LIBOR floor of 0.00%), with the total balance repayable November 2021. |
169
• | Facility B-3 ($385 million tranche B-3 term loan facility) which shall bear interest at 2.75% above LIBOR (subject to a LIBOR floor of 0.00%) with the balance repayable on the seventh anniversary of the closing date of the escrow credit agreement. |
• | Euro Facility (€470 million term loan facility) which shall bear interest at 3.00% above EURIBOR (subject to a EURIBOR floor of 0.00%) with the balance repayable on the seventh anniversary of the closing date of the escrow credit agreement. |
• | Seattle Term Loan Facility of $2.6 billion which shall bear interest at 2.75% above LIBOR (subject to a LIBOR floor of 0.00%) with the balance repayable on the seventh anniversary of the closing date of the agreement. |
Micro Focus will also increase its existing Revolving Credit Facility to a total amount of up to $500 million, which it does not intend to further draw down on as of Closing. Undrawn commitment fees are assumed to be 0.5%.
Interest expense in the Pro Forma Statement of Comprehensive Income has been adjusted as follows based on the expected sources of funding described above:
(in millions of U.S. dollars)
|
Remaining
principal amount |
Estimated
principal amount |
Estimated
future interest rate |
Historical
interest expense |
Adjustment to
interest expense for the twelve months ended April 30, 2017 |
||||||||||
Existing Tranche B-2 Term Loan Facility
|
$
|
1,103
|
|
|
N/A
|
|
|
N/A
|
|
$
|
54
|
|
$
|
(54
|
)
|
Existing Tranche C Term Loan Facility
|
|
412
|
|
|
N/A
|
|
|
N/A
|
|
|
20
|
|
|
(20
|
)
|
Amended Micro Focus Term Loan Facility
|
|
N/A
|
|
$
|
1,515
|
|
|
3.57
|
%
|
|
N/A
|
|
|
54
|
|
Facility B-3
|
|
N/A
|
|
|
385
|
|
|
3.82
|
%
|
|
N/A
|
|
|
15
|
|
Euro Facility
|
|
N/A
|
|
|
500
|
|
|
3.04
|
%
|
|
N/A
|
|
|
15
|
|
Assumed Seattle Term Loan Facility
|
|
N/A
|
|
|
2,600
|
|
|
3.82
|
%
|
|
N/A
|
|
|
99
|
|
Total estimated borrowings
|
$
|
1,515
|
|
$
|
5,000
|
|
|
|
|
|
|
|
$
|
109
|
|
|
Estimated debt
issuance costs |
|
|
|
|
||||||||||
Debt issuance costs amortization - Amended Micro Focus Term Loan Facility
|
$
|
27
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
$
|
8
|
|
Debt issuance costs amortization - Revolving Credit Facility fees
|
|
14
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
4
|
|
Debt issuance costs & OID amortization - Facility B-3 and Euro Facility
|
|
18
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
3
|
|
Debt issuance costs & OID amortization - Seattle Term Loan Facility
|
|
52
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
8
|
|
Other fees
|
|
96
|
|
|
|
|
|
N/A
|
|
|
N/A
|
|
|
16
|
|
Total estimated debt issuance costs
|
$
|
207
|
|
Adjustment to total interest expense
|
$
|
148
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total estimated borrowings (excluding undrawn amounts), net
|
$
|
4,793
|
|
|
|
|
|
|
|
||||||
Historical remaining principal amount
|
|
(1,515
|
)
|
|
|
|
|
|
|
||||||
Adjustment to borrowings, net
|
$
|
3,278
|
|
|
|
|
|
|
|
Total incremental borrowings, net of debt issuance costs are $3,278 million. For each 0.125% change in estimated interest rates on the variable rate debt, the pro forma interest expense adjustment would increase or decrease by approximately $8 million for the twelve months ended April 30, 2017. These adjustments were calculated as if the debt were entered into on May 1, 2016, the beginning of the earliest period presented.
(c) | Preliminary purchase consideration and allocation |
The Merger will be accounted for as a business combination using the acquisition method of accounting in accordance with IFRS. Under this method, the Seattle assets acquired and liabilities assumed have been recorded based on preliminary estimates of fair value and limited information available. In accordance with IFRS, Micro Focus defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The actual fair values will be determined upon the completion of the Merger and may vary from these estimates.
170
i. | Prior to the Merger as part of the Micro Focus Return of Value, Micro Focus will issue one B Share to each existing Micro Focus Shareholder. Micro Focus will subsequently redeem these B Shares for a total Return of Value payment of an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs and proceeds) and then cancel the B Shares. |
Micro Focus intends to fund the Micro Focus Return of Value with the Micro Focus Term Loan Facility. With the intent to ensure that the market price of each Micro Focus Share is not materially affected by the Micro Focus Return of Value, Micro Focus will effect the Share Capital Consolidation. As a result of the Share Capital Consolidation, the number of Micro Focus Shares outstanding will be reduced but each Micro Focus Shareholder will still own the same proportion of Micro Focus as it owned prior to the Micro Focus Return of Value. The Share Capital Consolidation ultimately reduces the number of Consideration Shares issued to holders of Seattle Shares as consideration in the Merger but will still result in pre-Merger HPE Stockholders owning Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares immediately following the Merger.
The total equity consideration in the Merger was estimated using a sterling price of 2,284p for each Micro Focus Share traded on the LSE based on Micro Focus closing share price on July 27, 2017, adjusted for the Share Capital Consolidation, and then translated to U.S. dollars using the July 27, 2017 exchange rate of 1.3051 to arrive at a price of $29.81. The actual purchase consideration will be determined following Closing.
This share calculation is summarized as follows:
(In millions, except for per share data)
|
|
Share
calculation |
||||
Total Micro Focus diluted shares outstanding prior to Return of Value and Share Consolidation
|
|
|
|
|
238.27
|
|
Return of Value
|
$
|
(500
|
)
|
|
|
|
Micro Focus' closing share price as of July 27, 2017
|
$
|
29.81
|
|
|
|
|
Reduction of shares from Share Consolidation
|
|
|
|
|
(16.77
|
)
|
Total Micro Focus Shares outstanding after Share Consolidation
|
|
|
|
|
221.50
|
|
Share Ratio Adjustment pursuant to the Merger Agreement
|
|
|
|
|
1.004
|
|
Total Micro Focus ADSs to be issued to Seattle shareholders (assuming the ADS ratio equals 1)
|
|
|
|
|
222.39
|
|
171
The estimated purchase consideration, preliminary estimated fair values and residual goodwill are as follows:
(In millions of U.S. dollars, except for per share data)
|
|
|
||
Total Micro Focus ADSs to be issued to Seattle shareholders
|
|
222.39
|
|
|
Micro Focus' closing share price as of July 27, 2017
|
$
|
29.81
|
|
|
Total equity consideration
|
$
|
6,629
|
|
(ii)
|
Add preliminary fair value of Seattle new indebtedness assumed by Micro Focus, net
|
|
2,548
|
|
(iii)
|
Total purchase consideration, including debt assumed
|
|
9,177
|
|
|
Allocation of purchase consideration, including debt assumed:
|
|
|
|
|
Net working capital (excluding deferred revenue)
|
|
174
|
|
|
Property, plant and equipment
|
|
191
|
|
|
Other long-term assets
|
|
139
|
|
|
Other long-term liabilities
|
|
(140
|
)
|
|
Identifiable intangible assets
|
|
6,535
|
|
(iv)
|
Deferred income
|
|
(830
|
)
|
(v)
|
Deferred taxes, net
|
|
(906
|
)
|
(vi)
|
Residual goodwill
|
|
4,014
|
|
(vii)
|
Less: Seattle's historical goodwill
|
|
(8,095
|
)
|
|
Goodwill adjustment
|
$
|
(4,081
|
)
|
|
A hypothetical 10% change in the price of Micro Focus Shares, all other factors remaining constant, would result in a corresponding increase or decrease in the total Merger consideration of approximately $663 million.
The final allocation of the purchase price will be determined at a later date and is dependent on a number of factors, including the final evaluation of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed. The final purchase price allocation may result in a material change in the fair value of the net assets acquired and consequently in the value of residual goodwill.
ii. | The portion of the estimated purchase consideration attributable to Seattle equity awards which will be assumed by Micro Focus is considered immaterial and no adjustment has been made in the Pro Forma Financial Information. |
iii. | Represents the estimated fair value of the Seattle Term Loan Facility (net of debt issuance costs) which Seattle expects to incur immediately prior to the Distribution. See the sections entitled The Transactions- Transaction Steps and Debt Financing for more information. |
iv. | Except as discussed below, the carrying value of Seattle’s assets and liabilities are considered to approximate their fair values. |
The preliminary fair value of Seattles intangible assets is estimated to be $6,535 million or a net increase of $6,196 million compared to a carrying value of $339 million at April 30, 2017. The primary intangible assets include customer relationships, existing technology, trade/product names and other intangible assets, for which the fair value estimates of identifiable intangible assets have been determined using the income approach, using publicly available benchmark data where relevant. Certain assumptions used by Micro Focus to arrive at the estimated fair value of the identifiable intangible assets have been derived primarily from publicly available information, including market transactions of varying degrees of comparability. However, a detailed analysis has not been completed and actual results may differ from these estimates.
172
The fair value and weighted-average estimated useful life of identifiable intangible assets are estimated as follows:
|
Fair value
|
Weighted-average
estimated useful life |
Amortization for the
twelve months ended April 30, 2017 |
||||||
|
(in millions)
|
(in years)
|
(in millions)
|
||||||
Customer relationships
|
$
|
4,725
|
|
|
10
|
|
$
|
473
|
|
Core technology
|
|
1,593
|
|
|
10
|
|
|
159
|
|
Trade name and trade marks
|
|
217
|
|
|
20
|
|
|
11
|
|
Total acquired identifiable intangible assets
|
|
6,535
|
|
|
|
|
|
|
|
Less: Seattle's historical net book value of intangible assets
|
|
(339
|
)
|
|
|
|
|
|
|
Adjustment to intangible assets, net
|
$
|
6,196
|
|
|
|
|
|
|
|
Incremental amortization of acquired identifiable intangible assets (selling and distribution)
|
|
484
|
|
Incremental amortization of acquired identifiable intangible assets (cost of sales)
|
|
159
|
|
Incremental amortization of acquired identifiable intangible assets
|
|
643
|
|
Less: Seattle's historical amortization of intangible assets (selling and distribution)
|
|
(47
|
)
|
Less: Seattle's historical amortization of intangible assets (cost of sales)
|
|
(97
|
)
|
Less: Seattle's historical amortization of intangible assets
|
|
(144
|
)
|
Adjustment to total amortization
|
$
|
499
|
|
v. | Represents the estimated balance of deferred income after taking into account an adjustment to decrease Seattle’s recorded value of deferred income to its estimated remaining future service obligations based on the preliminary purchase price allocation. The final purchase price allocation will be based on a complete analysis subsequent to Closing and may result in a materially different allocation for deferred income than that presented in the Pro Forma Statement of Financial Position. Any recurring impact to the Pro Forma Statement of Comprehensive Income is expected to be immaterial and therefore an adjustment to the Pro Forma Statement of Comprehensive Income has not been made. |
(In millions of U.S. dollars)
|
Change in
Deferred Income |
||
Preliminary adjustment to fair value (short-term)
|
$
|
(57
|
)
|
Preliminary adjustment to fair value (long-term)
|
|
(27
|
)
|
Adjustment to deferred income
|
$
|
(84
|
)
|
vi. | Deferred tax asset and liability were adjusted as follows: |
(In millions of U.S. dollars)
|
Change in
Deferred Taxes |
||
Total deferred tax asset
|
$
|
964
|
|
Seattle deferred tax liability as of April 30, 2017
|
|
(5
|
)
|
Preliminary step-up in fair value of deferred tax liabilities
|
|
(1,865
|
)
|
Total deferred tax liability
|
|
(1,870
|
)
|
Total deferred tax, net
|
$
|
(906
|
)
|
The preliminary adjustment to fair value of deferred tax liabilities is calculated using an estimated tax rate of 30%.
vii. | The goodwill balance arising from the Merger is estimated to be $4,014 million, which results in a net adjustment to goodwill of ($4,081) million. The goodwill arising from the Merger has been calculated as the excess of the total purchase consideration (including debt assumed) of $9,177 million over the fair value of the net assets acquired. |
173
(d) | Transfer of assets and liabilities |
Upon or shortly prior to Closing, pursuant to the terms of the Separation and Distribution Agreement and the Merger Agreement, HPE will engage in the following transactions with Seattle:
(In millions of U.S. dollars)
|
Historical
Seattle as of April 30, 2017 |
Transfer of
certain corporate assets (i) |
Transfer of
certain corporate and shared personnel, net (ii) |
Transfer of
cash to meet agreement requirements (iii) |
Adjusted
Seattle as of April 30, 2017 |
||||||||||
Property, plant and equipment
|
$
|
147
|
|
$
|
44
|
|
|
|
|
|
|
|
$
|
191
|
|
Cash and cash equivalents
|
|
167
|
|
|
|
|
|
|
|
|
67
|
|
|
234
|
|
Trade and other payables
|
|
499
|
|
|
|
|
|
6
|
|
|
|
|
|
505
|
|
i. | Transfer of $44 million of certain corporate assets including a portion of HPE’s global real estate portfolio and IT assets. |
ii. | Transfer $6 million of liabilities related to corporate and shared Seattle personnel in connection with the Transactions. |
iii. | Transfer $67 million of cash to Seattle to meet the minimum cash requirements set forth in the Separation and Distribution Agreement. |
(e) | Impact to stockholders’ equity |
The estimated impact to total stockholders equity is summarized as follows:
|
Acquisition
|
|
||||||||||||||||
(In millions of U.S. dollars)
|
Estimated
transaction costs (i) |
Transfers of
Assets & Liabilities (ii) |
Eliminate
Seattle's adjusted historical equity (iii) |
Issuance of
Micro Focus common stock (iv) |
Return of
Value Payment (v) |
Total
pro forma adjustments to equity |
||||||||||||
Share capital
|
|
|
|
|
|
|
|
|
|
$
|
22
|
|
|
|
|
$
|
22
|
|
Share premium account
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Parent company investment
|
|
|
|
$
|
105
|
|
$
|
(8,825
|
)
|
|
|
|
|
|
|
|
(8,720
|
)
|
Merger reserve
|
|
|
|
|
|
|
|
|
|
|
6,607
|
|
|
|
|
|
6,607
|
|
Capital redemption reserve
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
Retained earnings/(deficit)
|
$
|
(60
|
)
|
|
|
|
|
|
|
|
|
|
$
|
(500
|
)
|
|
(560
|
)
|
Foreign currency translation reserve/(deficit)
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
30
|
|
Total stockholders' equity
|
$
|
(60
|
)
|
$
|
105
|
|
$
|
(8,795
|
)
|
$
|
6,629
|
|
$
|
(500
|
)
|
$
|
(2,621
|
)
|
i. | Estimated total transaction costs of $60 million, yet to be incurred by Micro Focus and Seattle as of April 30, 2017. These amounts have not been tax effected as the tax deductibility of these items has not been determined. |
ii. | Upon or shortly prior to Closing, pursuant to the terms of the Separation and Distribution Agreement and the Merger Agreement, HPE will engage in the transactions referenced in adjustment (d). |
iii. | Historical equity accounts of Seattle, consisting of HPE’s Parent company investment and accumulated other comprehensive income, have been eliminated in recording the Merger. |
iv. | Issuance of approximately 222.39 million Micro Focus ADSs, each representing one Micro Focus Share, in exchange for all Seattle Shares outstanding immediately prior to the Merger. This issue of shares falls within the provisions of section 612 of the Companies Act 2006 (‘merger relief’) as a result of which the company is precluded from recording share premium. The Company has chosen to record the excess of the fair value of the Seattle shares acquired over the aggregate nominal value of shares issued as a merger reserve. |
v. | The Micro Focus Return of Value of $500 million to the Micro Focus Shareholders prior to Closing. |
174
(f) | Impact to cash |
The estimated impact to cash is summarized as follows:
(In millions of U.S. dollars)
|
Change in cash
|
|
||
Return of Value
|
$
|
(500
|
)
|
(i)
|
Estimated transaction costs
|
|
(60
|
)
|
(ii)
|
Borrowings, net
|
|
3,278
|
|
(iii)
|
Seattle Payment to HPE
|
|
(2,500
|
)
|
(iv)
|
Cash transfer
|
|
67
|
|
(v)
|
Adjustment to cash and cash equivalents
|
$
|
285
|
|
|
i. | The Micro Focus Return of Value of $500 million to the Micro Focus Shareholders prior to Closing. |
ii. | Estimated total transaction and financing costs of $60 million, yet to be incurred by Micro Focus and Seattle as of April 30, 2017. |
iii. | Total incremental borrowings, net of debt issuance costs are $3,278 million. |
iv. | The Seattle Payment of $2.5 billion to be paid by Seattle to HPE in connection with the Contribution, which will be funded by the Seattle Term Loan Facility. |
v. | Transfer $67 million of cash to Seattle to meet the minimum cash requirements set forth in the Separation and Distribution Agreement. |
(g) | Income tax impact |
The estimated income tax impacts of the pre-tax adjustments that are reflected in the Pro Forma Statement of Comprehensive Income are calculated using an estimated blended statutory rate of 33.00%, which is based on preliminary assumptions related to the jurisdictions in which the income (expense) adjustments will be recorded. The blended statutory rate of the Enlarged Group following the Merger could be significantly different depending on post-Merger activities and geographical mix of profit before taxes.
Note 4. Pro forma earnings (loss) per share
Pro forma earnings (loss) per share (EPS) for the Pro Forma Statement of Comprehensive Income have been recalculated to show the impacts of the Merger after giving effect to the Micro Focus ADSs to be issued to Seattle shareholders and the reduction of Micro Focus Shares from the Share Consolidation, on a constant diluted and basic outstanding share basis, assuming Micro Focus Shares issued in connection with the Merger have been outstanding at the beginning of the period presented. Total pro forma shares outstanding for basic EPS and diluted EPS is assumed to be 435 million and 435 million, respectively, for the Pro Forma Statement of Comprehensive Income. Due to the pro forma condensed combined net loss for the year ended April 30, 2017, dilutive ordinary share equivalents were excluded from diluted weighted average ordinary shares outstanding as they would have been antidilutive.
|
For the twelve months ended
April 30, 2017 |
|||||
(In millions, except for per share data)
|
Historical
Micro Focus |
Pro forma
combined group |
||||
Net income (loss)
|
$
|
158
|
|
$
|
(175
|
)
|
Weighted average number of ordinary shares
|
|
229
|
|
|
435
|
|
Basic EPS
|
$
|
0.69
|
|
$
|
(0.40
|
)
|
Net income (loss)
|
$
|
158
|
|
$
|
(175
|
)
|
Weighted average number of ordinary shares (diluted)
|
|
237
|
|
|
435
|
|
Diluted EPS
|
$
|
0.67
|
|
$
|
(0.40
|
)
|
175
HISTORICAL PER SHARE DATA, MARKET PRICE AND DIVIDEND POLICIES
Comparative Historical and Pro Forma Per Share Data
The following table sets forth selected per share data for Micro Focus on a historical basis. It also includes unaudited pro forma combined per share data for Micro Focus, which combines the data of Micro Focus and Seattle on a pro forma basis giving effect to the Merger. This data does not give effect to any anticipated synergies, operating efficiencies or cost savings that may be associated with the Merger. This data also does not include any integration costs Micro Focus or Seattle may incur related to the Merger as part of combining their respective operations. This comparative historical and pro forma per share data is being provided for illustrative purposes only. Micro Focus and Seattle may have performed differently had the Merger and the other Transactions occurred prior to the periods or as of the date presented. You should not rely on the pro forma per share data presented as being indicative of the results that would have been achieved had Micro Focus and Seattle been combined during the periods or as of the date presented or of the future results or financial condition of Micro Focus or Seattle to be achieved following the consummation of the Merger and the other Transactions.
This data has been prepared in accordance with IFRS and should be read in conjunction with Micro Focus and Seattles historical financial statements and accompanying notes included elsewhere in this information statement/prospectus as well as the section entitled Unaudited Pro Forma Condensed Combined Financial Information. See Index to Financial Statements.
|
As of and for the
Year Ended April 30, 2017 |
||
Micro Focus Historical Per Share Data:
|
|
|
|
Net profit per basic ordinary share
|
$
|
0.69
|
|
Net profit per diluted ordinary share
|
|
0.67
|
|
Cash dividends per share
|
|
0.88
|
|
Book value per share
|
|
7.04
|
|
Micro Focus Unaudited Pro Forma Combined Per Share Data:
|
|
|
|
Net loss per basic ordinary share
|
$
|
(0.40
|
)
|
Net loss per diluted ordinary share
|
|
(0.40
|
)
|
Cash dividends per share
|
|
0.88
|
|
Book value per share(1)
|
|
17.66
|
|
(1) | Book value per share uses equity on a pro forma basis at April 30, 2017, divided by weighted average pro forma shares outstanding at April 30, 2017. |
Historical Market Prices, Recent Closing Prices and Dividend Data
Micro Focus Shares are quoted on the LSE under the symbol MCRO. HPE Shares are listed for trading on the NYSE under the symbol HPE. Historical market price data for Seattle has not been presented as HPE Software is currently wholly owned and operated by HPE and there is no established trading market in Seattle Shares, all of which are owned directly by HPE. Following the Distribution, Seattle Shares will be automatically converted into the right to receive Micro Focus ADSs representing Micro Focus Shares in connection with the Merger.
Following Closing and subject to the Enlarged Groups performance (and, in particular, Micro Focus being able to comply with the restrictions on paying dividends imposed by the Micro Focus Facilities), the Micro Focus Board intends to continue its stated dividend policy of paying an annual dividend that is approximately twice covered by Adjusted Earnings Per Share. In addition to certain other exceptions, the Micro Focus Facilities permit the payment of dividends provided that no event of default is continuing under such agreements and, taking into account such payment, the ratio of secured debt (net of free cash) of the Enlarged Group to its consolidated EBITDA (as defined in the New Micro Focus Facility Agreement) is less than 3.0:1. Until that financial metric is achieved, under the Micro Focus Facilities, Micro Focus will have access to the available amount basket of $100 million plus an additional basket for restricted payments of $250 million, providing $350 million of dividend payment capacity. See the sections entitled The Transactions—Micro Focus Return of Value and Historical Per Share Data, Market Price and Dividend Policies.
176
On September 6, 2016, the last trading day before the date of the Merger Agreement, the closing price of Micro Focus Shares on the LSE was £1,961.00. On , 2017, the last practicable trading day prior to the date of this information statement/prospectus, the closing price of Micro Focus Shares on the LSE was £ .
On September 6, 2016, the last trading day before the date of the Merger Agreement, the closing price of HPE Shares on the NYSE was $21.86. On , 2017, the last practicable trading day prior to the date of this information statement/prospectus, the closing price of HPE Shares on the NYSE was $ .
On , 2017, the last practicable trading day prior to the date of this information statement/prospectus, there were Micro Focus Shares outstanding and HPE Shares outstanding. As of such date, Micro Focus had holders of record of Micro Focus Shares and HPE had holders of record of HPE Shares.
The following tables set forth, for the periods indicated, the high and low sales prices per Micro Focus Share, as reported on the LSE, and HPE Share, as reported on the NYSE, as well as the dividends per share paid by Micro Focus and HPE to their respective shareholders for these periods. The quotations are as reported in published financial sources. The market prices of Micro Focus Shares and HPE Shares will fluctuate before the Merger is completed. You should obtain current market quotations from a newspaper, the Internet or your broker or banker.
|
Micro Focus Share Price
|
Dividends
|
|||||||
|
High
|
Low
|
|||||||
|
(in pence)
|
(in £)
|
|||||||
Fiscal year ended April 30, 2013
|
|
1,232.00
|
|
|
421.42
|
|
|
0.26
|
|
Fiscal year ended April 30, 2014
|
|
859.73
|
|
|
621.90
|
|
|
0.26
|
|
Fiscal year ended April 30, 2015
|
|
1,262.00
|
|
|
717.50
|
|
|
0.37
|
|
Fiscal year ended April 30, 2016
|
|
|
|
|
|
|
|
|
|
First quarter ended July 31, 2015
|
|
1,442.00
|
|
|
1,250.00
|
|
|
—
|
|
Second quarter ended October 31, 2015
|
|
1,399.00
|
|
|
1,155.00
|
|
|
0.21
|
|
Third quarter ended January 31, 2016
|
|
1,622.00
|
|
|
1,233.00
|
|
|
0.11
|
|
Fourth quarter ended April 30, 2016
|
|
1,618.00
|
|
|
1,295.00
|
|
|
—
|
|
Annual
|
|
1,622.00
|
|
|
1,155.00
|
|
|
0.32
|
|
Fiscal year ended April 30, 2017
|
|
|
|
|
|
|
|
|
|
First quarter ended July 31, 2016
|
|
1,985.00
|
|
|
1,408.00
|
|
|
—
|
|
Second quarter ended October 31, 2016
|
|
2,400.00
|
|
|
1,876.00
|
|
|
0.37
|
|
Third quarter ended January 31, 2017
|
|
2,266.00
|
|
|
1,944.00
|
|
|
0.28
|
|
Fourth quarter ended April 30, 2017
|
|
2,612.00
|
|
|
2,101.01
|
|
|
—
|
|
February 2017
|
|
2,285.00
|
|
|
2,103.00
|
|
|
—
|
|
March 2017
|
|
2,281.00
|
|
|
2,133.00
|
|
|
—
|
|
April 2017
|
|
2,612.00
|
|
|
2,290.48
|
|
|
—
|
|
Annual
|
|
2,612.00
|
|
|
1,408.00
|
|
|
0.65
|
|
Fiscal year ending October 31, 2018
|
|
|
|
|
|
|
|
|
|
First quarter ended July 31, 2017
|
|
2,675.00
|
|
|
1,993.00
|
|
|
|
|
May 2017
|
|
2,675.00
|
|
|
2,292.00
|
|
|
—
|
|
June 2017
|
|
2,510.00
|
|
|
2,239.00
|
|
|
—
|
|
July 2017
|
|
2,301.00
|
|
|
1,993.00
|
|
|
—
|
|
August 2017 (through August 2, 2017)
|
|
2,274.00
|
|
|
2,176.00
|
|
|
—
|
|
177
|
HPE Share Price
|
Dividends
|
||||||||||
|
High
|
Low
|
Declared
|
Paid
|
||||||||
Fiscal year ended October 31, 2016:(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter ended January 31, 2016
|
$
|
15.88
|
|
$
|
11.63
|
|
$
|
0.110
|
|
$
|
0.055
|
|
Second quarter ended April 30, 2016
|
|
18.55
|
|
|
12.02
|
|
|
0.055
|
|
|
0.055
|
|
Third quarter ended July 31, 2016
|
|
21.90
|
|
|
15.38
|
|
|
0.055
|
|
|
0.055
|
|
Fourth quarter ended October 31, 2016
|
|
23.53
|
|
|
20.63
|
|
|
—
|
|
|
—
|
|
Fiscal year ending October 31, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
First quarter ended January 31, 2017
|
$
|
24.79
|
|
$
|
21.52
|
|
$
|
0.13
|
|
$
|
0.12
|
|
Second quarter ended April 30, 2017(2)
|
|
24.86
|
|
|
17.31
|
|
|
0.065
|
|
|
0.065
|
|
Third quarter ended July 31, 2017
|
|
19.11
|
|
|
16.48
|
|
|
—
|
|
|
—
|
|
(1) | Prior to November 1, 2015, which was the first day of HPE’s 2016 fiscal year, the HPE business was owned and operated as part of Hewlett-Packard Company, and no HPE Shares were publicly traded. |
(2) | On April 1, 2017, HPE completed the previously announced spinoff and merger of its enterprise services business with CSC. |
178
Below is a step-by-step summary description of the sequence of material events relating to the Transactions, which should be read in conjunction with the sections entitled The Merger Agreement and The Separation and Distribution Agreement.
Step 1 Separation of HPE Software
Pursuant to the Contribution and prior to the Distribution and the Merger, HPE will transfer HPE Software to Seattle pursuant to the terms and conditions set forth in the Separation and Distribution Agreement.
Step 2 Issuance of Seattle Shares to HPE, Incurrence of Seattle Debt and the Seattle Cash Payment
In connection with the transfer of HPE Software to Seattle in the Contribution in Step 1, Seattle will issue to HPE additional Seattle Shares and make the Seattle Payment to HPE. Seattle Borrower will incur new indebtedness in an aggregate principal amount of $2.6 billion and Seattle will use $2.5 billion of the proceeds of this loan to pay to HPE the Seattle Payment in connection with the transfer of HPE Software to Seattle. Seattle will use the balance to pay certain fees and expenses related to such indebtedness and for general corporate purposes.
Step 3 Incurrence of Micro Focus Debt
Prior to Closing, the Micro Focus Borrower will incur new indebtedness in the form of (i) the $2.4 billion Micro Focus Term Loan Facilities, including $1,515 million of Facility B-2 repriced, amended and extended pursuant to an amendment to the Existing Facilities Agreement and $885 million of term loans incurred by the Micro Focus Escrow Borrower pursuant to an escrow credit agreement which term loans will automatically be deemed issued under the Micro Focus Term Loan Facilities upon the merger of the Micro Focus Escrow Borrower with and into the Micro Focus Borrower prior to the Merger and (ii) the $500 million Revolving Credit Facility. The proceeds received by the Micro Focus Borrower will be used to fund (i) the Micro Focus Return of Value of an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs or proceeds) to the Micro Focus Shareholders, (ii) the partial repayment of the indebtedness pursuant to the Existing Facilities Agreement, dated as of November 20, 2014, by and among Micro Focus, Micro Focus Group Limited, the Borrower, the lenders from time to time party thereto, and Bank of America, N.A., as administrative agent, collateral agent and swingline lender, (iii) fees and expenses incurred in connection with the Transactions and (iv) working capital and general corporate purposes of Micro Focus and its subsidiaries.
Step 4 Distribution
HPE will distribute all of the outstanding Seattle Shares on a pro rata basis to HPE Stockholders as of the close of business on the Distribution Record Date pursuant to the terms and conditions set forth in the Separation and Distribution Agreement. The Distribution is expected to occur on September 1, 2017.
Step 5 Merger
After the Distribution, Merger Sub will merge with and into Seattle, whereby the separate corporate existence of Merger Sub will cease and Seattle will continue as the surviving corporation and as an indirect wholly owned subsidiary of Micro Focus. In the Merger, each Seattle Share will be automatically converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement, each representing one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE, as described in the section entitled The Merger Agreement—Merger Consideration. The Micro Focus Shares underlying the Micro Focus ADSs issued in connection with the Merger (sometimes referred to herein as the Consideration Shares) will be issued directly to the Depositary. Immediately following Closing, pre-Merger HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares, and the balance of the then-outstanding Micro Focus Shares will be held by pre-Merger Micro Focus Shareholders.
After completion of all of the steps described above, Micro Focus will own and operate HPE Software through Seattle, which will be a direct wholly owned subsidiary of Holdings, and an indirect wholly owned subsidiary of Micro Focus. Micro Focus will also continue to own and operate its current businesses. Seattle will continue as
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the obligor under the new indebtedness to be incurred by Seattle in connection with the Transactions which, after Closing, is expected to be guaranteed by Micro Focus. We have applied to list Micro Focus ADSs on the NYSE under the symbol MFGP, and Micro Focus Shares will remain listed on the LSE after Closing under the symbol MCRO.
Background of the Separation, the Distribution and the Merger
In 2014, Hewlett-Packard Company announced plans to separate into two new publicly traded companies, HPE and HP Inc. The separation was completed on November 1, 2015.
Following completion of the separation of HPE from Hewlett-Packard Company (now HP Inc.) on November 1, 2015, the HPE Board periodically, and in the ordinary course, evaluates and considers a variety of financial and strategic opportunities to enhance stockholder value as part of HPEs long-term business plans. As part of this process, at a meeting of the HPE Board on January 27, 2016, the HPE Board reviewed and discussed the strategic direction, performance and prospects of HPE, including potential strategic alternatives and strategic opportunities. Among other strategic alternatives, the HPE Board and HPEs management discussed a potential separation and/or potential merger of certain non-core software assets (i.e., HPE Software) with a third party. The HPE Board and HPEs management also reviewed the potential divestiture of HPEs Enterprise Services business, including through a spin-off, a merger transaction, and a spin-off combined with a merger. In connection with this review, the HPE Board instructed management to explore potential strategic transactions involving the Enterprise Services business. This exploration ultimately led to HPEs entry into a definitive agreement with Computer Sciences Corporation (CSC) on May 24, 2016 to combine HPEs Enterprise Services business with CSCs business (the Everett Transaction). The background of the Everett Transaction is described in more detail in the proxy statement/prospectus-information statement filed by Everett SpinCo, Inc. with the SEC on February 27, 2017 (File No. 333-214393). Everett SpinCo, Inc. was formed by HPE to hold its Enterprise Services business in connection with the Everett Transaction and has since been renamed DXC Technology Company in connection with the completion of the Everett Transaction on April 1, 2017.
Micro Focus management and the Micro Focus Board also regularly consider potential strategic transactions, including potential acquisitions of and mergers with other software businesses.
In March 2016, the HPE Board, as part of its ongoing, comprehensive review of value creation opportunities across HPEs businesses, determined that it was in the best interests of HPE and HPE Stockholders to prioritize the Everett Transaction in order to ensure its successful execution.
In April 2016, Micro Focus management discussed a transaction involving HPE Software as a potential transaction Micro Focus may pursue to enhance shareholder value. On April 17, 2016 Micro Focus and HPE executed a mutual non-disclosure agreement pursuant to which each party agreed to keep confidential certain information provided by the other party as part of their consideration of a potential strategic transaction.
During the spring and early summer of 2016, HPE separately received expressions of interest from Micro Focus and four financial sponsors (including Financial Sponsor A, Financial Sponsor B and Financial Sponsor C, which are discussed further below) regarding a potential transaction involving HPE Software. During this period, HPE entered into nondisclosure agreements with the four interested financial sponsors. HPEs management held initial meetings with Micro Focus on April 21, 2016 and with three of the four financial sponsors on April 25, 2016, April 27, 2016 and May 5, 2016, respectively. Following these meetings, in mid-May 2016, each of these parties was informed that HPE would not be in a position to engage in discussions regarding a transaction involving HPE Software earlier than mid to late summer 2016. HPE's decision to defer discussions regarding a transaction involving HPE Software was driven by HPE's desire to assess the reaction of HPE Stockholders, the investor community more generally, and other stakeholders including customers and partners, to the announcement of the Everett Transaction, as well as to provide sufficient time for HPE to assess its internal capabilities to successfully execute another large transaction following the relatively recent separation of HPE from HP Inc. and in parallel with the Everett Transaction.
On May 23, 2016, the Micro Focus Board held a meeting attended by Micro Focus management, during which the potential transaction involving HPE Software was discussed, including a proposed non-binding offer to HPE and a potential timetable for the transaction. In evaluating the transaction, the Micro Focus Board considered whether such transaction would be aligned with Micro Focus strategy and consistent with the scale and profile of acquisitions that it has discussed regularly with Micro Focus Shareholders. At the meeting, the Micro Focus Board approved sending a non-binding offer letter to HPE.
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Following the public announcement of the Everett Transaction in late May 2016, investors in HPE and CSC reacted favorably, which HPE believes represented positive investor reaction to the proposed synergies and enhanced value of the combined company to be created by the transaction for both HPE Stockholders and CSC stockholders. Customer and employee reaction to the proposed Everett Transaction was also generally positive. In this context, during the summer of 2016, the HPE Board continued to consider possible strategic opportunities involving HPE Software.
On June 17, 2016, Micro Focus submitted a preliminary indication of interest proposing a spin-merge transaction that valued HPE Software at approximately $7.4 billion, consisting of a majority ownership interest in the combined company for HPE Stockholders valued at approximately $5.4 billion, plus a $2.0 billion pre-closing cash payment to be paid to HPE Stockholders, which would be funded by the incurrence of new indebtedness by HPE Software.
During mid-to-late June 2016, three financial sponsors (Financial Sponsor A, Financial Sponsor B and Financial Sponsor C) each submitted a preliminary, non-binding indication of interest proposing a cash acquisition of HPE Software. These preliminary indications of interest valued HPE Software at or in the range of $7.5 billion to $8.5 billion, and each such proposal contemplated the retention of a minority equity interest in HPE Software by HPE (although Financial Sponsor B later indicated that its proposal was not contingent on HPEs retention of such a minority interest). The fourth financial sponsor that had initially expressed interest regarding a potential transaction involving HPE Software and entered into a nondisclosure agreement with HPE informed HPE that it no longer intended to pursue a potential transaction upon learning the process would be competitive. Each of the transactions proposed by Financial Sponsor A, Financial Sponsor B and Financial Sponsor C would be a taxable transaction to HPE for U.S. federal income tax purposes, which would substantially lower the net proceeds of such a transaction to HPE and the HPE Stockholders, and would not permit HPE Stockholders to participate in the potential growth of HPE Software to the same extent as the proposed spin-merge transaction with Micro Focus.
On June 22, 2016, at a regularly scheduled meeting, the HPE Board, as part of its review of the ongoing exploration of a potential transaction involving HPE Software, authorized HPEs management and HPEs financial and legal advisors to engage in discussions with a group of potential transaction counterparties comprised of software companies and financial sponsors, including Micro Focus, Financial Sponsor A, Financial Sponsor B and Financial Sponsor C. As part of its review of the preliminary, non-binding indications of interest that had been received, the HPE Board considered, among other things, an indicative valuation of HPE Software prepared by HPE management in a hypothetical scenario in which HPE Software was spun off from HPE to HPE Stockholders on a standalone basis (i.e., without combining HPE Software with another company). This indicative valuation, which did not include the value of potential synergies believed to be available in a combination of HPE Software with another software business, was a reference point considered by the HPE Board in its assessment of the relative value of the preliminary, non-binding indications of interest received as of that time, but the HPE Board did not independently consider the merits of a standalone spinoff of HPE Software because it had determined that HPE Software lacked the scale to be successful in the software business on a standalone basis and would be more likely to succeed with the right partner. In addition to compelling economic value to HPE and the HPE Stockholders (including the ability of HPE Stockholders to continue to own a portion of and benefit from the potential growth of HPE Software), the HPE Board directed management that a potential transaction should be capable of a prompt announcement and entail a very high probability of closing.
During late June and July 2016, pursuant to the direction of the HPE Board, members of HPEs management contacted each of Micro Focus, two other software companies (Company A and Company B), Financial Sponsor A, Financial Sponsor B, Financial Sponsor C and a fourth financial sponsor (Financial Sponsor D) to gauge their respective levels of interest in, and ability to offer compelling value pursuant to, a potential strategic transaction involving HPE Software. During this time, HPE entered into additional nondisclosure agreements with Company A, Company B and Financial Sponsor D and provided access to a virtual data room containing certain confidential information regarding HPE Software to Micro Focus, Company A, Company B, Financial Sponsor A, Financial Sponsor B and Financial Sponsor C.
During late June and July 2016, members of HPEs management held separate in-person management presentations and due diligence sessions regarding HPE Software with representatives of Micro Focus, Financial Sponsor A, Financial Sponsor B and Financial Sponsor C. Financial Sponsor D indicated that after initial review
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of certain due diligence information, it was likely to propose a cash acquisition of HPE Software at a valuation range of $7.0 to $8.0 billion. However, on July 21, 2016, Financial Sponsor D indicated to Goldman Sachs that it no longer intended to pursue a potential transaction given valuation and timing expectations.
During mid-July 2016, representatives of HPE, Goldman Sachs & Co., HPEs financial advisor (Goldman Sachs), and Wachtell, Lipton, Rosen & Katz, HPEs U.S. legal counsel (Wachtell Lipton), and representatives of Micro Focus, J.P. Morgan Cazenove, Micro Focus financial advisor, and Kirkland & Ellis LLP, Micro Focus U.S. legal counsel (K&E), negotiated the terms of a preliminary indicative term sheet with respect to a potential spin-merge transaction, pursuant to which (i) HPE would transfer HPE Software to a wholly owned subsidiary, (ii) HPE would spin off or split off that subsidiary to HPE Stockholders and (iii) immediately thereafter that subsidiary would merge with a subsidiary of Micro Focus, with HPE Stockholders receiving equity interests representing at least 50.1% of the combined companys outstanding and fully diluted capital stock. In addition, prior to the separation of HPE Software from HPE, the parties agreed that HPE Software would make a cash payment of $2.5 billion to HPE, to be funded by newly incurred indebtedness of HPE Software. The indicative term sheet also contemplated that Micro Focus would be permitted to complete a pre-closing return of value to the Micro Focus Shareholders so long as net debt as a proportion of Facility EBITDA (as defined in Micro Focus annual report for its fiscal year 2016) would not exceed 3.3x prior to the closing of the merger with HPE Software. On July 22, 2016, Micro Focus submitted a revised preliminary, non-binding indication of interest regarding the proposed spin-merge transaction that increased the indicative value of its offer to combine its business with HPE Software to $8.3 billion, consisting of a majority ownership interest in the combined company for HPE Stockholders valued at $5.8 billion, plus a $2.5 billion pre-closing cash payment to be paid to HPE.
On July 27, 2016, the HPE Board reviewed with management and representatives of Goldman Sachs the status of discussions with the potential counterparties to a transaction involving HPE Software. At this meeting, the HPE Board also reviewed the relative benefits to HPE and the HPE Stockholders from structuring a potential transaction with Micro Focus as a Reverse Morris Trust (i.e., a spin-off followed by a merger), which was expected to be generally tax-free to HPE for U.S. federal income tax purposes, as compared to an all-cash sale of HPE Software to a third party, which would be taxable to HPE for U.S. federal income tax purposes. Based on this review, and in light of the compelling terms included in Micro Focus latest indication of interest, the synergies that would likely result from a combination of HPE Software with Micro Focus and the strength of the combined management team, in addition to the substantial progress that Micro Focus had made in its evaluation of HPE Software and the speed with which Micro Focus would be capable of negotiating definitive agreements and announcing a transaction, the HPE Board directed management and HPEs financial and legal advisors to prioritize discussions with Micro Focus while continuing to engage in discussions with other interested counterparties.
On July 29, 2016, HPEs management met with representatives of Company A, but following subsequent discussions regarding valuation and timing expectations, Company A informed HPE that it would not continue to pursue a potential transaction.
On August 1, 2016, Micro Focus submitted a final version of their final non-binding indication of interest which had been negotiated with HPEs management.
On August 9, 2016, HPEs management met with representatives of Company B. Thereafter, on August 24, 2016, Company B submitted a preliminary, non-binding indication of interest regarding a spin-merge transaction that was less favorable to HPE and the HPE Stockholders than the proposal submitted by Micro Focus. HPEs management informed Company B that continued discussions were unlikely to be productive at this time.
In late July and August 2016, HPE engaged in discussions with additional financial sponsors regarding a potential transaction involving HPE Software. Following these and subsequent discussions, these additional financial sponsors elected not to participate further in discussions regarding a potential transaction given timing expectations. These discussions were preliminary and high level in nature and did not advance beyond initial due diligence to the stage of discussing potential transaction structures but generally would have been taxable transactions to HPE.
On August 11, 2017, following the completion of additional due diligence, Financial Sponsor B and Financial Sponsor C both indicated that they no longer intended to pursue a potential transaction.
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On August 18, 2016, Financial Sponsor A submitted an updated non-binding indication of interest that was less favorable to HPE and the HPE Stockholders than the proposal offered by Micro Focus.
On August 19, 2016, the Micro Focus Board held a meeting attended by Micro Focus management, during which Mr. Loosemore reported to the Micro Focus Board the status of due diligence and discussions with HPE.
On August 22, 2016 Kevin Loosemore, Mike Phillips, Karen Slatford and Steve Schuckenbrock attended a meeting at the offices of Wachtell Lipton in New York and presented to a number of members of the HPE Board. The presentation explained Micro Focus business and financial strategy and the background to and Micro Focus rationale for the Transactions.
During August and early September 2016, HPE, Micro Focus and their respective legal advisors engaged in ongoing negotiations of various definitive transaction documents, including a merger agreement, separation agreement and various ancillary agreements. During this period, the parties exchanged various drafts of the relevant transaction documents and conducted telephone conferences to negotiate the terms of the various agreements, including, among other things (1) deal protection terms, such as the maximum termination fee that could become payable by Micro Focus under English law and the circumstances under which the termination fee would be payable, (2) the composition of the combined companys board of directors following the completion of the transaction, (3) the conditions that must be satisfied prior to the completion of the transaction and (4) ongoing commercial arrangements between the parties following closing. These terms were ultimately determined after extensive negotiations based on commercial considerations between the parties. During this period, on August 28, 2016, representatives of HPE, Goldman Sachs, Wachtell Lipton, Micro Focus and K&E also met at the offices of HPE in Palo Alto, California to discuss and finalize the terms of the proposed transaction and the anticipated timeframe for its announcement.
During the same period, the parties and their respective advisors engaged in mutual due diligence of Micro Focus business and HPE Software, as applicable. Micro Focus and HPE and their respective legal advisors also negotiated the terms of various financing arrangements for the transaction with various financial institutions during this period.
On September 2, 2016, the Audit Committee of the Micro Focus Board held a meeting attended by Micro Focus management to review the status of due diligence and negotiations regarding the potential transaction. Micro Focus financial, legal, tax and operational advisors also attended the meeting. During the meeting, Micro Focus advisors reviewed with the Micro Focus Board the transaction structure, the due diligence status on legal, tax, financial and operational matters, and key terms of the draft transaction agreements, including the merger agreement, the separation and distribution agreement and ancillary agreements. The Audit Committee also reviewed the risks associated with the transaction. At the meeting, the Audit Committee concluded that the proposed transaction was in the best interest of Micro Focus and had the support of the Audit Committee.
On September 5, 2016, the Micro Focus Board held a meeting attended by Micro Focus management to discuss the status of draft transaction agreements and planned public announcements relating to the proposed transaction. During the meeting, the Micro Focus Board reviewed and discussed with Micro Focus management the results of ongoing due diligence and the latest terms of the transaction documents. The Micro Focus Board also received updates on the contemplated financing and reviewed the required regulatory approvals, public announcements and directors verification notes relating to the transaction. Following discussion, the Micro Focus Board instructed members of senior management to proceed to finalize the definitive transaction documents with HPE based on the terms discussed with the Micro Focus Board. At the meeting, the Micro Focus Board also formed a special committee (the Micro Focus Committee) consisting of Messrs. Kevin Loosemore, Mike Phillips and Richard Atkins to oversee all the matters relating to the transaction and related financing matters, including the approval of the final transaction documents.
On September 6, 2016, the Micro Focus Committee held a meeting, attended by certain other Micro Focus directors, Travers Smith LLP and K&E, at which the Micro Focus Committee received updates on the transaction documents and related financing and reviewed public announcements for the transaction. At the conclusion of the meeting, the Micro Focus Committee unanimously approved the execution by Micro Focus of definitive transaction documents.
Also on September 6, 2016, the HPE Board held a meeting, at which it reviewed the status of negotiations with Micro Focus and the terms of the proposed transaction with, and received a detailed summary of the results of
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HPEs due diligence of Micro Focus from, HPEs management and advisors. Following discussion, HPEs management recommended that the HPE Board approve the proposed transaction with Micro Focus. Following discussion among the directors, the HPE Board unanimously determined that the Separation, the Distribution and the Merger are advisable and in the best interests of HPE and the HPE Stockholders, and approved, adopted and authorized HPEs management to enter into the Merger Agreement, the Separation and Distribution Agreement and the other agreements contemplated thereby. The transaction was thereafter announced on September 7, 2016.
Micro Focus Reasons for Engaging in the Transactions
The Micro Focus Board believes that segments of the infrastructure software market are consolidating and that successful companies in such markets will be those with outstanding operational efficiency and scale. The Transactions present a rare opportunity to achieve a significant increase in Micro Focus scale and breadth, with the potential to deliver enhanced Total Shareholder Returns consistent with Micro Focus stated objectives.
The Micro Focus Board has set out a clear objective of delivering consistent Total Shareholder Returns in excess of Micro Focus risk adjusted cost of capital, with an objective of achieving Total Shareholder Returns of 15% to 20% per annum over the long term. This objective has been exceeded over the period since Micro Focus listed on the LSE on May 12, 2005. Over the previous six financial years ended April 30, 2017, Micro Focus achieved an average Total Shareholder Return of 39.76% per annum, through a combination of increasing earnings per share, improving the consistency of Micro Focus financial performance, returning cash to shareholders, and selectively reinvesting cash flow from operations into acquisitions and into improving the quality of the Micro Focus Groups portfolio of products, solutions and commercial propositions.
The Micro Focus Board believes the Transactions will enhance Adjusted Earnings Per Share by April 30, 2019 and thereafter, with scope for further benefits as operational improvements are realized across the Enlarged Group.
The Micro Focus Board believes that the businesses of Micro Focus and HPE Software, which operate in largely adjacent and complementary product areas, share a number of important attributes:
• | both Micro Focus and HPE Software are well established enterprise software vendors operating at a global scale with a presence in all significant international markets; |
• | both Micro Focus and HPE Software hold a portfolio of software solutions organized into different product groups which address specific aspects of the infrastructure software requirements of a substantial installed base of large enterprise customers; and |
• | both Micro Focus’ and HPE Software’s respective primary revenue generating product portfolios are predominantly mature solution sets which are embedded within the IT infrastructures of large corporate customers. |
Micro Focus executive team has, over the previous five financial years ended April 30, 2017, proven adept at managing Micro Focus product portfolio to slow declining revenues and improving operating margins through a combination of customer centered innovation, invigorated product management, improved sales effectiveness and an alignment of employee and management incentives to shareholder returns and cash generation.
The Micro Focus Board believes the Transactions represent a substantial opportunity to:
• | create significantly greater scale and breadth of product portfolio covering largely adjacent areas of the software infrastructure market, thereby creating one of the world’s largest pure-play infrastructure software companies; |
• | add a substantial recurring revenue base to Micro Focus’ existing product portfolio, together with access to important new growth drivers and new revenue models; and |
• | accelerate operational effectiveness over the medium term, through the alignment of best practices between Micro Focus and HPE Software in areas such as product development, support, product management, account management, and sales force productivity, as well as achieving operational efficiencies where appropriate. |
Given the scale of the Enlarged Group, the Micro Focus Board believes that significant cost benefits will arise from reducing duplicated central costs, combining corporate support functions (where appropriate) and increasing efficiency across all functions.
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HPEs Reasons for the Separation, the Distribution and the Merger
As further discussed under —Background of the Separation, the Distribution and the Merger, the HPE Board and HPEs management periodically conduct reviews of HPEs portfolio of assets to evaluate HPEs current structure and composition, to determine whether changes might be advisable, and to look for attractive ways to add value for HPE Stockholders. As part of such a review, the HPE Board and HPEs management determined that separating HPE Software was in the best interests of HPE and HPE Stockholders. The HPE Board thus began the process that resulted in the execution of the Transaction Documents. The HPE Board believes that the Transactions will accomplish a number of important business objectives for HPE, as well as provide enhanced opportunities for the combined business of Micro Focus and HPE Software. These important business objectives include, among other things, the following:
• | the Transactions are expected to enable HPE to sharpen its focus and expand its leadership in building the vital end-to-end infrastructure solutions necessary for providing cloud and mobility services; |
• | the Transactions are expected to increase HPE’s management focus on secure, next-generation, software-defined infrastructure that leverages a portfolio of servers, storage, networking, converged infrastructure and software assets to help customers run their traditional IT better, while building a bridge to multi-cloud environments; |
• | the Transactions are expected to unlock faster growth, higher margins and more free cash flow at HPE; and |
• | the Transactions are expected to result in, among other things, improved operating efficiencies to enable HPE Software, combined with Micro Focus, to accelerate financial and operational performance. |
As part of its decision to approve the Transactions, the HPE Board recognized that HPE was likely to continue to face challenges in its maturing infrastructure software business as part of the general market shift to cloud computing and SaaS. The HPE Board believed that these challenges were exacerbated by HPE Software's lack of a separate general and administrative expense structure within HPE, scalability challenges (including in sales and marketing), and demands on HPE management from HPEs other businesses. The HPE Board believed that a combination of HPE Software with Micro Focus would help address these challenges by creating a more focused, nimble and scalable software business, particularly given Micro Focus's historical experience with and focus on effectively managing portfolios of mature infrastructure software products.
In reaching its decision to approve the Transactions, the HPE Board consulted with HPEs management and HPEs financial and legal advisors to consider the likely impact on HPE Stockholders, as well as a wide variety of additional factors in favor of the Transactions, including, among others, the following:
• | the potential value to HPE Stockholders of the Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares that they will own immediately following the Merger, including value resulting from: (1) the potential cost reductions attributable to efficiencies and synergies to be realized by combining HPE Software with Micro Focus and (2) the benefits of separating HPE Software from HPE’s other businesses; |
• | the extensive process undertaken by HPE to evaluate the strategic alternatives available to HPE with respect to HPE Software and the potential risks and benefits of such alternatives, including retaining HPE Software, effecting a standalone spin-off of HPE Software or engaging in a sale of HPE Software for cash to a financial sponsor or other third party (which would be a taxable transaction to HPE for U.S. federal income tax purposes); |
• | the receipt by HPE of the HPE Tax Opinion, substantially to the effect that, among other things, for U.S. federal income tax purposes, the Distribution, taken together with the Contribution, should qualify as a reorganization under Sections 368(a)(1)(D), 361 and 355 of the Code, upon which no income, gain or loss should be recognized by HPE or Seattle (except for certain items required to be recognized under Treasury Regulations regarding consolidated federal income tax returns), and the risk that the Distribution will not qualify for the intended tax treatment (of which there is no guarantee); and |
• | the other terms and conditions of the Merger Agreement, the Separation and Distribution Agreement and the other Transaction Documents, which are summarized elsewhere in this information statement/prospectus. |
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The HPE Board also considered certain countervailing factors during its deliberations that did not favor the Separation, the Distribution and the Merger, including, among others, the possibility that the anticipated benefits of the Separation and the Merger would fail to materialize.
The above discussion is not intended to be exhaustive. In view of the variety of factors and the amount of information considered, the HPE Board did not find it practicable to, and did not make specific assessments of, quantify or otherwise assign relative weights to, the specific factors considered in reaching its determination. In addition, the HPE Board did not undertake to make any specific determination as to whether any particular factor, or any aspect of any particular factor, was favorable or unfavorable to its ultimate determination, and individual members of the HPE Board may have given different weights to different factors.
HPE Shares
Following the Distribution, HPE Stockholders will continue to hold their HPE Shares, with the same rights as apply prior to the Distribution, except that HPE Shares following the Distribution will represent an interest in HPE that no longer reflects the ownership and operation of HPE Software. HPE Shares will continue to be publicly traded on the NYSE under the symbol HPE following the Distribution and the Merger. HPE Stockholders that hold HPE Shares as of the close of business on the Distribution Record Date (and who do not sell their entitlement thereto) will receive Seattle Shares in the Distribution, which will then be automatically converted into the right to receive Micro Focus ADSs representing Micro Focus Shares in the Merger.
It is currently expected that beginning on or about August 17, 2017, which is two business days before the Distribution Record Date, and continuing through the close of trading on August 31, 2017, which is the last business day prior to September 1, 2017, the expected Closing Date, there will be two markets in HPE Shares on the NYSE: a regular way market and an ex-distribution market.
If an HPE Stockholder sells HPE Shares in the regular way market under the ticker symbol HPE during this time period, that HPE Stockholder will be selling both his HPE Shares and the right (represented by a due-bill) to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing. HPE Stockholders should consult their brokers before selling their HPE Shares in the regular way market during this time period to be sure they understand the effect of the NYSE due-bill procedures. The due-bill process is not managed, operated or controlled by HPE, Seattle or Micro Focus.
If an HPE Stockholder sells HPE Shares in the ex-distribution market during this time period, that HPE Stockholder will be selling only his HPE Shares, and will retain the right to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing. It is currently expected that ex-distribution trades of HPE Shares will settle within three business days after the Closing Date and that if the Merger is not completed all trades in this ex-distribution market will be cancelled.
After the close of trading on August 31, 2017, HPE Shares will no longer trade in this ex-distribution market, and HPE Shares that are sold in the regular way market will no longer reflect the right to receive Seattle Shares that will be converted into the right to receive Micro Focus ADSs, and cash in lieu of fractional shares (if any), at Closing.
Seattle Shares
No trading market currently exists or will ever exist for Seattle Shares. All Seattle Shares are currently owned directly by HPE. All outstanding Seattle Shares will be distributed to HPE Stockholders in the Distribution. Immediately following the Distribution, Seattle Shares will be automatically converted into the right to receive Micro Focus ADSs in the Merger.
Micro Focus ADSs
We have applied to list the Micro Focus ADSs on the NYSE under the symbol MFGP. Trading of the Micro Focus ADSs is expected to begin on September 1, 2017.
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In addition, it is currently expected that beginning on or about August 17, 2017, which is two business days before the Distribution Record Date, and continuing through the close of trading on August 31, 2017, which is the last business day prior to September 1, 2017, the expected Closing Date, there will be a when issued market in Micro Focus ADSs on the NYSE.
The when issued market will be a market for the Micro Focus ADSs that will be issued to holders of Seattle Shares. If an HPE Stockholder sells Micro Focus ADSs in the when issued market during this time period, that HPE Stockholder will be required to deliver the number of Micro Focus ADSs so sold in settlement of the sale after Micro Focus ADSs are issued upon Closing. It is currently expected that when issued trades of Micro Focus ADSs will settle within three business days after the Closing Date and that if the Merger is not completed, all trades in this when issued market will be cancelled. After the close of trading on August 31, 2017, Micro Focus ADSs will no longer trade in this when issued market.
Micro Focus Shares
Micro Focus Shares began trading on the LSE under the symbol MCRO in 2005. In connection with the Merger, new Micro Focus Shares and the Consideration Shares will be admitted to the premium listing segment of the Official List and are expected to start trading on the LSEs main market on September 1, 2017.
Ownership and Management of Micro Focus Following the Transactions
Immediately following Closing, pre-Merger HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares and the balance of the then-outstanding Micro Focus Shares will be held by pre-Merger Micro Focus Shareholders.
For information regarding the Micro Focus Board and management following the Transactions, see the section entitled Board of Directors and Management of Micro Focus After the Merger.
To complete the Merger, Micro Focus and HPE must make and deliver certain filings, submissions and notices to obtain required authorizations, approvals, consents or expiration of waiting periods from certain antitrust and other regulatory authorities. The parties to the Merger Agreement have agreed to use reasonable best efforts to cause the expiration or termination of the applicable waiting periods under the HSR Act and the receipt of clearance from CFIUS and approvals under other applicable competition laws. Micro Focus and HPE are not currently aware of any material governmental filings, authorizations, approvals or consents that are required prior to Closing other than those described below. All required authorizations, approvals, consents and expiration of waiting periods have occurred or been obtained, as applicable.
The HSR Act
The Merger is conditioned on, among other things, the termination or expiration of the waiting period under the HSR Act. Micro Focus and HPE filed Notification and Report forms with the U.S. Federal Trade Commission (the FTC) and the Antitrust Division of the U.S. Department of Justice (the DOJ) on October 27, 2016 and the waiting period under the HSR Act was terminated on November 28, 2016.
The FTC, the DOJ, state attorneys general, and others may challenge the Merger on antitrust grounds after termination of the applicable waiting period. Accordingly, at any time before or after Closing, the FTC, the DOJ, or others could take action under the antitrust laws, including without limitation seeking to enjoin Closing or permitting Closing subject to regulatory concessions or conditions. Neither Micro Focus nor HPE believes that the Merger violates federal or state antitrust laws, but there can be no assurance that a challenge to the Merger on antitrust grounds will not be made or, if such a challenge is made, that it would not be successful.
European Union
Under Council Regulation (EC) No 139/2004 of January 20, 2004, on the control of concentrations between undertakings, the Merger cannot be completed until, among other things, notifications have been given and certain information has been provided to the European Commission, and the European Commission has granted clearance. The parties to the Merger Agreement submitted a Form CO to the European Commission on February 6, 2017 and the European Commission granted clearance on March 8, 2017.
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Turkey
The Merger is subject to antitrust review by the Turkish Competition Authority pursuant to the Law on Protection of Competition No. 4054 dated December 13, 1994. The Merger cannot be completed until certain filings have been made and the Turkish Competition Authority has granted clearance. The parties to the Merger Agreement filed a notification with the Turkish Competition Authority on February 15, 2017 and the Turkish Competition Authority granted clearance on March 13, 2017.
Russia
The Merger is subject to antitrust review by the Federal Antimonopoly Service of the Russian Federation (FAS) pursuant to the Russian Federal Law No. 135-FZ dated July 26, 2006 On Protection of Competition (as further amended). The Merger cannot be completed until filings are made and certain information is provided to the FAS and the FAS has granted clearance. The parties to the Merger Agreement filed a notification with the FAS on February 14, 2017 and the FAS granted clearance on March 16, 2017.
South Africa
The Merger is subject to antitrust review by the Competition Commission and Competition Tribunal pursuant to the Competition Act 89 of 1998, as amended and the regulations promulgated pursuant to that Act. Under that Act, the Merger cannot be completed until notifications have been given and the Competition Commission has granted clearance. The parties to the Merger Agreement filed a notification with the Competition Commission on February 10, 2017 and the Competition Commission granted clearance on April 11, 2017.
Brazil
The Merger is subject to antitrust review by the Administrative Council of Economic Defence (CADE) pursuant to Law No. 12,529 of 2011 and CADE resolutions thereunder. The Merger cannot be completed until the parties notify and provide certain information to CADE and CADE approves the Merger. The parties to the Merger Agreement filed a notification with CADE on February 7, 2017 and CADE granted clearance on April 3, 2017.
CFIUS
Section 721 of the Defense Production Act of 1950, as amended by Section 5021 of the Omnibus Trade and Competitiveness Act of 1988 and subsequent amendments (the DPA), as well as related Executive Orders and regulations, authorize the President of the United States or CFIUS to review transactions which could result in control of a U.S. business by a foreign person. Under the DPA and Executive Order 13456, the Secretary of the Treasury acts through CFIUS to coordinate review of certain covered transactions that are voluntarily submitted to CFIUS or that are unilaterally reviewed by CFIUS. In general, CFIUS review of a covered transaction occurs in an initial 30 day review period that may be extended by CFIUS for an additional 45 day investigation period, which may be further extended in the discretion of CFIUS by asking the parties to withdraw and refile the relevant transaction notice to allow CFIUS additional time to review. At the close of its review or investigation, CFIUS may (i) decline to take any action relative to the covered transaction; (ii) impose mitigation terms to resolve any national security concerns with the covered transaction; or (iii) send a report to the President recommending that the transaction be suspended or prohibited, or providing notice to the President that CFIUS cannot agree on a recommendation relative to the covered transaction. The President has 15 days under the DPA to act on the CFIUS report.
If CFIUS determines that a transaction presents national security concerns, it can impose measures to mitigate such concerns or recommend that the President of the United States block or unwind a transaction. Parties to transactions subject to CFIUS jurisdiction may voluntarily notify CFIUS of their proposed transactions in order to obtain CFIUS approval. CFIUS may also initiate a review of any transaction within its jurisdiction. On January 18, 2017, the parties to the Merger Agreement submitted a draft joint voluntary notice with CFIUS. On February 10, 2017, the parties submitted the final joint voluntary notice with CFIUS. On March 15, 2017, CFIUS provided notice to the parties that the transaction was proceeding to a second-stage, 45-day investigation, which was completed on May 1, 2017. CFIUS approved the Transactions on May 1, 2017.
IFRS 3 Business Combinations requires the use of acquisition accounting for business combinations. In applying acquisition accounting, it is necessary to identify both the accounting acquiree and the accounting acquiror. In a
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business combination effected through an exchange of equity interests, such as the Merger, the entity that issues the interests (Micro Focus in this case) is generally the acquiring entity. In identifying the acquiring entity in a combination effected through an exchange of equity interests, however, all pertinent facts and circumstances must be considered, including the following:
• | The relative voting interests in the combined entity after the combination. In accordance with the exchange ratio agreed to in the Merger Agreement, the HPE Stockholders as of the close of business on the Distribution Record Date will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. |
• | The composition of the governing body of the combined entity. At Closing, it is expected that the Micro Focus Board will consist of, at a minimum, the current Micro Focus Executive Chairman and Chief Financial Officer, Chris Hsu as Chief Executive Officer, Nils Brauckmann as Chief Executive Officer of SUSE, one director designated by HPE as a Non-Executive Director and five independent Non-Executive Directors, of which three will be nominated by Micro Focus and two will be HPE Nominated Directors. An additional independent HPE Nominated Director will be appointed following Closing. All proposed director appointments must be approved by the Nomination Committee and will be subject to election by the Micro Focus Shareholders on an annual basis by a simple majority vote. |
• | The composition of the senior management of the combined entity. Kevin Loosemore and Mike Phillips will continue as Executive Chairman and Chief Financial Officer, respectively, of the Enlarged Group following Closing. Chris Hsu (currently Executive Vice President and General Manager of HPE Software as well as Chief Operating Officer at HPE) will become Chief Executive Officer of the Enlarged Group at Closing, Stephen Murdoch (the current Chief Executive Officer of Micro Focus) will become the Chief Operating Officer at Closing. Nils Brauckmann will continue as Chief Executive Officer of SUSE following Closing. |
Micro Focus management has determined that Micro Focus represents the accounting acquirer in this combination based on analysis of the facts and circumstances outlined above. Micro Focus will apply acquisition accounting to the acquired assets and assumed liabilities of Seattle upon consummation of the Merger. Upon completion of the Transactions, the historical financial statements will reflect only the assets and liabilities of Micro Focus.
No Dissenters Rights or Rights of Appraisal
Neither Micro Focus Shareholders nor HPE Stockholders will be entitled to exercise appraisal or dissenters rights under the Companies Act 2006 or the DGCL, in connection with the Merger.
The Micro Focus Return of Value will be an aggregate principal amount in sterling equivalent to $500 million (inclusive of any currency hedging costs or proceeds) and will be implemented by way of the issuance and subsequent redemption and cancellation of the B Shares pursuant to U.K. law. The exchange rate to be used for the Micro Focus Return of Value will be determined by the Micro Focus Board in due course having regard to the then prevailing exchange rate as shown by Bloomberg at the time of determination. If Micro Focus announces the sterling equivalent amount of the Micro Focus Return of Value prior to the date of its implementation, it will enter into suitable hedging or economically similar arrangements which ensure that the aggregate cash cost to Micro Focus of the payment of the sterling amount of the Micro Focus Return of Value to Micro Focus Shareholders inclusive of any costs associated with such hedging or economically similar arrangements, based on the USD/GBP exchange rate at the time at which the Micro Focus Return of Value is implemented, will not exceed $500 million in the aggregate. An announcement giving details of the exchange rate adopted will be made by RIS once such determination has been made, with such announcement being made available on Micro Focus website at www.microfocus.com.
It is currently expected that completion of the Micro Focus Return of Value will occur on the business day prior to the Closing Date (except for the Share Capital Consolidation which is conditional upon the Micro Focus Return of Value and Admission). The Transactions are not conditional on completion of the Micro Focus Return of Value.
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Under the terms of the Micro Focus Return of Value, a Micro Focus Shareholder will receive one B Share for each existing Micro Focus Share held at the relevant record time, with each B Share being redeemed for its nominal value. Each such B Share will be cancelled following the redemption.
It is intended that the Micro Focus Return of Value will be funded by the Micro Focus Facilities.
After the Micro Focus Return of Value, and disregarding the dilutive effect of the Merger if and when completed, existing Micro Focus Shareholders will own the same proportion of Micro Focus as they did immediately prior to the implementation of the Micro Focus Return of Value, subject only to fractional roundings.
This structure has been chosen to complete the Micro Focus Return of Value because it treats all Micro Focus Shareholders equally relative to the size of their existing shareholdings in Micro Focus.
The Consideration Shares shall not rank for (i.e., will not be entitled to receive) the Micro Focus Return of Value as they will be issued after the record date for the Micro Focus Return of Value.
In connection with the Micro Focus Return of Value, Micro Focus will also undertake the Share Capital Consolidation pursuant to U.K. law. The purpose of the Share Capital Consolidation is to seek to ensure that the market price of Micro Focus Shares is not materially affected by the implementation of the Micro Focus Return of Value.
Under the proposed Share Capital Consolidation, the existing Micro Focus Shares in issue at the record time will be consolidated, subdivided and redesignated so that Micro Focus Shareholders will receive a fraction of a new Micro Focus Share for each existing Micro Focus Share held at the record time. As the nominal value of a new Micro Focus Share will be the same as the nominal value of an existing Micro Focus Share, the Share Capital Consolidation will also result in Micro Focus Shareholders receiving an entitlement to a fraction of a Deferred Share for each existing Micro Focus Share held to ensure that the Share Capital Consolidation does not result in an unlawful reduction of capital.
The consolidation ratio for the Share Capital Consolidation to be used in connection with the Micro Focus Return of Value will be determined by the Micro Focus Board not later than three business days prior to Admission. An announcement giving details of the consolidation ratio for the Share Capital Consolidation will be made by RIS once a determination has been made, with such announcement being made available on Micro Focus website at www.microfocus.com.
The effect of the Share Capital Consolidation will be to reduce the number of Micro Focus Shares in issue to reflect the Micro Focus Return of Value. However, each Micro Focus Shareholder will own the same proportion of Micro Focus as they did beforehand, subject to fractional entitlements and disregarding the dilutive impact of the Merger.
The Share Capital Consolidation will also reduce the number of Consideration Shares to be issued to holders of Seattle Shares in the form of Micro Focus ADSs at Closing. However, former holders of Seattle Shares will still own Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares immediately following Closing.
The Share Capital Consolidation is conditional upon Admission. The new Micro Focus Shares will, subject to Admission, be traded on the LSEs main market for listed securities and will be equivalent in all material respects to the existing Micro Focus Shares.
Information Relating to the B Shares and the Deferred Shares
None of the B Shares to be issued pursuant to the Micro Focus Return of Value or the Deferred Shares which will arise in connection with the Share Capital Consolidation will be admitted to the premium segment of the Official List or to trading on the LSEs main market for listed securities, nor will any of them be listed or admitted to trading on any other recognized securities exchange. The B Shares and the Deferred Shares will have limited rights as set forth in the Micro Focus Articles.
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The following is a summary of the material provisions of the Merger Agreement. The summary is qualified in its entirety by the Merger Agreement, which is included as an exhibit to the registration statements of which this information statement/prospectus forms a part and is incorporated herein by reference. See the section entitled Where You Can Find Additional Information.
Micro Focus Shareholders and HPE Stockholders are urged to read the Merger Agreement in its entirety. This summary of the Merger Agreement has been included to provide information regarding its terms. The rights and obligations of the parties are governed by the express terms of the Merger Agreement and not by this summary or any other information included in this information statement/prospectus. This summary is not intended to provide any other factual information about Micro Focus, Holdings, Merger Sub, HPE or Seattle. Information about Micro Focus, Holdings, Merger Sub, HPE and Seattle can be found elsewhere in this information statement/prospectus and in the documents incorporated by reference into this information statement/prospectus.
The Merger Agreement contains representations and warranties of Micro Focus, Holdings and Merger Sub that are solely for the benefit of HPE and Seattle and representations and warranties of HPE that are solely for the benefit of Micro Focus, Holdings and Merger Sub. The representations and warranties in the Merger Agreement were made solely for the benefit of the parties to the Merger Agreement and were used for the purpose of allocating risk among the respective parties. This summary and the Merger Agreement are included with this information statement/prospectus only to provide investors with information regarding the terms of the Merger Agreement, and not to provide investors with any other factual information with respect to Micro Focus, HPE, Seattle, Holdings, Merger Sub or their respective subsidiaries or businesses. Investors should not rely on the representations and warranties or any descriptions thereof as characterizations of the actual state of facts or condition of Micro Focus, HPE, Seattle, Holdings, Merger Sub or their respective subsidiaries or businesses. Moreover, information concerning the subject matter of the representations and warranties may have changed after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in information about Micro Focus, HPE, Seattle, Holdings, Merger Sub or their respective subsidiaries or businesses made in this information statement/prospectus or other public disclosures.
Under the Merger Agreement and in accordance with the DGCL, at Closing, Merger Sub will merge with and into Seattle. As a result of the Merger, the separate corporate existence of Merger Sub will cease and Seattle will continue as the surviving corporation and an indirect wholly owned subsidiary of Micro Focus. In accordance with the DGCL, at Closing Seattle will succeed to and assume all the rights, powers and privileges and be subject to all of the obligations of Merger Sub. The certificate of incorporation and bylaws of Seattle as in effect immediately prior to the Merger will be amended and restated in their entirety to read as set forth in Exhibit B and Exhibit C, respectively, to the Merger Agreement and, as so amended and restated, will be the certificate of incorporation and bylaws of Seattle following Closing.
Under the terms of the Merger Agreement, Closing will take place on the third business day after all conditions precedent to the Merger (other than those, including the completion of the Separation and the Distribution in all material respects, that are to be satisfied at Closing) have been satisfied or, where permissible under applicable law, waived, or such other date and time as the parties to the Merger Agreement may mutually agree. The Closing is expected to occur on September 1, 2017. The conditions precedent are described below under —Conditions to the Merger. However, if the marketing period for the Debt Financing has not ended at the time that all of the conditions have been satisfied or validly waived (other than those conditions that are to be satisfied by action at Closing), then Closing shall occur instead on the date following the satisfaction or waiver of such conditions that is the earlier to occur of (a) any date before or during the marketing period as may be specified in writing by Micro Focus to HPE on no less than three business days prior notice and (b) one business day after the final day of the marketing period, unless another date, time or place is mutually agreed by Micro Focus and HPE.
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Subject to the satisfaction or waiver of the conditions to Closing, it is currently expected that Seattle and Merger Sub will file a certificate of merger with the Secretary of State of the State of Delaware to effect the Merger so that it becomes effective on Admission.
The Merger Agreement provides that, at Closing, each issued and outstanding Seattle Share (except for any such shares held as treasury stock or by Micro Focus, Holdings or Merger Sub, which will be cancelled) will be automatically converted into the right to receive a number of Micro Focus ADSs representing Micro Focus Shares equal to the exchange ratio multiplied by the ADS ratio, subject to adjustment as set forth in the Merger Agreement. The exchange ratio will be determined prior to Closing based on the number of Micro Focus Fully Diluted Shares, on the one hand, and the number of Seattle Shares, on the other hand, in each case outstanding immediately prior to Closing, such that HPE Stockholders (who will have received Seattle Shares in the Distribution prior to Closing) will own Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. As defined in the Merger Agreement, the exchange ratio equals the quotient of (a) the aggregate number of Micro Focus Fully Diluted Shares outstanding immediately prior to Closing multiplied by the quotient of 50.1% divided by 49.9%, divided by (b) the number of outstanding Seattle Shares immediately prior to Closing. For example, solely for illustrative purposes, assume there are 1,000 Micro Focus Fully Diluted Shares outstanding immediately prior to Closing and 2,000 Seattle Shares outstanding immediately prior to Closing. In order for HPE Stockholders to own Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing, Micro Focus must issue to holders of the outstanding Seattle Shares the Micro Focus ADSs representing a number of Micro Focus Shares equal to 1,000 multiplied by the quotient of 50.1% divided by 49.9%, or 1,004 Micro Focus Shares. The exchange ratio therefore equals the quotient of 1,004 Micro Focus Shares divided by 2,000 Seattle Shares, or 0.502004. With aggregate ownership of Micro Focus ADSs representing 1,004 Micro Focus Shares out of 2,004 Micro Focus Fully Diluted Shares outstanding, HPE Stockholders will hold Micro Focus ADSs representing 50.1% of the Micro Focus Fully Diluted Shares outstanding immediately following Closing. The ADS ratio is defined in the Merger Agreement as one unless otherwise mutually agreed to by Micro Focus and HPE.
As such, the Merger is expected to result in the HPE Stockholders as of the close of business on the Distribution Record Date of the Seattle Shares receiving Micro Focus ADSs representing an aggregate number of newly issued Micro Focus Shares equal to 50.1% of the Micro Focus Fully Diluted Shares immediately following Closing.
Pursuant to an adjustment provision in the Merger Agreement, in the event that the percentage of outstanding Micro Focus Shares to be received in the Merger by HPE Stockholders with respect to the Seattle Shares (which are Seattle Shares distributed in the Distribution with respect to HPE Shares that were not acquired directly or indirectly pursuant to a plan (or series of related transactions) which includes the Distribution (within the meaning of Section 355(e) of the Code)) would be less than 50.1% of all Micro Focus Shares outstanding immediately following Closing (determined before any adjustment pursuant to this adjustment provision), then at HPEs election, the exchange ratio will be increased so that that the number of Micro Focus Shares represented by the Micro Focus ADSs to be received in the Merger by HPE Stockholders with respect to such Seattle Shares represents 50.1% of the Micro Focus Shares outstanding immediately following Closing. If such an increase is necessary, then, in certain circumstances described in the Merger Agreement, the amount of the Seattle Payment distributed pursuant to the Separation and Distribution Agreement will be decreased.
No fractional Micro Focus ADSs will be issued pursuant to the Merger.
The value of the Consideration Shares and Micro Focus ADSs issued in the Merger, as well as cash in lieu of fractional shares (if any) paid in connection with the Merger will be reduced by any applicable tax withholding.
Distribution of Per Share Merger Consideration
Prior to Closing, Micro Focus will designate an exchange agent reasonably acceptable to HPE to act as the agent to distribute the Micro Focus ADSs to be issued in the Merger. At or substantially concurrently with Closing, Micro Focus will (i) allot and issue, or cause to be allotted and issued, to the Depositary, a number of Micro Focus Shares equal to the aggregate number of Micro Focus ADSs to be issued as Consideration Shares and (ii) deposit or cause to be deposited with the exchange agent, for the benefit of the holders of Seattle Shares, the receipts (or uncertificated book-entries, as applicable) representing such aggregate number of Micro Focus ADSs,
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and authorize the Depositary to issue the Micro Focus ADSs representing such Micro Focus Shares. At Closing, each issued and outstanding Seattle Share (except for any such shares held as treasury stock or by Micro Focus, Holdings or Merger Sub, which will be cancelled) will be automatically converted into the right to receive a number of Micro Focus ADSs as described above.
Immediately thereafter, the exchange agent will distribute to each HPE Stockholder entitled to receive Micro Focus ADSs in the Merger (in exchange for such stockholders Seattle Shares) receipts or book-entry authorizations representing the number of whole ADSs to which such stockholder is entitled. The exchange agent will also distribute to each HPE Stockholder entitled to receive Micro Focus ADSs in the Merger cash in lieu of any fractional Micro Focus ADSs to which such stockholder otherwise would have been entitled.
Treatment of HPE Equity Awards in the Merger
Under the terms of the Employee Matters Agreement, (i) HPE equity awards granted to HPE Software employees (as identified in accordance with the terms of the Employee Matters Agreement) after May 24, 2016 and prior to September 1, 2016 that remain outstanding and unvested as of immediately prior to Closing will be assumed by Micro Focus and converted into equivalent unvested awards relating to Micro Focus Shares and (ii) HPE will be solely responsible for the settlement of, and all other liabilities relating to, all other HPE equity awards held by the HPE Software employees (including all such awards that were outstanding as of May 24, 2016, the vesting of which will be accelerated on the Distribution Date, any such awards that otherwise vest prior to Closing and any such awards granted on or after September 1, 2016).
Distributions with respect to Seattle Shares after Closing
No dividends or other distributions payable with respect to the Micro Focus ADSs or the underlying Micro Focus Shares with a record date after Closing shall be paid to the former holders of Seattle Shares with respect to any Micro Focus ADSs that are not able to be distributed by the exchange agent promptly after Closing, whether due to a legal impediment to such distribution or otherwise. Subject to the effect of applicable laws, following the distribution of any such previously undistributed Micro Focus ADSs, there shall be paid to the record holder of such ADSs, without interest:
• | at the time of the distribution, to the extent not previously paid, the amount of cash payable in lieu of fractional Micro Focus ADSs to which such holder is entitled and the amount of dividends or other distributions with a record date after Closing and a payment date prior to the distribution of such Micro Focus ADSs payable with respect to such whole Micro Focus ADSs or the underlying Micro Focus Shares; and |
• | at the appropriate payment date therefor, the amount of dividends or other distributions with a record date after Closing but prior to the distribution of such Micro Focus ADSs and with a payment date subsequent to the distribution of such Micro Focus ADSs payable with respect to such whole Micro Focus ADSs or the underlying Micro Focus Shares. |
Termination of Distribution Fund
Any portion of the Micro Focus ADSs or cash made available to the exchange agent that remains undistributed to the former holders of Seattle Shares on the one-year anniversary of Closing shall be delivered to Micro Focus, and any former holders of Seattle Shares who have not received Micro Focus ADSs must thereafter look only to Micro Focus for payment of their claim for Micro Focus ADSs and any dividends, distributions or cash in lieu of fractional Micro Focus ADSs with respect to Micro Focus Shares (subject to any applicable abandoned property, escheat or similar law).
Post-Closing Micro Focus Board of Directors
The Merger Agreement provides that Micro Focus shall cause the Micro Focus Board to take all action necessary (including, subject to the Micro Focus Boards fiduciary duties, recommending the election of such persons to Micro Focus Shareholders) such that, from Closing until the second annual general meeting of Micro Focus Shareholders that occurs after Closing, (i) Mr. Kevin Loosemore, Mr. Mike Phillips and one new Non-Executive Director who is an HPE Nominated Director and a serving executive of HPE are appointed to the Micro Focus Board and (ii) one-half of the Micro Focus Boards Non-Executive Directors who qualify as independent under the U.K. Corporate Governance Code (as amended) are HPE Nominated Directors.
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The committee assignments of the Micro Focus Board from and after Closing will be determined by the Nomination Committee. Each committee will include an equal number of directors designated by each of HPE and Micro Focus at least until the second annual general meeting of Micro Focus Shareholders that occurs after Closing, subject to the requirements of the U.K. Corporate Governance Code (as amended).
Under the terms of the Merger Agreement, Micro Focus was required, on the second business day following the date upon which the U.K. Circular was approved and stamped by the U.K. Listing Authority, to publish a notice of general meeting of Micro Focus to call, give notice of and convene a general meeting of Micro Focus Shareholders for the purpose of approving the Merger, including the allotment of the Micro Focus Shares underlying the Micro Focus ADSs to be issued pursuant to the Merger and approving any required changes to the Micro Focus Articles in connection with the foregoing. Micro Focus was required to use its reasonable best efforts to solicit proxies from Micro Focus Shareholders in favor of the approval of the above matters and to take all other action necessary or advisable to secure all such approvals by Micro Focus Shareholders. Micro Focus Shareholders approved all of the Resolutions at the Micro Focus General Meeting held on May 26, 2017.
Representations and Warranties
In the Merger Agreement, Micro Focus, Holdings and Merger Sub have made representations and warranties to HPE and Seattle, and HPE has made representations and warranties to Micro Focus, Holdings and Merger Sub relating to HPE and Seattle, in each case, as of the date of the Merger Agreement, which representations and warranties will also be made, subject to certain materiality, material adverse effect, knowledge and other qualifications, as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which are made only as of such specified date), as described below. These representations and warranties relate to, among other things:
• | due organization, good standing and qualification; |
• | authority to enter into the Merger Agreement (and other Transaction Documents); |
• | absence of conflicts with or violations of governance documents, other obligations or laws; |
• | governmental approvals; |
• | capital structure; |
• | financial statements and the absence of undisclosed material liabilities; |
• | absence of investigations or litigation; |
• | compliance with applicable laws; |
• | internal controls over financial reporting; |
• | material contracts; |
• | government contracts; |
• | employee benefit matters and labor matters; |
• | tax matters; |
• | payment of fees to brokers or finders in connection with the Transactions; |
• | insurance; |
• | permits; |
• | interests in real property; |
• | intellectual property matters; |
• | environmental matters; |
• | absence of certain changes or events; |
• | affiliate matters; |
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• | accuracy of information supplied for use in this information statement/prospectus and the registration statements to be filed by Micro Focus with respect to the Merger and Seattle with respect to the Distribution; |
• | certain approvals by the relevant boards of directors; and |
• | absence of ownership of any capital stock of Micro Focus, in the case of HPE and Seattle, or of the capital stock of HPE or Seattle, in the case of Micro Focus, Holdings and Merger Sub. |
Micro Focus has also made representations and warranties to HPE and Seattle relating to the Debt Financing, the opinion of Micro Focus financial advisor and the required vote of Micro Focus Shareholders to effect the transactions contemplated by the Merger Agreement (including the Merger). HPE has also made representations and warranties to Micro Focus, Holdings and Merger Sub relating to the sufficiency of the assets to be transferred to Seattle in connection with the Separation.
Many of the representations and warranties contained in the Merger Agreement are subject to a material adverse effect standard (that is, they will not be deemed to be untrue or incorrect unless their failure to be true or correct, individually or in the aggregate, may, as the case may be, have a material adverse effect on Micro Focus, HPE or Seattle, as applicable), knowledge qualifications, or both, and none of the representations and warranties will survive Closing. The Merger Agreement does not contain any post-Closing indemnification obligations with respect to breaches of these representations and warranties.
Under the Merger Agreement, a material adverse effect means any change, event, development, condition, occurrence or effect that (1) with respect to HPE, has or would reasonably be expected to have a material adverse effect on the ability of HPE to perform its obligations under the Merger Agreement, or to consummate the transactions contemplated by the Merger Agreement and (2) with respect to Micro Focus or Seattle, as applicable, (a) is or would reasonably be expected to be materially adverse to the business, condition (financial or otherwise) or results of operations of Micro Focus and its subsidiaries, taken as a whole, or Seattle and its subsidiaries, taken as a whole, as the case may be; or (b) has or would reasonably be expected to have a material adverse effect on the ability of Micro Focus or the Seattle entities (as defined below), as the case may be, to perform their respective obligations under the Merger Agreement, or to consummate the transactions contemplated by the Merger Agreement. However, only with respect to the foregoing clause (2)(a), none of the following, either alone or in combination, will be deemed to constitute, or taken into account in determining whether there is, a material adverse effect:
• | any changes resulting from general market, economic, financial, capital markets or political or regulatory conditions; |
• | with respect to Seattle, any changes or proposed changes of law or U.S. GAAP (or, in each case, authoritative interpretations thereof), and with respect to Micro Focus, any changes or proposed changes of law, IFRS or UK GAAP (as defined in the Merger Agreement) (or, in each case, authoritative interpretations thereof); |
• | any changes resulting from weather, force majeure, an act of terrorism, war, national or international calamity, or any worsening thereof; |
• | any changes generally affecting the industries in which Micro Focus and its subsidiaries or Seattle and its subsidiaries, as applicable, conduct their respective businesses; |
• | any changes resulting from the execution of the Merger Agreement or the announcement or the pendency of the Merger, including any loss of employees or customers, any cancellation of or delay in customer orders or any disruption in or termination of (or loss of or other negative effect or change with respect to) customer, supplier, distributor or similar business relationships or partnerships resulting from the transactions contemplated by the Merger Agreement (other than in the context of the representations and warranties made as to the absence of conflicts with or violations of a parties’ organizational documents or other obligations or laws, governmental approvals and litigation and proceedings); |
• | changes in the price or the trading volume of Micro Focus Shares or HPE Shares, as applicable, or any change in the credit rating of Micro Focus, HPE or Seattle, as applicable (excluding, in each case, the underlying cause of any such changes); |
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• | any changes or effects resulting from any action required to be taken by the terms of the Merger Agreement; |
• | the failure to meet internal or analysts’ expectations, projections or results of operations (excluding, in each case, the underlying cause of any such changes); and |
• | any proceeding arising from or relating to the Merger or the other transactions contemplated by the Merger Agreement. |
However, with respect to the matters described in the first four bullet points listed above, those matters may be taken into account in determining whether a material adverse effect has occurred or would reasonably be expected to occur if and to the extent that such changes have a disproportionate impact on Micro Focus and its subsidiaries, taken as a whole, or Seattle and its subsidiaries, taken as a whole, as the case may be, as compared to other participants in the industries in which such entities conduct their respective businesses.
Conduct of Business Pending the Merger
Each of the parties to the Merger Agreement has undertaken to perform customary covenants in the Merger Agreement until Closing. In general, each of Micro Focus and HPE (only with respect to Seattle and its subsidiaries and HPE Software) has agreed that prior to Closing, except as contemplated by the Merger Agreement or the other Transaction Documents, required by applicable law or consented to by the other party (which consent may not be unreasonably withheld, conditioned, delayed or denied), subject to certain agreed exceptions, it will conduct its business in the ordinary course consistent with past practice.
In addition, Micro Focus has agreed that, prior to Closing, except as contemplated by the Merger Agreement or the other Transaction Documents, required by applicable law, or consented to by HPE (which consent may not be unreasonably withheld, conditioned, delayed or denied), subject to certain agreed exceptions set forth in the Merger Agreement (including Micro Focus disclosure schedules to the Merger Agreement, which permit the Micro Focus Return of Value), Micro Focus will not, and will cause its subsidiaries not to, take any of the following actions:
• | amend or modify the Micro Focus Articles or similar organizational documents of any of its subsidiaries; |
• | declare or pay any dividends on or make other distributions in respect of any of its equity interests (whether in cash, securities or property), except for cash dividends or distributions with respect to a wholly owned subsidiary and the declaration and payment of Micro Focus’ quarterly cash dividend in the ordinary course of business consistent with past practice and consistent with Micro Focus’ declared dividend policy as of the date of the Merger Agreement; |
• | split, combine or reclassify any of its equity interests or issue or authorize or propose the issuance of any other securities for such equity interests; |
• | redeem, repurchase or otherwise acquire any of its equity interests (including any securities convertible or exchangeable into such capital stock); |
• | enter into any agreement with respect to the voting or registration of its capital stock or other equity interests; |
• | issue, sell, pledge, dispose of, grant, transfer or encumber, or authorize any such actions with respect to, any shares of capital stock of, or any other equity interests in Micro Focus or any of its subsidiaries, any indebtedness that grants its holders voting rights with respect to the capital stock of Micro Focus or any of its subsidiaries, or other rights of any kind to acquire such equity interests or convertible into such equity interests, or any options, warrants, convertible security, phantom stock, phantom stock rights, stock appreciation rights or stock-based performance rights, subject to certain exceptions with respect to (1) the issuance of Micro Focus Shares upon the exercise of Micro Focus Options or Micro Focus ASG Awards outstanding as of the date of the Merger Agreement in accordance with their terms, (2) the issuance of any Micro Focus Options required by the terms of any employment agreement outstanding as of the date of the Merger Agreement in accordance with such terms, (3) the issuance of Micro Focus Options, Micro Focus ASG Awards or other awards in respect of Micro Focus Shares in the ordinary course of business, (4) the issuance by a wholly owned subsidiary of its capital stock to |
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Micro Focus or another wholly owned subsidiary of Micro Focus or (5) the grant of security over or pledge of equity interests of Micro Focus subsidiaries in connection with Micro Focus financing requirements in the ordinary course of business or in connection with the Debt Financing;
• | sell, assign, transfer, convey, lease, license, encumber (other than permitted liens under the Merger Agreement) or otherwise dispose of any assets (other than intellectual property) that are material to Micro Focus and its subsidiaries (taken as a whole); |
• | (i) sell, assign, pledge, grant or acquire, covenant not to assert, agree not to enforce, agree to grant to or acquire from any person, or otherwise encumber, transfer, license, abandon, place in the public domain, permit to lapse or expire, or agree to dispose of any owned intellectual property material to Micro Focus and its subsidiaries, except pursuant to the terms of existing contracts, the ordinary course prosecution and maintenance of such intellectual property that constitutes registered intellectual property, the expiration of intellectual property in accordance with the applicable statutory term or the non-exclusive licensing of any such intellectual property in the ordinary course of business; (ii) disclose to any third party any trade secrets included in intellectual property owned by Micro Focus or its subsidiaries that are material to the Micro Focus business except in the ordinary course of business pursuant to a legally binding confidentiality undertaking or as a result of publication of a patent application filed by Micro Focus or any of its subsidiaries; or (iii) compromise, settle or agree to settle, or consent to judgment in, any one or more actions or institute any action concerning any intellectual property owned by Micro Focus or its subsidiaries that is material to them, except in the ordinary course of business or for amounts that are not material to Micro Focus and its subsidiaries and in each case that do not otherwise involve the imposition of material limitations on the continued use of such owned intellectual property by Micro Focus and its subsidiaries; |
• | merge, combine or consolidate Micro Focus or any of its subsidiaries with any person or adopt a plan of complete or partial liquidation or resolutions providing for a complete or partial liquidation, dissolution, restructuring, recapitalization (other than repayment or refinancing of debt in accordance with the terms of the Merger Agreement) or other reorganization of Micro Focus or any of its subsidiaries, other than internal reorganizations in the ordinary course of business that would not have a material and adverse impact on Micro Focus or the transactions contemplated by the Merger Agreement; |
• | acquire any interest in any person or any assets of another person with value in excess of $10,000,000, other than in the ordinary course of business; |
• | except in the ordinary course of business, permit or cause Micro Focus or any of its subsidiaries to repurchase, repay, refinance or incur any indebtedness for borrowed money (other than drawings under Micro Focus’ existing credit agreement that would not reasonably be expected to adversely impact the ability of Micro Focus to obtain the Debt Financing or the timing of the Debt Financing in each case in accordance with the terms and conditions of the Merger Agreement) in excess of the amount necessary to effect the Debt Financing, issue any debt securities, engage in any securitization transactions or similar arrangements or assume, guarantee or endorse, or otherwise as an accommodation become responsible for (whether directly, contingently or otherwise), the obligations of any third party for borrowed money; |
• | permit or cause Micro Focus or any of its subsidiaries to make any material loans or investments in, or material advances of money to, any person (other than any wholly owned subsidiary of Micro Focus), except for advances to employees or officers of Micro Focus or any subsidiary for expenses incurred in the ordinary course of business; |
• | except in the ordinary course of business, (i) materially adversely modify or terminate (excluding any expiration in accordance with its terms) any material contract or affiliate contract as defined in the Merger Agreement or (ii) enter into any contract that would have been classified as a material contract if entered into prior to the date of the Merger Agreement; |
• | except as otherwise required by Micro Focus benefit plans, policies or contracts as in effect on the date of the Merger Agreement, (i) adopt, enter into, amend or materially increase the benefits under any Micro Focus benefit plan if such action would materially increase the benefits provided to Micro Focus |
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employees or the cost for providing such benefits, (ii) grant any increase in compensation or severance pay to any officer of Micro Focus or any subsidiary other than in the ordinary course of business or (iii) adopt, enter into or amend any labor or collective bargaining agreement other than in the ordinary course of business consistent with past practice;
• | forgive any loans to directors, officers or employees of Micro Focus or its subsidiaries; |
• | except as required or permitted by IFRS or UK GAAP (as defined in the Merger Agreement), make any material change to any financial accounting principles, methods or practices; |
• | compromise, settle or agree to settle any action or investigation other than in the ordinary course of business and only for the payment of monetary damages not in excess of $15,000,000 individually or $75,000,000 in the aggregate, in any case without the imposition of equitable relief on, or the admission of wrongdoing by, Micro Focus or any of its subsidiaries or the deferral of payment until after the Distribution Date; |
• | make, change or revoke any material tax election or settle, compromise or abandon any material tax liability, in each case (i) other than in the ordinary course of business or (ii) as would not be likely to have a material and adverse impact on Micro Focus and its subsidiaries taken as a whole; or |
• | authorize or enter into any contract to do any of the foregoing or otherwise make any commitment to do any of the foregoing. |
HPE has also agreed that, prior to Closing, except as contemplated by the Merger Agreement, the Reorganization or the other Transaction Documents, required by applicable law or consented to by Micro Focus (which consent may not be unreasonably withheld, conditioned, delayed or denied), subject to certain agreed exceptions set forth in the Merger Agreement (including HPEs disclosure schedules to the Merger Agreement), HPE will not, and will cause Seattle and its subsidiaries not to, take any of the following actions with respect to Seattle and its subsidiaries or HPE Software:
• | amend or modify the certificate of incorporation or bylaws (or similar organizational documents) of Seattle or any entity that will be a subsidiary of Seattle after giving effect to the Reorganization, which are collectively referred to in this section (together with Seattle) as the Seattle entities; |
• | other than as contemplated by the Reorganization, the Distribution, the Seattle Payment or the Subsidiary Stock Exchange (as defined in the Separation and Distribution Agreement): (i) declare or pay any dividends on or make other distributions in respect of any equity interests of Seattle or its subsidiaries (whether in cash, securities or property); (ii) split, combine or reclassify any of the equity interests of Seattle or its subsidiaries, or issue or authorize the issuance of any other securities in respect of or in lieu of the equity interests of Seattle and its subsidiaries; (iii) redeem, repurchase or otherwise acquire any equity interests of Seattle or its subsidiaries, or permit any subsidiaries to do the same (including any securities convertible or exchangeable into such equity interests); or (iv) enter into any agreement with respect to the voting or registration of the capital stock or other equity interests of Seattle or any of its subsidiaries; |
• | other than as contemplated by the Distribution or the Subsidiary Stock Exchange, issue, sell, pledge, dispose of, grant, transfer or encumber, or authorize any such actions with respect to, any shares of capital stock of, or any other equity interests in Seattle or any of its subsidiaries, any indebtedness that grants its holders voting rights with respect to the equity interests of Seattle or any of its subsidiaries, or other rights of any kind to acquire such equity interests or convertible into such equity interests, or any options, warrants, convertible security, phantom stock, phantom stock rights, stock appreciation rights or stock-based performance rights, other than the issuance of equity among wholly owned subsidiaries of Seattle and Seattle or to HPE; |
• | sell, assign, transfer, convey, lease, license, encumber (other than permitted liens under the Merger Agreement) or otherwise dispose of any assets (other than intellectual property) of HPE or any of its subsidiaries or Seattle or any of its subsidiaries that are material to HPE Software (taken as a whole), except in the ordinary course of business; |
• | (i) sell, assign, pledge, grant or acquire, covenant not to assert, agree not to enforce, agree to grant to or acquire from any person, or otherwise encumber, transfer, license, abandon, place in the public |
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domain, permit to lapse or expire, or agree to dispose of any owned intellectual property material to HPE Software, except pursuant to the terms of existing contracts, the ordinary course prosecution and management of such intellectual property that constitutes transferred registered intellectual property, the expiration of intellectual property in accordance with the applicable statutory term, or the non-exclusive licensing of any such intellectual property in the ordinary course of business; (ii) disclose to any third party any trade secrets included in the intellectual property owned by any Seattle entity that are material to HPE Software except in the ordinary course of business pursuant to a legally binding confidentiality undertaking or as a result of publication of a patent application filed by HPE or any of its subsidiaries; or (iii) compromise, settle or agree to settle, or consent to judgment in, any one or more actions or institute any action concerning any intellectual property owned by any Seattle entity that is material to HPE Software except in the ordinary course of business or for amounts that are not material to HPE Software and in each case that do not otherwise involve the imposition of material limitations on the Seattle entities continued use of such owned intellectual property;
• | merge, combine or consolidate any of the Seattle entities with any person or adopt a plan of complete or partial liquidation or resolutions providing for a complete or partial liquidation, dissolution, restructuring, recapitalization or other reorganization of any of the Seattle entities, other than internal reorganizations in the ordinary course of business that would not have a material and adverse impact on the Seattle entities, HPE Software or the transactions contemplated by the Merger Agreement; |
• | acquire any interest in any person or any assets thereof that would be an asset of the Seattle entities at Closing, in each case with value in excess of $10,000,000, other than (i) in the ordinary course of business or (ii) acquisitions for which the purchase price will be paid by HPE prior to the Distribution Date; |
• | permit or cause any of the Seattle entities to repurchase, repay, refinance or incur any indebtedness for borrowed money except pursuant to the debt commitment letter entered into by Micro Focus to effect the Seattle Payment to HPE, issue any debt securities, engage in any securitization transactions or similar arrangements or assume, guarantee or endorse, or otherwise as an accommodation become responsible for (whether directly, contingently or otherwise), the obligations of any third party for borrowed money; |
• | permit or cause any of the Seattle entities to make any material loans or investments in, or material advances of money to, any person (other than another Seattle entity), except for advances to employees or officers of any Seattle entity for expenses incurred in the ordinary course of business; |
• | except in the ordinary course of business, (i) materially adversely modify or terminate (excluding any expiration in accordance with its terms) any material contract or affiliate contract as defined in the Merger Agreement or (ii) enter into any contract that would have been classified as a material contract if entered into prior to the date of the Merger Agreement; |
• | except as otherwise required by HPE’s or HPE Software’s benefit plans, policies or contracts as in effect on the date of the Merger Agreement, (i) adopt, enter into, amend or materially increase the benefits under any HPE’s or HPE Software’s benefit plan if such action would materially increase the benefits provided to any HPE Software’s employee or the cost for providing such benefits, (ii) grant any increase in compensation or severance pay to any officer of any Seattle entity other than in the ordinary course of business or (iii) adopt, enter into or amend any labor or collective bargaining agreement other than in the ordinary course of business consistent with past practice; |
• | forgive any loans to directors, officers or employees of any of the Seattle entities; |
• | except as required or permitted by U.S. GAAP, make any material change to any financial accounting principles, methods or practices of any Seattle entity; |
• | compromise, settle or agree to settle any action or investigation other than in the ordinary course of business and only for the payment of monetary damages not in excess of $15,000,000 individually or $75,000,000 in the aggregate, in any case without the imposition of equitable relief on, or the admission of wrongdoing by, the Seattle entities or the deferral of payment until after the Distribution Date; |
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• | issue to HPE Software employees any additional awards under HPE’s stock plans that would be subject to the Employee Matters Agreement, or modify or waive the terms of any outstanding HPE equity awards that are subject to the Employee Matters Agreement, or modify or waive the terms of any HPE stock plan as applied to any outstanding awards under such HPE stock plans that are subject to the Employee Matters Agreement; |
• | make, change or revoke any material tax election in respect of HPE Software that would bind any Seattle entity for periods following Closing or settle, compromise or abandon any material tax liability for which a Seattle entity would be responsible under the Tax Matters Agreement, in each case (i) other than in the ordinary course of business or (ii) as would not be likely to have a material and adverse impact on the Seattle entities taken as a whole; or |
• | authorize or enter into any contract to do any of the foregoing or otherwise make any commitment to do any of the foregoing. |
The Merger Agreement contains certain covenants relating to tax matters, including with respect to the Reorganization, the Distribution and the Merger. Additional covenants relating to the intended U.S. federal income tax treatment of the Transactions and other tax matters are contained in the Tax Matters Agreement. Under the Merger Agreement, HPE and Micro Focus agree to use their respective reasonable best efforts to ensure that the Transactions qualify for the intended U.S. federal income tax treatment, including that (1) the Contribution and the Distribution, taken together, qualify as a reorganization within the meaning of Section 368(a)(1)(D) and 355 of the Code, (2) the Merger qualifies as a reorganization within the meaning of Section 368(a) of the Code and (3) Micro Focus is not treated as a U.S. corporation pursuant to Section 7874(b) of the Code. Indemnification for taxes generally, including indemnification for taxes resulting from a failure for the Transactions to qualify for the intended U.S. federal income tax treatment, is governed by the terms, provisions and procedures described in the Tax Matters Agreement.
SEC and U.K. Listing Authority Filings
The Merger Agreement requires Micro Focus, HPE and Seattle to jointly prepare the registration statement with respect to the issuance of Micro Focus ADSs in the Merger and the registration statement for the distribution of Seattle Shares in the Distribution as promptly as practicable, and to use reasonable best efforts to have each registration statement declared effective by the SEC as promptly as practicable after being filed. This information statement/prospectus forms a part of both of these registration statements.
The Merger Agreement also requires Micro Focus to prepare and use its reasonable best efforts to cause to be approved by the U.K. Listing Authority the U.K. Circular and the U.K. Prospectus as promptly as practicable. In addition, Micro Focus is required to prepare and use its reasonable best efforts to cause the Depositary to file a registration statement on Form F-6 relating to the registration of the Micro Focus ADSs under the Securities Act and to cause such Form F-6 to be declared effective.
The Merger Agreement provides that each party to the Merger Agreement will use reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, and to assist and cooperate with the other parties in doing or causing to be done, all things necessary, proper or advisable under the Merger Agreement and applicable laws to consummate the Merger and the other transactions contemplated by the Merger Agreement as soon as practicable after the date of the Merger Agreement, including preparing and filing as promptly as practicable all documentation to effect all necessary applications, notices, petitions and filings and to obtain specified required governmental consents and any other material consents, approvals, waivers or clearances that are required to be obtained or made at or prior to Closing from any third party and/or any governmental authority in order to consummate the Merger or any of the other transactions contemplated by the Merger Agreement.
Each party to the Merger Agreement has also agreed to promptly make its respective filings under the HSR Act and to the Committee on Foreign Investment in the United States and to make any other required or appropriate filings under any competition laws with respect to the transactions contemplated by the Merger Agreement and to
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supply the appropriate governmental authorities any additional information and documentary material that may be requested pursuant to the HSR Act and such other laws as promptly as practicable. The parties have agreed to use reasonable best efforts to cause the expiration or termination of the applicable waiting periods under the HSR Act and the receipt of clearance from the CFIUS and approvals under other applicable competition laws as soon as practicable. See the section entitled The Transactions—Regulatory Approvals for more information on the status of these filings and approvals as of the date of this information statement/prospectus.
In addition, each of the parties has agreed to take, or cause to be taken, any and all steps and to make any and all undertakings necessary to avoid or eliminate each and every impediment under any antitrust, merger control, competition, national security or trade regulation law that may be asserted by any governmental authority with respect to the Merger so as to enable Closing to occur as soon as reasonably possible, including proposing, negotiating, committing to, and effecting, by consent decree, hold separate order, or otherwise, the sale, divestiture, licensing or disposition of such assets or businesses of Seattle (or Seattles subsidiaries) or Micro Focus (or Micro Focus subsidiaries), as applicable, or otherwise taking or committing to take actions that limit Seattles or its subsidiaries or Micro Focus or Micro Focus subsidiaries, as applicable, freedom of action with respect to, or their ability to retain, any of the businesses, product lines or assets of Seattle (or Seattles subsidiaries) or Micro Focus (or Micro Focus subsidiaries), in each case, as may be required in order to avoid the entry of, or to effect the dissolution of, any injunction, temporary restraining order, or other order in any suit or proceeding, which would otherwise have the effect of preventing Closing (provided that the effectiveness of any such sale, divestiture, license or disposition or action or commitment must be contingent on consummation of the Merger). However, the parties to the Merger Agreement will not have to take any such action that would be materially adverse to the business, financial condition or results of operations of Micro Focus and its subsidiaries (including Seattle and its subsidiaries, taken as a whole, after giving effect to the Reorganization) or that would require such action by HPE with respect to any assets or businesses that are not part of HPE Software.
The Merger Agreement contains provisions restricting Micro Focus ability to seek an alternative transaction. Under these provisions, Micro Focus agrees that it will not, and will cause its subsidiaries and representatives not to, directly or indirectly:
• | solicit, initiate or knowingly encourage any Competing Proposal (as defined below) or any proposal which would reasonably be expected to lead to a Competing Proposal; or |
• | engage in any discussions or negotiations regarding any Competing Proposal. |
The Merger Agreement provides that the term Competing Proposal means any proposal or offer from a third party relating to:
• | a merger, scheme of arrangement, reorganization, sale of assets, share exchange, consolidation, business combination, recapitalization, dissolution, liquidation, joint venture or similar transaction involving Micro Focus; |
• | the acquisition (whether by merger, scheme of arrangement, consolidation, equity investment, joint venture or otherwise) by any person or entity of 20% or more of the consolidated assets of Micro Focus and its subsidiaries, as determined on a book-value or fair market value basis; |
• | the purchase or acquisition in any manner by any person or entity of 20% or more of the issued and outstanding Micro Focus Shares or any other ownership interests in Micro Focus; |
• | any purchase, acquisition, tender offer or exchange offer that, if consummated, would result in any other person or entity beneficially owning 20% or more of the Micro Focus Shares, or any other ownership interests of Micro Focus or any of its subsidiaries; or |
• | any combination of the foregoing. |
Micro Focus also agreed to cease, and to cause its subsidiaries and representatives to cease, any discussions or negotiations with any person that may have been ongoing with respect to a Competing Proposal prior to the date of the Merger Agreement.
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Under the Merger Agreement, Micro Focus must promptly (and in any event within 24 hours) notify HPE after the receipt of (i) any Competing Proposal or written indication that a person or entity is considering making a Competing Proposal, (ii) any request for non-public information relating to Micro Focus or its subsidiaries (other than in the ordinary course, consistent with past practice and unrelated to a Competing Proposal) or (iii) any inquiry or request for discussions or negotiations regarding any Competing Proposal. The notice must include the identity of the person or entity making the request, inquiry or proposal and a copy of the request, inquiry or proposal, including any modifications thereto. Micro Focus must also keep HPE and Seattle reasonably and currently informed of any material changes or developments in connection with the foregoing (and in any event must notify them within 24 hours of any such changes). Micro Focus has also agreed that it will simultaneously provide to HPE and Seattle any non-public information concerning Micro Focus that may be made available to any other person or entity in response to such a Competing Proposal if such information has not already been provided to HPE or Seattle.
Notwithstanding the covenants described in the foregoing paragraphs in this section, at any time prior to the receipt of the approval of Micro Focus Shareholders of the Merger and related matters, Micro Focus is permitted to furnish information to, and enter into discussions and negotiations with, a person or entity who has made an unsolicited, written, bona fide Competing Proposal that did not result from a breach of the foregoing non-solicitation provisions by Micro Focus. Micro Focus must provide HPE one business days written notice before engaging in any such actions.
Micro Focus has agreed in the Merger Agreement that neither the Micro Focus Board nor any committee thereof will:
• | withhold, withdraw, modify or qualify or publicly propose to withdraw, withhold, modify or qualify, in a manner adverse to HPE or Seattle, the recommendation by the Micro Focus Board that the Micro Focus Shareholders approve the Merger and related matters; |
• | make or permit any director or executive officer to make any public statement or make any public statement in connection with the Micro Focus special meeting that would reasonably be expected to have the same effect; |
• | approve, determine to be advisable or recommend, or publicly propose to approve, determine to be advisable or recommend any Competing Proposal; or |
• | enter into or permit or authorize Micro Focus or any of its affiliates to enter into any contract with respect to a Competing Proposal. |
Each action described in the foregoing bullet points is referred to as a Change in Recommendation.
Notwithstanding the foregoing, the Micro Focus Board may, at any time prior to receiving approval of the Micro Focus Shareholders of the Merger and related matters, make a Change in Recommendation, if either of the following conditions is satisfied:
• | if Micro Focus has received a bona fide written Competing Proposal that was not, directly or indirectly, solicited, initiated or encouraged in violation of the provisions described in —No Solicitation above and the Micro Focus Board concludes in good faith (after consultation with outside financial advisors and outside legal counsel), taking into account the various legal, financial and regulatory aspects of the Competing Proposal, that such Competing Proposal constitutes a Superior Proposal (as defined below); or |
• | for any other reason, if the Micro Focus Board concludes in good faith (after consultation with outside financial advisors and outside legal counsel) that the failure to make a Change in Recommendation would reasonably be expected to be inconsistent with the duties the directors owe to Micro Focus in their capacity as directors of Micro Focus under applicable law. |
However, Micro Focus may not make a Change in Recommendation unless:
• | Micro Focus notifies HPE and Seattle in writing of its intention to make a Change in Recommendation at least four business days prior to taking such action, which notice must include certain information required by the Merger Agreement; |
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• | if requested by HPE or Seattle, the Micro Focus Board and its representatives must negotiate in good faith with HPE during the notice period to enable HPE and Seattle to propose changes to the terms of the Merger Agreement intended to cause the Superior Proposal to no longer constitute a Superior Proposal or to cause such other reason not to be material, as applicable; |
• | the Micro Focus Board concludes in good faith, after consultation with Micro Focus’ outside legal counsel and financial advisors and after considering any revisions to the Merger Agreement that HPE and Seattle have agreed to in writing, that such Superior Proposal continues to be a Superior Proposal (if applicable) and that the failure to make a Change in Recommendation would reasonably be expected to be inconsistent with the Micro Focus Board’s duties that the directors owe to Micro Focus in their capacity as directors under applicable law; and |
• | if there is any amendment to the terms of the Superior Proposal during the four business day period following delivery of the notice described above, Micro Focus provides a new written notice of the terms of such amended Superior Proposal giving HPE and Seattle two business days from each subsequent amendment to offer to revise the terms of the Transactions (and Micro Focus and its representatives negotiate in good faith during that additional period). |
Notwithstanding the foregoing, if the U.K. Panel on Takeovers and Mergers determines that any of the above requires Micro Focus to take or not to take action that is not permitted by Rule 21.2 of the City Code on Takeovers and Mergers, such provision shall have no effect and shall be disregarded.
The Merger Agreement provides that the term Superior Proposal means a bona fide written Competing Proposal (except the references in that definition to 20% are replaced by 50%) by a third party that was not solicited by Micro Focus or its representatives in violation of the non-solicitation provisions of the Merger Agreement and that the Micro Focus Board has determined in good faith (after consultation with its outside financial and legal advisors), taking into account the various legal, financial and regulatory aspects of the Competing Proposal, (i) is, if accepted, reasonably likely to be consummated on a timely basis, and (ii) if consummated, would be more favorable to the Micro Focus Shareholders, from a financial point of view, than the Merger and the other transactions contemplated by the Merger Agreement after giving effect to all adjustments or modifications to the terms thereof which may be agreed in writing to be made by HPE and Seattle.
The Merger Agreement provides that Micro Focus is not prohibited from making disclosures to its shareholders of the position of the Micro Focus Board with respect to any takeover offer for Micro Focus or other matter that Micro Focus reasonably and in good faith determines requires disclosure pursuant to the U.K. Listing Rules.
At the same time as Micro Focus entered into the Merger Agreement, Micro Focus entered into the Micro Focus Commitment Letter, under which the commitment parties thereto committed to provide Micro Focus with debt financing in an aggregate amount of approximately $2.9 billion subject to the terms and conditions of the Micro Focus Commitment Letter. Also in connection with the execution of the Merger Agreement, Micro Focus entered into the Seattle Commitment Letter, under which the commitment parties thereto committed to provide Seattle with debt financing in an aggregate amount of $2.6 billion subject to the terms and conditions of the Seattle Commitment Letter. See the section entitled Debt Financing.
The Merger Agreement provides that Micro Focus must and must cause its subsidiaries to use their respective reasonable best efforts to take all actions necessary, proper or advisable to arrange the debt financing contemplated by the Seattle Commitment Letter as promptly as reasonably practicable after the date of the Merger Agreement on the terms and conditions set forth in the Seattle Commitment Letter. Furthermore, Micro Focus must and must cause each of its subsidiaries to use reasonable best efforts to:
• | comply with and maintain the Seattle Commitment Letter in effect and negotiate and execute definitive agreements on the terms and conditions contained in the Seattle Commitment Letter or other terms permitted by the Merger Agreement; |
• | comply with the obligations set forth in the Seattle Commitment Letter that are applicable to Micro Focus or any of its subsidiaries; |
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• | satisfy on a timely basis the conditions in the Seattle Commitment Letter and the definitive agreements for the debt financing that are within its control; and |
• | fully enforce its rights under the Seattle Commitment Letter and the definitive agreements for the debt financing. |
The Merger Agreement provides that if any portion of the financing contemplated by the Seattle Commitment Letter or the related definitive agreements becomes or is reasonably likely to become unavailable on the terms and conditions contemplated in the Seattle Commitment Letter or such definitive agreements, Micro Focus must and must cause its subsidiaries to use their respective reasonable best efforts to promptly obtain alternative financing that is sufficient to finance the Seattle Payment (and any related fees and expenses) to be made by Seattle to HPE under the Separation and Distribution Agreement. Micro Focus will be subject to the same obligations described in the preceding paragraph with respect to any such alternative financing arrangements.
Micro Focus has agreed to keep HPE informed of the status of its efforts to arrange the debt financing. Except in limited circumstances, Micro Focus may not, without HPEs consent, amend, modify, supplement, restate, substitute, replace, terminate or agree to any waiver under the Seattle Commitment Letter or any definitive agreement relating to the debt financing in a manner that (i) adds new or expands upon the conditions precedent to the funding on the closing date of the debt financing, (ii) would reduce the aggregate amount of debt financing provided for under the Seattle Commitment Letter, (iii) would limit the rights and remedies of Micro Focus or its subsidiaries as against the lenders under the Seattle Commitment Letter or (iv) would otherwise prevent, impair or materially delay the consummation of the Transactions. Prior to Closing, HPE has agreed to use reasonable best efforts to cooperate and to cause its representatives to cooperate, at the expense of Micro Focus, with Micro Focus for the arrangement and consummation of the debt financing.
Mutual Employee Non-Solicitation
Under the Merger Agreement, for a period starting on September 7, 2016 and ending 12 months after the Closing Date, each of HPE, on the one hand, and Micro Focus and Seattle (in the case of Seattle, from and after Closing), on the other hand, has agreed that, without the other partys prior written consent, it will not, directly or indirectly:
• | solicit, hire or offer to hire any of the employees of the other party; |
• | otherwise cause or seek to cause any employees of the other party to leave the employ of such other party or any of its affiliates; or |
• | enter into a consulting agreement with any employee of such other party. |
The restrictions in the preceding paragraph do not apply to general mass solicitations or advertisements that are not targeted at the employees of the other party. In addition, neither party is restricted from soliciting, hiring, offering to hire or entering into a consulting agreement with any employee of the other party whose employment with such other party was terminated by such other party.
Certain Other Covenants and Agreements
The Merger Agreement contains certain other covenants and agreements, including covenants (with certain exceptions specified in the Merger Agreement) relating to:
• | access to each of Micro Focus’ and Seattle’s properties, contracts and books and records and appropriate senior-level officers and employees; |
• | HPE’s obligation to deliver to Micro Focus a list of all registered intellectual property to be transferred to or held by Seattle or its subsidiaries in connection with the Separation, as well as information relating to all actions that must be taken with respect to such intellectual property within 90 days of the Distribution; |
• | preservation of the indemnification provisions in the governing documents of Seattle with respect to directors, officers, employees or agents of Seattle; |
• | advanced consent requirements for public announcements concerning the transactions contemplated by the Merger Agreement; |
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• | defense and settlement of any actions or other proceedings brought by the Micro Focus Shareholders or in the name of Micro Focus against Micro Focus and/or its directors in connection with the Transactions; |
• | steps required to cause any disposition of Seattle Shares or acquisitions of Micro Focus Shares (including via Micro Focus ADSs) resulting from the Transactions by each officer or director who is subject to the reporting requirements of Section 16(a) of the Exchange Act with respect to Micro Focus or Seattle to be exempt under Rule 16b-3 promulgated under the Exchange Act; |
• | HPE’s and Seattle’s obligations to ensure Seattle has a sufficient number of authorized shares to effect the Distribution and certain related transactions; |
• | the obligations of Micro Focus to obtain the release of HPE and its affiliates from certain contracts, instruments or other arrangements to the extent relating to Seattle and for which HPE or its affiliate is a guarantor or person required to provide financial support, including by substituting Micro Focus or one of its subsidiaries for the applicable HPE entity and HPE’s indemnification obligations following Closing with respect thereto; |
• | HPE’s obligation to deliver to Micro Focus certain audited and unaudited financial statements of HPE Software; |
• | the continued obligations of Seattle with respect to certain non-competition restrictions in existing agreements; |
• | cooperation by HPE to provide Micro Focus with information relating to Seattle in connection with Micro Focus’ compliance with the requirements of the U.K. FCA; |
• | Micro Focus’ obligation to establish a sponsored ADR facility with the Depositary, which must be a reputable national bank reasonably acceptable to HPE, for the purpose of issuing the Micro Focus ADSs, and use reasonable best efforts to cause the Micro Focus ADSs to be approved for listing on the NYSE; |
• | Micro Focus’ and HPE’s obligations to cause all Transaction Documents to be executed and delivered at Closing; and |
• | the formation of a special separation committee comprised of three members appointed by Micro Focus and three members appointed by HPE to monitor and oversee the separation in accordance with the terms of the Separation and Distribution Agreement. |
The obligations of the parties to the Merger Agreement to consummate the Merger are subject to the satisfaction or, if permitted under applicable law, waiver, of the following conditions:
• | the expiration or termination of any applicable waiting period under the HSR Act, and the receipt of applicable consents, authorizations, orders, or approvals required under the antitrust or competition laws of certain specified jurisdictions, including merger control approval from the European Commission, all of which have been received and which condition has been satisfied; |
• | the consummation of the Reorganization and the Distribution in all material respects in accordance with the Separation and Distribution Agreement; |
• | the effectiveness of the registration statements of Micro Focus and Seattle filed with the SEC of which this information statement/prospectus forms a part, the Form F-6 filed by the Depositary with the SEC with respect to the Micro Focus ADSs (to the extent required by law) and the Form 8-A filed by Micro Focus, and the absence of any stop order issued by the SEC or any pending proceeding before the SEC seeking a stop order with respect thereto; |
• | the approval of the U.K. Prospectus by the U.K. Listing Authority and the U.K. Prospectus having been made publicly available in accordance with the U.K. Prospectus Rules, which condition has been satsified; |
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• | the approval of the U.K. Circular by the U.K. Listing Authority and the U.K. Circular having been made available to Micro Focus Shareholders in accordance with the U.K. Listing Rules and the Micro Focus Articles, which condition has been satisfied; |
• | Admission occurring; |
• | the approval for listing on the NYSE of the Micro Focus ADSs issuable pursuant to the Merger; |
• | the approval by Micro Focus Shareholders of the Merger and specified related matters, which condition has been satisfied; and |
• | the absence of any law or action by a governmental authority that enjoins, restrains or prohibits the consummation of the Reorganization, the Distribution or the Merger. |
The obligations of Micro Focus, Holdings and Merger Sub to consummate the Merger are subject to the satisfaction or, if permitted by applicable law, waiver, of the following additional conditions:
• | the performance of and compliance with all covenants required under the Merger Agreement to be complied with or performed by HPE or Seattle in all material respects at or prior to Closing; |
• | the truth and correctness in all material respects of specified representations and warranties of HPE and Seattle with respect to corporate organization, due authorization, certain capitalization matters of Seattle, the board and stockholder approvals of HPE and Seattle necessary to effect the Transactions and the absence of brokers’ fees, in each case, as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of specified representations and warranties of HPE relating to Seattle with respect to its capital stock and the absence of a material adverse effect with respect to Seattle as of the date of the Merger Agreement and as of the Closing Date (except that the representation and warranty with respect to the capitalization of Seattle will still be deemed true and correct so long as any deviations are de minimis, and except that certain representations and warranties that by their terms address matters only as of a specified date must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of all other representations and warranties made by HPE in the Merger Agreement (without giving effect to any materiality, material adverse effect or similar qualifiers) as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date), except to the extent the failure to be so true and correct would not, individually or in the aggregate, have a material adverse effect with respect to Seattle; and |
• | the delivery by HPE to Micro Focus of a certificate, dated as of the Closing Date, and signed by a senior officer of HPE, certifying the satisfaction of the conditions described in the preceding four bullet points. |
The obligations of HPE and Seattle to effect the Merger are subject to the satisfaction or, if permitted by applicable law, waiver, of the following additional conditions:
• | the performance of and compliance with all covenants required under the Merger Agreement to be complied with or performed by Micro Focus, Holdings or Merger Sub in all material respects at or prior to Closing; |
• | the truth and correctness in all material respects of specified representations and warranties of Micro Focus with respect to organization, due authorization, certain capitalization matters, brokers’ fees, certain findings of the Micro Focus Board and the shareholder approvals necessary to effect the Transactions, in each case, as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date); |
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• | the truth and correctness in all respects of specified representations and warranties of Micro Focus with respect to the capital stock of Micro Focus and the absence of a material adverse effect with respect to Micro Focus as of the date of the Merger Agreement and as of the Closing Date (except that the representation and warranty with respect to the capitalization of Micro Focus will still be deemed true and correct so long as any deviations are de minimis, and except that certain representations and warranties that by their terms address matters only as of a specified date must be true and correct only as of such specified date); |
• | the truth and correctness in all respects of all other representations and warranties made by Micro Focus, Holdings or Merger Sub in the Merger Agreement (without giving effect to any materiality, material adverse effect or similar qualifiers) as of the date of the Merger Agreement and as of the Closing Date (except for certain representations and warranties that by their terms address matters only as of a specified date, which must be true and correct only as of such specified date), except to the extent the failure to be so true and correct would not, individually or in the aggregate, have a material adverse effect with respect to Micro Focus; |
• | the delivery by Micro Focus to HPE of a certificate, dated as of the Closing Date, and signed by a senior officer of Micro Focus, certifying the satisfaction of the conditions described in the preceding four bullet points; and |
• | the receipt by HPE of the HPE Tax Opinion. |
The Merger Agreement may be terminated at any time prior to the consummation of the Merger by the mutual written consent of HPE and Micro Focus. Also, subject to specified qualifications and exceptions, either HPE or Micro Focus may terminate the Merger Agreement at any time prior to the consummation of the Merger if:
• | any governmental authority of competent jurisdiction has promulgated, entered, enforced, enacted or issued or deemed applicable to the Merger or the other transactions contemplated by the Merger Agreement any law that permanently prohibits, restrains or makes illegal the Merger or the other transactions contemplated by the Merger Agreement; |
• | the Merger has not been consummated on or prior to March 7, 2018; or |
• | Micro Focus Shareholders fail to approve the Merger and specified related matters upon a vote taken at the meeting of Micro Focus Shareholders held for such purpose (including any adjournment or postponement thereof). |
In addition, subject to specified qualifications and exceptions, HPE may terminate the Merger Agreement if:
• | Micro Focus has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to HPE’s and Seattle’s obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018; |
• | the Micro Focus Board effects a Change in Recommendation; or |
• | Micro Focus has breached in any material respect specified obligations relating to non-solicitation or its obligation to hold the special meeting of Micro Focus Shareholders to approve the Merger and specified related matters. |
In addition, subject to specified qualifications and exceptions, Micro Focus may terminate the Merger Agreement if HPE or Seattle has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to Micro Focus, Holdings or Merger Subs obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018.
In the event of termination of the Merger Agreement, the Merger Agreement will terminate without any liability on the part of any party except as described below under —Termination Payment and Expenses Payable in Certain Circumstances, provided that nothing in the Merger Agreement will relieve any party of liability for fraud or willful breach prior to termination.
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Termination Payment and Expenses Payable in Certain Circumstances
The Merger Agreement provides that upon termination of the Merger Agreement under specified circumstances, Micro Focus is required to pay HPE a termination payment of $59,825,000 (the Termination Payment). The circumstances under which the Termination Payment will be payable are as follows:
• | if HPE or Micro Focus terminates the Merger Agreement as a result of the failure to obtain the required approval of Micro Focus Shareholders upon a vote taken at a meeting of Micro Focus Shareholders held for such purpose (including any adjournment or postponement thereof); |
• | if HPE terminates the Merger Agreement after Micro Focus has breached in any material respect specified obligations relating to non-solicitation or its obligation to hold a special meeting of Micro Focus Shareholders to approve the Merger and specified related matters; |
• | if HPE terminates the Merger Agreement following a Change in Recommendation by the Micro Focus Board; |
• | if (i) a Competing Proposal (replacing references to 20% in that definition with 50% for purposes of this Termination Payment trigger) with respect to Micro Focus is publicly announced or otherwise communicated to the Micro Focus Board and not publicly withdrawn at least five business days prior to the termination of the Merger Agreement; (ii) Micro Focus consummates, or enters into a definitive agreement with respect to, any Competing Proposal within twelve months of the termination of the Merger Agreement; and (iii) the Merger Agreement is terminated in either of the following circumstances: |
• | Micro Focus has breached any representation, warranty, covenant or agreement in the Merger Agreement that would cause any of the conditions to HPE’s and Seattle’s obligation to consummate the Merger not to be satisfied at Closing, and such breach is not cured by the earlier of 60 days after notice of the breach and March 7, 2018, or is incapable of cure prior to March 7, 2018; or |
• | the outside date of March 7, 2018 is reached without a vote of the Micro Focus Shareholders to approve the Merger and related specified matters having occurred. |
In no event will Micro Focus be required to pay the Termination Payment more than once.
If accepted by HPE, payment of the Termination Payment will be HPEs sole and exclusive remedy for any losses or damages based upon, arising out of or relating to the Merger Agreement, except in the case of willful breach or fraud by Micro Focus.
In addition, because HPE consented in writing on or before October 31, 2016 to the completion of the Debt Financing on or before April 4, 2017, Seattle shall pay HPE the full amount of interest and ticking or other fees and any interest on borrowings incurred to finance such amounts actually paid by HPE (without reduction) no later than ten business days following the Closing Date.
In the Merger Agreement, the parties acknowledge and agree any breach of the Merger Agreement by any party could not be adequately compensated by monetary damages alone and that the parties would not have any adequate remedy at law. Accordingly, the parties have agreed that in addition to any other right or remedy to which a party may be entitled, in the event of any actual or threatened default or breach of any of the terms or conditions or provisions of the Merger Agreement, the aggrieved party will have the right to specific performance and injunctive or other equitable relief in respect of its rights under the Merger Agreement or any other Transaction Document, including the right to enforce specifically the other parties obligations to consummate the transactions contemplated by the Merger Agreement.
The Merger Agreement may not be amended or modified, in whole or in part, except by an instrument in writing duly signed by an authorized representative of each party to the Merger Agreement that expressly references the Merger Agreement.
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Governing Law and Jurisdiction
The Merger Agreement and all actions or other proceedings that may be based upon, arise out of or relate to the Merger Agreement or the negotiation, execution or performance of the Merger Agreement will be governed by and construed in accordance with Delaware law, without regard to the choice of law or conflicts of law principles (except for the duties of the members of the Micro Focus Board, which will be governed by the laws of England and Wales). Each party to the Merger Agreement has irrevocably and unconditionally submitted to the exclusive jurisdiction of the Delaware Court of Chancery or, if such court does not have jurisdiction, any U.S. federal court sitting in Delaware, and any appellate court from any appeal thereof, in any action or other proceeding arising out of or relating to the Merger Agreement or the other Transaction Documents or the transactions contemplated by such documents.
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THE SEPARATION AND DISTRIBUTION AGREEMENT
The following is a summary of the material provisions of the Separation and Distribution Agreement. This summary does not purport to be complete and is subject to, and qualified in its entirety by reference to, the full text of the Separation and Distribution Agreement, which is included as an exhibit to the registration statements of which this information statement/prospectus forms a part and is incorporated herein by reference. See the section entitled Where You Can Find Additional Information. HPE Stockholders are urged to read the Separation and Distribution Agreement in its entirety.
This summary of the Separation and Distribution Agreement has been included to provide HPE Stockholders with information regarding its terms. The rights and obligations of the parties are governed by the express terms and conditions of the Separation and Distribution Agreement and not by this summary or any other information included in this information statement/prospectus. This summary is not intended to provide any other factual information about Micro Focus, Seattle Holdings, Merger Sub, HPE or Seattle. Information about Micro Focus, Merger Sub, HPE and Seattle can be found elsewhere in this information statement/prospectus and in the documents incorporated by reference into this information statement/prospectus. Descriptions regarding the assets and liabilities conveyed to Seattle and retained by HPE contained in the Separation and Distribution Agreement are qualified by certain information that has been exchanged separately between HPE and Seattle and that is not reflected in the Separation and Distribution Agreement. Accordingly, HPE Stockholders should not rely on the general descriptions of assets and liabilities in the Separation and Distribution Agreement, as they may have been modified in important ways by the information exchanged separately between HPE and Micro Focus.
The Separation and Distribution Agreement provides for the separation of HPE Software from HPE. Among other things, the Separation and Distribution Agreement specifies which assets of HPE related to HPE Software are to be transferred to, and which liabilities of HPE related to HPE Software are to be assumed by, Seattle and its subsidiaries, and sets forth when and how these transfers and assumptions will occur. The Separation and Distribution Agreement also includes procedures by which HPE and Seattle will become separate and independent companies. The matters addressed by the Separation and Distribution Agreement include the matters described below.
In consideration of the transfer of the specified assets and liabilities relating to HPE Software to Seattle or other members of the Seattle Group by HPE or other members of the HPE Group, Seattle will:
• | issue to HPE additional Seattle Shares such that the number of Seattle Shares outstanding immediately prior to the Distribution is equal to the number of Seattle Shares necessary to effect the Distribution; and |
• | pay to HPE the Seattle Payment. |
Transfer of Assets and Assumption of Liabilities
The Separation and Distribution Agreement identifies the assets to be transferred, the liabilities to be assumed and the contracts to be assigned to each of HPE and Seattle as part of the separation of HPE into two independent companies, and it provides for when and how these transfers, assumptions and assignments will occur.
In particular, the Separation and Distribution Agreement provides that subject to the terms and conditions contained therein, assets related to HPE Software will generally be retained by or transferred to Seattle or another member of the Seattle Group, including, among others:
• | assets listed on certain schedules to the Separation and Distribution Agreement; |
• | shares of capital stock and other equity interests in certain subsidiaries of HPE as of the date of the Separation and Distribution Agreement that, together with Seattle, will comprise the Seattle Group; |
• | contracts (or portions thereof) specified or exclusively related to HPE Software; |
• | assets reflected on the combined unaudited pro forma pre-tax balance sheet of HPE Software as of April 30, 2016, and any assets acquired by or for HPE Software after April 30, 2016 which would have |
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been reflected on such balance sheet had such assets been acquired on or before April 30, 2016, subject to any dispositions of such assets subsequent to April 30, 2016 as may be permitted under the Merger Agreement, but in all events excluding all cash and cash equivalents in excess of an agreed amount;
• | certain intellectual property and technology rights allocated to the Seattle Group, as further described in the section entitled Other Agreements—Intellectual Property Matters Agreement below; |
• | certain rights under occurrence-based insurance policies in place prior to the Distribution, but only to the extent such policies provide coverage to members of the Seattle Group without cost to HPE and its subsidiaries; |
• | certain owned real property and leases of real property allocated to the Seattle Group, as further described in the section entitled Other Agreements—Real Estate Matters Agreement below; |
• | certain office equipment, trade fixtures and furnishings located at physical sites of the Seattle Group; |
• | intercompany receivables owed to a member of the Seattle Group, on the one hand, by a member of the HPE Group, on the other hand, that (1) are in respect of goods or services sold by a member of the Seattle Group and (2) are effective or outstanding as of the Distribution, after giving effect to any settlement and payment made prior to or as of the Distribution in accordance in the Separation and Distribution Agreement; |
• | other assets expressly contemplated by the Separation and Distribution Agreement or any ancillary agreement as assets to be transferred to the Seattle Group; and |
• | assets (other than certain intellectual property and assets retained by or transferred to the HPE Group) exclusively relating to or exclusively used in HPE Software. |
All of the assets of HPE or any of its subsidiaries other than the assets allocated to the Seattle Group will be retained by or transferred to the HPE Group. The Separation and Distribution Agreement identifies specific assets that will not be allocated to the Seattle Group, including:
• | assets listed on certain schedules to the Separation and Distribution Agreement; |
• | cash and cash equivalents, other than cash or cash equivalents held by or in the name of a member of the Seattle Group as of immediately prior to Closing, subject to specified exceptions; |
• | shares of capital stock and other equity interests in subsidiaries and other entities held by HPE that are not members of the Seattle Group; |
• | contracts not allocated to the Seattle Group; |
• | intellectual property rights owned or licensed by the HPE Group that are not allocated to the Seattle Group; |
• | owned real property or leases of real property allocated to the HPE Group; and |
• | other assets expressly contemplated by the Separation and Distribution Agreement or any ancillary agreement as assets to be retained by the HPE Group. |
The Separation and Distribution Agreement provides that liabilities related to HPE Software or any of the assets allocated to the Seattle Group will generally be retained by or transferred to the Seattle Group, including:
• | liabilities listed on certain schedules to the Separation and Distribution Agreement; |
• | liabilities to the extent relating to, arising out of or resulting from (1) the operation of HPE Software at any time; (2) the operation of any business conducted by any member of the Seattle Group after the Distribution; (3) assets allocated to the Seattle Group; and (4) any environmental condition or matter relating to, arising out of or resulting from (a) any properties (or portion thereof if shared with the HPE Group) owned, leased or occupied by any member of the Seattle Group from and after the Distribution, (b) the ownership, occupancy or use of the assets allocated to the Seattle Group, (c) the presence on or release of hazardous materials on or from any assets allocated to the Seattle Group, (d) the conduct or operation of HPE Software or (e) the use, treatment, release, handling, transportation or disposal of hazardous materials by HPE Software or by or on behalf of any member of the Seattle Group; |
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• | liabilities reflected on the combined unaudited pro forma pre-tax balance sheet of HPE Software as of April 30, 2016, and any liabilities arising or assumed after April 30, 2016 which would have been reflected on such balance sheet had such liabilities arisen or been assumed on or before April 30, 2016, subject to any discharge of such liabilities subsequent to April 30, 2016; |
• | liabilities arising out of or resulting from (1) any debt incurred by Seattle, Micro Focus or any of their respective subsidiaries to finance the Seattle Payment, (2) capitalized and operating lease obligations related to HPE Software and (3) the Seattle Indebtedness (described under —Post-Closing Adjustment below); |
• | intercompany payables owed by a member of the Seattle Group, on the one hand, to a member of the HPE Group, on the other hand, that (1) are in respect of goods or services sold by a member of the HPE Group to a member of the Seattle Group and (2) are effective or outstanding as of the Distribution, after giving effect to any settlement and payment made prior to or as of the Distribution in accordance with the Separation and Distribution Agreement; and |
• | other liabilities that are expressly provided by the Separation and Distribution Agreement or any ancillary agreement to be assumed by the Seattle Group, and all liabilities of the Seattle Group under the Separation and Distribution Agreement or any ancillary agreement. |
All of the liabilities other than the liabilities allocated to Seattle will be retained by or transferred to HPE. The Separation and Distribution Agreement identifies specific liabilities that will not be allocated to Seattle, including:
• | liabilities listed on certain schedules to the Separation and Distribution Agreement; |
• | liabilities of HPE or any of its affiliates to the extent relating to, arising out of or resulting from (1) any assets not allocated to the Seattle Group or (2) any businesses or operations conducted prior to the Distribution by any member of the Houston Group that are not included in HPE Software; |
• | liabilities arising out of or resulting from any amounts that would constitute indebtedness of any member of the HPE Group under GAAP; and |
• | other liabilities that are expressly contemplated by the Separation and Distribution Agreement or any ancillary agreement to be retained or assumed by the HPE Group, and all liabilities of the HPE Group under the Separation and Distribution Agreement or any ancillary agreement. |
Information in this information statement/prospectus with respect to the assets and liabilities of Seattle and HPE following the Distribution is presented based on the allocation of such assets and liabilities pursuant to the Separation and Distribution Agreement and the ancillary agreements, unless the context otherwise requires.
The Separation and Distribution Agreement provides that, in the event that the transfer or assignment of assets and liabilities allocated to the Seattle Group or the HPE Group, as applicable, does not occur prior to the Separation, then until such assets or liabilities are able to be transferred or assigned, the Seattle Group or the HPE Group, as applicable, will hold such assets on behalf and for the benefit of the other party and its group and will pay, perform and discharge such liabilities in the ordinary course of business, provided that a party shall not be obligated to expend any money unless the other party advances or agrees to reimburse the necessary funds.
Consents and Delayed Transfers
The Separation and Distribution Agreement provides that Seattle and HPE will use commercially reasonable efforts to obtain or make any consents, waivers, approvals, permits, authorizations, notifications, registrations, reports or filings required for the transfer or assignment of any assets or the assumption of any liabilities contemplated by the Separation and Distribution Agreement, or as required to novate or assign obligations under agreements, leases, licenses and other liabilities, or to obtain releases or substitutions such that such party and its subsidiaries are solely liable for the liabilities allocated to it under the Separation and Distribution Agreement. However, except as expressly provided in any ancillary agreement, no member of the HPE Group or the Seattle Group will be obligated to contribute capital or pay any consideration to any person in order to obtain or make such consent, waiver, approval, permit, authorization, notification, registration, report or other filing. The transfer or assignment of assets or the assumption of liabilities, as the case may be, shall be automatically deemed
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deferred if and to the extent that the valid, complete and perfected transfer or assignment of such assets or the assumption of such liabilities would be a violation of applicable law or require any consent, waiver, approval, permit, authorization, notification, registration, report or other filing that has not been made or obtained at or prior to the Distribution until such time as all legal impediments are removed or such consent, waiver, approval, permit, authorization, notification, registration, report or other filing has been obtained or made. The party retaining such asset will hold such asset in trust for the use and benefit of the other (at such other partys expense) until properly conveyed. The parties obligations to obtain or make such consents, waivers, approvals, permits, authorizations, notifications, registrations, reports or other filings will terminate 24 months after the Distribution.
The Separation and Distribution Agreement provides that HPE and Seattle will use commercially reasonable efforts to separate assets and contracts that relate both to HPE Software and HPEs other businesses into separate assets and contracts so that the Seattle Group or the HPE Group, as applicable, will retain the rights and benefits, and be subject to the liabilities, with respect to or arising from each shared asset or contract to the extent relating to its business. If any third-party consent to the separation of such asset or contract has not be obtained or if such separation has not otherwise been completed as of the Distribution, then HPE and Seattle will use commercially reasonable efforts to develop and implement arrangements to pass along the benefits and liabilities of the portion of any such shared asset or contracts as relates to the other partys business. These obligations with respect to shared assets and contracts will terminate 24 months after the Distribution (or upon the expiration of any such shared contract in accordance with its terms, if earlier). HPE and Seattle will share equally any costs relating to separating shared assets and contracts.
The Separation and Distribution Agreement provides for a specified post-Closing adjustment payment to be made by one party to the other party if and to the extent that (i) the amount of working capital of HPE Software; (ii) the cash and cash equivalents held by or in the name of the members of the Seattle Group; and (iii) the amount of certain obligations for borrowed money and other indebtedness of (or any guaranties in respect of the foregoing by) any member of the Seattle Group, in each case, as of immediately prior to Closing (which we refer to as the Seattle Indebtedness), are greater than or less than specified targets for each such amount, as further described in the Separation and Distribution Agreement.
Disclaimer of Representations and Warranties
Except as expressly set forth in the Separation and Distribution Agreement, the Merger Agreement or any ancillary agreement, neither Seattle nor HPE makes any representation or warranty as to the assets, businesses or liabilities transferred or assumed as part of the Separation, the Distribution or the Merger, as to any approvals or notifications required in connection with the transfers or assumptions, as to the value or freedom from any security interests of, or any other matter concerning, any assets of Seattle or HPE, as to the absence of any defenses or right of setoff or freedom from counterclaim with respect to any action or other asset of either Seattle or HPE or as to the legal sufficiency of any assignment, document, certificate or instrument delivered under the Separation and Distribution Agreement, the Merger Agreement or any ancillary agreement to convey title to any asset or thing of value. Except as expressly set forth in the Separation and Distribution Agreement, the Merger Agreement or any ancillary agreement, all assets are transferred on an as is, where is basis and the respective transferees will bear the economic and legal risks that any conveyance will prove to be insufficient to vest in the transferee good or marketable title, free and clear of all security interests, and that any necessary approvals or notifications are not obtained or made or that any requirements of laws or judgments are not complied with.
In the Distribution, HPE will distribute all of the outstanding Seattle Shares to HPE Stockholders as of the close of business on the Distribution Record Date. The Separation and Distribution Agreement provides that the Distribution may be effected, at HPEs option, by way of a spin-off, in which HPE would make a pro rata distribution of Seattle Shares to HPE Stockholders, or a split-off, in which HPE would exchange Seattle Shares for HPE Shares. HPE intends to effect the Distribution as a spin-off, as further described elsewhere herein.
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Conditions to the Distribution
The obligation of HPE to complete the Distribution is subject to the satisfaction or waiver by HPE (subject to the limitation that Micro Focus must also consent to any waiver of the first bullet point described below, such consent not to be unreasonably withheld, conditioned or delayed) of the following conditions:
• | completion of the Reorganization in connection with the Separation substantially in accordance with the terms of the Separation and Distribution Agreement; |
• | the issuance by Seattle to HPE of Seattle Shares such that the number of Seattle Shares outstanding immediately prior to the Distribution is equal to the number of Seattle Shares necessary to effect the Distribution; the payment of the Seattle Payment; and the completion of specified recapitalization transactions involving certain HPE subsidiaries; |
• | delivery of an opinion to the HPE Board, in form and substance reasonably acceptable to HPE in its sole discretion, from an independent appraisal firm as to the solvency of HPE after giving effect to the Seattle Payment and the consummation of the Distribution (and such opinion not having been withdrawn, rescinded or modified in any respect adverse to HPE); and |
• | satisfaction or waiver by the party entitled to the benefit thereof of the conditions to the obligations of the parties to the Merger Agreement to consummate the Merger and complete the other transactions contemplated by the Merger Agreement (other than those conditions that by their nature are to be satisfied contemporaneously with the Distribution or the Merger). |
Treatment of Intercompany Agreements, Receivables and Payables; Bank and Brokerage Accounts
The Separation and Distribution Agreement provides that all agreements that are between members of the Seattle Group, on the one hand, and members of the HPE Group, on the other hand, and that do not involve any third parties will be terminated as of the Distribution, except for the Separation and Distribution Agreement, the Merger Agreement and the ancillary agreements, certain shared contracts and other arrangements specified in the Separation and Distribution Agreement.
The Separation and Distribution Agreement also provides that all intercompany receivables owed and intercompany payables due solely between members of the Seattle Group, on the one hand, and members of the HPE Group, on the other hand, that are in respect of goods or services and are effective or outstanding as of immediately prior to the Distribution will be settled and paid concurrently with the Distribution, or as promptly as practicable thereafter, subject to limited exceptions.
The Separation and Distribution Agreement further provides that concurrently with the Distribution or as soon as possible thereafter, all bank and brokerage accounts owned by a member of the Seattle Group will be de-linked from the accounts owned by any member of the HPE Group, and all bank and brokerage accounts owned by a member of the HPE Group will be de-linked from the accounts owned by any member of the Seattle Group.
Financing of the Seattle Payment
Prior to the Distribution, Seattle Borrower has entered into definitive agreements providing for indebtedness in an aggregate principal amount equal to $2.6 billion, as further described in the section entitled Debt Financing. Seattle Borrower will incur such indebtedness and receive the proceeds thereof prior to the Distribution in order to fund the Seattle Payment.
Certain Seattle Cash and Pension Funding
The Separation and Distribution Agreement provides that, as of Closing, HPE will cause the Seattle Group to have immediately available cash with respect to HPE Softwares defined benefits plan liabilities to be assumed by Seattle (or will have pre-funded such liabilities in whole or in part on or after September 1, 2016 and prior to Closing) in an aggregate amount agreed by the parties. Additionally, as of Closing, HPE will cause the Seattle Group to have immediately available cash or cash equivalents in an aggregate amount equal to (i) any insurance proceeds received after the date of the Separation and Distribution Agreement that were generated by assets that would have been allocated to the Seattle Group under the Separation and Distribution Agreement and (ii) the proceeds of any asset divestiture by HPE Software outside the ordinary course of business after the date of the Separation and Distribution Agreement and not otherwise contemplated by the Merger Agreement or any Transaction Document.
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HPE will use commercially reasonable efforts to deliver to Seattle, by the Distribution, standalone information technology systems that (in combination with services provided to Seattle under the Transition Services Agreement) in and of themselves will not prevent Seattle from complying in all material respects with IFRS. If HPE has not delivered such standalone information technology systems to Seattle by the Distribution, HPE and Seattle will discuss in good faith which party will be responsible for the completion and costs of such standalone information technology systems after the Distribution.
The Separation and Distribution Agreement provides that, upon the Distribution, except as expressly provided in the Separation and Distribution Agreement, the Merger Agreement or any ancillary agreement, Seattle, on behalf of itself, its affiliates, successors and assigns, and all persons who at any time prior to the Distribution were directors, officers, agents or employees of any member of the Seattle Group, releases and forever discharges HPE and its affiliates, successors and assigns, and all persons who at any time prior to the Distribution were stockholders, members, partners, directors, managers, officers, agents or employees of any member of the HPE Group from all liabilities to the extent existing or arising from any acts and events occurring or failing to occur, and any conditions existing, at or prior to the Distribution, including in connection with the implementation of the Separation, the Distribution and the Merger. The Separation and Distribution Agreement provides that, upon the Distribution, except as expressly provided in the Separation and Distribution Agreement, the Merger Agreement or any ancillary agreement, HPE, on behalf of itself, its affiliates, successors and assigns, and all persons who at any time prior to the Distribution were stockholders, members, partners, directors, managers, officers, agents or employees of any member of the HPE Group, releases and forever discharges Seattle and its affiliates, successors and assigns, and all persons who at any time prior to the Distribution were directors, officers, agents or employees of any member of the Seattle Group from all liabilities to the extent existing or arising from any acts and events occurring or failing to occur, and any conditions existing, at or prior to the Distribution, including in connection with the implementation of the Separation, the Distribution and the Merger.
These releases will not extend to obligations or liabilities under any agreements between the parties that remain in effect following the Separation, which agreements include, among others, the Separation and Distribution Agreement, the Merger Agreement and the ancillary agreements.
In the Separation and Distribution Agreement, Seattle agrees to indemnify, defend and hold harmless each member of the HPE Group, each of HPEs affiliates and each of their respective directors, officers and employees, from and against all liabilities relating to, arising out of or resulting from:
• | any liabilities allocated to the Seattle Group; |
• | the failure of any member of the Seattle Group or any other person to pay, perform or otherwise promptly discharge any liabilities allocated to the Seattle Group, whether prior to, at or after Closing; |
• | any guarantee, indemnification obligation, surety bond or other credit support arrangement to the extent discharged and performed by any member of the HPE Group for the benefit of any member of the Seattle Group that survives the Distribution (except to the extent related to a liability allocated to the HPE Group, and other than as a result of breach thereof by any member of the Seattle Group prior to Closing or breach thereof by any member of the HPE Group); and |
• | any breach by any member of the Seattle Group of the Separation and Distribution Agreement or any of the ancillary agreements (other than the ancillary agreements that expressly contain indemnification provisions, which will be subject to the indemnification provisions contained therein) after Closing. |
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HPE agrees to indemnify, defend and hold harmless each member of the Seattle Group, each of Seattles affiliates and each of their respective directors, officers and employees from and against all liabilities relating to, arising out of or resulting from:
• | the liabilities allocated to the HPE Group; |
• | the failure of any members of the HPE Group or the Seattle Group to pay, perform or otherwise promptly discharge any liabilities allocated to the HPE Group, whether prior to, at or after the Distribution; |
• | any guarantee, indemnification obligation, surety bond or other credit support arrangement to the extent discharged and performed by a member of the Seattle Group for the benefit of any member of the HPE Group that survives the Distribution (except to the extent related to a liability allocated to the Seattle Group, and other than as a result of breach thereof by any member of the Seattle Group after Closing); and |
• | any breach by any member of the Seattle Group prior to Closing or any member of the HPE Group at any time, of the Separation and Distribution Agreement or any of the ancillary agreements (other than the ancillary agreements that expressly contain indemnification provisions, which will be subject to the indemnification provisions contained therein). |
The Separation and Distribution Agreement also establishes procedures with respect to claims subject to indemnification and related matters. Under the Separation and Distribution Agreement, the amount of any indemnifiable loss will be reduced by any insurance proceeds or similar amounts actually recovered by the indemnified party in respect of the indemnifiable loss. Indemnification with respect to taxes will generally be governed solely by the Tax Matters Agreement.
Management of Claims, Litigation and Settlements
Each party to the Separation and Distribution Agreement will direct the defense or prosecution of litigation solely related to assets or liabilities allocated to such party or its group under the Separation and Distribution Agreement. With respect to litigation in which members of both the HPE Group and the Seattle Group are named and that relate to assets or liabilities of both the HPE Group and the Seattle Group, each of Seattle and HPE will be entitled to assume its own defense and will consult in good faith with each other regarding the management of the defense of such actions. Any other litigation related to assets or liabilities of both the HPE Group and the Seattle Group will be managed by the party with the greater financial exposure with respect to the litigation, provided that if an action involves the pursuit of criminal sanctions or penalties or seeks equitable or injunctive relief against any party, that party will be entitled to control the defense of the claim against such party.
Neither party may settle any action that involves assets or liabilities of the other party or its group without the prior written consent of the other party, except that if the settling party is indemnifying the other party, the settling party may settle the action without the other partys consent so long as the settlement does not (1) result in any non-monetary remedy or relief being imposed upon any member of the other partys group and (2) contain or involve an admission or statement providing for or acknowledging any liability or criminal wrongdoing on behalf of the other partys group or any of its affiliates.
Insurance Policies and Coverage
Following the Distribution, the members of the Seattle Group and HPE Software will no longer be covered under the insurance policies of the HPE Group, and HPE will retain all rights to control such policies. The members of the Seattle Group will have the right to access occurrence-based coverage (to the extent such coverage exists) under the insurance policies of the HPE Group for claims asserted after the Distribution but arising out of an occurrence prior to the Distribution, but only to the extent such policies provide for such coverage without cost to HPE and its subsidiaries.
In addition to the actions specifically provided for in the Separation and Distribution Agreement, each of Seattle and HPE agree to use commercially reasonable efforts prior to, at and for 12 months after the Distribution to
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take all actions and to do all things reasonably necessary under applicable laws, regulations and agreements to consummate and make effective the transactions contemplated by the Separation and Distribution Agreement and the ancillary agreements.
Except as expressly set forth in the Separation and Distribution Agreement or in any ancillary agreement, HPE will be responsible for all out-of-pocket fees, costs and expenses of HPE, Seattle and any of their respective subsidiaries incurred in connection with the Separation or the Distribution prior to Closing, other than the separation expenses that Micro Focus agrees in writing should be reimbursed by Seattle to HPE. Each of HPE and Seattle will pay for all such expenses incurred by it concurrently with or after the Distribution.
The Separation and Distribution Agreement contains provisions that govern, except as otherwise provided in certain ancillary agreements, the resolution of disputes, controversies or claims that may arise between Seattle and HPE related to such agreements, the Separation or the Distribution. These provisions contemplate that efforts will be made to resolve disputes, controversies and claims first by escalation of the dispute to senior management of Seattle and HPE before the parties avail themselves of any other remedies. If senior management is unable to resolve a dispute within a specified period, the dispute may be submitted by either party to mediation in accordance with the Separation and Distribution Agreement. If the parties are unable to resolve the dispute through mediation within a specified period, the dispute may be submitted by either party to binding arbitration in accordance with the Separation and Distribution Agreement.
The Separation and Distribution Agreement will terminate simultaneously with a valid termination of the Merger Agreement prior to the Distribution. Except for a termination described in the immediately preceding sentence, prior to the Distribution, Seattle may not agree to terminate the Separation and Distribution Agreement without the prior written consent of Micro Focus (not to be unreasonably withheld, conditioned or delayed). After the Distribution, the Separation and Distribution Agreement may not be terminated except by an agreement in writing signed by each of HPE and Seattle. In the event of such a termination, neither party, nor any of their respective officers and directors, will have any liability to any person by reason of the Separation and Distribution Agreement.
The Separation and Distribution Agreement also governs, among other matters, access to information, confidentiality, access to and provision of witnesses and records, counsel and legal privileges and treatment of outstanding guarantees.
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The Employee Matters Agreement entered into on September 7, 2016 governs the allocation of liabilities and responsibilities relating to employment matters, employee compensation and benefits plans and programs and other related matters in connection with the Separation.
The Employee Matters Agreement provides that Seattle and its subsidiaries generally will be responsible for liabilities associated with active employees who report directly or indirectly to the Executive Vice President and General Manager, Software for HPE or who serve in a global functions role that is primarily dedicated to supporting HPE Software (collectively, the Seattle Employees), other than certain of such liabilities that are specifically allocated to HPE and its subsidiaries under the Employee Matters Agreement, and HPE and its subsidiaries (other than Seattle and its subsidiaries) generally will retain liabilities associated with all active employees who are not Seattle Employees and all former employees.
Under the terms of the Employee Matters Agreement, (i) HPE equity awards granted to Seattle Employees after May 24, 2016 and prior to September 1, 2016 that remain outstanding and unvested as of immediately prior to Closing will be assumed by Micro Focus and converted into equivalent unvested awards relating to Micro Focus Shares and (ii) HPE will be solely responsible for the settlement of, and all other liabilities relating to, all other HPE equity awards held by the Seattle Employees (including (x) all such awards that were outstanding as of May 24, 2016, the vesting of which will be accelerated on the Distribution Date, (y) any such awards that otherwise vest prior to Closing and (z) any such awards granted on or after September 1, 2016).
Micro Focus incentive equity awards are not impacted by the Transactions and will remain outstanding in accordance with their existing terms after Closing.
The Tax Matters Agreement, which will be entered into at or shortly prior to the Distribution Date, sets forth the terms and conditions regarding the allocation of taxes between HPE and Seattle following the Distribution.
Pursuant to the Tax Matters Agreement, each of HPE and Seattle will be entitled to be indemnified by the other party with respect to certain tax matters, including in respect of taxes which are attributable to the other party and taxes arising from certain actions (or failures to act) by the other party or certain transactions with respect to the stock or assets of the party that, in each case, would affect the intended tax treatment of the Distribution or certain related transactions. The Tax Matters Agreement also includes a customary general pre- and post- Closing allocation between HPE and Seattle of HPE Softwares taxes incurred in the ordinary course of business and establishes procedures for preparing tax returns and handling tax audits and proceedings.
In addition, under the Tax Matters Agreement, the Enlarged Group will, during the two year period following the Distribution Date, be restricted from taking certain actions that could adversely affect the intended tax treatment of the Distribution and certain related transactions unless, prior to taking any such actions, Micro Focus or Seattle obtains an unqualified opinion from its tax advisers or ruling from the IRS, in each case, satisfactory to HPE, confirming that the restricted action or actions will not affect the intended tax treatment of the Distribution or certain related transactions. These restrictions may limit the Enlarged Groups ability to pursue certain strategic transactions or engage in certain other transactions, including share issuances, certain debt issuances, business combinations, transactions (other than the Merger) that would (when combined with certain other transactions or changes in ownership of Seattle Shares) have the effect of causing one or more persons to acquire (directly or indirectly) shares comprising 40% or more of the vote or value of all outstanding Seattle Shares, sales of assets, partial and full liquidations, the cessation of the active conduct of certain businesses, amendments of organizational documents, actions that affect the voting rights of Seattle Shares, share redemptions and repurchases.
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Intellectual Property Matters Agreement
The Intellectual Property Matters Agreement, which will be entered into at or shortly prior to Closing, sets forth the terms and conditions regarding (i) the allocation and transfer by the HPE Group to Seattle of intellectual property used exclusively by HPE Software, (ii) the licensing from the HPE Group to Seattle of other intellectual property used by HPE Software prior to Closing and (iii) the licensing from Seattle to the HPE Group of certain intellectual property transferred to Seattle at or prior to Closing which were used by the HPE Group (other than HPE Software) prior to Closing.
The HPE Group will transfer to Seattle (i) all registered intellectual property rights (including patents, trademarks, copyrights and domain names) which are set forth in a schedule to the Intellectual Property Matters Agreement and (ii) all unregistered intellectual property rights owned by the HPE Group that exclusively relate to HPE Software.
HPE (on behalf of itself and the other members of the HPE Group) will grant to Seattle, Micro Focus and their respective subsidiaries a perpetual, non-exclusive and royalty-free license of certain intellectual property retained by the HPE Group that was used in the operation of HPE Software prior to Closing.
Seattle will grant to the HPE Group a perpetual, non-exclusive and royalty-free license of certain intellectual property rights transferred to Seattle pursuant to the Intellectual Property Matters Agreement that was used by the HPE Group (other than HPE Software) prior to Closing.
The Intellectual Property Matters Agreement will remain in effect in perpetuity unless terminated by mutual agreement of HPE and Seattle.
The Transition Services Agreement, which will be entered into at or shortly prior to Closing, sets forth the terms and conditions under which HPE and Seattle will provide various services (such as IT services) to each other after Closing on a transitional basis in connection with the Separation.
HPE and Seattle will agree to provide to each other and their respective subsidiaries (and, in the case of HPE, to Micro Focus and its subsidiaries) specific transitional services set forth on schedules to the Transition Services Agreement and, subject to certain requirements, such other services required to operate HPE Software or the other businesses of HPE, as applicable, in substantially the same manner following Closing.
The initial term of the Transition Services Agreement will be nine months, and each party in certain circumstances may extend the term of services it will receive for up to two three-month periods (for a total term of up to 15 months).
Each party, as recipient, will pay to the other, as provider, the providers actual costs in providing the services plus a markup of 5% for the initial term of a service, 10% during the first renewal term for a service, and 15% for the second renewal term for a service.
Each partys payments to the other party for which it is responsible as recipient of the services will be subject to a quarterly cap.
Each party, as recipient, may terminate the Transition Services Agreement with respect to all or part of any service for convenience (subject to an applicable notice period) or the providers failure to perform a material obligation (subject to a 30-day cure period). Each party, as provider, may terminate the Transition Services Agreement with respect to one or more services (in their entirety) for the recipients material breach of any obligations (subject to a 60-day cure period). The recipient will be required to pay to the provider certain breakage or termination fees and costs or, with respect to the termination of a part of an individual service, any costs incurred by the provider in connection with such termination that would not have otherwise been incurred but for the termination, to the extent such costs cannot reasonably be mitigated or eliminated.
The Real Estate Matters Agreement, which will be entered into at or shortly prior to Closing, sets forth the terms and conditions regarding the separation of HPE Softwares real estate from HPE, including providing for the transfer of certain properties by HPE to Seattle.
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HPE and Seattle will agree that each will use commercially reasonable efforts to obtain any landlord consents required in connection with the transfer of the leased properties. Seattle will also be entitled to receive rental income from HPE Software property in the event that such property has not been transferred by HPE prior to Closing.
A form of deed, assignment of lease, lease and sublease are attached as exhibits to the Real Estate Matters Agreement. Such forms have been, or will be, subsequently further negotiated to address the particular local requirements of each property transfer.
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The Facilities Agreements comprise (i) the New Micro Focus Facility Agreement, which will make available the Micro Focus Facilities and (ii) the New Seattle Facility Agreement, which will make available the Seattle Term Loan Facility. Within two business days following Closing, the New Facilities are expected to be cross-guaranteed and secured on a pari passu basis by identical guarantors and collateral. Prior to the Merger, the obligations under the Seattle Term Loan Facility shall not be guaranteed by Micro Focus or any of its subsidiaries and the obligations under the Micro Focus Facilities shall not be guaranteed by Seattle or any of its subsidiaries.
Pursuant to Amendment No. 3, the Existing Facilities Agreement was amended to (i) reduce the pricing of the Facility B-2 term loans, (ii) refinance the Facility C term loans, (iii) provide for the borrowing of the Facility B-3 term loans and Euro Facility term loans into escrow, (iv) provide for the conversion of the Existing Facilities Agreement into the New Micro Focus Facility Agreement on a date anticipated to be one business day prior to Closing pursuant to the terms and conditions of the escrow credit agreement and (v) make certain other changes to the Existing Facilities Agreement. The New Micro Focus Facility Agreement will include three tranches of term loans and the revolving loans. The Facility B-2 term loans shall amortize in quarterly installments of 0.25% of the principal amount per quarter, starting with the second full financial quarter after Closing, with the balance repayable on November 20, 2021 (or if such anniversary is not a business day, the next preceding business day). The Facility B-3 term loans shall amortize in quarterly installments of 0.25% of the principal amount per quarter, starting with the second full financial quarter after Closing, with the balance repayable on the seventh anniversary of the date of the initial funding of the Facility B-3 term loans. Euro Facility term loans shall amortize in quarterly installments of 0.25% of the principal amount per quarter, starting with the second full financial quarter after Closing, with the balance repayable on the seventh anniversary of the date of the initial funding of the Euro Facility term loans. Revolving loans are repayable on the fifth anniversary of the closing date of Amendment No. 3.
The initial term loans under the New Seattle Facility Agreement are expected to be initially incurred by a newly formed domestic subsidiary of Seattle pursuant to an escrow credit agreement. On a date anticipated to be one business day prior to Closing, such loans will be converted and deemed issued under the New Seattle Facility Agreement pursuant to the terms and conditions of the escrow credit agreement.
Interest on the initial term loans or revolving loans in the New Micro Focus Facility Agreement is calculated at margins over Alternate Base Rate or Adjusted Eurocurrency Rate of (i) in the case of the initial Facility B-2 term loans, 1.50% and 2.50% respectively (beginning with the delivery of the compliance certificate for the fiscal quarters ending April 30, 2018, ratcheting down to 1.25% and 2.25% respectively if the first lien leverage ratio is less than or equal to 3:1), (ii) in the case of the initial Facility B-3 term loans, 1.75% and 2.75% respectively (beginning with the delivery of the compliance certificate for the fiscal quarters ending April 30, 2018, ratcheting down to 1.50% and 2.50% respectively if the first lien leverage ratio is less than or equal to 3:1, (iii) in the case of the initial Euro Facility term loans, 3.00% over Adjusted Eurocurrency Rate (beginning with the delivery of the compliance certificate for the fiscal quarters ending April 30, 2018, ratcheting down to 2.75% if the first lien leverage ratio is less than or equal to 3:1) and (iv) in the case of the initial revolving loans, 2.50% and 3.50% respectively (beginning with the delivery of the compliance certificate for the fiscal quarters ending April 30, 2018, ratcheting down to 2.25% and 3.25% respectively if the first lien leverage ratio is less than or equal to 3:1).
The initial term loans in the New Seattle Facility Agreement shall amortize in quarterly installments of 0.25% of the principal amount per quarter, starting with the second full financial quarter after Closing, with the balance repayable on the seventh anniversary of date of the initial funding of the New Seattle Facility Term Loan. Pursuant to the New Seattle Facility Agreement, interest on the initial term loans under the New Seattle Facility Agreement is calculated at margins over Alternate Base Rate or Adjusted Eurocurrency Rate of 1.75% and 2.75% respectively (ratcheting down to 1.50% and 2.50% respectively if the first lien leverage ratio is less than or equal to 3:1).
In addition, a commitment fee of 0.50% (ratcheting down to 0.375% if the first lien leverage ratio is less than or equal to 3:1) is payable on undrawn amounts of the revolving loans under the Micro Focus Facilities. The Micro Focus Facilities will contain representations and warranties, affirmative and negative covenants binding Micro Focus and its restricted subsidiaries (including after Closing, Seattle and its restricted subsidiaries) and events of default. The only financial covenant attaching to the New Micro Focus Facilities is an aggregate net first lien
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leverage covenant which only applies to the Revolving Credit Facility in circumstances where more than 35% of the Revolving Credit Facility (excluding certain letters of credit) is outstanding at a fiscal quarter end.
Additionally, the Seattle Term Loan Facility will contain representations and warranties, affirmative and negative covenants binding Seattle and its restricted subsidiaries (and, after Closing, Micro Focus and its restricted subsidiaries) and events of default. The Seattle Term Loan Facility will not contain any financial covenants.
If an event of default occurs and is continuing under the Micro Focus Facilities the lenders under the Micro Focus Facilities will, subject to certain limitations and exceptions, be entitled to accelerate repayment of the Micro Focus Facilities, cancel any unutilized commitment and enforce their rights under the guarantees and security.
Additionally, if an event of default occurs and is continuing under the Seattle Term Loan Facility the lenders under the Seattle Term Loan Facility will, subject to certain limitations and exceptions, be entitled to accelerate repayment of the Seattle Term Loan Facility, cancel any unutilized commitment and enforce their rights under the guarantees and security.
The term loans under the Micro Focus Facilities will include provisions requiring mandatory prepayment subject to a minimum threshold in certain circumstances, in relation to (i) amounts received from the incurrence of debt; (ii) net cash proceeds from certain permitted categories of asset sales and other dispositions of property; (iii) insurance proceeds in respect of a property or asset; and (iv) a percentage of annual excess cash flow (based upon achievement of certain specified net first lien leverage ratios). Pursuant to Amendment No. 3, Micro Focus obtained a waiver of the required annual excess cash flow payment for the financial year ending April 30, 2017.
The term loans under the Seattle Term Loan Facility will also include provisions requiring mandatory prepayment subject to a minimum threshold in certain circumstances, in relation to (i) amounts received from the incurrence of debt; (ii) net cash proceeds from certain permitted categories of asset sales and other dispositions of property; (iii) insurance proceeds in respect of a property or asset; and (iv) a percentage of annual excess cash flow (based upon achievement of certain specified net first lien leverage ratios).
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DESCRIPTION OF THE MICRO FOCUS AMERICAN DEPOSITARY SHARES
For the purposes of this section, (i) you and your refer to each HPE Stockholder as of the close of business on the Distribution Record Date, each of whom will be entitled to receive Seattle Shares in the Distribution, with such Seattle Shares being converted into Micro Focus ADSs in the Merger, as further described elsewhere in this information statement/prospectus, and each future holder of Micro Focus ADSs, in each case, in his, her or its capacity as such, and (ii) references to we, us and our mean Micro Focus (and not, for the avoidance of doubt, Seattle or HPE).
The Depositary will register and deliver the Micro Focus ADSs. Each Micro Focus ADS will represent ownership of one Micro Focus Share deposited with Deutsche Bank AG, London Branch, as custodian for the Depositary. Each Micro Focus ADS will also represent ownership of any other securities, cash or other property which may be held by the Depositary. The Depositarys principal office at which the Micro Focus ADSs will be administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the Depositary is located at 60 Wall Street, New York, NY 10005, USA.
The Direct Registration System (DRS) is a system administered by The Depository Trust Company (DTC) pursuant to which the Depositary may register the ownership of uncertificated Micro Focus ADSs, which ownership shall be evidenced by periodic statements issued by the Depositary to the Micro Focus ADS holders entitled thereto.
Micro Focus ADS holders are not Micro Focus Shareholders and accordingly, you, as a Micro Focus ADS holder, will not have shareholder rights. English law governs Micro Focus Shareholder rights. The Depositary will be the holder of the Micro Focus Shares underlying your Micro Focus ADSs. As a holder of Micro Focus ADSs, you will have Micro Focus ADS holder rights. The Deposit Agreement among us, the Depositary and you, as a Micro Focus ADS holder, and the beneficial owners of Micro Focus ADSs sets out Micro Focus ADS holder rights as well as the rights and obligations of the Depositary. The laws of the State of New York govern the Deposit Agreement and the Micro Focus ADSs.
The following is a summary of the material provisions of the Deposit Agreement. This summary does not purport to be complete and is qualified in its entirety by the full text of the Deposit Agreement and the form of ADR, which you should read in their entirety, and which are included as exhibits to the registration statements of which this information statement/prospectus forms a part and incorporated herein by reference. See the section entitled Where You Can Find More Information.
How will you hold your Micro Focus ADSs?
You may hold Micro Focus ADSs either (i) directly (a) by having an ADR, which is a certificate evidencing a specific number of Micro Focus ADSs, registered in your name, or (b) by holding Micro Focus ADSs in DRS, or (ii) indirectly through your broker or other financial institution. If you hold Micro Focus ADSs directly, you are a Micro Focus ADS holder. This description assumes you hold your Micro Focus ADSs directly. Micro Focus ADSs will be issued through DRS, unless you specifically request certificated ADRs. If you hold the Micro Focus ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of Micro Focus ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Dividends and Other Distributions
How will you receive dividends and other distributions on the Micro Focus ADSs?
The Depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on the Micro Focus Shares or other deposited securities, after deducting applicable fees and expenses. You will receive these distributions in proportion to the number of Micro Focus Shares your Micro Focus ADSs represent as of the record date set by the Depositary with respect to the Micro Focus ADSs (which will be as close as practicable to the record date for the Micro Focus Shares).
• | Cash. The Depositary will convert any cash dividend or other cash distribution we pay on the Micro Focus Shares or any net proceeds from the sale of any Micro Focus Shares, rights, securities or other |
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entitlements into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the United States. If that is not practical or lawful or if any government approval is needed and cannot be obtained with respect to any particular Micro Focus ADS holder, the Deposit Agreement allows the Depositary either to distribute the foreign currency to the Micro Focus ADS holder, or to hold the foreign currency for the account of the Micro Focus ADS holder, in which case it will not invest the foreign currency and it will not be liable for any interest. Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the Depositary, that must be paid, will be deducted. See the sections entitled —Fees and Expenses and —Payment of Taxes. The Depositary will distribute only whole U.S. dollars and cents and will round fractional cents down to the nearest whole cent. If the exchange rates fluctuate during a time when the Depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.
• | Shares. The Depositary may, or upon our instructions will, distribute additional Micro Focus ADSs representing any Micro Focus Shares we distribute as a dividend or free distribution. The Depositary will only distribute whole Micro Focus ADSs. It will sell any Micro Focus Shares that would require it to deliver a fractional Micro Focus ADS and distribute the net proceeds in the same way as it does cash. If the Depositary does not distribute additional Micro Focus ADSs, the outstanding Micro Focus ADSs will, to the extent permissible by law, also represent the new Micro Focus Shares. The Depositary may also sell all or a portion of the Micro Focus Shares that it has not distributed, and distribute the net proceeds in the same way as it does cash. Additionally, the Depositary may sell a portion of the distributed Micro Focus Shares sufficient to pay its fees and expenses, and any taxes and governmental charges, in connection with that distribution. |
• | Elective Distributions in Cash or Shares. If we offer Micro Focus Shareholders the option to receive dividends in either cash or shares, the Depositary, after consultation with us and having received timely notice as described in the Deposit Agreement of such elective distribution by us, will make such elective distribution available to you as a Micro Focus ADS holder. We must first timely instruct the Depositary to make such elective distribution available to you and furnish it with satisfactory evidence that it is legal to do so. The Depositary could decide it is not legal or reasonably practical to make such elective distribution available to you. In such case, the Depositary shall, on the basis of the same determination as is made in respect of the Micro Focus Shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional Micro Focus ADSs representing Micro Focus Shares in the same way as it does in a share distribution. The Depositary is not obligated to make available to you a method to receive the elective dividend in shares rather than in Micro Focus ADSs. You may not be given the opportunity to receive elective distributions on the same terms and conditions as the Micro Focus Shareholders. |
• | Rights to Subscribe for Additional Shares. If we offer Micro Focus Shareholders any rights to subscribe for additional shares or any other rights, the Depositary, after consultation with us and having received timely notice as described in the Deposit Agreement of such distribution by us, will make these rights available to you as a Micro Focus ADS holder. We must first timely instruct the Depositary to make such rights available to you and furnish the Depositary with satisfactory evidence that it is legal to do so. If the Depositary decides it is not legal and reasonably practicable to make the rights available, or if rights have been made available but have not been exercised and appear to be about to lapse, the Depositary may, if it determines it is lawful and reasonably practicable to do so, endeavor to sell the rights and distribute the net proceeds in the same way as it does with cash. The Depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them. |
If the Depositary makes rights available to you, it will establish procedures to enable you to exercise the rights and purchase the shares on your behalf. The Depositary will then deposit the shares and deliver Micro Focus ADSs to you. It will only exercise rights if you pay it the exercise price and any other charges the rights require you to pay. The Depositary will sell shares that would require it to deliver a fractional Micro Focus ADS and distribute the net proceeds in the same way as it does with cash.
The Depositary may sell a portion of the distributed rights sufficient to pay its fees and expenses, and any taxes and governmental charges, in connection with that distribution.
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You may not be given the opportunity to exercise rights on the same terms and conditions as the Micro Focus Shareholders, or be able to exercise such rights.
• | Other Distributions. Subject to receipt of timely notice, as described in the Deposit Agreement, from us with the request to make any such distribution available to you, and provided the Depositary has, upon consultation with us if practicable, determined such distribution is lawful and reasonably practicable and in accordance with the terms of the Deposit Agreement, the Depositary will send to you anything else we distribute on deposited securities by any means it thinks are practicable. If the Depositary cannot make a distribution in this way, it may endeavor to sell what we distributed and distribute the net proceeds in the same way as it does cash. If the Depositary is unable to sell what we distribute, it may dispose of such property in any way it deems reasonably practicable under the circumstances for nominal or no consideration. In that case you will receive nominal or no value for the property. The Depositary may sell a portion of the distributed securities or property sufficient to pay its fees and expenses and any taxes and governmental charges in connection with that distribution. |
The Depositary is not responsible if it reasonably determines, to the extent permitted to do so under the Deposit Agreement, that it is unlawful or impractical to make a distribution available to any Micro Focus ADS holders. Other than with respect to the Merger, we have no obligation to register Micro Focus ADSs, shares, rights or other securities under the Securities Act. Other than with respect to the Merger, we also have no obligation to take any other action to permit the distribution of Micro Focus ADSs, shares, rights or anything else to Micro Focus ADS holders. This means that you may not receive the distributions we make on Micro Focus Shares or any value for them if it is illegal or impractical for us or the Depositary to make them available to you.
Deposit, Withdrawal and Cancellation
How are Micro Focus ADSs issued?
The Depositary will issue Micro Focus ADSs to you or your broker upon the deposit of Micro Focus Shares by Micro Focus with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the Depositary will register the appropriate number of Micro Focus ADSs in the names you request and will deliver the Micro Focus ADSs to or upon the order of the person or persons entitled thereto.
How do Micro Focus ADS holders cancel an American Depositary Share?
You may turn in your Micro Focus ADSs at the Depositarys principal office or by providing appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the Depositary will direct the custodian to deliver the Micro Focus Shares and any other deposited securities underlying the Micro Focus ADSs to you or a person you designate.
How do Micro Focus ADS holders interchange between certificated ADSs and uncertificated ADSs?
You may surrender your ADR to the Depositary for the purpose of exchanging your ADR for uncertificated Micro Focus ADSs. The Depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated Micro Focus ADSs. Alternatively, upon receipt by the Depositary of a proper instruction from a holder of uncertificated Micro Focus ADSs requesting the exchange of uncertificated Micro Focus ADSs for certificated Micro Focus ADSs, the Depositary will execute and deliver to you an ADR evidencing those Micro Focus ADSs.
How do you vote?
You may instruct the Depositary to vote the Micro Focus Shares or other deposited securities underlying your Micro Focus ADSs. Otherwise, you could exercise your right to vote directly if you withdraw the Micro Focus Shares underlying your Micro Focus ADSs. However, there can be no guarantee that you will know about any applicable meeting of Micro Focus Shareholders sufficiently far in advance to withdraw the Micro Focus Shares underlying your Micro Focus ADSs in time to vote such Micro Focus Shares at such meeting.
Upon timely notice from us as described in the Deposit Agreement, the Depositary will notify you of any upcoming vote and arrange to deliver our voting materials to you by regular mail delivery or by electronic
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transmission. The materials will (i) describe the matters to be voted on, (ii) explain how you may instruct the Depositary to vote the Micro Focus Shares or other deposited securities underlying your Micro Focus ADSs as you direct and (iii) include an express indication that if no vote is timely received or instructions are timely received that do not specify the manner in which the Depositary is to vote, then no vote will be placed on your behalf.
For your voting instructions to be valid, the Depositary must receive them in writing on or before the date specified. The Depositary will, subject to timely receipt of valid voting instructions, applicable law and the provisions of the Deposit Agreement, the deposited securities and the Micro Focus Articles, vote or have its agents vote the Micro Focus Shares or other deposited securities as you instruct. The Depositary will only vote or attempt to vote as you instruct. If we timely requested the Depositary to solicit instructions of holders of Micro Focus ADSs but no instructions are received by the Depositary from an owner with respect to any of the deposited securities represented by the Micro Focus ADSs of that owner on or before the date established by the Depositary for such purpose, the Depositary shall not place any votes whatsoever with respect to the deposited securities.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the Depositary to vote the deposited securities underlying your Micro Focus ADSs. In addition, the Depositary and its agents are not responsible for failing to carry out voting instructions or for the manner in which any vote is cast. This means that you may not be able to exercise your right to vote and you may have no recourse if the Micro Focus Shares underlying your Micro Focus ADSs are not voted as you requested. In order to give you a reasonable opportunity to instruct the Depositary as to the exercise of voting rights relating to deposited securities, we will use reasonable efforts to give the Depositary notice of any meeting and details concerning the matters to be voted upon sufficiently in advance of the meeting date.
As a Micro Focus ADS holder, you will be required to pay the following service fees to the Depositary and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your Micro Focus ADSs):
Service
|
Fees
|
|
•
|
To any person to which Micro Focus ADSs are issued or to any person to which a distribution is made in respect of Micro Focus ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash)
|
Up to US$0.05 per Micro Focus ADS issued
|
•
|
Cancellation of Micro Focus ADSs, including termination of the Deposit Agreement
|
Up to US$0.05 per Micro Focus ADS cancelled
|
•
|
Distribution of cash dividends
|
Up to US$0.05 per Micro Focus ADS held
|
•
|
Distribution of cash entitlements (other than cash dividends) and/or cash proceeds, including proceeds from the sale of rights, securities and other entitlements
|
Up to US$0.05 per Micro Focus ADS held
|
•
|
Distribution of Micro Focus ADSs pursuant to exercise of rights.
|
Up to US$0.05 per Micro Focus ADS held
|
•
|
Depositary services
|
Up to US$0.05 per Micro Focus ADS held on the applicable record date(s) established by the Depositary
|
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As a Micro Focus ADS holder, you will also be responsible for paying certain fees and expenses incurred by the Depositary and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your Micro Focus ADSs) such as the following:
• | Fees for the transfer and registration of Micro Focus Shares charged by the registrar and transfer agent for the Micro Focus Shares in the United Kingdom (i.e., upon deposit and withdrawal of Micro Focus Shares); |
• | Expenses incurred for converting foreign currency into U.S. dollars; |
• | Expenses for cable, telex, fax and electronic transmissions and for delivery of securities; |
• | Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when Micro Focus Shares are deposited or withdrawn from deposit); |
• | Fees and expenses incurred in connection with the delivery of Micro Focus Shares on deposit or the servicing of Micro Focus Shares, deposited securities and/or Micro Focus ADSs; and |
• | Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Micro Focus Shares, deposited securities and Micro Focus ADSs. |
The Depositary fees payable upon the issuance and cancellation of Micro Focus ADSs are typically paid to the Depositary by the brokers (on behalf of their clients) receiving the newly issued Micro Focus ADSs from the Depositary and by the brokers (on behalf of their clients) delivering the Micro Focus ADSs to the Depositary for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to Micro Focus ADS holders and the Depositary services fee are charged by the Depositary to the holders of record of Micro Focus ADSs as of the applicable Micro Focus ADS record date.
The Depositary fees payable for cash distributions are generally deducted from the cash being distributed. In the case of distributions other than cash (i.e., share dividends, rights), the Depositary charges the applicable fee to the Micro Focus ADS record date holders concurrent with the distribution. In the case of Micro Focus ADSs registered in the name of the investor (whether certificated or uncertificated in DRS), the Depositary sends invoices to be paid to the applicable record date Micro Focus ADS holders. In the case of Micro Focus ADSs held in brokerage and custodian accounts (via DTC), the Depositary generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the Micro Focus ADSs held in DTC) from the brokers and custodians holding Micro Focus ADSs in their DTC accounts. The brokers and custodians that hold their clients Micro Focus ADSs in DTC accounts in turn charge their clients accounts the amount of the fees paid to the Depositary.
In the event of refusal to pay the Depositary fees, the Depositary may, under the terms of the Deposit Agreement, refuse the requested service until payment is received or may set off the amount of the Depositary fees from any distribution to be made to the Micro Focus ADS holder.
The Depositary has agreed to reimburse us for certain expenses we incur that are related to the establishment and maintenance of the ADS program upon such terms and conditions as we and the Depositary may agree from time to time. There are limits on the amount of expenses for which the Depositary will reimburse Micro Focus. Further, the Depositary has agreed to reimburse Micro Focus certain fees payable to the Depositary by Micro Focus ADS holders. Neither the Depositary nor Micro Focus can determine the exact amount to be made available to Micro Focus because (i) the number of Micro Focus ADSs that will be issued, and (ii) its reimbursable expenses related to the program are not known at this time.
You will be responsible for any taxes or other governmental charges payable, or which become payable, on your Micro Focus ADSs or on the deposited securities represented by any of your Micro Focus ADSs. The Depositary may refuse to register or transfer your Micro Focus ADSs or allow you to withdraw the deposited securities represented by your Micro Focus ADSs until it receives payment of such taxes or other charges. It may apply payments owed to you or sell deposited securities represented by your Micro Focus ADSs to pay any taxes owed and you will remain liable for any deficiency. If the Depositary sells deposited securities, it will, if appropriate,
227
reduce the number of Micro Focus ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the Micro Focus Depositary, the custodian and each of our and their respective agents, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any refund of taxes, reduced rate or withholding or other tax benefit obtained for you in accordance with instructions of documentation provided by you. Your obligations under this paragraph shall survive any transfer of ADSs, any surrender of ADRs and withdrawal of deposited securities or the termination of the Deposit Agreement.
If we:
|
Change the par value of the Micro Focus Shares
|
Reclassify, split up, subdivide or consolidate any of the deposited securities
|
Distribute securities on the Micro Focus Shares that are not distributed to you
|
or
|
Recapitalize, reorganize, merge, liquidate, sell our assets, or take any similar action
|
|
Then:
|
The cash, shares or other securities received by the Depositary will become deposited securities to the extent permitted by law, and each Micro Focus ADS will automatically represent its equal share of the new deposited securities.
|
The Depositary may deliver new Micro Focus ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities.
|
If any securities received by the Depositary may not be lawfully distributed to some or all holders of Micro Focus ADSs, the Depositary may sell such securities and distribute the net proceeds in the same way as it does cash.
|
How may the Deposit Agreement be amended?
We may agree with the Depositary to amend the Deposit Agreement and the form of ADR without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the Depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations, or materially prejudices a substantial existing right of Micro Focus ADS holders, it will not become effective for outstanding Micro Focus ADSs until 30 days after the Depositary notifies Micro Focus ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your Micro Focus ADSs, to agree to the amendment and to be bound by the ADRs and the Deposit Agreement as amended. If any new laws are adopted that would require the Deposit Agreement to be amended in order to comply therewith, we and the Depositary may amend the Deposit Agreement in accordance with such laws and such amendment may become effective before notice thereof is given to Micro Focus ADS holders.
How may the Deposit Agreement be terminated?
The Depositary will terminate the Deposit Agreement if we ask it to do so, in which case the Depositary will give notice to you at least 90 days prior to termination. The Depositary may also terminate the Deposit Agreement if the Depositary has told us that it would like to resign, or if we have removed the Depositary, and in either case we have not appointed a new depositary within 90 days. In either such case, the Depositary must notify you at least 30 days before termination.
After termination, the Depositary and its agents will do the following under the Deposit Agreement but nothing else:
• | Collect distributions on the deposited securities; |
• | Sell rights and other property; and |
228
• | Deliver Micro Focus Shares and other deposited securities upon cancellation of Micro Focus ADSs after payment of any fees, charges, taxes or other governmental charges. Six months or more after termination, the Depositary may sell any remaining deposited securities by public or private sale. |
After that, the Depositary will hold the money it received on the sale, as well as any other cash it is holding under the Deposit Agreement, for the pro rata benefit of the Micro Focus ADS holders that have not surrendered their Micro Focus ADSs. It will not invest the money and has no liability for interest. The Depositarys only obligations will be to account for the money and other cash. After termination, our only obligations under the Deposit Agreement will be to indemnify the Depositary and to pay fees and expenses of the Depositary that we agreed to pay.
The Depositary will maintain Micro Focus ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of the business of Micro Focus or matters relating to the Micro Focus ADSs or the Deposit Agreement.
The Depositary will maintain facilities in New York to record and process the issuance, cancellation, combination, split-up and transfer of ADRs.
These facilities may be closed from time to time, to the extent not prohibited by law, if such action is deemed necessary or advisable by the Depositary or us, in good faith, because of any requirement of law, any government or governmental body or commission or any securities exchange on which the ADRs or Micro Focus ADSs are listed, or under any provision of the Deposit Agreement or provisions of, or governing, the deposited securities, or any meeting of Micro Focus Shareholders or for any other reason.
Limitations on Obligations and Liability
Limits on our obligations and the obligations of the depositary and the custodian; limits on liability to holders of Micro Focus ADSs
The Deposit Agreement expressly limits our obligations and the obligations of the Depositary and the custodian. It also limits our liability and the liability of the Depositary and the custodian as follows:
• | We, the Depositary and the custodian are only obligated to take the actions specifically set forth in the Deposit Agreement without gross negligence or willful misconduct; |
• | We, the Depositary and the custodian are not liable if we or they are prevented or delayed by law or circumstances beyond our or their control from performing our or their obligations under the Deposit Agreement, including, without limitation, requirements of any present or future law, regulation, governmental or regulatory authority or securities exchange of any applicable jurisdiction, any present or future provisions of the Micro Focus Articles, on account of possible civil or criminal penalties or restraint, any provisions of or governing the deposited securities or any act of God, war or other circumstances beyond our or their control, as set forth in the Deposit Agreement; |
• | We, the Depositary and the custodian are not liable if we or they exercise, or fail to exercise, discretion permitted under the Deposit Agreement; |
• | We, the Depositary and the custodian are not liable for the inability of any holder of Micro Focus ADSs to benefit from any distribution, offering, right or other benefit made available to holders of deposited securities that is not made available to holders of Micro Focus ADSs under the terms of the Deposit Agreement; |
• | We, the Depositary and the custodian have no obligation to become involved in a lawsuit or other proceeding related to the Micro Focus ADSs or the Deposit Agreement on your behalf or on behalf of any other party if in our or the Depositary’s opinion, as applicable, such proceeding may subject us or the Depositary, as applicable, to expense or liability, unless satisfactory indemnity against all expenses and liabilities is furnished as often as may be required; |
• | We, the Depositary and the custodian may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party; |
229
• | We, the Depositary and the custodian disclaim any liability for any action or inaction in reliance on the advice or information of legal counsel, accountants, any person presenting Micro Focus Shares for deposit, holders and beneficial owners (or authorized representatives) of ADSs, or any other person believed in good faith to be competent to give such advice or information; and |
• | We, the Depositary and the custodian disclaim any liability for any indirect, special, punitive or consequential damages for any breach of the terms of the Deposit Agreement or otherwise. |
The Depositary and any of its agents also disclaim any liability for any of the following:
• | Failure to carry out any instructions to vote; |
• | Manner in which any vote is cast; |
• | Effect of any vote; |
• | Failure to determine that any distribution or action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the Deposit Agreement; |
• | Failure or timeliness of any notice from us, the content of any information submitted to the Depositary (or its agent) by us for distribution to you or for any inaccuracy of any translation thereof; |
• | Any investment risk associated with the acquisition of an interest in the deposited securities; |
• | The validity or worth of the deposited securities; |
• | The creditworthiness of any third party; |
• | Any tax consequences that may result from ownership of Micro Focus ADSs, Micro Focus Shares or deposited securities; and |
• | Any acts or omissions made by a successor depositary. |
In addition, the Deposit Agreement provides that each party to the Deposit Agreement (including each holder, beneficial owner and holder of interests in the ADRs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any lawsuit or proceeding against the Depositary or Micro Focus related to the Micro Focus Shares, the Micro Focus ADSs or the Deposit Agreement.
In the Deposit Agreement, we and the Depositary agree to indemnify each other under certain circumstances.
Requirements for Depositary Actions
Before the Depositary will issue, deliver or register a transfer of a Micro Focus ADS, split-up, subdivide or combine Micro Focus ADSs, make a distribution on a Micro Focus ADS, or permit the withdrawal of Micro Focus Shares, the Depositary may require the following:
• | Payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any Micro Focus Shares or other deposited securities and payment of the applicable fees, expenses and charges of the Depositary; |
• | Satisfactory proof of the identity and genuineness of any signature or any other matters contemplated in the Deposit Agreement; and |
• | Compliance with applicable laws and governmental regulations, and such reasonable regulations and procedures as the Depositary may establish, from time to time, consistent with the Deposit Agreement and applicable law, including presentation of transfer documents. |
The Depositary may refuse to issue and deliver Micro Focus ADSs or register transfers of Micro Focus ADSs generally when the register of the Depositary or our transfer books are closed or at any time if the Depositary or we think it is necessary or advisable to do so.
Your right to receive the Micro Focus Shares underlying your Micro Focus ADSs
You have the right to cancel your Micro Focus ADSs and withdraw the underlying Micro Focus Shares at any time except in the following instances:
230
• | when temporary delays arise because: (1) the Depositary has closed its transfer books or we have closed our transfer books; (2) the transfer of Micro Focus Shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on the Micro Focus Shares; |
• | when you owe money to pay fees, taxes and similar charges; or |
• | when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to Micro Focus ADSs or to the withdrawal of Micro Focus Shares or other deposited securities. |
This right of withdrawal may not be limited by any other provision of the Deposit Agreement.
The Deposit Agreement provides that, to the extent available by the Depositary, Micro Focus ADSs shall be evidenced by uncertificated ADRs issued through DRS/Profile, unless certificated ADRs are specifically requested by the ADS holder. DRS is the system administered by DTC pursuant to which the Depositary may register the ownership of uncertificated Micro Focus ADSs, which ownership shall be evidenced by periodic statements issued by the Depositary to the Micro Focus ADS holders entitled thereto. The Profile Modification System, or Profile, is a required feature of DRS which allows a DTC participant, claiming to act on behalf of a Micro Focus ADS holder, to direct the Depositary to register a transfer of those Micro Focus ADSs to DTC or its nominee and to deliver those Micro Focus ADSs to the DTC account of that DTC participant without receipt by the Depositary of prior authorization from the Micro Focus ADS holder to register such transfer.
In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the Deposit Agreement understand that the Depositary will not verify, determine or otherwise ascertain that the DTC participant claiming to be acting on behalf of a Micro Focus ADS holder in requesting registration of transfer and delivery described in the paragraph above has the actual authority to act on behalf of the Micro Focus ADS holder (notwithstanding any requirements under the Uniform Commercial Code).
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DESCRIPTION OF SEATTLE CAPITAL STOCK
The following summary describes the material terms of Seattles capital stock and the provisions of the certificate of incorporation and the bylaws of Seattle, in each case as in effect as of the date of this information statement/prospectus, but it does not purport to describe all of the terms thereof.
The Seattle certificate of incorporation authorizes the issuance of (i) 1,000 shares, par value $0.01 per share, of Class A common stock (referred to herein as the Seattle Shares), (ii) 100 shares, par value $0.01 per share, of Class B common stock and (iii) 100 shares, par value $0.01 per share, of preferred stock. As of July 25, 2017, there were 100 Seattle Shares and 10 shares of Seattle Class B common stock issued and outstanding, all of which are held directly by HPE, and no shares of Seattle preferred stock issued or outstanding. No Seattle securities (including the Seattle Shares to be distributed in the Distribution) are or will be publicly traded. As of the date of this information statement/prospectus, none of the directors and executive officers of HPE or Seattle own any Seattle Shares.
Prior to the Distribution, Seattle will amend its certificate of incorporation and take all other actions necessary to authorize a number of Seattle Shares and to issue to HPE a number of Seattle Shares such that the number of Seattle Shares outstanding immediately prior to the Distribution equals the number of Seattle Shares necessary to effect the Distribution in accordance with the Separation and Distribution Agreement. On the Distribution Date, HPE will distribute all of the outstanding Seattle Shares pro rata to HPE Stockholders of record as of the close of business on the Distribution Record Date. Immediately following completion of the Distribution, HPE will cease to hold any Seattle Shares. All Seattle Shares distributed in the Distribution will be automatically converted into the right to receive Micro Focus ADSs in the Merger, as further described elsewhere herein.
The outstanding shares of Series A Junior Participating Redeemable Preferred Stock of HPE, which are held by a wholly owned subsidiary of HPE as of the date of this information statement/prospectus, will be automatically redeemed for shares of Seattle Class B common stock at the effective time of the Distribution, as further described in the Current Report on Form 8-K filed by HPE with the SEC on March 20, 2017. As further described in such Current Report on Form 8-K, the automatic redemption of these shares of Series A Junior Participating Redeemable Preferred Stock of HPE is intended to ensure that this subsidiary of HPE does not retain HPE Shares following the Distribution.
Each holder of Seattle Shares is entitled to ten votes per share, and each holder of shares of Seattle Class B common stock is entitled to one vote per share, on all matters for which holders of Seattle common stock have voting power. The Seattle Shares and the shares of Seattle Class B common stock vote together as a single class on all matters. Holders of Seattle Shares and shares of Seattle Class B common stock are entitled to receive an equal amount per share of dividends and other distributions that may be declared by Seattles board of directors. In the event of Seattles liquidation, dissolution or winding up, holders of Seattle Shares and shares of Seattle Class B common stock will be entitled to receive an equal amount per share of any assets available for distribution to holders of Seattle Shares and shares of Seattle Class B common stock after the rights of the holders of the Seattle preferred stock (if any is outstanding) have been satisfied.
Limitation of Liability of Directors; Indemnification of Directors
Seattles certificate of incorporation provides that no director will be personally liable to Seattle or its stockholders for monetary damages for breach of fiduciary duty as a director, except to the extent that this limitation on or exemption from liability is not permitted by the DGCL. The Seattle certificate of incorporation does not eliminate Seattles directors duties of care and loyalty. The inclusion of this exculpation provision in the Seattle certificate of incorporation may, however, discourage or deter stockholders or management from bringing a lawsuit against Seattle directors for a breach of their fiduciary duties.
The bylaws of Seattle provide that Seattle is required to indemnify its directors and officers and any person who is or was serving at the request of Seattle as a director, officer, employee or agent of another corporation or of a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan, to the fullest extent permitted by applicable law.
232
To the extent permissible under the DGCL and the certificate of incorporation of Seattle, Seattles bylaws may be altered, amended or repealed by Seattles board of directors. Seattles bylaws may also be altered, amended or repealed (whether or not such bylaws were adopted by the stockholders) by majority vote of the stockholders present and entitled to vote at a duly called meeting or by the written consent of a majority of all stockholders.
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DESCRIPTION OF MICRO FOCUS SHARES
The following summary describes the material terms of Micro Focus shares, but it does not purport to describe all of the terms thereof and is qualified in its entirety by reference to applicable law and the Micro Focus Articles.
Subject to the Companies Act 2006, Micro Focus may, by ordinary resolution, declare dividends to be paid to Micro Focus Shareholders according to their rights and interests in the profits of Micro Focus available for distribution, but no dividend shall be declared in excess of the amount recommended by the Micro Focus Board. Subject to the Companies Act 2006, the Micro Focus Board may from time to time pay to Micro Focus Shareholders such interim dividends as appear to the Micro Focus Board to be justified by the profits available for distribution and the position of Micro Focus, on such dates and in respect of such periods as determined by the Micro Focus Board in its discretion.
Except insofar as the rights attaching to, or the terms of issue of, any Micro Focus Share otherwise provide (no such shares being issued as of the date of this information statement/prospectus), all dividends shall be apportioned and paid pro rata according to the amounts paid or credited as paid up (other than in advance of calls) on the Micro Focus Shares during any portion or portions of the period in respect of which the dividend is paid. Any dividend unclaimed after a period of six years from the date of declaration shall be forfeited and shall revert to Micro Focus.
On a return of capital on a winding-up (excluding any intra-group reorganization on a solvent basis), after paying such sums as may be due in priority to the holders of any other class of shares in the capital of Micro Focus (including an amount equal to the nominal value of a B Share per B Share held by a Micro Focus Shareholder, rounded down in respect of the shareholder's aggregate holding to the nearest penny), any further such amount shall be paid to Micro Focus Shareholders ratably according to the amounts paid up or credited as paid up in respect of each Micro Focus Share, together with the sum of £100,000,000,000 per Micro Focus Share. Any further such amount remaining after payments to the holders of Micro Focus Shares shall be paid to the holders of the Deferred Shares up to the nominal value paid up or credited as paid up on such shares in accordance with the Micro Focus Articles.
Micro Focus Shareholders shall be entitled, in respect of their holding of such shares and subject to relevant provisions of the Micro Focus Articles, to receive notice of any general meeting of Micro Focus and to attend and vote at any such general meeting. At any such meeting, on a show of hands, each Micro Focus Shareholder present in person or by proxy shall have one vote and each such holder present in person or by proxy shall upon a poll have one vote for every Micro Focus Share of which he or she is the holder.
The Micro Focus Shares are not renounceable and will be transferable by an instrument of transfer in usual or common form. The Micro Focus Shares are in registered form. The Micro Focus Shares will be admitted to CREST with effect from Admission. Accordingly, settlement of transactions in the Micro Focus Shares may take place within the CREST system in respect of general market transactions. The B Shares and the Deferred Shares will not be admitted to CREST and will not be traded on a recognized securities exchange.
Subject to the Companies Act 2006, all or any of the rights attached to any class of share in Micro Focus (including the Micro Focus Shares) may (unless otherwise provided by the terms of issue of shares of that class) be varied (whether or not Micro Focus is being wound up) either with the written consent of the holders of not less than three-quarters in nominal value of the issued shares of that class or with the sanction of a special resolution passed at a separate general meeting of such holders. The quorum at any such general meeting is two persons holding or representing by proxy at least one-third in nominal value of the issued shares of that class and
234
at an adjourned meeting the quorum is one holder present in person or by proxy, whatever the amount of his/her shareholding. Any holder of shares of the class in question present in person or by proxy may demand a poll. Every holder of shares of the class shall be entitled, on a poll, to one vote for every share of the class held by him/her. Except as mentioned above, such rights shall not be varied.
The special rights conferred upon the holders of any shares or class of shares shall not, unless otherwise expressly provided in the Micro Focus Articles or the conditions of issue of such shares, be deemed to be varied by the creation or issue of new shares ranking pari passu therewith or subsequent thereto.
Micro Focus may by ordinary resolution alter its share capital in accordance with the Companies Act 2006. The resolution may determine that, as between the holders of shares resulting from a sub-division, any of the shares may have any preference or advantage or be subject to any restriction as compared with the others.
The Micro Focus Articles provide for Micro Focus Shares to be held in CREST accounts, or through another system for holding shares in uncertificated form, such shares being referred to as Participating Securities. Subject to such of the restrictions in the Micro Focus Articles as shall be applicable, any member may transfer all or any of his or her Micro Focus Shares. In the case of Micro Focus Shares represented by a certificate the transfer shall be made by an instrument of transfer in the usual form or in any other form which the Micro Focus Board may approve. A transfer of a Participating Security need not be in writing, but shall comply with such rules as the Micro Focus Board may make in relation to the transfer of such Micro Focus Shares, a CREST transfer being acceptable under the current rules.
The instrument of transfer of a certificated share shall be executed by or on behalf of the transferor and (in the case of a partly paid share) by or on behalf of the transferee, and the transferor is deemed to remain the holder of the share until the name of the transferee is entered in the register of members.
The Micro Focus Board may also refuse to register a transfer unless (i) in the case of a certificated share, the instrument of transfer (duly stamped if required) is lodged at the registered office of Micro Focus or at some other place as the Micro Focus Board may elect accompanied by the relevant share certificate and such other evidence of the right to transfer as the Micro Focus Board may reasonably require; (ii) in the case of a certificated share, the instrument of transfer is in respect of only one class of share; and (iii) in the case of a transfer to joint holders of a certificated share, the transfer is in favour of not more than four such transferees.
In the case of Participating Securities, the Micro Focus Board may refuse to register a transfer if the Uncertificated Securities Regulations 2001 allow it to do so, and must do so where such regulations so require.
The Micro Focus Shares are not redeemable.
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OWNERSHIP OF MICRO FOCUS SHARES
Share Ownership of Certain Beneficial Owners and Management
Beneficial ownership of shares is determined under rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Micro Focus believes, based upon the information available to Micro Focus, that the person and entities named in the table below have sole voting and investment power with respect to all Micro Focus Shares shown as beneficially owned by them. The following table sets forth information, as of July 25, 2017, regarding the beneficial ownership of Micro Focus Shares.
Name
|
Number of
Micro Focus Shares |
Percentage of issued
share capital(1) |
||||
Major Shareholder:
|
|
|
|
|
|
|
FMR LLC
|
|
22,559,483
|
|
|
9.82
|
|
Old Mutual Plc
|
|
15,786,879
|
|
|
6.87
|
|
Directors and Executive Officers:
|
|
|
|
|
|
|
Kevin Loosemore(2)
|
|
750,418
|
|
|
*
|
|
Christopher Hsu
|
|
—
|
|
|
—
|
|
Mike Phillips(3)
|
|
147,158
|
|
|
*
|
|
Stephen Murdoch
|
|
—
|
|
|
—
|
|
Nils Brauckmann
|
|
—
|
|
|
—
|
|
Sue Barsamian
|
|
—
|
|
|
—
|
|
John Delk
|
|
—
|
|
|
—
|
|
Jane Smithard
|
|
4,187
|
|
|
*
|
|
Martin Taylor
|
|
1,734
|
|
|
*
|
|
Rob Ebrey(4)
|
|
10,640
|
|
|
*
|
|
Suzanne Chase(5)
|
|
15,721
|
|
|
*
|
|
Paul Rodgers(6)
|
|
148,255
|
|
|
*
|
|
Karen Slatford
|
|
—
|
|
|
—
|
|
Richard Atkins(7)
|
|
6,867
|
|
|
*
|
|
Amanda Brown
|
|
5,000
|
|
|
*
|
|
Silke Scheiber
|
|
—
|
|
|
—
|
|
Darren Roos
|
|
—
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|
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John Schultz
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* | Less than one percent of the outstanding Micro Focus Shares |
(1) | Based on 229,732,879 Micro Focus Shares in issue as of July 25, 2017. |
(2) | 47,918 shares are held by Kevin Loosemore’s wife, Joy Loosemore. |
(3) | 122,077 share are held by Mike Phillips’ wife, Josephine Phillips. |
(4) | 6,455 shares are held by Rob Ebrey’s wife, Tiffany Ebrey. |
(5) | 9,652 shares are held by Suzanne Chase's husband, Graham Chase. |
(6) | 82,039 shares are held by Paul Rodgers' wife, Dawn Rodgers. |
(7) | 2,055 shares are held by Richard Atkins’ wife, Julie Atkins. |
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COMPARISON OF RIGHTS OF MICRO FOCUS SHAREHOLDERS AND MICRO FOCUS ADS HOLDERS AND HPE STOCKHOLDERS
HPE is incorporated under the laws of Delaware and, accordingly, the rights of HPE Stockholders are governed by Delaware law, including the DGCL. Before Closing, the rights of HPE Stockholders are also governed by the HPE certificate of incorporation and the HPE bylaws, each as amended. Micro Focus is incorporated under the laws of England and Wales and the rights of the Micro Focus Shareholders are governed by those laws, as well as the Micro Focus Articles. In addition, the rights of Micro Focus ADS holders will be governed by the terms and conditions of the Deposit Agreement. In connection with the Merger, each Seattle Share issued in the Distribution will be converted into the right to receive a number of Micro Focus ADSs determined in accordance with the Merger Agreement. Each Micro Focus ADS will represent one Micro Focus Share, unless another ratio is agreed by Micro Focus and HPE. As a result, upon Closing, the rights of HPE Stockholders who become Micro Focus ADS holders after the Merger will be governed by the terms of the Deposit Agreement, the laws of England and Wales and the Micro Focus Articles.
The following is a summary of material differences between the current rights of HPE Stockholders and the current rights of Micro Focus Shareholders. For additional information regarding the differences between owning Micro Focus Shares and owning Micro Focus ADSs, see the section entitled Description of the Micro Focus American Depositary Shares. While HPE and Micro Focus believe that the following summary covers the material differences between the current rights of HPE Stockholders and the current rights of Micro Focus Shareholders, this summary may not contain all of the information that is important to you, and should be read in conjunction with the section entitled Description of the Micro Focus American Depositary Shares. This summary is not intended to be a complete discussion of the respective rights of HPE Stockholders and Micro Focus Shareholders and Micro Focus ADS holders, and it is qualified in its entirety by reference to the DGCL, the laws of England and Wales, the Deposit Agreement and the various documents of HPE and Micro Focus to which HPE and Micro Focus refer in this summary. In addition, the identification of some of the differences as being material is not intended to indicate that other differences that are equally important do not exist. HPE and Micro Focus urge you to carefully read this entire information statement/prospectus, the relevant provisions of the DGCL and the Companies Act 2006, the Deposit Agreement, and the other documents to which HPE and Micro Focus refer in this information statement/prospectus for a more complete understanding of the differences between the rights of an HPE Stockholder, the rights of a Micro Focus Shareholder and the rights of a Micro Focus ADS holder. HPE and Micro Focus will send copies of these documents to you, without charge, upon your request. See the section entitled Where You Can Find More Information.
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Micro Focus Shareholder Rights
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HPE Stockholder Rights
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Applicable Law
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The Micro Focus Articles, the U.K. Listing Rules and the laws of England and Wales (including the Companies Act 2006) govern the rights of holders of Micro Focus Shares.
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HPE’s certificate of incorporation and bylaws, each as amended, and Delaware law govern the rights of HPE Stockholders.
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Authorized Stock
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The Micro Focus Articles do not specify an amount of authorized capital, as the requirement to have an authorized capital is no longer applicable under the Companies Act 2006.
As of July 25, 2017, the issued share capital of Micro Focus was 229,732,879 ordinary shares, with a par value of £0.10 each. |
9,900,000,000 shares of stock are authorized, consisting of (1) 9,600,000,000 shares of common stock, par value $0.01 per share, and (2) 300,000,000 shares of preferred stock, par value $0.01 per share.
As of July 25, 2017, there were 1,627,004,406 HPE Shares issued and outstanding. |
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Preferred Stock
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The Micro Focus Articles provide that (without prejudice to any existing rights attached to shares) new shares may be issued by Micro Focus carrying such rights as Micro Focus may determine provided the prior sanction of an ordinary resolution in general meeting is obtained.
Micro Focus currently only has a single class of share capital, which is ordinary shares; Micro Focus does not have any class of preferred stock. B Shares and Deferred Shares will be issued in connection with the Micro Focus Return of Value and subsequently redeemed and cancelled. |
The HPE certificate of incorporation permits the HPE Board to issue shares of preferred stock in any series and to establish the designation, powers, preferences and relative participating, optional or other rights, if any, of the shares of each such series and the qualifications, limitations or restrictions of each such series, subject to any limits prescribed by the DGCL.
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Voting Rights
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The Micro Focus Articles provide that, subject to any special terms as to voting upon which any Micro Focus Shares may be issued, or may for the time being be held and any restriction on voting referred to below, every holder of Micro Focus Shares who (being an individual) is present in person or (being a corporation) is present by a duly authorised representative and every proxy (regardless of the number of members for whom s/he is proxy) shall, subject to limited exceptions, have one vote on a show of hands. On a poll, every holder of Micro Focus Shares present in person or by proxy shall have one vote for every Micro Focus Share of which s/he is the holder.
The duly authorised representative of a corporate shareholder may exercise the same powers on behalf of that corporation as it could exercise if it were an individual shareholder. A shareholder is not entitled to vote unless all calls due from him have been paid. A shareholder is also not entitled to attend or vote at meetings of Micro Focus in respect of any Micro Focus Shares held by him in relation to which he or any other person appearing to be interested in such shares has been duly served with a notice under section 793 of the Companies Act 2006 and, has failed to comply with such notice within 14 days. Such disentitlement will apply only for so long as the notice from Micro Focus has not been complied with. |
Each HPE Stockholder is entitled to one vote for each HPE Share held by such HPE Stockholder.
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At any Micro Focus general meeting of shareholders, any procedural resolution (such as a resolution on the choice of a chairman of the meeting or a resolution to adjourn the meeting) put to the vote shall be decided on a show of hands unless a poll is (before the resolution is put to the vote on a show of hands, or on the declaration of the result of the show of hands) demanded and any other resolution put to the vote shall be decided on a poll. |
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Stockholder Action by Written Consent
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The Companies Act 2006 does not provide provision for public companies to use the written resolution procedure. As a result, resolutions of the Micro Focus Shareholders can only be considered and voted upon at a general meeting of Micro Focus.
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The HPE certificate of incorporation provides that any action permitted to be taken by HPE Stockholders must be effected at a duly called annual or special meeting of the HPE Stockholders and may not be effected by written consent of the HPE Stockholders, subject to the rights of the holders of the shares of any series of preferred stock or any other class of stock or series of stock having a preference over the HPE Shares as to dividends or upon liquidation.
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Amendment of Corporate Governance Documents
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Under the Companies Act 2006 a company incorporated in England and Wales may amend its articles of association by way of a special resolution, which requires the affirmative vote of a majority of not less than 75% of those voting at a general meeting of shareholders either in person or by proxy.
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Under Delaware law, unless the certificate of incorporation requires a greater vote, an amendment to the certificate of incorporation requires the approval and recommendation of the board of directors, the affirmative vote of a majority of the outstanding stock entitled to vote on the amendment, and the affirmative vote of a majority of the outstanding stock of each class entitled to vote on the amendment as a class.
Under the HPE certificate of incorporation and the HPE bylaws, the HPE Board is expressly empowered to adopt, amend or repeal the HPE bylaws. HPE Stockholders also may amend, adopt or repeal the HPE bylaws. |
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Dividends
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Subject to the Companies Act 2006, Micro Focus may, by ordinary resolution, declare dividends to be paid to the Micro Focus Shareholders according to their rights and interests in the profits of Micro Focus available for distribution, but no dividend shall be declared in excess of the amount recommended by the Micro Focus Board.
Subject to the Companies Act 2006, the Micro Focus Board may from time to time pay to the Micro Focus Shareholders such interim dividends as appear to the Micro Focus Board to be justified by the profits available for distribution and the position of Micro Focus, on such dates and in respect of such periods as it thinks fit. Except insofar as the rights attaching to, or the terms of issue of, any share otherwise provide (no such shares presently being in issue), all dividends shall be apportioned and paid pro rata according to the amounts paid or credited as paid up (other than in advance of calls) on the shares during any portion or portions of the period in respect of which the dividend is paid. Any dividend unclaimed after a period of |
Under the DGCL, the HPE Board may declare a dividend. The HPE bylaws provide that the HPE Board may fix a record date on which only stockholders of record on the fixed date will be entitled to receive the dividend.
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6 years from the date of declaration or from the date on which such dividends became due for payment shall be forfeited and shall revert to Micro Focus.
The Micro Focus Board may, if authorised by an ordinary resolution, offer the holders of shares the right to elect to receive additional shares, credited as fully paid, instead of cash in respect of any dividend or any part of any dividend. The Micro Focus Board may withhold dividends payable on shares representing not less than 0.25% by number of the issued shares of any class after there has been a failure to comply with any notice under section 793 of the Companies Act 2006 requiring the disclosure of information relating to interests in the shares concerned. Such dividend will be withheld only for so long as the notice from Micro Focus has not been complied with. |
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Appraisal Rights
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English law does not generally provide for the equivalent of appraisal rights. However, Micro Focus is subject to the jurisdiction of the United Kingdom Takeover Panel which, under the United Kingdom Takeover Code, enforces certain rights of shareholders in relation to a takeover and/or merger of Micro Focus which is subject to the Takeover Code and over which the United Kingdom Takeover Panel has jurisdiction and, in circumstances where the takeover is structured as a scheme of arrangement rather than a takeover offer, a shareholder could apply to the English courts and courts may specify terms for the acquisition that it considers appropriate if there has been a breach of the United Kingdom Takeover Code and/or shareholder rights. The Merger is not subject to the jurisdiction of the United Kingdom Takeover Panel.
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HPE Stockholders will not have appraisal rights in connection with the Transactions.
In general, under Delaware law, stockholders of a corporation involved in a merger have the right to a judicial appraisal of their shares and to receive payment of the fair value of their stock so appraised in certain situations. However, appraisal rights are not available to holders of stock listed on a national securities exchange or held of record by more than 2,000 stockholders; unless the stockholder is required to accept anything in the transaction other than, in each case: • stock of the surviving corporation (or depositary receipts in respect thereof); • stock of any other corporation (or depositary receipts in respect thereof) that is or will be listed on a national securities exchange or held by more than 2,000 stockholders; • cash in lieu of fractional shares (or fractional depositary receipts); or • any combination of the above. In addition, appraisal rights are not available to the holders of stock of the surviving corporation in the merger, if the merger does not require approval of the stockholders of that corporation. |
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Preemptive Rights
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Under the Companies Act 2006, the issuance of equity securities (except shares issued pursuant to the terms of an employees’ share scheme) that are to be paid for wholly in cash (as defined in the Companies Act 2006) must generally be offered first to the existing holders of equity securities in proportion to the respective nominal amounts (i.e., par values) of their holdings on the same or more favorable terms, unless a special resolution for
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HPE’s certificate of incorporation does not provide for preemptive rights for the HPE Shares.
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disapplication has been passed. Under United Kingdom corporate governance rules applicable to Micro Focus, this disapplication can be only for a maximum of one year, after which shareholders’ approval would be required to renew such disapplication.
There are similar preemptive rights contained in the U.K. Listing Rules which apply to Micro Focus. |
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Number of Directors
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The Micro Focus Articles provide that unless and until otherwise determined by an ordinary resolution requiring a simple majority of Micro Focus Shareholders voting at a general meeting, the number of Micro Focus directors shall be not less than three and no more than eleven.
The Micro Focus Board currently consists of nine members and there are expected to be 10 members at Closing. In accordance with the Merger Agreement, a further independent HPE Nominated Director will be appointed following Closing, bringing the size of the Micro Focus Board to 11 members. All directors are elected or re-elected, as applicable, by shareholders annually. |
The HPE certificate of incorporation provides that the number of directors of HPE must be no less than eight and no more than 17. There are currently 14 directors. The HPE bylaws provide that the number of directors will be fixed from time to time exclusively pursuant to a resolution adopted by a majority of the total number of directors which HPE would have if there were no vacancies. All directors are elected annually
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Rights of Inspection
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Under English law, a company must retain and keep available for inspection by shareholders, free of charge, and by any other person on providing the required information and prescribed fee, its register of members. It must also keep available for inspection by shareholders, free of charge, records of all resolutions and meetings by shareholders, and for a fee, provide copies of such records to shareholders who request them. A company must also send an up-to-date copy of a company's articles of association to shareholders who request them.
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Under Delaware law, stockholders have the right to inspect, during normal business hours, the corporation’s stock ledger, a list of the corporation’s stockholders, and other books and records of the corporation, after making a written demand stating their purpose so long as the purpose is reasonably related to the person’s interest as a stockholder.
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Rights of Purchase and Redemption
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Under the Companies Act 2006, a company may issue redeemable shares if authorized by its articles of association, subject to any conditions stated therein. No redeemable shares may be issued at a time when there are no issued shares of the company existing which are not redeemable.
Under the Companies Act 2006, a company may redeem or repurchase shares only if the shares are fully paid and, in the case of public companies, only out of: (a) distributable profits; or (b) the proceeds of a new issue of shares made for the purpose of such repurchase or redemption. The Micro Focus Articles permit the issuance of redeemable shares, although Micro Focus Shares are not redeemable and there are no other redeemable shares currently in issue. Subject to applicable law, Micro Focus may purchase its own shares as it has such authority under the Micro Focus Articles to do so however such authority to make the purchase |
Under Delaware law, any corporation may purchase, redeem and dispose of its own shares out of the corporation’s surplus, and a corporation may purchase or redeem any of its shares of preferred stock (or its common stock if no preferred stock is outstanding) out of capital if these shares will be retired upon acquisition or redemption, thereby reducing the capital of the corporation, and the remaining assets of the corporation are sufficient to pay its debts.
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has to be sanctioned by way of a special resolution of shareholders requiring a majority of not less than 75% of those voting.
Micro Focus has a current authority to purchase its own shares, which was granted at the Micro Focus general meeting of shareholders on September 22, 2016, in respect of a total of up to 34,346,931 ordinary shares representing, approximately 15% of its issued shares at the time of such meeting. |
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Stockholder Votes on Certain Transactions
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There is no equivalent legal restriction under English law or the Micro Focus Articles. However the U.K. Listing Rules prescribe the requirement for a shareholder resolution to be passed in certain circumstances, including prior to significant transactions and/or a reverse takeover.
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Generally, under Delaware law, unless the certificate of incorporation provides for the vote of a larger portion of the stock, completion of a merger or consolidation or sale of substantially all of a corporation’s assets or dissolution requires the approval of the board of directors and approval by the vote of the holders of a majority of the outstanding stock or, if the certificate of incorporation provides for more or less than one vote per share, a majority of the corporation’s voting power.
HPE’s certificate of incorporation does not contain a provision with respect to the vote required to complete a merger or consolidation or sale of substantially all of its assets or dissolution. |
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Board Committees
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The Micro Focus Articles provide that the Micro Focus Board may delegate any of its powers and discretions to committees or sub-committees to be made up of one or more directors or one or more other persons, provided that a majority of committee members shall be directors.
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Under the HPE bylaws, the HPE Board may designate one or more committees, each of which must include at least one director. Any committee, unless limited by resolution of the HPE Board or any applicable laws or listing standards, will have all the authority of the HPE Board, but no such committee will have the power or authority to (i) approve or adopt or recommend to the HPE Stockholders any action or matter (other than the election or removal of directors) that requires the approval of the HPE Stockholders under applicable law or (ii) adopt, amend or repeal the HPE bylaws.
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Removal of Directors
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Under the Companies Act 2006, a company may remove a director without cause at a general meeting by way of ordinary resolution of shareholders, irrespective of anything in any agreement between the director and the company, provided that 28 clear days’ notice of the proposed resolution to remove the director is given.
On receipt of an intended resolution to remove a director, the company must send a copy to the director concerned. The director has a right to be heard on the resolution at the meeting, and may have representations in writing sent to the members of the company to whom notice of the general meeting is sent. In addition to any power of removal under the Companies Act 2006, and subject to the applicable notice period being adhered to, under the Micro Focus Articles an ordinary resolution (being, a simple majority of the Micro Focus Shareholders voting at a general meeting |
The HPE bylaws provide that any director or the entire HPE Board may be removed, with or without cause, by the holders of a majority of the shares then entitled to vote in an election of directors.
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whether in person or by proxy) of which special notice has been given may:
• remove any director before the expiration of his period of office, but without prejudice to any claim for damages which he may have for breach of any contract of service between him and Micro Focus; and • appoint another person who is willing to act to be a director in his place (subject to the Micro Focus Articles). |
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Vacancies on the Board of Directors
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Under the Micro Focus Articles, by an ordinary resolution passed at a general meeting, Micro Focus can appoint a person who is willing to act to be a director, either to fill a vacancy or as an addition to the existing directors, subject to the total number of directors not exceeding any maximum number fixed by or in accordance with the Micro Focus Articles.
In addition the directors have power at any time to appoint any person who is willing to act as a director to fill a vacancy or as an addition to the existing board, subject to the total number of directors not exceeding the maximum number. Under the Micro Focus Articles, all directors are required to retire and submit themselves for election at the first annual general meeting following their appointment and for re-election on an annual basis thereafter. |
The HPE bylaws provide that a vacancy created by the removal of a director by the vote of the HPE Stockholders or by court order may be filled only by the affirmative vote of a majority of the voting power of shares represented and voting at a duly held meeting at which a quorum is present. Vacancies and newly created directorships resulting from any increase in the authorized number of directors elected by all of the stockholders having the right to vote as a single class may be filled by a majority vote of the directors then in office, although less than a quorum, or by a sole remaining director. Whenever the holders of any class or classes of stock or series of stock are entitled to elect one or more directors pursuant to the terms of the HPE charter, vacancies and newly created directorships of such class or classes or series may be filled by a majority of the directors elected by such class or classes or series then in office, or by a sole remaining director.
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Limitation of Director Liability
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English law does not permit a company to exempt any director of the company from any liability arising from a director’s own negligence, default, breach of duty or breach of trust in relation to the company. See —Directors and Officers Indemnity below.
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The HPE certificate of incorporation provides that to the fullest extent permitted by Delaware law, the directors of HPE will not be personally liable to HPE or its stockholders for monetary damages for breach of fiduciary duty as a director. Delaware law permits a corporation’s certificate of incorporation to include a provision granting to a corporation the power to exempt a director from personal liability to the corporation and its stockholders for monetary damages arising from a breach of fiduciary duty as a director. However, no provision can limit the liability of a director for:
• any breach of his duty of loyalty to the corporation or its stockholders; • acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; • intentional or negligent payment of unlawful dividends or stock purchases or redemptions; or • any transaction from which he derives an improper personal benefit. |
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Directors and Officers Indemnity
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Subject to the provisions on indemnities set out in the Companies Act 2006 and the U.K. Listing Rules, under the Micro Focus Articles, every director and officer and former director and former officer of Micro Focus and of each of the associated companies (meaning any company that is a parent, subsidiary, or sister company of Micro Focus) of Micro Focus shall be indemnified by Micro Focus out of its own funds against:
(i) subject to certain exceptions, any liability incurred by or attaching to him/her in connection with any negligence, default, breach of duty or breach of trust by him in relation to Micro Focus or any associated company of Micro Focus; and (ii) any other liability incurred by or attaching to him/her in the actual or purported execution and/or discharge of his/her duties and/or the exercise or purported exercise of his/her powers and/or otherwise in relation to or in connection with his/her duties, powers or office. Where a director or officer is indemnified against any liability in accordance with the above, such indemnity shall extend to all costs, charges, losses, expenses and liabilities incurred by him/her in relation thereto. |
HPE’s certificate of incorporation provides that HPE may indemnify to the fullest extent permitted by law any person made or threatened to be made a party to an action or proceeding, whether criminal, civil, administrative or investigative, by reason of the fact that he or she, or his or her testator or intestate is or was a director, officer or employee of HPE or any predecessor of HPE (which shall include without limitation Hewlett-Packard Company, a Delaware corporation (HP Co.), for periods prior to November 1, 2015) or serves or served at any other enterprise as a director, officer or employee at the request of HPE or any predecessor to HPE (which shall include without limitation HP Co. for periods prior to November 1, 2015).
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Insurance
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The Micro Focus Articles provide that, subject to the Companies Act 2006, the Micro Focus Board may purchase and maintain insurance at Micro Focus’ expense for the benefit of any person who is or was at any time a director, alternate director, secretary or other officer or employee of Micro Focus or its subsidiaries against any liability which may attach to him or her or loss or expenditure which he or she may incur in relation to anything done or alleged to have been done or omitted to be done in the actual or purported execution and/or discharge of his or her duties and/or in the exercise or purported exercise of his or her powers.
Under the Companies Act 2006, an English company may purchase and maintain director and officer insurance insuring its directors or the directors of an associated company, (meaning a company that is a parent, subsidiary, or sister company of Micro Focus) against liability attaching in connection with any negligence, default, breach of duty or breach of trust owed to the company of which the insured individual is a director. |
The HPE bylaws provide that HPE may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of HPE (or any predecessor, which shall include without limitation HP Co. for periods prior to November 1, 2015), or is or was serving at the request of HPE (or any predecessor, which shall include without limitation HP Co. for periods prior to November 1, 2015) as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him or her and incurred by him or her in any such capacity, or arising out of his or her status as such, whether or not HPE would have the power to indemnify him or her against such liability under the provisions of the DGCL.
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Stockholder Derivative Suits and Class Action Lawsuits
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Section 260 of the Companies Act 2006 provides limited circumstances in which a shareholder of a company may bring a derivative claim, which is defined in such section as arising in respect of a cause of action vested in the company and seeking relief on behalf of the company. A derivative claim may only be brought in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company. It is immaterial whether the cause of action arose before or after the person seeking to bring the derivative claim became a shareholder in the company.
A person seeking to continue a derivative claim in relation to Micro Focus would first have to obtain the permission of the courts in England to do so. There are specified grounds on which a court must refuse to grant permission to continue the claim, as well as specified grounds that the court must take into consideration. Section 994 of the Companies Act 2006 also permits a shareholder to apply for a court order on the grounds that (a) the company’s affairs are being or have been conducted in a manner unfairly prejudicial to the interests of all or some shareholders, including at least the shareholder making the claim, or (b) an actual or proposed act or omission of the company (including an act or omission on its behalf) is or would be so prejudicial. The courts in England must be satisfied that any such application is well founded and if this was the case then it may make such order as it thinks fit for giving relief in respect of the matters complained of. Except in these limited circumstances set out above, lawsuits by shareholders on behalf of the company or on behalf of other shareholders are rare. Further, English law does not generally permit class action lawsuits. |
Under Delaware law, stockholders may bring derivative actions on behalf of the corporation to enforce the rights of the corporation. Prior to bringing an action, a stockholder plaintiff is required to make a demand on the directors of the corporation to assert the claim, unless it is able to show that making such a demand would be futile.
Additionally, the plaintiff must remain a stockholder through the duration of the derivative suit. The action will not be dismissed or compromised without the approval of the Delaware Court of Chancery. An individual may also commence a class action suit on behalf of himself and other similarly situated stockholders where the requirements for maintaining a class action under Delaware law have been met. |
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Business Combinations with an Interested Stockholder
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There is no direct equivalent limitation under the Companies Act 2006; however: (a) directors must have regard to their statutory duty of independence and duty to avoid a conflict of interest, (b) under the U.K. Listing Rules, shareholder approval must be obtained for certain acquisitions or disposals of assets involving directors or substantial shareholders or their associates and (c) the U.K. Listing Rules provide certain public disclosure requirements in circumstances of a related party transaction, which includes a transaction with a shareholder who owns 10% or more of the company’s shares.
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Section 203 of the DGCL prohibits business combinations, including mergers, sales and leases of assets, issuances of securities and similar transactions, by a corporation or a subsidiary with an interested stockholder who beneficially owns 15% or more of a corporation’s voting stock, within three years after the person or entity became an interested stockholder, unless:
• prior to the time that the person became an interested stockholder, the corporation’s board of directors approved either the business combination or the transaction that caused the person to become an interested stockholder; • after completion of the transaction in which the person became an interested stockholder, the interested stockholder held at least 85% of the voting stock of |
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the corporation not including (a) shares
held by officers and directors and (b) shares held by specified employee benefit plans; or • at or subsequent to the time the business combination is approved by the corporation’s board of directors, the business combination is approved by holders of at least 66 2/3% of the outstanding voting stock, excluding shares held by the interested stockholder. |
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Enforcement Of Civil Liabilities Against Non-United States Persons And Enforceability Of Judgments
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Micro Focus is a corporation organized under the laws of England and Wales. Most of the directors and officers of Micro Focus following the Merger will be residents of jurisdictions outside the United States. Following Closing, Micro Focus’ corporate headquarters will be located in England and a significant proportion of Micro Focus’ assets and a large proportion of the assets of certain of its directors and officers will be located outside of the United States.
As a result of the foregoing, U.S. investors may find it difficult in a lawsuit based on the civil liability provisions of the United States federal securities laws: (i) to effect service within the United States upon Micro Focus and Micro Focus’ directors and officers that are located outside the United States; (ii) to enforce in United States courts or outside the United States, judgments obtained against those persons in United States courts; (iii) to enforce, in United States courts, judgments obtained against those persons in courts in jurisdictions outside the United States; and (iv) to enforce against those persons in the United Kingdom, whether in original actions or in actions for the enforcement of judgments of U.S. courts, civil liabilities based solely upon the U.S. federal securities laws. |
HPE is a corporation incorporated under the laws of Delaware and has substantial assets located in the United States. As a result, investors generally can initiate lawsuits in the United States against HPE and its directors and officers and can enforce lawsuits based on U.S. federal securities laws in United States courts.
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Stockholder Proposals and Stockholder Nomination of Directors
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Under the Companies Act 2006, shareholders of a public company may require the directors to call a general meeting of the company and, subject to certain limitations, may specify the text of a resolution be voted on at that meeting if the request is made by shareholders holding at least 5% of the total voting rights.
Shareholders may also require the company to circulate to shareholders that are entitled to receive notice of a general meeting, a statement of not more than 1,000 words with respect to (a) a matter referred to in a proposed resolution to be dealt with at that meeting, or (b) other business to be dealt with at that meeting. A company is required to circulate a statement once it has received requests to do so from (a) shareholders representing at least 5% of the total voting rights of all shareholders, or (b) by at least 100 shareholders who have a relevant right to vote and hold shares in the company on which there has been paid up an average sum, per shareholder, of at least £100. |
HPE’s bylaws provide that at an annual meeting only such persons who are nominated in accordance with the following procedures shall be eligible to stand for election as directors and only such business may be conducted as shall have been brought before the meeting in accordance with the following procedures. Nominations and proposals for business may be brought only:
• pursuant to the corporation’s notice of meeting; • by or at the direction of the HPE Board; or • by any stockholder of the corporation who is entitled to vote at the meeting, and who complies with the notice provision. To be timely, an HPE Stockholder’s notice of business to be conducted at the meeting must be in writing and received by the Secretary of HPE no earlier than the 120th day and not later than |
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Resolutions to appoint or re-appoint directors to a public limited company such as Micro Focus must generally be put to shareholders on the basis of one resolution for each nominated director.
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the close of business on the 90th day prior to the first anniversary of the prior year’s annual meeting. However, if the date of the annual meeting is more than 30 days before or 60 days after the date it was held in the prior year or if the corporation did not hold an annual meeting in the prior year, then such notice must be received no earlier than the 120th day prior to the annual meeting and not later than the later of the 90th day prior to the meeting and the 10th day following public announcement of the meeting date.
Every such notice by an HPE Stockholder must set forth: • the name and address of such stockholder as they appear on the corporation’s books and the class and number of shares of the corporation’s voting stock that are owned beneficially and of record by such stockholder; • a representation that the stockholder is a holder of the corporation’s voting stock and intends to appear in person or by proxy at the meeting to propose such business; • and certain other information, including, • with respect to notice of an intent to make a nomination, a description of all arrangements or understandings among the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; a written statement executed by such nominee acknowledging that, as a director of such corporation, such person will owe a fiduciary duty, under the DGCL, exclusively to HPE and its stockholders; and such other information as is required to be disclosed in solicitations of proxies for elections of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Exchange Act; and • with respect to notice of an intent to bring up any other matter, a description of the matter, the reasons for conducting such business at the meeting and any material interest of the stockholder in the matter. |
|
|
|
Board of Directors Meetings
|
The Micro Focus Articles provide that the directors may set the time and place of any meeting of the directors of Micro Focus provided due notice is given in accordance with the articles of association.
|
HPE’s bylaws provide that a majority of the authorized number of directors will constitute a quorum, except to fill vacancies or to adjourn.
Additionally, regular and meetings of the HPE Board may be held without notice if the times of such meetings are fixed by the HPE Board. Special meetings of the HPE Board may be called at any time by the chair of the HPE |
247
|
|
Board, if any, or in the absence of a chair, by the lead independent director, or by the chief executive officer, the secretary or a majority of the directors then in office.
Notice of any special meeting must be given to each director by the chair, if any, the chief executive officer, the secretary, assistant secretary or any of their delegates. |
|
|
|
Stockholder Quorum
|
Before a general meeting starts, there must be a quorum, being two members entitled to vote being present in person or by proxy.
|
HPE’s bylaws provide that, except as otherwise provided by law or HPE’s certificate of incorporation, the holders of a majority in voting power of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, will constitute a quorum at all meetings of the stockholders.
|
|
|
|
Annual Meetings of Stockholders
|
The Companies Act 2006 requires that a public limited company, such as Micro Focus, must convene an annual general meeting within six months from the end of its accounting reference date.
In addition, the Micro Focus Articles permit the Micro Focus Board to convene a general meeting whenever it thinks fit. A general meeting may also be capable of being convened on requisition of members as described under —Stockholder Proposals and Stockholder Nomination of Directors above. |
HPE’s bylaws provide that the date, and time of the annual meeting of stockholders will be fixed by the HPE Board.
|
|
|
|
Special Meetings of Stockholders
|
General meetings at which special resolutions are proposed and passed generally involve proposals to change the name of the company, change or amend the rights of shareholders, permit the company to issue new shares for cash without applying the shareholders’ pre-emptive rights, amend the company’s articles of association, or carry out other matters where either the company’s articles of association or the Companies Act 2006 prescribe that a special resolution is required.
Other proposals relating to the ordinary course of the company’s business, such as the election of directors, would generally be the subject of an ordinary resolution. Under the Companies Act 2006, an ordinary resolution requires a simple majority of those attending and voting (in person or by proxy) and a special resolution requires not less than a 75% majority of those attending and voting (in person or by proxy). Under Section 303 of the Companies Act 2006, members representing 5% or more of the paid up share capital of Micro Focus can compel directors to convene a general meeting. |
The HPE bylaws provide that a special meeting of the HPE Stockholders may be called by the HPE Board, or by any of the following persons with the concurrence of a majority of the HPE Board: (i) the chair of the HPE Board, (ii) the chief executive officer of HPE or (iii) the secretary of HPE.
The HPE bylaws also provide that a special meeting of HPE Stockholders may be called by the HPE Board upon written request to the secretary of HPE of one or more record holders who are acting on behalf of beneficial owners who have a net long position (as defined in the HPE bylaws) of shares of stock of HPE representing in the aggregate not less than 25% of the total number of shares of stock entitled to vote on the matter or matters to be brought before the proposed special meeting. |
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248
Proxy Statements and Reports
|
As a foreign private issuer, Micro Focus will not be governed by the proxy rules under the Exchange Act. However, Micro Focus will be governed by the Companies Act 2006, which provides that notice of an annual general meeting of the company must be given to shareholders at least 21 clear days before the date of the meeting or 14 clear days for any other general meeting.
The best practice guidance given under the U.K. Corporate Governance Code provides that notice of an annual general meeting of the company must be given to shareholders at least 20 working days before the date of the meeting or at least 14 working days for any other general meeting. The notice must specify, among other matters, the date, time and place of the meeting and state the general nature of the business to be transacted in the meeting. |
Under the Exchange Act proxy rules, HPE must comply with notice and disclosure requirements relating to the solicitation of proxies for stockholder meetings.
|
|
|
|
Reporting Requirements
|
Since Micro Focus will become a foreign private issuer and, following Closing, the Micro Focus ADSs will be quoted on the NYSE and registered under Section 12 of the Exchange Act, Micro Focus will be required to publicly file with the SEC annual reports on Form 20-F within six months after the end of each fiscal year and reports on Form 6-K.
In addition, Micro Focus is subject to the reporting and disclosure requirements of English law, including publishing an annual report and accounts, and a half-yearly financial report each year. Micro Focus is generally required, subject to certain exceptions, to disclose as soon as possible to a Regulatory Information Service any inside information concerning Micro Focus. |
As a U.S. public company and a large accelerated filer, HPE must file with the SEC, among other reports and notices:
• an Annual Report on Form 10-K within 60 days after the end of the fiscal year; • a Quarterly Report on Form 10-Q within 40 days after the end of a fiscal quarter; and • Current Reports on Form 8-K upon the occurrence of important corporate events, in most instances, within four business days after the occurrence of such important corporate events. |
|
|
|
Short-Swing Profits
|
Directors, officers and principal shareholders of Micro Focus will not be subject to the Exchange Act’s short-swing profit rules, because Micro Focus will be a foreign private issuer under the Exchange Act.
However, directors of Micro Focus will be subject to applicable English and U.S. laws prohibiting insider trading. |
Directors and officers of HPE are governed by rules under the Exchange Act that may require directors and officers to forfeit to HPE any short-swing profits realized from purchases and sales, as determined under the Exchange Act and the rules thereunder, of HPE equity securities.
|
249
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
At the beginning of Micro Focus fiscal year 2016, Wizard Parent LLC (Wizard) held 39.9% of the issued share capital of Micro Focus and during fiscal year 2016, Wizard reduced its holding to 13.8% by April 30, 2016. On May 13, 2016, Wizard announced that it had sold 24,078,342 Micro Focus Shares. Following completion of this sale, Wizard held 6,017,369 Micro Focus Shares, representing approximately 2.6% of the outstanding Micro Focus Shares, and as such Wizard is no longer considered to be a related party. These remaining Micro Focus Shares were expected to be distributed to certain members of Wizard and certain partners and investors of such members (including entities managing funds for any such member, partner or investor) who wished to retain a residual stake in Micro Focus and benefit from their ongoing ownership. At the end of Micro Focus fiscal year 2016, there were three major shareholders of Wizard and one of these shareholders held a major shareholding in a technology company with which Micro Focus had traded during 2016. These transactions were at arms length and the goods and services were based on the price lists in force and terms that would be available to third parties. The value of sales made to this third party in fiscal year 2016 was $12.2 million and in fiscal year 2015 was $5.0 million, and the value of goods purchased from this third party in fiscal year 2016 was $0.8 million and in fiscal year 2015 was $.01 million.
SERVICE OF PROCESS AND ENFORCEABILITY OF CIVIL LIABILITIES
Micro Focus is a public limited company organized under the laws of England and Wales and its executive offices and a substantial portion of its assets are located outside the United States. In addition, the members of Micro Focus Board and its executive officers and the experts named herein may be residents of the United Kingdom and other jurisdictions other than the United States. As a result, it may be difficult for investors:
• | to obtain jurisdiction over Micro Focus or its board members in courts in the United States in actions predicated on the civil liability provisions of the U.S. federal securities laws; |
• | to enforce against Micro Focus or its board members judgments obtained in such actions; |
• | to obtain judgments against Micro Focus or its board members in actions in non-U.S. courts predicated solely upon the U.S. federal securities laws; or |
• | to enforce against Micro Focus or its board members in non-U.S. courts judgments of courts in the United States predicated upon the civil liability provisions of the U.S. federal securities laws. |
Micro Focus is being represented by Kirkland & Ellis LLP with respect to legal matters of U.S. federal securities and New York State laws. The validity of the Micro Focus Shares and certain U.K. legal matters are being passed upon for Micro Focus by Travers Smith LLP. Certain tax matters are being passed upon for Seattle by Skadden, Arps, Slate, Meagher & Flom LLP.
The Micro Focus financial statements as of April 30, 2017, 2016 and 2015 and for each of the three years in the period ended April 30, 2017 included in this information statement/prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP (PwC), an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of the Software Segment of Hewlett Packard Enterprise Company (Seattle SpinCo, Inc.) as of October 31, 2016 and 2015, and for each of the three years in the period ended October 31, 2016, appearing in this information statement/prospectus have been audited by Ernst & Young LLP, independent registered public accounting firm, as set forth in their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
The audited financial statements of The Attachmate Group, Inc. included in this information statement/prospectus have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of said firm as experts in accounting and auditing.
250
On April 11, 2017, Micro Focus announced that KPMG LLP (KPMG) had been successful in a competitive tender process to serve as its registered public accounting firm to audit its consolidated financial statements for the period beginning May 1, 2017. The audit tender process was led by the Audit Committee and arose because PwC have a joint business arrangement with HPE Software which will continue post-Closing. Consequently, PwC would no longer be independent with respect to Micro Focus and so could not be its independent registered public accounting firm.
PwC has served as Micro Focus independent registered public accounting firm since 2005 and will continue as Micro Focus independent registered public accounting firm until KPMG is formally appointed at the Micro Focus Annual General Meeting on September 4, 2017. The reports of PwC on Micro Focus financial statements for the years ended April 30, 2015, 2016 and 2017 did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles.
During the Micro Focus fiscal years ended April 30, 2015, 2016 and 2017, there were no disagreements with PwC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PwC, would have caused PwC to make reference thereto in its reports on Micro Focus financial statements for such years.
During the Micro Focus fiscal years ended April 30, 2015, 2016 and 2017, there were no reportable events as that term is used in Item 16F(a)(1)(v)(A)-(D) of Form 20-F.
During the Micro Focus fiscal years ended April 30, 2015, 2016 and 2017, Micro Focus did not consult with KPMG regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on Micro Focus financial statements, and neither a written report nor oral advice was provided to Micro Focus that KPMG concluded was an important factor considered by Micro Focus in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was either the subject of a disagreement or a reportable event.
WHERE YOU CAN FIND MORE INFORMATION
Micro Focus has filed with the SEC a Registration Statement on Form F-4 (Reg. No. 333- ) of which this information statement/prospectus forms a part, including the exhibits thereto, to register under the Securities Act the Micro Focus Shares that HPE Stockholders will receive in the form of Micro Focus ADSs in connection with the Merger. Seattle has filed with the SEC a Registration Statement on Form 10 (Reg. No. 000- ), of which this information statement/prospectus forms a part, including the exhibits thereto, to register under the Exchange Act the Seattle Shares (which will automatically be converted into the right to receive Micro Focus ADSs upon consummation of the Merger) to be distributed by HPE to HPE Stockholders in the Distribution. Micro Focus and Seattle may also file amendments to the registration statements. This information statement/prospectus does not contain all of the information set forth in the registration statements, and some parts have been omitted in accordance with the rules and regulations of the SEC. You should read the Registration Statement on Form F-4 filed by Micro Focus and the Registration Statement on Form 10 filed by Seattle, including the exhibits filed with such registration statements, in their entirety, as they contain important information about Micro Focus, HPE, Seattle, the Seattle Shares, the Micro Focus Shares and the Micro Focus ADSs.
HPE files annual, quarterly, and current reports, proxy statements and other information with the SEC. You may obtain copies of this information in person or by mail from the public reference room at the SEC, 100 F Street, N.E., Room 1024, Washington, D.C. 20549, at prescribed rates. You may obtain information on the operation of the public reference room by calling the SEC at (800) SEC-0330 or (202) 942-8090. The SEC also maintains a website that contains reports, proxy statements and other information about issuers like HPE, which file electronically with the SEC. The address of that site is http://www.sec.gov.
HPE has supplied all information contained in this information statement/prospectus (or incorporated by reference herein) relating to HPE and its subsidiaries (including Seattle), and Micro Focus has supplied all information contained in this information statement/prospectus relating to Micro Focus and its subsidiaries. You can also find information about HPE and Micro Focus at their websites at www.hpe.com and www.microfocus.com, respectively. Information contained on these websites does not constitute part of this information statement/prospectus.
251
Any person to whom this information statement/prospectus is delivered may request copies of this information statement/prospectus and any information incorporated by reference in this information statement/prospectus, without charge, by written or telephonic request directed to HPE at 3000 Hanover Street, Palo Alto, California 94304, investor.relations@hpe.com or (650) 857-2246, or directed to Micro Focus at The Lawn, 22-30 Old Bath Road, Berkshire, RG14 1QN, United Kingdom, investors@microfocus.com or 44-0-1635-565-200.
THIS INFORMATION STATEMENT/PROSPECTUS DOES NOT CONSTITUTE THE SOLICITATION OF A PROXY. YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS INFORMATION STATEMENT/PROSPECTUS. THE PARTIES HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS. THIS INFORMATION STATEMENT/PROSPECTUS IS DATED , 2017. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS INFORMATION STATEMENT/PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THAT DATE.
252
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Micro Focus International plc Audited Consolidated Financial Statements
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The Attachmate Group, Inc. and Subsidiaries Unaudited Condensed Consolidated Financial Statements
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The Attachmate Group, Inc. and Subsidiaries Audited Consolidated Financial Statements
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Seattle Audited Combined Financial Statements
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Seattle Unaudited Condensed Combined Financial Statements
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F-1
Report of Independent Registered Public Accounting Firm
To the board of directors and shareholders of Micro Focus International plc.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, of changes in equity and of cash flows present fairly, in all material respects, the financial position of Micro Focus International plc as of April 30, 2017 and April 30, 2016 and the results of its operations and its cash flows for each of the three years in the period ended April 30, 2017 in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board and in conformity with International Financial Reporting Standards as adopted by the European Union. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Reading, United Kingdom
July 17, 2017, except for the first paragraph of the Note to the Consolidated Statements of Cash Flows, as to which the date is August 3, 2017.
F-2
Micro Focus International plc
Consolidated Statements of Comprehensive Income
For the years ended April 30, 2017, 2016 and 2015
|
|
2017
|
2016*
|
2015*
|
||||||||||||||||||||||||
|
|
Before
exceptional items |
Exceptional
items |
Total
|
Before
exceptional items |
Exceptional
items |
Total
|
Before
exceptional items |
Exceptional
items |
Total
|
||||||||||||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||||
Revenue
|
3,4
|
|
1,380,702
|
|
|
—
|
|
|
1,380,702
|
|
|
1,245,049
|
|
|
—
|
|
|
1,245,049
|
|
|
834,539
|
|
|
—
|
|
|
834,539
|
|
Cost of sales comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Cost of sales (excluding amortization of capitalized product development costs and acquired technology intangibles)
|
|
|
(142,724
|
)
|
|
(2,949
|
)
|
|
(145,673
|
)
|
|
(133,260
|
)
|
|
(2,172
|
)
|
|
(135,432
|
)
|
|
(86,861
|
)
|
|
(4,629
|
)
|
|
(91,490
|
)
|
- Amortization of product development costs
|
|
|
(22,398
|
)
|
|
—
|
|
|
(22,398
|
)
|
|
(19,515
|
)
|
|
—
|
|
|
(19,515
|
)
|
|
(18,605
|
)
|
|
—
|
|
|
(18,605
|
)
|
- Amortization of acquired technology intangibles
|
|
|
(69,098
|
)
|
|
—
|
|
|
(69,098
|
)
|
|
(75,227
|
)
|
|
—
|
|
|
(75,227
|
)
|
|
(30,452
|
)
|
|
—
|
|
|
(30,452
|
)
|
Cost of sales
|
|
|
(234,220
|
)
|
|
(2,949
|
)
|
|
(237,169
|
)
|
|
(228,002
|
)
|
|
(2,172
|
)
|
|
(230,174
|
)
|
|
(135,918
|
)
|
|
(4,629
|
)
|
|
(140,547
|
)
|
Gross profit
|
|
|
1,146,482
|
|
|
(2,949
|
)
|
|
1,143,533
|
|
|
1,017,047
|
|
|
(2,172
|
)
|
|
1,014,875
|
|
|
698,621
|
|
|
(4,629
|
)
|
|
693,992
|
|
Selling and distribution costs
|
|
|
(461,605
|
)
|
|
(5,479
|
)
|
|
(467,084
|
)
|
|
(411,961
|
)
|
|
(4,372
|
)
|
|
(416,333
|
)
|
|
(270,864
|
)
|
|
(19,611
|
)
|
|
(290,475
|
)
|
Research and development expenses comprising:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- Expenditure incurred in the year
|
|
|
(200,976
|
)
|
|
(6,792
|
)
|
|
(207,768
|
)
|
|
(194,265
|
)
|
|
(1,258
|
)
|
|
(195,523
|
)
|
|
(129,713
|
)
|
|
(3,069
|
)
|
|
(132,782
|
)
|
- Capitalization of product development costs
|
|
|
27,664
|
|
|
—
|
|
|
27,664
|
|
|
30,877
|
|
|
—
|
|
|
30,877
|
|
|
19,490
|
|
|
—
|
|
|
19,490
|
|
Research and development expenses
|
|
|
(173,312
|
)
|
|
(6,792
|
)
|
|
(180,104
|
)
|
|
(163,388
|
)
|
|
(1,258
|
)
|
|
(164,646
|
)
|
|
(110,223
|
)
|
|
(3,069
|
)
|
|
(113,292
|
)
|
Administrative expenses
|
|
|
(120,864
|
)
|
|
(82,038
|
)
|
|
(202,902
|
)
|
|
(118,911
|
)
|
|
(20,051
|
)
|
|
(138,962
|
)
|
|
(73,620
|
)
|
|
(69,369
|
)
|
|
(142,989
|
)
|
Operating profit
|
|
|
390,701
|
|
|
(97,258
|
)
|
|
293,443
|
|
|
322,787
|
|
|
(27,853
|
)
|
|
294,934
|
|
|
243,914
|
|
|
(96,678
|
)
|
|
147,236
|
|
Share of loss of associates and gain on dilution of investment
|
15
|
|
(1,254
|
)
|
|
—
|
|
|
(1,254
|
)
|
|
(2,190
|
)
|
|
—
|
|
|
(2,190
|
)
|
|
(788
|
)
|
|
—
|
|
|
(788
|
)
|
Finance costs
|
6
|
|
(96,824
|
)
|
|
—
|
|
|
(96,824
|
)
|
|
(98,357
|
)
|
|
—
|
|
|
(98,357
|
)
|
|
(53,847
|
)
|
|
(2,384
|
)
|
|
(56,231
|
)
|
Finance income
|
6
|
|
979
|
|
|
—
|
|
|
979
|
|
|
1,009
|
|
|
—
|
|
|
1,009
|
|
|
1,210
|
|
|
—
|
|
|
1,210
|
|
Profit before tax
|
5
|
|
293,602
|
|
|
(97,258
|
)
|
|
196,344
|
|
|
223,249
|
|
|
(27,853
|
)
|
|
195,396
|
|
|
190,489
|
|
|
(99,062
|
)
|
|
91,427
|
|
Taxation
|
7
|
|
(50,174
|
)
|
|
11,633
|
|
|
(38,541
|
)
|
|
(39,259
|
)
|
|
6,835
|
|
|
(32,424
|
)
|
|
(15,729
|
)
|
|
25,753
|
|
|
10,024
|
|
Profit for the financial year
|
|
|
243,428
|
|
|
(85,625
|
)
|
|
157,803
|
|
|
183,990
|
|
|
(21,018
|
)
|
|
162,972
|
|
|
174,760
|
|
|
(73,309
|
)
|
|
101,451
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity shareholders of the parent
|
|
|
243,531
|
|
|
(85,625
|
)
|
|
157,906
|
|
|
183,912
|
|
|
(21,018
|
)
|
|
162,894
|
|
|
175,062
|
|
|
(73,309
|
)
|
|
101,753
|
|
Non-controlling interests
|
34
|
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
|
78
|
|
|
—
|
|
|
78
|
|
|
(302
|
)
|
|
—
|
|
|
(302
|
)
|
Profit for the financial year
|
|
|
243,428
|
|
|
(85,625
|
)
|
|
157,803
|
|
|
183,990
|
|
|
(21,018
|
)
|
|
162,972
|
|
|
174,760
|
|
|
(73,309
|
)
|
|
101,451
|
|
Other comprehensive (expense)/income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Items that will not be reclassified to profit or loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial gain/(loss) on pension liabilities schemes
|
26
|
|
402
|
|
|
—
|
|
|
402
|
|
|
2,697
|
|
|
—
|
|
|
2,697
|
|
|
(4,196
|
)
|
|
—
|
|
|
(4,196
|
)
|
Actuarial gain on non-plan pension assets
|
26
|
|
130
|
|
|
—
|
|
|
130
|
|
|
3,104
|
|
|
—
|
|
|
3,104
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Deferred tax movement on pensions
|
7
|
|
(325
|
)
|
|
—
|
|
|
(325
|
)
|
|
(1,745
|
)
|
|
—
|
|
|
(1,745
|
)
|
|
1,301
|
|
|
—
|
|
|
1,301
|
|
Items that may be subsequently reclassified to profit or loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency translation differences
|
|
|
(5,953
|
)
|
|
—
|
|
|
(5,953
|
)
|
|
(3,458
|
)
|
|
—
|
|
|
(3,458
|
)
|
|
(8,375
|
)
|
|
—
|
|
|
(8,375
|
)
|
Other comprehensive (expense)/income for the financial year
|
|
|
(5,746
|
)
|
|
—
|
|
|
(5,746
|
)
|
|
598
|
|
|
—
|
|
|
598
|
|
|
(11,270
|
)
|
|
—
|
|
|
(11,270
|
)
|
Total comprehensive income for the year
|
|
|
237,682
|
|
|
(85,625
|
)
|
|
152,057
|
|
|
184,588
|
|
|
(21,018
|
)
|
|
163,570
|
|
|
163,490
|
|
|
(73,309
|
)
|
|
90,181
|
|
Attributable to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity shareholders of the parent
|
|
|
237,785
|
|
|
(85,625
|
)
|
|
152,160
|
|
|
184,510
|
|
|
(21,018
|
)
|
|
163,492
|
|
|
163,792
|
|
|
(73,309
|
)
|
|
90,483
|
|
Non-controlling interests
|
34
|
|
(103
|
)
|
|
—
|
|
|
(103
|
)
|
|
78
|
|
|
—
|
|
|
78
|
|
|
(302
|
)
|
|
—
|
|
|
(302
|
)
|
Total comprehensive income for the financial year
|
|
|
237,682
|
|
|
(85,625
|
)
|
|
152,057
|
|
|
184,588
|
|
|
(21,018
|
)
|
|
163,570
|
|
|
163,490
|
|
|
(73,309
|
)
|
|
90,181
|
|
Earnings per share expressed in cents per share:
|
|
|
|
|
|
|
|
|
cents
|
|
|
|
|
|
|
|
|
cents
|
|
|
|
|
|
|
|
|
cents
|
|
- basic
|
9
|
|
|
|
|
|
|
|
68.88
|
|
|
|
|
|
|
|
|
74.50
|
|
|
|
|
|
|
|
|
58.54
|
|
- diluted
|
9
|
|
|
|
|
|
|
|
66.51
|
|
|
|
|
|
|
|
|
71.61
|
|
|
|
|
|
|
|
|
56.71
|
|
Earnings per share expressed in pence per share:
|
|
|
|
|
|
|
|
|
pence
|
|
|
|
|
|
|
|
|
pence
|
|
|
|
|
|
|
|
|
pence
|
|
- basic
|
9
|
|
|
|
|
|
|
|
53.25
|
|
|
|
|
|
|
|
|
49.59
|
|
|
|
|
|
|
|
|
36.64
|
|
- diluted
|
9
|
|
|
|
|
|
|
|
51.42
|
|
|
|
|
|
|
|
|
47.66
|
|
|
|
|
|
|
|
|
35.50
|
|
* | In the year ended April 30, 2017, the Company has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. The year ended April 30, 2016 and April 30, 2015 comparatives have also been re-classified (see accounting policies). |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-3
Micro Focus International plc
Consolidated Statements of Financial Position
As at April 30, 2017 and 2016
|
|
2017
|
2016
|
||||||
|
Note
|
$’000
|
$’000
|
||||||
Non-current assets
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
10
|
|
|
2,828,604
|
|
|
2,436,168
|
|
Other intangible assets
|
|
11
|
|
|
1,089,370
|
|
|
966,555
|
|
Property, plant and equipment
|
|
13
|
|
|
40,956
|
|
|
40,867
|
|
Investments in associates
|
|
15
|
|
|
11,457
|
|
|
12,711
|
|
Long-term pension assets
|
|
26
|
|
|
22,031
|
|
|
22,272
|
|
Other non-current assets
|
|
16
|
|
|
3,093
|
|
|
4,002
|
|
Deferred tax assets
|
|
28
|
|
|
208,253
|
|
|
198,757
|
|
|
|
|
|
|
4,203,764
|
|
|
3,681,332
|
|
Current assets
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
17
|
|
|
64
|
|
|
93
|
|
Trade and other receivables
|
|
18
|
|
|
289,509
|
|
|
268,186
|
|
Current tax receivables
|
|
22
|
|
|
1,637
|
|
|
18,016
|
|
Cash and cash equivalents
|
|
19
|
|
|
150,983
|
|
|
667,178
|
|
Assets classified as held for sale
|
|
12
|
|
|
—
|
|
|
888
|
|
|
|
|
|
|
442,193
|
|
|
954,361
|
|
Total assets
|
|
|
|
|
4,645,957
|
|
|
4,635,693
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
|
Trade and other payables
|
|
20
|
|
|
170,042
|
|
|
188,090
|
|
Borrowings
|
|
21
|
|
|
71,184
|
|
|
275,256
|
|
Provisions
|
|
25
|
|
|
20,142
|
|
|
10,545
|
|
Current tax liabilities
|
|
22
|
|
|
42,679
|
|
|
22,426
|
|
Deferred income
|
|
23
|
|
|
640,650
|
|
|
565,480
|
|
|
|
|
|
|
944,697
|
|
|
1,061,797
|
|
Non-current liabilities
|
|
|
|
|
|
|
|
|
|
Deferred income
|
|
24
|
|
|
223,786
|
|
|
196,483
|
|
Borrowings
|
|
21
|
|
|
1,490,352
|
|
|
1,469,953
|
|
Retirement benefit obligations
|
|
26
|
|
|
30,773
|
|
|
31,669
|
|
Long-term provisions
|
|
25
|
|
|
11,937
|
|
|
14,354
|
|
Other non-current liabilities
|
|
27
|
|
|
4,191
|
|
|
3,671
|
|
Deferred tax liabilities
|
|
29
|
|
|
326,731
|
|
|
264,038
|
|
|
|
|
|
|
2,087,770
|
|
|
1,980,168
|
|
Total liabilities
|
|
|
|
|
3,032,467
|
|
|
3,041,965
|
|
Net assets
|
|
|
|
|
1,613,490
|
|
|
1,593,728
|
|
Capital and reserves
|
|
|
|
|
|
|
|
|
|
Share capital
|
|
30
|
|
|
39,700
|
|
|
39,573
|
|
Share premium account
|
|
32
|
|
|
192,145
|
|
|
190,293
|
|
Merger reserve
|
|
33
|
|
|
338,104
|
|
|
988,104
|
|
Capital redemption reserve
|
|
33
|
|
|
163,363
|
|
|
163,363
|
|
Retained earnings
|
|
|
|
|
902,183
|
|
|
228,344
|
|
Foreign currency translation deficit
|
|
|
|
|
(22,959
|
)
|
|
(17,006
|
)
|
Total equity attributable to owners of the parent
|
|
|
|
|
1,612,536
|
|
|
1,592,671
|
|
Non-controlling interests
|
|
34
|
|
|
954
|
|
|
1,057
|
|
Total equity
|
|
|
|
|
1,613,490
|
|
|
1,593,728
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-4
Micro Focus International plc
Consolidated Statements of Changes in Equity
For the years ended April 30, 2017, 2016 and 2015
|
|
Share
capital |
Share
premium account |
Retained
(deficit)/ earnings |
Foreign
currency translation reserve / (deficit) |
Capital
redemption reserve |
Merger
reserve |
(Deficit)/
equity attributable to the parent |
Non-
controlling interests |
Total
(deficit)/ equity |
||||||||||||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||||
Balance as at May 1, 2014
|
|
|
37,802
|
|
|
14,546
|
|
|
(140,324
|
)
|
|
(5,173
|
)
|
|
103,983
|
|
|
(27,085
|
)
|
|
(16,251
|
)
|
|
—
|
|
|
(16,251
|
)
|
Profit/(loss) for the financial year
|
|
|
—
|
|
|
—
|
|
|
101,753
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
101,753
|
|
|
(302
|
)
|
|
101,451
|
|
Other comprehensive expense for the year
|
|
|
—
|
|
|
—
|
|
|
(2,895
|
)
|
|
(8,375
|
)
|
|
—
|
|
|
—
|
|
|
(11,270
|
)
|
|
—
|
|
|
(11,270
|
)
|
Total comprehensive income/(expense)
|
|
|
—
|
|
|
—
|
|
|
98,858
|
|
|
(8,375
|
)
|
|
—
|
|
|
—
|
|
|
90,483
|
|
|
(302
|
)
|
|
90,181
|
|
Non-controlling interests on acquisition of The Attachmate Group (TAG)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,281
|
|
|
1,281
|
|
Transactions with owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
8
|
|
—
|
|
|
—
|
|
|
(72,707
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(72,707
|
)
|
|
—
|
|
|
(72,707
|
)
|
Share options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital
|
30
|
|
106
|
|
|
1,541
|
|
|
(513
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,134
|
|
|
—
|
|
|
1,134
|
|
Movement in relation to share options
|
|
|
—
|
|
|
—
|
|
|
12,151
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,151
|
|
|
—
|
|
|
12,151
|
|
Corporation tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
4,808
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,808
|
|
|
—
|
|
|
4,808
|
|
Deferred tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
3,591
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,591
|
|
|
—
|
|
|
3,591
|
|
Acquisitions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to acquire TAG
|
30, 33
|
|
13,550
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,372,666
|
|
|
1,386,216
|
|
|
—
|
|
|
1,386,216
|
|
Expenses relating to relisting on the LSE
|
39
|
|
—
|
|
|
—
|
|
|
(723
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(723
|
)
|
|
—
|
|
|
(723
|
)
|
Reallocation of merger reserve
|
33
|
|
—
|
|
|
—
|
|
|
130,000
|
|
|
—
|
|
|
—
|
|
|
(130,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Share reorganization and buy-backs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return of Value– share consolidation
|
30
|
|
(37,866
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,903
|
|
|
—
|
|
|
(25,963
|
)
|
|
—
|
|
|
(25,963
|
)
|
Issue and redemption of B shares
|
30
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
47,477
|
|
|
(47,477
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Return of Value– new share issues
|
30
|
|
25,963
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,963
|
|
|
—
|
|
|
25,963
|
|
Return of Value to shareholders
|
31
|
|
—
|
|
|
—
|
|
|
(131,565
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(131,565
|
)
|
|
—
|
|
|
(131,565
|
)
|
Expenses relating to Return of Value
|
31
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
|
—
|
|
|
(55
|
)
|
Total movements for the year
|
|
|
1,753
|
|
|
1,541
|
|
|
43,845
|
|
|
(8,375
|
)
|
|
59,380
|
|
|
1,195,189
|
|
|
1,293,333
|
|
|
979
|
|
|
1,294,312
|
|
Balance as at April 30, 2015
|
|
|
39,555
|
|
|
16,087
|
|
|
(96,479
|
)
|
|
(13,548
|
)
|
|
163,363
|
|
|
1,168,104
|
|
|
1,277,082
|
|
|
979
|
|
|
1,278,061
|
|
Profit for the financial year
|
|
|
—
|
|
|
—
|
|
|
162,894
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
162,894
|
|
|
78
|
|
|
162,972
|
|
Other comprehensive income/(expense) for the year
|
|
|
—
|
|
|
—
|
|
|
4,056
|
|
|
(3,458
|
)
|
|
—
|
|
|
—
|
|
|
598
|
|
|
—
|
|
|
598
|
|
Total comprehensive income/(expense)
|
|
|
—
|
|
|
—
|
|
|
166,950
|
|
|
(3,458
|
)
|
|
—
|
|
|
—
|
|
|
163,492
|
|
|
78
|
|
|
163,570
|
|
Transactions with owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
8
|
|
—
|
|
|
—
|
|
|
(105,159
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(105,159
|
)
|
|
—
|
|
|
(105,159
|
)
|
Share options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital– share options
|
30
|
|
18
|
|
|
950
|
|
|
(70
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
898
|
|
|
—
|
|
|
898
|
|
Movement in relation to share options
|
|
|
—
|
|
|
—
|
|
|
23,582
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,582
|
|
|
—
|
|
|
23,582
|
|
Corporation tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
1,545
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,545
|
|
|
—
|
|
|
1,545
|
|
Deferred tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
8,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,490
|
|
|
—
|
|
|
8,490
|
|
Share placement:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital– share placement
|
30
|
|
—
|
|
|
176,235
|
|
|
49,485
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
225,720
|
|
|
—
|
|
|
225,720
|
|
Share placement issue costs
|
30
|
|
—
|
|
|
(2,979
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2,979
|
)
|
|
—
|
|
|
(2,979
|
)
|
Reallocation of merger reserve
|
33
|
|
—
|
|
|
—
|
|
|
180,000
|
|
|
—
|
|
|
—
|
|
|
(180,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total movements for the year
|
|
|
18
|
|
|
174,206
|
|
|
324,823
|
|
|
(3,458
|
)
|
|
—
|
|
|
(180,000
|
)
|
|
315,589
|
|
|
78
|
|
|
315,667
|
|
Balance as at April 30, 2016
|
|
|
39,573
|
|
|
190,293
|
|
|
228,344
|
|
|
(17,006
|
)
|
|
163,363
|
|
|
988,104
|
|
|
1,592,671
|
|
|
1,057
|
|
|
1,593,728
|
|
Profit/(loss) for the financial year
|
|
|
—
|
|
|
—
|
|
|
157,906
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
157,906
|
|
|
(103
|
)
|
|
157,803
|
|
Other comprehensive income/(expense) for the year
|
|
|
—
|
|
|
—
|
|
|
207
|
|
|
(5,953
|
)
|
|
—
|
|
|
—
|
|
|
(5,746
|
)
|
|
—
|
|
|
(5,746
|
)
|
Total comprehensive income/(expense)
|
|
|
—
|
|
|
—
|
|
|
158,113
|
|
|
(5,953
|
)
|
|
—
|
|
|
—
|
|
|
152,160
|
|
|
(103
|
)
|
|
152,057
|
|
Transactions with owners:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
8
|
|
—
|
|
|
—
|
|
|
(177,535
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(177,535
|
)
|
|
—
|
|
|
(177,535
|
)
|
Treasury shares purchased
|
|
|
—
|
|
|
—
|
|
|
(7,678
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,678
|
)
|
|
—
|
|
|
(7,678
|
)
|
Share options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issue of share capital– share options
|
30
|
|
127
|
|
|
1,852
|
|
|
(90
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,889
|
|
|
—
|
|
|
1,889
|
|
Movement in relation to share options
|
|
|
—
|
|
|
—
|
|
|
23,952
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,952
|
|
|
—
|
|
|
23,952
|
|
Corporation tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
4,081
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,081
|
|
|
—
|
|
|
4,081
|
|
Deferred tax on share options
|
7
|
|
—
|
|
|
—
|
|
|
22,996
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,996
|
|
|
—
|
|
|
22,996
|
|
Reallocation of merger reserve
|
33
|
|
—
|
|
|
—
|
|
|
650,000
|
|
|
—
|
|
|
—
|
|
|
(650,000
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Total movements for the year
|
|
|
127
|
|
|
1,852
|
|
|
673,839
|
|
|
(5,953
|
)
|
|
—
|
|
|
(650,000
|
)
|
|
19,865
|
|
|
(103
|
)
|
|
19,762
|
|
Balance as at April 30, 2017
|
|
|
39,700
|
|
|
192,145
|
|
|
902,183
|
|
|
(22,959
|
)
|
|
163,363
|
|
|
338,104
|
|
|
1,612,536
|
|
|
954
|
|
|
1,613,490
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-5
Micro Focus International plc
Consolidated Statements of Cash Flows
For the years ended April 30, 2017, 2016 and 2015
|
|
2017
|
2016*
|
2015*
|
||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
|
|
Profit after tax
|
|
|
157,803
|
|
|
162,972
|
|
|
101,451
|
|
Adjustments for:
|
|
|
|
|
|
|
|
|
|
|
Net interest
|
6
|
|
95,845
|
|
|
97,348
|
|
|
55,021
|
|
Taxation
|
7
|
|
38,541
|
|
|
32,424
|
|
|
(10,024
|
)
|
Share of results of associates
|
15
|
|
1,254
|
|
|
2,190
|
|
|
788
|
|
Operating profit
|
|
|
293,443
|
|
|
294,934
|
|
|
147,236
|
|
Research and development tax credits
|
|
|
(2,998
|
)
|
|
(2,041
|
)
|
|
(2,135
|
)
|
Depreciation
|
13
|
|
11,794
|
|
|
11,419
|
|
|
7,674
|
|
Loss on disposal of property, plant and equipment
|
5
|
|
520
|
|
|
109
|
|
|
41
|
|
Gain on disposal of intangible assets
|
|
|
—
|
|
|
—
|
|
|
(1,603
|
)
|
Amortization of intangibles
|
11
|
|
236,434
|
|
|
203,313
|
|
|
109,092
|
|
Impairment of intangibles
|
11
|
|
—
|
|
|
—
|
|
|
984
|
|
Impairment of long-term assets
|
11
|
|
—
|
|
|
—
|
|
|
11,642
|
|
Share-based compensation
|
35
|
|
34,506
|
|
|
28,793
|
|
|
15,561
|
|
Exchange movements
|
|
|
(4,890
|
)
|
|
(2,915
|
)
|
|
(87
|
)
|
Provisions movements
|
25
|
|
47,266
|
|
|
12,985
|
|
|
52,538
|
|
Changes in working capital:
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
29
|
|
|
28
|
|
|
39
|
|
Trade and other receivables
|
|
|
10,224
|
|
|
(49,175
|
)
|
|
40,127
|
|
Payables and other liabilities
|
|
|
(33,252
|
)
|
|
30,923
|
|
|
(108,516
|
)
|
Provision utilization
|
25
|
|
(43,476
|
)
|
|
(55,639
|
)
|
|
(5,655
|
)
|
Deferred income
|
|
|
15,375
|
|
|
(16,603
|
)
|
|
21,657
|
|
Pension funding in excess of charge to operating profit
|
|
|
(183
|
)
|
|
(18
|
)
|
|
586
|
|
Cash generated from operations
|
|
|
564,792
|
|
|
456,113
|
|
|
289,181
|
|
Interest paid
|
|
|
(81,115
|
)
|
|
(91,807
|
)
|
|
(50,482
|
)
|
Bank loan costs paid
|
|
|
(6,654
|
)
|
|
(1,805
|
)
|
|
(40,174
|
)
|
Tax (paid)/received
|
|
|
(24,644
|
)
|
|
(79,282
|
)
|
|
1,798
|
|
Net cash generated from operating activities
|
|
|
452,379
|
|
|
283,219
|
|
|
200,323
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
|
|
Payments for intangible assets
|
11
|
|
(31,438
|
)
|
|
(34,488
|
)
|
|
(21,240
|
)
|
Purchase of property, plant and equipment
|
13
|
|
(11,727
|
)
|
|
(10,281
|
)
|
|
(4,972
|
)
|
Costs associated with relisting on the LSE
|
39
|
|
—
|
|
|
—
|
|
|
(723
|
)
|
Interest received
|
|
|
979
|
|
|
1,009
|
|
|
320
|
|
Payment for acquisition of business
|
39
|
|
(299,061
|
)
|
|
(9,960
|
)
|
|
—
|
|
Repayment of bank borrowings on the acquisitions
|
39
|
|
(316,650
|
)
|
|
—
|
|
|
(1,294,726
|
)
|
Net cash acquired with acquisitions
|
39
|
|
68,173
|
|
|
106
|
|
|
165,946
|
|
Short term investments
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Net cash used in investing activities
|
|
|
(589,724
|
)
|
|
(53,614
|
)
|
|
(1,155,397
|
)
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
|
|
Investment in non-controlling interests
|
32
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
Proceeds from issue of ordinary share capital
|
30
|
|
1,979
|
|
|
968
|
|
|
1,647
|
|
Purchase of treasury shares
|
|
|
(7,678
|
)
|
|
—
|
|
|
—
|
|
Proceeds from share capital placement
|
|
|
—
|
|
|
225,720
|
|
|
—
|
|
Costs associated with share placement
|
|
|
—
|
|
|
(2,979
|
)
|
|
—
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-6
|
|
2017
|
2016*
|
2015*
|
||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||
Return of Value paid to shareholders
|
31
|
|
—
|
|
|
—
|
|
|
(131,565
|
)
|
Costs associated with the Return of Value
|
|
|
—
|
|
|
—
|
|
|
(55
|
)
|
Repayment of bank borrowings
|
21
|
|
(372,062
|
)
|
|
(157,750
|
)
|
|
(522,000
|
)
|
Net proceeds from bank borrowings
|
21
|
|
180,000
|
|
|
245,000
|
|
|
1,903,625
|
|
Dividends paid to owners
|
8
|
|
(177,535
|
)
|
|
(105,159
|
)
|
|
(72,707
|
)
|
Net cash (used in)/generated from financing activities
|
|
|
(375,298
|
)
|
|
205,800
|
|
|
1,178,945
|
|
Effects of exchange rate changes
|
|
|
(3,552
|
)
|
|
(9,551
|
)
|
|
(15,347
|
)
|
Net (decrease)/increase in cash and cash equivalents
|
|
|
(516,195
|
)
|
|
425,854
|
|
|
208,524
|
|
Cash and cash equivalents at beginning of year
|
|
|
667,178
|
|
|
241,324
|
|
|
32,800
|
|
Cash and cash equivalents at end of year
|
19
|
|
150,983
|
|
|
667,178
|
|
|
241,324
|
|
* Note | The Company has determined that the appropriate classification for the repayment of bank borrowings on the acquisition of TAG of $1,294.7 million for the year ended April 30, 2015 is a cash outflow from investing activities as the repayments relate to the repayment of bank borrowings in connection with acquisitions completed during the year. The Consolidated Statements of Cash Flows for the year ended April 30, 2015 has been revised to reflect the classification. |
In addition, provision utilization consisting of cash payments of $56.0 million and $6.1 million for the year ended April 30, 2016 and 2015, respectively, has been revised from provision movements to working capital movements with a corresponding impact on the effects of the exchange rate changes line. Subsequent to the revision, the remaining amounts presented in provision movements represent expenses net of reversals recorded within the Consolidated Statement of Comprehensive Income. |
The presentation of bank loan costs paid of $1.8 million and $40.2 million for the year ended April 30, 2016 and 2015, respectively, has also been revised from cash flows from financing activities to cash flows from operating activities as management determined they were inappropriately presented within cash flows from financing activities. |
Management does not believe these corrections are material, individually or in the aggregate, to the Consolidated Financial Statements taken as a whole, in any periods. The revision did not impact the Consolidated Statements of Comprehensive Income, Consolidated Statements of Financial position and Consolidated Statements of Changes in Equity in any periods. |
The principal non-cash transaction of $nil in the year ended April 30, 2017 (2016: $nil) was the cashless rollover of Term Loan C to Term Loan B-2. Non-cash payments of $1,386.2m were made in respect of the issue of shares relating to the acquisition of TAG (note 39) for the year ended April 30, 2015. |
The accompanying notes are an integral part of these Consolidated Financial Statements.
F-7
Notes to the Consolidated Financial Statements
1. General information
Micro Focus International plc (Company) is a public limited Company incorporated and domiciled in the UK. The address of its registered office is, The Lawn, 22-30 Old Bath Road, Newbury, RG14 1QN, UK. Micro Focus International plc and its subsidiaries (together Group) provide innovative software to clients around the world enabling them to dramatically improve the business value of their enterprise applications. As at April 30, 2017, the Group had a presence in 40 countries worldwide and employed approximately 4,800 people.
The Company is listed on the London Stock Exchange.
Following Closing of the acquisition of HPE Software, the Group intends to align its financial year end to October 31, and will report an 18 month financial period ending October 31, 2018.
The Group consolidated financial statements were authorized for issuance by the board of directors on July 17, 2017.
2. Significant Accounting Policies
I. Group accounting policies
A. Basis of preparation
The consolidated financial statements of the Company have been prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IASB) and in conformity with IFRS as adopted by the European Union (collectively IFRS).
The consolidated financial statements have been prepared on a going concern basis under the historical cost convention.
The preparation of financial statements in conformity with IFRS requires the use of certain critical accounting estimates. It also requires management to exercise its judgment in the process of applying the Groups accounting policies. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below in II, ‘Critical accounting estimates and assumptions.
The principal accounting policies adopted by the Group in the preparation of the consolidated financial statements are set out below. Other than as described below, the accounting policies adopted are consistent with those of the Annual Report and Accounts for the year ended April 30, 2016, apart from standards, amendments to or interpretations of published standards adopted during the year, certain cash flow classification described in consolidated statements of cash flows; and the re-classification of costs in the consolidated statement of comprehensive income.
Re-classification of costs for Consolidated Statement of Comprehensive Income Presentation
As part of the HPE Software transaction the Companys shares and ADS will be listed on the London and New York Stock Exchange respectively. As part of the regulatory filing process in the USA the Group has reviewed its consolidated statement of comprehensive income presentation and has decided to re-classify both amortization of product development costs and amortization of acquired technology intangibles from research and development expenses to cost of sales. This presentation complies with IFRS and, in the view of the Companys Audit Committee, provides investors with a consolidated statement of comprehensive income presentation that is more comparable with other software companies listed on both markets. The year ended April 30, 2016 and April 30, 2015 comparatives have also been re-classified and additional detail is provided on the face of the consolidated statement of comprehensive income this year.
B. Consolidation
The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company, its subsidiaries and the Groups share of its interests in associates prepared at the consolidated statement of financial position date.
F-8
Subsidiaries
Subsidiaries are entities controlled by the Group. The Group has control over an entity where the Group is exposed to, or has rights to, variable returns from its involvement within the entity and it has the power over the entity to effect those returns. The existence and effect of potential voting rights that are currently exercisable or convertible are considered when assessing control. Control is presumed to exist when the Group owns more than half of the voting rights (which does not always equal percentage ownership) unless it can be demonstrated that ownership does not constitute control. The results of subsidiaries are consolidated from the date on which control passes to the Group. The results of disposed subsidiaries are consolidated up to the date on which control passes from the Group.
The purchase method of accounting is used to account for the acquisition of subsidiaries by the Group. The cost of acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, with costs directly attributable to the acquisition being expensed. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any non-controlling interest. The excess of the cost of acquisition over the fair value of the Groups share of the identifiable net assets acquired is recorded as goodwill.
Where new information is obtained within the ‘measurement period (defined as the earlier of the period until which the Group receives the information it was seeking about facts and circumstances that existed as of the acquisition date or learns that more information is not obtainable, or one year from the acquisition date) about facts and circumstances that existed as at the acquisition date and, if known, would have affected the measurement of the amounts recognized as of that date, the Group recognizes these adjustments to the acquisition balance sheet with an equivalent offsetting adjustment to goodwill. Where new information is obtained after this measurement period has closed, this is reflected in the post-acquisition period.
For partly owned subsidiaries, the allocation of net assets and net earnings to outside shareholders is shown in the line ‘Attributable to non-controlling interests on the face of the consolidated statement of comprehensive income and the consolidated statement of financial position.
Inter-company transactions, balances and unrealized gains on transactions between Group companies are eliminated. Accounting policies of subsidiaries have been changed where necessary to ensure consistency with the policies adopted by the Group.
At April 30, 2017, the Group had a 74.7% (2016: 71.5%, 2015: 68.3%) interest in Novell Japan Ltd.
Associates
An associate is an entity, that is neither a subsidiary or a joint venture, over whose operating and financial policies the Group exercises significant influence. Significant influence is presumed to exist where the Group has between 20% and 50% of the voting rights, but can also arise where the Group holds less than 20% if it has the power to be actively involved and influential in policy decisions affecting the entity.
Associates are accounted for under the equity method, where the consolidated statement of comprehensive income and the consolidated financial position includes the Groups share of their profits and losses and net assets, less any impairment in value. This involves recording the investment initially at cost to the Group, which therefore includes any goodwill on acquisition and then, in subsequent periods, adjusting the carrying amount of the investment to reflect the Groups share of the associates post-acquisition profits and losses, which is recognized in the consolidated statement of comprehensive income, and its share of post-acquisition comprehensive income, which is recognized in the consolidated statement of comprehensive income. Unrealized gains arising from transactions between the Group and its associates are eliminated to the extent of the Groups interests in the associates.
At April 30, 2017, the Group had a 12.5% interest ($10.5m) (2016: 14.3%, $12.7m, 2015: 14.3%, $14.9m) investment in Open Invention Network LLC (OIN). There are eight (2016: seven) equal shareholders of OIN, all holding a 12.5% interest, and each shareholder has one board member and one alternative board member. The Group exercises significant influence over OINs operation and therefore accounts for its investment in OIN as an associate.
F-9
C. Revenue recognition
The Group recognizes revenues from sales of software Licences (including Intellectual Property and Patent rights, to end-users, resellers and Independent Software Vendors (ISV)), software maintenance, subscription, technical support, training and professional services, upon firm evidence of an arrangement, delivery of the software and determination that collection of a fixed or determinable fee is reasonably assured. ISV revenue includes fees based on end usage of ISV applications that have our software embedded in their applications. When the fees for software upgrades and enhancements, maintenance, consulting and training are bundled with the Licence fee, they are unbundled using the Groups objective evidence of the fair value of the elements represented by the Groups customary pricing for each element in separate transactions. If evidence of fair value exists for all undelivered elements and there is no such evidence of fair value established for delivered elements, revenue is first allocated to the elements where fair value has been established and the residual amount is allocated to the delivered elements. If evidence of fair value for any undelivered element of the arrangement does not exist, all revenue from the arrangement is deferred until such time that there is evidence of delivery.
If the arrangement includes acceptance criteria, revenue is not recognized until the Group can objectively demonstrate that the acceptance criteria have been met, or the acceptance period lapses, whichever is earlier.
The Group recognizes Licence revenue derived from sales to resellers upon delivery to resellers, provided that all other revenue recognition criteria are met; otherwise revenue is deferred and recognized upon delivery of the product to the end-user. Where the Group sells access to a Licence for a specified period of time and collection of a fixed or determinable fee is reasonably assured, Licence revenue is recognized upon delivery, except in instances where future substantive upgrades or similar performance obligations are committed to. Where these future performance obligations are specified in the Licence agreement, and fair value can be attributed to those upgrades, revenue for the future performance obligations is deferred and recognized on the basis of the fair value of the upgrades in relation to the total estimated sales value of all items covered by the Licence agreement. Where the future performance obligations are unspecified in the Licence agreement, revenue is deferred and recognized ratably over the specified period.
For Subscription revenue where access and performance obligations are provided evenly over a defined term, the revenue is deferred and recognized ratably over the specified period.
Maintenance revenue is recognized on a straight-line basis over the term of the contract, which in most cases is one year. Revenue from consulting and training services is recognized on a percentage of completion basis as the services are performed. The stage of completion is measured on the basis of services performed to date as a percentage of the total services to be performed. Amounts collected prior to satisfying the above revenue recognition criteria are included in deferred income.
Rebates paid to partners as part of a contracted program are netted against revenue where the rebate paid is based on the achievement of sales targets made by the partner, unless the Company receives an identifiable good or service from the partner that is separable from the sales transaction and for which the Group can reasonably estimate fair value.
D. Cost of sales
Cost of sales includes costs related to the amortization of product development costs, amortization of acquired technology intangibles, costs of the consulting business and helpline support and royalties payable to third parties.
E. Segment reporting
In accordance with IFRS 8, ‘Operating Segments, the Group has derived the information for its operating segments using the information used by the Chief Operating Decision Maker (the Executive Committee). Operating segments are consistent with those used in internal management reporting and the profit measure used by the Executive Committee is the Adjusted Operating Profit. Following the Company reorganization on May 1, 2015, the Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio and previously it had Base Micro Focus (North America, International, Asia Pacific and Japan) and TAG.
F-10
F. Exceptional items
Exceptional items are those significant items which are separately disclosed by virtue of their size, nature or incidence to enable a full understanding of the Groups financial performance. Management of the Group first evaluates group strategic projects such as acquisitions, divestitures and integration activities, company tax restructuring and other one off events such as restructuring programs. In determining whether an event or transaction is exceptional, management of the Group considers quantitative and qualitative factors such as its expected size, precedent for similar items and the commercial context for the particular transaction, while ensuring consistent treatment between favorable and unfavorable transactions impacting revenue, income and expense for all periods presented. Examples of transactions which may be considered of an exceptional nature include major restructuring programmes, cost of acquisitions or the cost of integrating acquired businesses.
G. Employee benefit costs
a) Pension obligations and long-term pension assets
The Group operates various pension schemes, including both defined contribution and defined benefit pension plans. A defined contribution plan is a pension plan under which the Group pays fixed contributions into a separate entity. The Group has no legal or constructive obligations to pay further contributions if the fund does not hold sufficient assets to pay all employees the benefits relating to employee service in the current and prior periods. A defined benefit plan is a pension plan that is not a defined contribution plan.
For defined contribution plans the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as an employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the future payments is available.
Typically, defined benefit plans define an amount of pension benefit that an employee will receive on retirement. This is usually dependent on one or more factors such as age, years of service and compensation.
The liability recognized in the consolidated statement of financial position in respect of defined benefit pension plans is the present value of the defined benefit obligation at the end of the reporting period less the fair value of plan assets. Certain long-term pension assets do not meet the definition of plan assets as they have not been pledged to the plan and are subject to the creditors of the Group. Such assets are recorded separately in the consolidated statement of financial position as long-term pension assets. The defined benefit obligation is calculated annually by independent actuaries using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash outflows using interest rates of high-quality corporate bonds that have terms to mature approximating to the terms of the related pension obligation.
Actuarial gains and losses arising from experience adjustments and changes in actuarial assumptions are charged or credited to equity in other comprehensive income in the period in which they arise. Past-service costs are recognized immediately in income.
The current service cost of the defined benefit plan, recognized in the consolidated statement of comprehensive income in employee benefit expense, except where included in the cost of an asset, reflects the increase in the defined benefit obligation resulting from employee service in the current year, benefit changes, curtailments and settlements.
The net interest cost is calculated by applying the discount rate to the net balance of the defined benefit obligation and the fair value of plan assets. This cost is included in employee benefit expense in the consolidated statement of comprehensive income.
Long-term pension assets relate to the reimbursement right under insurance policies held in the Group with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement rights assets are recorded in the consolidated statement of financial position as long-term pension assets. Fair value of the reimbursement right asset is deemed to be the present value of the related obligation because the right to reimbursement under the insurance policies exactly matches the amount and timing of some or all of the benefits payable under the defined benefit plan.
F-11
b) Share based compensation
The Group operated various equity-settled, share based compensation plans during the year.
The fair value of the employee services received in exchange for the grant of the shares or options is recognized as an expense. The total amount to be expensed over the vesting period is determined by reference to the fair value of the shares or options granted. Non-market vesting conditions are included in assumptions about the number of options that are expected to become exercisable. Market vesting conditions are taken into account when determining the fair value of the options at grant date. At each consolidated statement of financial position date, the Group revises its estimates of the number of options that are expected to become exercisable. It recognizes the impact of the revision of original estimates, if any, in the consolidated statement of comprehensive income, and a corresponding adjustment to equity over the remaining vesting period.
The shares are recognized when the options are exercised and the proceeds received allocated between ordinary shares and share premium account. Fair value is measured using the Black-Scholes pricing model. The expected life used in the model has been adjusted, based on managements best estimate for the effects of non-transferability, exercise restrictions and behavioral considerations. The Additional Share Grants have been valued using the Monte-Carlo simulation pricing model.
The social security contributions payable in connection with the grant of the share options is considered an integral part of the grant itself, and the charge is treated as a cash-settled transaction.
c) Employee benefit trust
Transactions, assets and liabilities of the Group sponsored Employee Benefit Trust are included in the consolidated financial statements as it is considered to be an intermediate payment arrangement. In particular, the Trusts purchases of shares in the Company remain deducted from shareholders funds until they vest unconditionally with employees.
H. Foreign currency translation
a) Functional and presentation currency
The presentation currency of the Group is US dollars. Items included in the financial statements of each of the Groups entities are measured in the functional currency of each entity. The Group uses the local currency as the functional currency, except for two entities based in Ireland (Novell Ireland Software Limited and Novell Ireland Real Estate Limited) and the parent company, where the functional currency is the US dollar.
b) Transactions and balances
Foreign currency transactions are translated into the functional currency using the exchange rates prevailing at the dates of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognized in the consolidated statement of comprehensive income.
c) Group companies
The results and financial position of all the Group entities that have a functional currency different from the presentation currency are translated into the presentation currency as follows:
i) | Assets and liabilities for each consolidated statement of financial position presented are translated at the closing rate at the date of that consolidated statement of financial position; |
ii) | Income and expenses for each consolidated statement of comprehensive income item are translated at average exchange rates (unless this average is not a reasonable approximation of the cumulative effect of the rates prevailing on the transaction dates, in which case income and expenses are translated at the dates of the transactions); and |
iii) | All resulting exchange differences are recognized as a separate component of equity. |
On consolidation, exchange differences arising from the translation of the net investment in foreign entities are taken to other comprehensive income.
F-12
Goodwill and fair value adjustments arising on the acquisition of a foreign entity are treated as assets and liabilities of the foreign entity and translated at the closing rate, with the exception for goodwill arising before May 1, 2004 which is treated as an asset of the Company and expressed in the Companys functional currency.
d) Exchange rates
The most important foreign currencies for the Group are Pounds Sterling, the Euro and Japanese Yen. The exchange rates used are as follows:
|
2017
|
2016
|
2015
|
|||||||||||||||
|
Average
|
Closing
|
Average
|
Closing
|
Average
|
Closing
|
||||||||||||
£1 = $
|
|
1.29
|
|
|
1.29
|
|
|
1.50
|
|
|
1.46
|
|
|
1.60
|
|
|
1.54
|
|
€1 = $
|
|
1.09
|
|
|
1.09
|
|
|
1.11
|
|
|
1.14
|
|
|
1.24
|
|
|
1.10
|
|
100 Yen = 1
|
|
0.93
|
|
|
0.90
|
|
|
0.84
|
|
|
0.94
|
|
|
0.90
|
|
|
0.84
|
|
I. Intangible assets
a) Goodwill
Goodwill represents the excess of the cost of an acquisition over the fair value of the net identifiable assets of the acquired subsidiary at the date of acquisition. Goodwill on acquisitions of subsidiaries is included in intangible assets. Goodwill is tested annually for impairment and carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold. Goodwill is allocated to cash-generating units for the purpose of impairment testing. Each of those cash-generating units represents the Groups investment in each area of operation by each primary reporting segment.
b) Computer software
Computer software licences are capitalized on the basis of the costs incurred to acquire and bring into use the specific software. These costs are amortized using the straight-line method over their estimated useful lives of three to five years.
c) Research and development
Research expenditure is recognized as an expense as incurred in the consolidated statement of comprehensive income in research and development expenses. Costs incurred on product development projects relating to the developing of new computer software programmes and significant enhancement of existing computer software programmes are recognized as intangible assets when it is probable that the project will be a success, considering its commercial and technological feasibility, and costs can be measured reliably. Only direct costs are capitalized which are the software development employee costs and third party contractor costs. Product development costs previously recognized as an expense are not recognized as an asset in a subsequent period. Product development costs are amortized from the commencement of the commercial production of the product on a straight-line basis over the period of its expected benefit, typically being three years, and are included in costs of sales in the consolidated statement of comprehensive income.
d) Intangible assets – arising on business combinations
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortization. Amortization is charged to the consolidated statement of comprehensive income on a straight-line basis over the estimated useful life of each intangible asset. Intangible assets are amortized from the date they are available for use. The estimated useful lives will vary for each category of asset acquired and to date are as follows:
Purchased software
|
Three to five years
|
Trade names
|
Three to 20 years
|
Technology
|
Three to 10 years
|
Customer relationships
|
Two to 10 years
|
Amortization of purchased software intangibles is included in administrative expenses, of technology intangibles in cost of sales and of trade names and customer relationships intangibles in selling and distribution costs in the consolidated statement of comprehensive income.
F-13
J. Property, plant and equipment
All property, plant and equipment is stated at historical cost less accumulated depreciation and impairment. Historical cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the assets carrying amount or recognized as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance expenditures are charged to the consolidated statement of comprehensive income during the financial year in which they are incurred. Depreciation is calculated using the straight-line method to write off the cost of each asset to its residual value over its estimated useful life as follows:
Buildings
|
30 years
|
Leasehold improvements
|
Three to 10 years
|
Fixtures and fittings
|
Two to seven years
|
Computer equipment
|
One to five years
|
Freehold land is not depreciated. The assets residual values and useful lives are reviewed, and adjusted if appropriate, at each consolidated statement of financial position date. An assets carrying amount is written down immediately to its recoverable amount if the assets carrying amount is greater than its estimated recoverable amount. Gains and losses on disposals are determined by comparing the disposal proceeds with the carrying amount and are included in the consolidated statement of comprehensive income.
Property held for sale is measured at the lower of its carrying amount or estimated fair value less costs to sell.
K. Impairment of non-financial assets
Assets that have an indefinite useful life are not subject to amortization and are tested annually for impairment. Assets that are subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. An impairment loss is recognized for the amount by which the assets carrying amount exceeds its recoverable amount. The recoverable amount is the higher of an assets fair value less costs of disposal and value in use. For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows being cash-generating units. Any non-financial assets other than goodwill which have suffered an impairment are reviewed for possible reversal of the impairment at each reporting date. Assets that are subject to amortization and depreciation are also reviewed for any possible impairment at each reporting date.
L. Inventories
Inventories are stated at the lower of cost and net realizable value. The cost of finished goods comprises software for resale and packaging materials. Net realizable value is the estimated selling price in the ordinary course of business, less applicable variable selling expenses.
When work has been performed and the revenue is not yet recognized, the direct costs of third party contractors and staff will be treated as work in progress where the probability of invoicing and evidence of collectability can be demonstrated.
M. Trade receivables
Trade receivables are initially recognized at fair value and subsequently measured at amortized cost less provisions for impairment. A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts due according to the original terms of receivables. The amount of the provision is the difference between the assets carrying amount and the present value of estimated future cash flows, discounted at the effective interest rate. The amount of the provision is recognized in the consolidated statement of comprehensive income.
N. Cash and cash equivalents
Cash and cash equivalents includes cash in hand, deposits held at call with banks, other short-term highly liquid investments with original maturities of three months or less, and bank overdrafts. Bank overdrafts are shown within borrowings in current liabilities on the consolidated statement of financial position.
F-14
O. Borrowings
Borrowings are recognized initially at fair value, net of transaction costs incurred. Subsequent to initial recognition, interest bearing borrowings are stated at amortized cost with any difference between cost and redemption value being recognized in the consolidated statement of comprehensive income over the period of borrowing on an effective interest basis.
P. Leases
Leases where the lessor retains a significant portion of the risks and rewards of ownership are classified as operating leases. Payments made under operating leases, net of any incentives received from the lessor, are charged to the consolidated statement of comprehensive income on a straight-line basis over the period of the lease.
Q. Taxation
Current and deferred tax are recognized in the consolidated statement of comprehensive income, except when the tax relates to items charged or credited directly to equity, in which case the tax is also dealt with directly in equity.
Deferred income tax is provided in full, using the liability method, on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. Deferred tax liabilities are not recognized if they arise from the initial recognition of goodwill. However, if the deferred income tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting nor taxable profit or loss, it is not accounted for. Deferred income tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the consolidated statement of financial position date and are expected to apply when the related deferred income tax asset is realized or the deferred income tax liability is settled. Deferred income tax assets are recognized to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilized.
Deferred income tax is provided on temporary differences arising on investments in subsidiaries, except where the timing of the reversal of the temporary difference is controlled by the Group and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are offset when there is a legally enforceable right to set off current tax assets against current tax liabilities and when they relate to income taxes levied by the same taxation authority and the Group intends to settle its current tax assets and liabilities on a net basis.
Current tax is recognized based on the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the consolidated statement of financial position date.
R. Ordinary shares, share premium and dividend distribution
Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds. Dividend distributions to the Companys shareholders are recognized as a liability in the Groups financial statements in the period in which the dividends are approved by the Companys shareholders. Interim dividends are recognized when they are paid.
S. Financial instruments and hedge accounting
Financial assets and liabilities are recognized in the Groups consolidated statement of financial position when the Group becomes a party to the contractual provision of the instrument. Trade receivables are non-interest bearing and are stated at their fair value less the amount of any appropriate provision for irrecoverable amounts. Trade payables are non-interest bearing and are stated at their fair value. In accordance with its treasury policy, as at April 30, 2017 and 2016 the Group does not typically hold or issue derivative financial instruments for hedge accounting or trading purposes.
T. Provisions
Provisions for onerous leases, restructuring costs and legal claims are recognized when the Group has a present legal or constructive obligation as a result of past events; it is probable that an outflow of resources will be
F-15
required to settle the obligation; and the amount has been reliably estimated. Restructuring provisions comprise lease termination penalties and employee termination payments. Provisions are not recognized for future operating losses.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognized even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to the passage of time is recognized as an interest expense.
U. Adoption of new and revised International Financial Reporting Standards
The accounting policies adopted in these consolidated financial statements are consistent with those of the annual financial statements for the year ended April 30, 2016, with the exception of the following standards, amendments to or interpretations of published standards adopted during the year:
(a) | The following standards, interpretations and amendments to existing standards are now effective and have been adopted by the Group: |
• | Amendment to IAS 16, ‘Property, plant and equipment’ and IAS 38, ‘Intangible assets’, on depreciation and amortization applies for periods beginning on or after January 1, 2016. In this amendment the IASB has clarified that the use of revenue based methods to calculate the depreciation of an asset is not appropriate because revenue generated by an activity that includes the use of an asset generally reflects factors other than the consumption of the economic benefits embodied in the asset. |
• | Annual Improvements 2014 includes amendments to IFRS 5, ‘Non-current Assets Held For Sale and Discontinued Operations’, IFRS 7, ‘Financial Instruments: Disclosures’, IAS 19, ‘Employee Benefits’ and IAS 34, ‘Interim Financial Reporting’ applies for periods beginning on or after January 1, 2016. |
• | Amendment to IAS 1, ‘Presentation of financial statements’ as part of the IASB initiative to improve presentation and disclosure in financial reports, effective for annual periods beginning on or after January 1, 2016. |
The amendments above do not have a material impact to the consolidated financial statements.
(b) | The following standards, interpretations and amendments to existing standards are not yet effective and have not been adopted early by the Group: |
• | IFRS 15 ‘Revenue from contracts with customers’ establishes the principles that an entity shall apply to report useful information to users of financial statements about the nature, amount, timing, and uncertainty of revenue and cash flows arising from a contract with a customer. Application of the standard is mandatory for annual reporting periods starting from January 1, 2018 onwards. Earlier application is permitted. The standard replaces IAS 18 ‘Revenue’ and IAS 11 ‘Construction contracts’ and related interpretations clarifications. Please refer to below for a more detailed assessment to-date on implementing this standard. |
• | IFRS 9 ‘Financial instruments’. This standard replaces the guidance in IAS 39 and applies to periods beginning on or after January 1, 2018. It includes requirements on the classification and measurement of financial assets and liabilities; it also includes an expected credit loss model that replaces the current incurred loss impairment model. |
• | Amendments to IAS 7, ‘Statement of cash flows’ on disclosure initiative are effective on periods beginning on or after January 1, 2017, subject to EU endorsement. This amendment introduces an additional disclosure that will enable users of financial statements to evaluate changes in liabilities arising from financing activities and is part of the IASB’s Disclosure Initiative, which continues to explore how financial statement disclosure can be improved. |
• | Amendments to IAS 12, 'Income taxes' on recognition of deferred tax assets for unrealized losses are effective on periods beginning on or after January 1, 2017, subject to EU endorsement. These amendments clarify how to account for deferred tax assets originated from unrealized loss in debt instruments measured at fair value. |
F-16
• | Amendments to IFRS 2, ‘Share based payments’ on clarifying how to account for certain types of share based payment transactions are effective on periods beginning on or after January 1, 2018, subject to EU endorsement. These amendments clarify the measurement basis for cash-settled share based payments and the accounting for modifications that change an award from cash-settled to equity-settled. It also introduces an exception to the principles in IFRS 2 that will require an award to be treated as if it was wholly equity-settled, where an employer is obliged to withhold an amount for the employee’s tax obligation associated with a share based payment and pay that amount to the tax authority. |
• | IFRS 16, ‘Leases’ addresses the definition of a lease, recognition and measurement of leases and establishes principles for reporting useful information to users of financial statements about the leasing activities of both lessees and lessors. A key change arising from IFRS 16 is that most operating leases will be accounted for on balance sheet for lessees. The standard replaces IAS 17 ‘Leases', and related interpretations. The standard is effective for annual periods beginning on or after January 1, 2019 and earlier application is permitted if the entity is adopting IFRS 15 'Revenue from contracts with customers' at the same time, subject to EU endorsement. |
• | Annual improvements 2014–2016 include amendments to IFRS 1, ‘First-time adoption of IFRS’, IFRS 12, ‘Disclosure of interests in other entities’ and IAS 28, ’Investments in associates and joint ventures’ regarding measuring an associate or joint venture at fair value applies for periods beginning on or after January 1, 2018, subject to EU endorsement. |
• | IFRIC 22, ‘Foreign currency transactions and advance consideration’ addresses foreign currency transactions or parts of transactions where there is consideration that is denominated or priced in a foreign currency. The interpretation provides guidance for when a single payment/receipt is made as well as for situations where multiple payments/receipts are made, effective for annual periods beginning on or after January 1, 2018, subject to EU endorsement. |
• | Clarifications to IFRS 15 ‘Revenue from Contracts with Customers’ are effective on periods beginning on or after January 1, 2018, subject to EU endorsement. These amendments comprise clarifications of the guidance on identifying performance obligations, accounting for licences of intellectual property and the principal versus agent assessment (gross versus net revenue presentation). |
• | IFRIC 23, ‘Uncertainty over Income Tax Treatments’ clarifies how to apply the recognition and measurement requirements in IAS 12 when there is uncertainty over income tax treatments. In such a circumstance, an entity shall recognize and measure its current or deferred tax asset or liability applying the requirements in IAS 12 based on taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined applying this interpretation. This interpretation is effective for annual periods beginning on or after January 1, 2019, subject to EU endorsement. |
For IFRS 9, IFRS 16, IFRIC 22 and IFRIC 23, it is too early to determine how significant the effect on reported results and financial position will be. The impact of IFRS 15 is discussed below. The impact of the other standards, amendments and interpretations listed above will not have a material impact on the consolidated financial statements.
Impact of IFRS 15 ‘Revenue from contracts with customers
On May 28, 2014, the IASB issued IFRS 15 ‘Revenue from Contracts with Customers. The new revenue recognition standard will be effective for the Group starting November 1, 2018, following the announcement of the new year-end date. We do not plan to adopt IFRS 15 early. The standard permits two possible transition methods for the adoption of the new guidance:
• | Retrospectively to each prior reporting period presented in accordance with IAS 8 ‘Accounting Policies, Changes in Accounting Estimates and Errors’, or |
• | Retrospectively with the cumulative effect of initially applying the standard recognized on the date of the initial application (cumulative catch-up approach). |
We currently plan to adopt the new standard using the cumulative catch-up approach. We are in the process of assessing the impact, developing our future IFRS 15 revenue recognition policies and adjusting the relevant business processes to adopt these new policies. We have established a project across Micro Focus business to review the impacts of IFRS 15 and as part of this effort, the most notable difference to date is in relation to
F-17
certain incremental costs of obtaining a contract. IFRS 15 requires the capitalization and amortization of certain in-scope sales commissions and third party costs to match the recognition of the associated revenue. An evaluation study is underway to determine the potential impact on the consolidated financial statements in the year of adoption. There will be no impact to cash flows.
IFRS 15 may also change the way we allocate on a transaction price to individual performance obligations which can impact the classification and timing of revenues. Further analysis of the requirements is currently being undertaken to understand the possible impact, if any.
In addition to the effects on our consolidated statement of comprehensive income, we expect changes to our consolidated statements of financial position (in particular due to the recognition of contract assets/contract liabilities, the differentiation between contract assets and trade receivables, the capitalization and amortization of costs of obtaining a contract and an impact in retained earnings from the initial adoption of IFRS 15) and changes to the quantitative and qualitative disclosures included.
We will continue to assess all of the impacts that the application of IFRS 15 will have on our consolidated financial statements in the period of initial application. The impacts, if material, will be disclosed, including statements on if and how we apply any of the practical expedients available in the standard.
II. Critical accounting estimates and assumptions
In preparing the consolidated financial statements, the Group has made its best estimates and judgments of certain amounts included in the financial statements, giving due consideration to materiality. The Group regularly reviews these estimates and updates them as required. Actual results could differ from these estimates. Unless otherwise indicated, the Group does not believe that it is likely that materially different amounts would be reported related to the accounting estimates and assumptions described below. The Group considers the following to be a description of the most significant estimates, which require the Group to make subjective and complex judgments, and matters that are inherently uncertain.
A. Potential impairment of goodwill and other intangible assets
The Group tests annually whether goodwill has suffered any impairment in accordance with the accounting policy K. The recoverable amounts of cash-generating units have been determined based on value-in-use calculations. These calculations require the use of estimates. The valuation of goodwill and other intangibles is tested annually or whenever there are changes in circumstances indicating that the carrying amounts may not be recoverable. These tests require the use of estimates. Details of the Groups impairment review and sensitivities to changes in assumptions are disclosed in note 10.
B. Provision for income taxes
The Group is subject to income taxes in numerous jurisdictions. Significant judgment is required in determining the worldwide provision for income taxes. There are many transactions and calculations for which the ultimate tax determination is uncertain during the ordinary course of business. The Group recognizes liabilities for anticipated settlement of tax issues based on estimates of whether additional taxes will be due. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the income tax and deferred tax provisions in the period in which such determination is made.
The Group carries appropriate provision, based on best estimates, until tax computations are agreed with the taxation authorities.
C. Business combinations
When making acquisitions, the Group has to make judgments and best estimates about the fair value allocation of the purchase price. Where acquisitions are significant, appropriate advice is sought from professional advisors before making such allocations otherwise valuations are done by management using consistent methodology used on prior year acquisitions where appropriate professional advice was sought.
D. Development expenditure
The Group invests in the development of future products in accordance with the accounting policy I(c). The assessment as to whether this expenditure will achieve a complete product for which the technical feasibility is assured is a matter of judgment, as is the forecasting of how the product will generate future economic benefit.
F-18
Finally, the period of time over which the economic benefit associated with the expenditure occurred will arise is also a matter of judgment. These judgments are made by evaluating the development plan prepared by the research and development department and approved by management, regularly monitoring progress by using an established set of criteria for assessing technical feasibility and benchmarking to other products.
E. Revenue recognition
The key areas of judgment in respect of recognizing revenue are the timing of recognition and the fair value allocation between Licence and Maintenance revenue, specifically in relation to recognition and deferral of revenue on support contracts where management assumptions and estimates are necessary.
F. Exceptional Items and Integration / Restructuring Provisions
The Group classifies items as exceptional in line with accounting policy F. The classification of these items as exceptional is a matter of judgement. This judgement is made by management after evaluating each item deemed to be exceptional against the criteria set out within the defined accounting policy.
G. Provisions
The Group has made key judgments relating to provisions. Provisions include onerous leases and dilapidations, restructuring and integration, legal and other. Key judgments included determining the time to sublet vacant properties, restructuring and integration liabilities and the potential outcome of legal cases.
III. Financial risk factors
The Groups multi-national operations expose it to a variety of financial risks that include the effects of changes in credit risk, foreign currency risk, interest rate risk and liquidity risk. Risk management is carried out by a central treasury department under policies approved by the board of directors. Group treasury identifies and evaluates financial risks alongside the Groups operating units. The board provides written principles for risk management together with specific policies covering areas such as foreign currency risk, interest rate risk, credit risk and liquidity risk, use of derivative financial instruments and non-derivative financial instruments as appropriate, and investment of excess funds.
In accordance with the treasury policy, as at April 30, 2017 and 2016 the Group did not hold or issue derivative financial instruments.
A. Credit risk
Financial instruments which potentially expose the Group to a concentration of credit risk consist primarily of cash and cash equivalents and accounts receivable. Cash equivalents are deposited with high-credit quality financial institutions. The Group provides credit to customers in the normal course of business. Collateral is not required for those receivables, but on-going credit evaluations of customers financial conditions are performed. The Group maintains a provision for impairment based upon the expected collectability of accounts receivable. The Group sells products and services to a wide range of customers around the world and therefore believes there is no material concentration of credit risk.
B. Foreign currency risk
The Group operates internationally and is exposed to foreign exchange risk arising from various currency exposures, primarily with respect to the UK Pound Sterling, Japanese Yen and the Euro. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. Foreign exchange risk arises when future commercial transactions, recognized assets and liabilities are denominated in a currency that is not the entitys functional currency.
There were no hedging transactions in place at April 30, 2017, 2016, and 2015. The Group has certain investments in foreign operations, whose net assets are exposed to foreign currency translation risk.
C. Interest rate risk
The Groups income and cash generated from operations are substantially independent of changes in market interest rates. The Groups interest rate risk arises from short-term and long-term borrowings. Borrowings issued at variable rates expose the Group to cash flow interest rate risk. The Group does not use interest rate swaps to manage its cash flow interest rate risk at the present time due to low market rates.
F-19
D. Liquidity risk
Central treasury carries out cash flow forecasting for the Group to ensure that it has sufficient cash to meet operational requirements and to allow the repayment of the bank facility. Surplus cash in the operating units over and above what is required for working capital needs is transferred to Group treasury. These funds are used to repay bank borrowings or invested in interest bearing current accounts, time deposits or money market deposits of the appropriate maturity period determined by consolidated cash forecasts.
Trade payables arise in the normal course of business and are all current. Onerous lease provisions are expected to mature between less than 12 months and nine years.
At April 30, 2017 gross borrowings of $1,595.2m (2016: $1,787.3m) related to our senior secured debt facilities (see note 21). $142.8m (2016: $287.8m) is current of which $80.0m (2016: $225.0m) is the revolving credit facility. The borrowings disclosed in the balance sheet are net of pre-paid facility costs.
3. Segmental reporting
In accordance with IFRS 8, ‘Operating Segments, the Group has derived the information for its operating segments using the information used by the Chief Operating Decision Maker (the Executive Committee) for the purposes of resource allocation and assessment of segment performance. The Groups reportable segments under IFRS 8 are as follows:
Micro Focus – The Micro Focus Product Portfolio segment contains mature infrastructure software products that are managed on a portfolio basis akin to a fund of funds investment portfolio. This portfolio is managed with a single product group that makes and maintains the software, whilst the software is sold and supported through a geographic Go-to-Market organization. The products within the Micro Focus Product Portfolio are grouped together into five sub-portfolios based on industrial logic: CDMS, Host Connectivity, IAS, Development & ITOM, and Collaboration & Network.
SUSE – The characteristics of the SUSE Product Portfolio segment are different from the Micro Focus Product Portfolio due to the Open Source nature of its offerings and the growth profile of those offerings. SUSE provides and supports enterprise-grade Linux and Open Source solutions. The SUSE Product Portfolio comprises: SUSE Linux Enterprise Server and Extensions, SUSE OpenStack Cloud, SUSE Enterprise Storage, SUSE Manager, and SUSE Linux Enterprise Desktop and Workstation Extension.
Operating segments are consistent with those used in internal management reporting and the profit measure used by the Executive Committee is the Adjusted Operating Profit. Centrally managed costs are allocated between the Micro Focus and SUSE segments based on identifiable segment specific costs with the remainder allocated based on other criteria including revenue and headcount.
Operating segments for the year ended April 30, 2017:
|
|
Micro Focus
|
SUSE
|
Total
|
||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||||
Segment revenue
|
|
|
|
|
1,077,273
|
|
|
303,429
|
|
|
1,380,702
|
|
Directly managed costs
|
|
|
|
|
(564,072
|
)
|
|
(178,562
|
)
|
|
(742,634
|
)
|
Allocation of centrally managed costs
|
|
|
|
|
26,196
|
|
|
(26,196
|
)
|
|
—
|
|
Total segment costs
|
|
|
|
|
(537,876
|
)
|
|
(204,758
|
)
|
|
(742,634
|
)
|
Adjusted Operating Profit
|
|
|
|
|
539,397
|
|
|
98,671
|
|
|
638,068
|
|
Exceptional items
|
5
|
|
|
|
|
|
|
|
(97,258
|
)
|
||
Share based compensation charge
|
35
|
|
|
|
|
|
|
|
(34,506
|
)
|
||
Amortization of purchased intangibles
|
11
|
|
|
|
|
|
|
|
(212,861
|
)
|
||
Operating profit
|
|
|
|
|
|
|
|
|
293,443
|
|
||
Share of results of associates
|
|
|
|
|
|
|
|
|
(1,254
|
)
|
||
Net finance costs
|
|
|
|
|
|
|
|
|
(95,845
|
)
|
||
Profit before tax
|
|
|
|
|
|
|
|
|
196,344
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Total assets
|
|
|
|
|
|
|
|
|
4,645,957
|
|
||
Total liabilities
|
|
|
|
|
|
|
|
|
3,032,467
|
|
F-20
Operating segments for the year ended April 30, 2016:
|
|
Micro Focus
|
SUSE
|
Total
|
||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||||
Segment revenue
|
|
|
|
|
991,233
|
|
|
253,816
|
|
|
1,245,049
|
|
Directly managed costs
|
|
|
|
|
(566,406
|
)
|
|
(145,129
|
)
|
|
(711,535
|
)
|
Allocation of centrally managed costs
|
|
|
|
|
28,883
|
|
|
(28,883
|
)
|
|
—
|
|
Total segment costs
|
|
|
|
|
(537,523
|
)
|
|
(174,012
|
)
|
|
(711,535
|
)
|
Adjusted Operating Profit
|
|
|
|
|
453,710
|
|
|
79,804
|
|
|
533,514
|
|
Exceptional items
|
5
|
|
|
|
|
|
|
|
(27,853
|
)
|
||
Share based compensation charge
|
35
|
|
|
|
|
|
|
|
(28,793
|
)
|
||
Amortization of purchased intangibles
|
11
|
|
|
|
|
|
|
|
(181,934
|
)
|
||
Operating profit
|
|
|
|
|
|
|
|
|
294,934
|
|
||
Share of results of associates
|
|
|
|
|
|
|
|
|
(2,190
|
)
|
||
Net finance costs
|
|
|
|
|
|
|
|
|
(97,348
|
)
|
||
Profit before tax
|
|
|
|
|
|
|
|
|
195,396
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Total assets
|
|
|
|
|
|
|
|
|
4,635,693
|
|
||
Total liabilities
|
|
|
|
|
|
|
|
|
3,041,965
|
|
Operating segments for the year ended April 30, 2015:
|
|
Micro Focus
|
SUSE
|
Total
|
||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||||
Segment revenue
|
|
|
|
|
733,435
|
|
|
101,104
|
|
|
834,539
|
|
Directly managed costs
|
|
|
|
|
(427,264
|
)
|
|
(59,502
|
)
|
|
(486,766
|
)
|
Allocation of centrally managed costs
|
|
|
|
|
15,532
|
|
|
(15,532
|
)
|
|
—
|
|
Total segment costs
|
|
|
|
|
(411,732
|
)
|
|
(75,034
|
)
|
|
(486,766
|
)
|
Adjusted Operating Profit
|
|
|
|
|
321,703
|
|
|
26,070
|
|
|
347,773
|
|
Exceptional items
|
5
|
|
|
|
|
|
|
|
(96,678
|
)
|
||
Share based compensation charge
|
35
|
|
|
|
|
|
|
|
(15,561
|
)
|
||
Amortization of purchased intangibles
|
11
|
|
|
|
|
|
|
|
(88,298
|
)
|
||
Operating profit
|
|
|
|
|
|
|
|
|
147,236
|
|
||
Share of results of associates
|
|
|
|
|
|
|
|
|
(788
|
)
|
||
Net finance costs
|
|
|
|
|
|
|
|
|
(55,021
|
)
|
||
Profit before tax
|
|
|
|
|
|
|
|
|
91,427
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Total assets
|
|
|
|
|
|
|
|
|
4,340,601
|
|
||
Total liabilities
|
|
|
|
|
|
|
|
|
3,062,540
|
|
No measure of total assets and total liabilities for each reportable segment has been reported as such amounts are not regularly provided to the Chief Operating Decision Maker. The operating segment split of depreciation on property, plant and equipment and the amortization of purchased software intangibles is as follows.
|
2017
|
2016
|
2015
|
||||||||||||||||||||||||
|
Micro Focus
|
SUSE
|
Total
|
Micro Focus
|
SUSE
|
Total
|
Micro Focus
|
SUSE
|
Total
|
||||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||||
Depreciation of property, plant and equipment
|
|
9,704
|
|
|
2,090
|
|
|
11,794
|
|
|
9,736
|
|
|
1,683
|
|
|
11,419
|
|
|
6,886
|
|
|
788
|
|
|
7,674
|
|
Amortization of purchased software intangibles
|
|
1,070
|
|
|
105
|
|
|
1,175
|
|
|
1,679
|
|
|
185
|
|
|
1,864
|
|
|
1,834
|
|
|
355
|
|
|
2,189
|
|
F-21
Analysis by geography
The Group is domiciled in the UK. The Groups revenue from external customers by geographical location are detailed below:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
UK
|
|
68,998
|
|
|
69,406
|
|
|
46,638
|
|
USA
|
|
667,534
|
|
|
576,589
|
|
|
375,604
|
|
Germany
|
|
148,801
|
|
|
136,334
|
|
|
77,249
|
|
France
|
|
50,676
|
|
|
49,691
|
|
|
42,057
|
|
Japan
|
|
49,980
|
|
|
45,179
|
|
|
36,832
|
|
Other
|
|
394,713
|
|
|
367,850
|
|
|
256,159
|
|
Total
|
|
1,380,702
|
|
|
1,245,049
|
|
|
834,539
|
|
The total of non-current assets other than financial instruments and deferred tax assets as at April 30, 2017 located in the UK is $147.7m (2016: $152.1m), the total in the USA is $3,778.7m (2016: $3,264.9m) and the total of such non-current assets located in other countries is $67.3m (2016: $65.6m). They exclude trade and other receivables, derivative financial instruments and deferred tax.
4. Supplementary information
Following the Company reorganization on May 1, 2015, the Group had five principal product portfolios within the Micro Focus product portfolio operating segment and one in the SUSE product portfolio operating segment. Previously, it had nine principal product portfolios across the Base Micro Focus (North America, International, and Asia Pacific and Japan) and TAG operating segments. Prior year revenue disclosures by product portfolio have been retrospectively adjusted to reflect the product portfolios within the Micro Focus product portfolio and SUSE product portfolio operating segments.
Set out below is an analysis of revenue recognized between the principal product portfolios for the year ended April 30, 2017.
|
Micro Focus
|
|
|
|||||||||||||||||||||
|
CDMS
|
Host
Connectivity |
Identity,
Access & Security |
Development &
IT Operations Management Tools |
Collaboration &
Networking |
Total
Micro Focus |
SUSE
|
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
Licence
|
|
105,962
|
|
|
69,158
|
|
|
48,635
|
|
|
55,464
|
|
|
29,175
|
|
|
308,394
|
|
|
—
|
|
|
308,394
|
|
Maintenance
|
|
149,668
|
|
|
104,400
|
|
|
140,032
|
|
|
215,843
|
|
|
110,726
|
|
|
720,669
|
|
|
—
|
|
|
720,669
|
|
Subscription
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
298,651
|
|
|
298,651
|
|
Consulting
|
|
9,530
|
|
|
1,857
|
|
|
18,354
|
|
|
13,860
|
|
|
4,609
|
|
|
48,210
|
|
|
4,778
|
|
|
52,988
|
|
Total
|
|
265,160
|
|
|
175,415
|
|
|
207,021
|
|
|
285,167
|
|
|
144,510
|
|
|
1,077,273
|
|
|
303,429
|
|
|
1,380,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set out below is an analysis of revenue recognized between the principal product portfolios for the year ended April 30, 2016.
|
Micro Focus
|
|
|
|||||||||||||||||||||
|
CDMS
|
Host
Connectivity |
Identity,
Access & Security |
Development &
IT Operations Management Tools |
Collaboration &
Networking |
Total
Micro Focus |
SUSE
|
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
Licence
|
|
104,737
|
|
|
89,862
|
|
|
52,360
|
|
|
33,918
|
|
|
23,943
|
|
|
304,820
|
|
|
—
|
|
|
304,820
|
|
Maintenance
|
|
145,180
|
|
|
105,381
|
|
|
142,209
|
|
|
121,310
|
|
|
130,371
|
|
|
644,451
|
|
|
—
|
|
|
644,451
|
|
Subscription
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
248,903
|
|
|
248,903
|
|
Consulting
|
|
8,911
|
|
|
2,920
|
|
|
22,083
|
|
|
2,219
|
|
|
5,829
|
|
|
41,962
|
|
|
4,913
|
|
|
46,875
|
|
Total
|
|
258,828
|
|
|
198,163
|
|
|
216,652
|
|
|
157,447
|
|
|
160,143
|
|
|
991,233
|
|
|
253,816
|
|
|
1,245,049
|
|
F-22
Set out below is an analysis of revenue recognized between the principal product portfolios for the year ended April 30, 2015.
|
Micro Focus
|
|
|
|||||||||||||||||||||
|
CDMS
|
Host
Connectivity |
Identity,
Access & Security |
Development &
IT Operations Management Tools |
Collaboration &
Networking |
Total
Micro Focus |
SUSE
|
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
Licence
|
|
111,594
|
|
|
71,533
|
|
|
20,536
|
|
|
27,849
|
|
|
29,492
|
|
|
261,004
|
|
|
—
|
|
|
261,004
|
|
Maintenance
|
|
149,680
|
|
|
55,270
|
|
|
65,882
|
|
|
62,925
|
|
|
106,925
|
|
|
440,682
|
|
|
—
|
|
|
440,682
|
|
Subscription
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
98,178
|
|
|
98,178
|
|
Consulting
|
|
8,752
|
|
|
2,152
|
|
|
13,731
|
|
|
3,566
|
|
|
3,548
|
|
|
31,749
|
|
|
2,926
|
|
|
34,675
|
|
Total
|
|
270,026
|
|
|
128,955
|
|
|
100,149
|
|
|
94,340
|
|
|
139,965
|
|
|
733,435
|
|
|
101,104
|
|
|
834,539
|
|
5. Profit before tax
Profit before tax is stated after charging/(crediting) the following operating costs/(gains) classified by the nature of the costs/(gains):
|
|
2017
|
2016
|
2015
|
||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||
Staff costs
|
35
|
|
588,541
|
|
|
538,526
|
|
|
363,766
|
|
Depreciation of property, plant and equipment
|
|
|
|
|
|
|
|
|
|
|
– owned assets
|
13
|
|
11,794
|
|
|
11,419
|
|
|
7,674
|
|
Loss on disposal of property, plant and equipment
|
13
|
|
520
|
|
|
109
|
|
|
41
|
|
Amortization of intangibles
|
11
|
|
236,434
|
|
|
203,313
|
|
|
109,092
|
|
Impairment of intangible assets
|
11
|
|
—
|
|
|
—
|
|
|
12,626
|
|
Inventories
|
|
|
|
|
|
|
|
|
|
|
– cost of inventories recognized as a credit (included in cost of sales)
|
17
|
|
(71
|
)
|
|
(72
|
)
|
|
(4
|
)
|
Operating lease rentals payable
|
|
|
|
|
|
|
|
|
|
|
– plant and machinery
|
|
|
3,566
|
|
|
1,702
|
|
|
2,284
|
|
– property
|
|
|
22,726
|
|
|
21,711
|
|
|
16,432
|
|
Provision for receivables impairment
|
18
|
|
2,023
|
|
|
2,531
|
|
|
965
|
|
Foreign exchange gains
|
|
|
(4,890
|
)
|
|
(2,915
|
)
|
|
(9,445
|
)
|
Exceptional items
The exceptional costs of $97.3m for the year ended April 30, 2017 (2016: $27.9m, 2015: $99.1m) shown in the consolidated statement of comprehensive income relate to costs incurred on the acquisition costs relating to Serena and GWAVA (note 39), pre-acquisition costs relating to HPE Software and integration costs for acquired businesses.
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Reported within Operating profit:
|
|
|
|
|
|
|
|
|
|
Integration costs
|
|
27,696
|
|
|
23,634
|
|
|
7,585
|
|
Acquisition costs
|
|
2,597
|
|
|
531
|
|
|
26,860
|
|
Pre-acquisition costs
|
|
58,004
|
|
|
5,569
|
|
|
—
|
|
Property costs
|
|
5,525
|
|
|
5,964
|
|
|
18,200
|
|
Severance and legal costs
|
|
3,436
|
|
|
(4,845
|
)
|
|
30,734
|
|
Royalty provision release
|
|
—
|
|
|
(3,000
|
)
|
|
—
|
|
Impairment of intangible assets
|
|
—
|
|
|
—
|
|
|
11,642
|
|
Impairment of prepayments
|
|
—
|
|
|
—
|
|
|
1,657
|
|
|
|
97,258
|
|
|
27,853
|
|
|
96,678
|
|
Reported within finance costs:
|
|
|
|
|
|
|
|
|
|
Accelerated amortization of facility fees
|
|
—
|
|
|
—
|
|
|
2,384
|
|
|
|
—
|
|
|
—
|
|
|
2,384
|
|
|
|
97,258
|
|
|
27,853
|
|
|
99,062
|
|
F-23
Integration costs of $27.7m for the year ended April 30, 2017 (2016: $23.6m, 2015: $7.6m) arose from the work done in bringing together the Base Micro Focus, TAG, Serena and GWAVA organizations into one organization. Other activities include: development of a new Group intranet and website, system integration costs.
The acquisition costs of $2.6m for the year ended April 30, 2017 are external costs in evaluating and completing the acquisition of Serena Software Inc., GWAVA Inc. and OpenATTIC completed during the year ended April 30, 2017 (2016: acquisition of Authasas BV $0.5m, 2015: acquisition of TAG $26.9m). The costs mostly relate to due diligence work, legal work on the acquisition agreements and professional advisors on the transaction.
Pre-acquisition costs of $58.0m for the year ended April 30, 2017 (2016: $5.6m, 2015: $nil) relate to the acquisition of HPE Software, which was announced in September 2016 and is expected to complete in the third quarter of calendar year 2017 (note 40). The costs mostly relate to due diligence work, legal work on the acquisition agreements, professional advisors on the transaction and pre-integration costs relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business.
The property costs of $5.5m for the year ended April 30, 2017 (2016: $6.0m, 2015: $18.2m) relate to the cost of exiting entire buildings or floors of buildings which the Group are leasing following the integration of the TAG and Serena businesses. The majority of the costs relate to TAG and Serena properties in North America.
Severance and legal costs of $3.4m for the year ended April 30, 2017 (2016: $4.8m release, 2015: $30.7m charge) relate mostly to termination costs for senior Serena executives after acquisition. Severance and legal costs releases of $4.8m in the year ended April 30, 2016 relate to the reassessment of provisions made for integrating the TAG business in the prior year, including the redeployment of staff previously notified of redundancy.
Royalty provision releases of $3.0m in the year ended April 30, 2016 related to provisions no longer required as a result of new contracts being concluded with a third party.
The one-off impairment of intangible assets of $11.6m and prepayments of $1.7m for the year ended April 30, 2015 related mostly to the write off of TAG computer systems and applications that had no future value for the Group.
The one-off accelerated amortization of facility fees of $2.4m for the year ended April 30, 2015 related to costs that were expensed early as a result of early repayment of such debt with new borrowings that also financed the acquisition of TAG.
The estimated total tax effect of exceptional items is a credit to the income statement of $11.6m for the year ended April 30, 2017 (2016: $6.8m, 2015: $25.8m).
Services provided by the Groups auditors and network of firms
During the year the Group obtained the following services from the Groups auditors as detailed below:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Audit of Company
|
|
1,032
|
|
|
563
|
|
|
538
|
|
Audit of subsidiaries
|
|
2,494
|
|
|
2,895
|
|
|
2,765
|
|
Total audit
|
|
3,526
|
|
|
3,458
|
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
Audit related assurance services
|
|
2,634
|
|
|
782
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
|
Tax compliance services
|
|
49
|
|
|
60
|
|
|
22
|
|
Tax advisory services
|
|
53
|
|
|
70
|
|
|
180
|
|
Services relating to taxation
|
|
102
|
|
|
130
|
|
|
202
|
|
Other non-audit services
|
|
7,470
|
|
|
1,842
|
|
|
5,059
|
|
Total
|
|
13,732
|
|
|
6,212
|
|
|
8,620
|
|
|
|
|
|
|
|
|
|
|
|
F-24
Audit related assurance services in the year ended April 30, 2017 related primarily to the additional audit procedures required to be performed on the Micro Focus International plc financial statements that are included in US filings associated with the HPE Software acquisition and the interim review.
Other non-audit services in the year relate primarily to auditors work as Reporting Accountants and due diligence in respect of the acquisition of HPE Software. Other services in the year included tax compliance, tax advice and customer licence compliance forensic services.
The majority of the other non-audit services provided by the auditors in the years ended April 30, 2016 and 2015 were in respect of due diligence work carried out on the acquisition of Serena and customer licence compliance forensic services.
6. Finance income and finance costs
|
|
2017
|
2016
|
2015
|
||||||||
|
Note
|
$’000
|
$’000
|
$’000
|
||||||||
Finance costs
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on bank borrowings
|
|
|
|
|
81,157
|
|
|
82,369
|
|
|
43,559
|
|
Commitment fees
|
|
|
|
|
796
|
|
|
1,108
|
|
|
826
|
|
Amortization of facility costs and original issue discounts
|
|
|
|
|
14,219
|
|
|
13,762
|
|
|
6,362
|
|
Finance costs on bank borrowings
|
|
|
|
|
96,172
|
|
|
97,239
|
|
|
50,747
|
|
Interest on tax provisions
|
|
|
|
|
—
|
|
|
525
|
|
|
2,643
|
|
Net interest expense on retirement obligations
|
26
|
|
565
|
|
|
467
|
|
|
261
|
|
||
Other
|
|
|
87
|
|
|
126
|
|
|
196
|
|
||
|
|
|
96,824
|
|
|
98,357
|
|
|
53,847
|
|
||
Included with exceptional items:
|
|
|
|
|
|
|
|
|
|
|
||
Accelerated amortization of facility fees
|
5
|
|
—
|
|
|
—
|
|
|
2,384
|
|
||
Total finance costs
|
|
|
96,824
|
|
|
98,357
|
|
|
56,231
|
|
||
|
|
|
|
|
|
|
|
|
|
|
||
Finance income
|
|
|
|
|
|
|
|
|
|
|
||
Bank interest
|
|
|
438
|
|
|
377
|
|
|
577
|
|
||
Interest on non-plan pension assets
|
|
|
404
|
|
|
333
|
|
|
—
|
|
||
Other
|
|
|
137
|
|
|
299
|
|
|
633
|
|
||
Total finance income
|
|
|
979
|
|
|
1,009
|
|
|
1,210
|
|
||
Net finance cost
|
|
|
95,845
|
|
|
97,348
|
|
|
55,021
|
|
7. Taxation
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Current tax
|
|
|
|
|
|
|
|
|
|
Current year
|
|
65,005
|
|
|
40,894
|
|
|
51,194
|
|
Adjustments to tax in respect of previous years
|
|
1,698
|
|
|
(20,570
|
)
|
|
(7,629
|
)
|
Impact of change in tax rates
|
|
—
|
|
|
—
|
|
|
(38
|
)
|
|
|
66,703
|
|
|
20,324
|
|
|
43,527
|
|
Deferred tax
|
|
|
|
|
|
|
|
|
|
Origination and reversal of timing differences
|
|
(22,426
|
)
|
|
(4,145
|
)
|
|
(51,942
|
)
|
Adjustments to tax in respect of previous years
|
|
(4,445
|
)
|
|
17,030
|
|
|
(1,524
|
)
|
Impact of change in tax rates
|
|
(1,291
|
)
|
|
(785
|
)
|
|
(85
|
)
|
|
|
(28,162
|
)
|
|
12,100
|
|
|
(53,551
|
)
|
Total
|
|
38,541
|
|
|
32,424
|
|
|
(10,024
|
)
|
A deferred tax credit of $23.0m as at April 30, 2017 (2016: $8.5m credit) and corporation tax credit of $4.1m as at April 30, 2017 (2016: $1.5m) have been recognized in equity in the year in relation to share options. A
F-25
deferred tax debit of $0.3m as at April 30, 2017 (2016: $1.7m debit) has been recognized in the consolidated statement of comprehensive income in the year in relation to the defined benefit pension schemes.
The tax charge for the year ended April 30, 2017 is lower than the standard rate of corporation tax in the UK of 19.92% (2016: 20.0%, 2015: 20.9%). The differences are explained below:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Profit before taxation
|
|
196,344
|
|
|
195,396
|
|
|
91,427
|
|
Tax at UK corporation tax rate 19.92% (2016: 20.0%, 2015: 20.9%)
|
|
39,112
|
|
|
39,079
|
|
|
19,108
|
|
Effects of:
|
|
|
|
|
|
|
|
|
|
Tax rates other than the UK standard rate
|
|
18,740
|
|
|
15,002
|
|
|
(708
|
)
|
Intra-group financing
|
|
(15,636
|
)
|
|
(14,445
|
)
|
|
(9,200
|
)
|
UK patent box benefit
|
|
(7,634
|
)
|
|
(7,593
|
)
|
|
(6,000
|
)
|
US R&D tax credit incentives
|
|
(2,200
|
)
|
|
(1,800
|
)
|
|
(752
|
)
|
Movement in deferred tax not recognized
|
|
200
|
|
|
(759
|
)
|
|
(9,026
|
)
|
Effect of change in tax rates
|
|
(1,291
|
)
|
|
(237
|
)
|
|
(123
|
)
|
Expenses not deductible
|
|
9,997
|
|
|
7,737
|
|
|
5,830
|
|
|
|
41,288
|
|
|
36,984
|
|
|
(871
|
)
|
Adjustments to tax in respect of previous years:
|
|
|
|
|
|
|
|
|
|
Current tax - UK patent box
|
|
—
|
|
|
—
|
|
|
(4,809
|
)
|
Current tax - other
|
|
1,698
|
|
|
(20,570
|
)
|
|
(2,820
|
)
|
Deferred tax
|
|
(4,445
|
)
|
|
16,010
|
|
|
(1,524
|
)
|
|
|
(2,747
|
)
|
|
(4,560
|
)
|
|
(9,153
|
)
|
Total taxation
|
|
38,541
|
|
|
32,424
|
|
|
(10,024
|
)
|
Tax rates, other than the UK standard rate, includes an increase in provisions of $14.8m for the year ended April 30, 2017 (2016: $0.8m, 2015: $nil) for uncertain tax positions relating to the risk of challenge from tax authorities to the geographic allocation of profits across the Group. Excluding these provisions, the net impact of the higher foreign rax rates is $3.9m (2016: $14.2m, 2015: $(0.7m)). This reduction in the year ended April 30, 2017 is primarily attributable to a lower level of profits subject to US tax.
The Group realized benefits in relation to intra-group financing of $15.6m for the year ended April 30, 2017 (2016: $14.4m, 2015: $9.2m). The benefits mostly relate to arrangements put in place part way through the prior year to facilitate the acquisitions of TAG and Serena.
Benefits from the UK patent box regime amounted to $7.6m for the year ended April 30, 2017 (2016: $7.6m, 2015: $6.0m current and $4.8m prior year benefit).
The movement in deferred tax assets and liabilities during the year is analyzed in note 29.
The Finance Act 2016, which provides for a reduction in the main rate of UK corporation tax to 17% effective from April 1, 2020, was substantively enacted on September 6, 2016. This rate reduction has been reflected in the calculation of deferred tax at the balance sheet date and has reduced the tax charge in the consolidated statement of comprehensive income by $1.3m. This reflects the net impact of the re-measurement of deferred tax balances, in particular liabilities relating to intangibles.
The expenses not deductible increase the tax charge in the consolidated statement of comprehensive income by $10.0m (2016: $7.7m, 2015: $5.8m). The increase is due to non-deductible costs incurred in relation to the acquisitions of Serena and GWAVA and costs incurred in relation to the anticipated HPE Software transaction.
The Group realized a net credit in relation to the true-up of prior year current and deferred tax estimates of $2.7m for the year ended April 30, 2017 (2016: $4.6m, 2015: $9.2m). In the year ended April 30, 2016, there was a significant movement between current and deferred tax in the US as a result of the Group being able to utilize significantly higher deferred tax assets (losses and tax credits) against prior year current (federal and state) tax liabilities than previously anticipated.
F-26
US R&D tax credit incentives of $2.2m for the year ended April 30, 2017 (2016: $1.8m, 2015: $0.8m) reflect the inclusion of a full year of results of TAG.
The net effect of movements in deferred tax not recognized is a debit of $0.2m for the year ended April 30, 2017 (2016: $0.8m credit, 2015: $9.0m credit). The net credit in the year ended April 30, 2015 included the impact of the one-off recognition of tax credits in the US following the acquisition of TAG.
There was a significant movement in current tax of $20.6m (credit) partially offset by a movement in deferred tax of $16.0m (debit), for the year ended April 30, 2016 mainly in the US, as a result of the Group being able to utilize significantly higher deferred tax assets (losses and tax credits) against prior year current (federal and state) tax liabilities than previously anticipated.
8. Dividends
|
2017
|
2016
|
2015
|
||||||
Equity– ordinary
|
$’000
|
$’000
|
$’000
|
||||||
2016 final paid 49.74 cents (2015: 33.00 cents, 2014: 30.00 cents) per ordinary share
|
|
111,023
|
|
|
70,015
|
|
|
40,215
|
|
2017 interim paid 29.73 cents (2016: 16.94 cents, 2015: 15.40 cents) per ordinary share
|
|
66,512
|
|
|
35,144
|
|
|
32,492
|
|
Total
|
|
177,535
|
|
|
105,159
|
|
|
72,707
|
|
The directors are proposing a final dividend in respect of the year ended April 30, 2017 of 58.33 cents per share which will utilize approximately $134.0m of total equity. The directors have concluded that the Company has sufficient distributable reserves to pay the dividend. It has not been included as a liability in these financial statements as it has not yet been approved by shareholders.
9. Earnings per share
The calculation of the basic earnings per share has been based on the earnings attributable to owners of the parent and the weighted average number of shares for each year.
|
Year ended April 30, 2017
|
Year ended April 30, 2016
|
Year ended April 30, 2015
|
|||||||||||||||||||||||||||||||||
|
Total
earnings |
Weighted
average number of shares |
Per
share amount |
Per
share amount |
Total
earnings |
Weighted
average number of shares |
Per
share amount |
Per
share amount |
Total
earnings |
Weighted
average number of shares |
Per
share amount |
Per
share amount |
||||||||||||||||||||||||
|
$’000
|
‘000
|
Cents
|
Pence
|
$’000
|
‘000
|
Cents
|
Pence
|
$’000
|
‘000
|
Cents
|
Pence
|
||||||||||||||||||||||||
Basic EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to ordinary shareholders1
|
|
157,906
|
|
|
229,238
|
|
|
68.88
|
|
|
53.25
|
|
|
162,894
|
|
|
218,635
|
|
|
74.50
|
|
|
49.59
|
|
|
101,753
|
|
|
173,829
|
|
|
58.54
|
|
|
36.64
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
|
|
8,165
|
|
|
|
|
|
|
|
|
|
|
|
8,847
|
|
|
|
|
|
|
|
|
|
|
|
5,583
|
|
|
|
|
|
|
|
Diluted EPS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings attributable to ordinary shareholders
|
|
157,906
|
|
|
237,403
|
|
|
66.51
|
|
|
51.42
|
|
|
162,894
|
|
|
227,482
|
|
|
71.61
|
|
|
47.66
|
|
|
101,753
|
|
|
179,412
|
|
|
56.71
|
|
|
35.50
|
|
1 | Earnings attributable to ordinary shareholders is the profit for the year ended April 30, 2017 of $157.8m (2016: $163.0m, 2015: $101.5m), excluding the loss attributable to non-controlling interests of $0.1m (2016: $0.1m profit, 2015: $0.3m loss). |
The weighted average number of shares excludes treasury shares that do not have dividend rights (note 30).
Earnings per share, expressed in pence, has used the average exchange rate for the year ended April 30, 2017 of $1.29 to £1 (2016: $1.50 to £1, 2015: $1.60 to £1).
F-27
10. Goodwill
|
|
2017
|
2016
|
||||||
|
Note
|
$’000
|
$’000
|
||||||
Cost and net book amount
|
|
|
|
|
|
|
|
|
|
At May 1,
|
|
|
|
|
2,436,168
|
|
|
2,421,745
|
|
Hindsight adjustment
|
39
|
|
—
|
|
|
5,583
|
|
||
Acquisitions
|
39
|
|
392,436
|
|
|
8,840
|
|
||
At April 30,
|
|
|
2,828,604
|
|
|
2,436,168
|
|
||
|
|
|
|
|
|
|
|
||
A segment-level summary of the goodwill allocation is presented below:
|
|
|
|
|
|
|
|
||
Micro Focus
|
|
|
1,969,038
|
|
|
1,576,602
|
|
||
SUSE
|
|
|
859,566
|
|
|
859,566
|
|
||
At April 30,
|
|
|
2,828,604
|
|
|
2,436,168
|
|
The Group has two operating segments: Micro Focus Product Portfolio and SUSE Product Portfolio.
The hindsight period adjustments relate to transactions that occurred within 12 months of the acquisition date and are attributable to TAG acquired during the year ended April 30, 2015 (note 39).
The additions to goodwill in the year ended April 30, 2017 relate to the acquisition of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. (Serena) and GWAVA Inc. (GWAVA) (note 39).
The additions to goodwill for the year ended April 30, 2016 relate to the acquisition of Authasas BV and hindsight period adjustments for the TAG acquisition (note 39).
Of the additions to goodwill, there is no amount that is expected to be deductible for tax purposes.
Goodwill acquired through business combinations has been allocated for impairment testing purposes to each individual cash generating unit (CGU). The Group conducts annual impairment tests on the carrying value of goodwill, based on the net present value on the recoverable amount of the CGU to which goodwill has been allocated. It has been determined that the Group has two CGUs being the two product portfolio groups: Micro Focus and SUSE.
An impairment test is a comparison of the carrying value of the assets of the CGU with their recoverable amount, where the recoverable amount is less than the carrying value, an impairment results. The Group has carried out its annual impairment testing at April 30, each year.
During the year, all goodwill was tested for impairment, with no impairment charge resulting (2016: $nil).
The recoverable amounts of the two CGUs are determined based on the value in use (VIU) calculations. The determination of whether or not the goodwill of the two CGUs has been impaired requires an estimate to be made of the VIU of the CGUs to which that goodwill has been allocated.
The VIU calculation includes estimates about the future financial performance of the CGUs. The cash flow projections in the three following financial years reflect managements expectation of the medium and long-term operating performance of the CGU and growth prospects in the CGUs market.
Key assumptions
The key assumptions in the VIU calculations are:
• | The discount rate applied to each CGU; |
• | Operating margin; and |
• | The long-term growth rate of net operating cash flows. |
In determining the key assumptions, management has taken into consideration the current economic climate, the resulting impact on expected growth and discount rates and the pressure these place on the impairment calculations.
F-28
The directors have considered combinations of a reduction in the Operating margins across the two CGUs combined with a reasonably possible increase in the absolute discount rate and a reasonably possible decrease in the long-term growth rates and no impairment would occur in these scenarios.
Discount rate applied
The Group based its estimate for the pre-tax discount rate on its weighted average cost of capital (WACC) and using long-term market and industry data to derive the appropriate inputs to the calculation. The discount rate applied to the two CGUs represents a pre-tax rate that reflects market assessment of the time value of money at the consolidated statement of financial position date which has been adjusted for risks specific to each CGU. For the purposes of the impairment review the directors have calculated discount rates for both CGUs and then applied the higher discount rate of 11.4% (2016: 11.6%.)
The directors have assessed that a 2.0% (2016: 2.0%) change in the absolute discount rate is the maximum change that could be considered as reasonably possible. If the estimated pre-tax discount rates applied to the discounted cash flows of all of the two CGUs were 2.0% (2016: 2.0%) higher in absolute terms than the managements estimate, the Group would not have any impairment charge.
Operating margins
The operating margin for each CGU is primarily based upon past performance adjusted as appropriate where management believes that past operating margins are not indicative of future operating margins.
The operating margins for each of the two CGUs is primarily based upon past performance adjusted as appropriate where management believes that past operating margins are not indicative of future operating margins. The operating margin applied to the Micro Focus CGU is c.50% (2016: 55%) and the SUSE CGU is 31% (2016: 32%).
The directors consider that a reduction of 4.0% for Micro Focus and 2.0% for SUSE in the absolute value of operating margins would be the limit of what could be considered to be reasonably possible on the basis that the Groups cost base is flexible and could quickly respond to market changes. The Group is spread across a range of geographies and sectors and also offers customer cost saving solutions, which help to insulate it from more significant changes. If the operating margin used in the VIU calculations for all CGUs were 4.0% for Micro Focus and 2.0% for SUSE lower in absolute terms than managements estimates, the Group would not have any impairment charge. If the operating margins remain in perpetuity at the current year levels then there would also not be any impairment charge.
Long-term growth rate
The VIU calculations are based on five years projections and then a terminal value calculation.
The long-term growth rates of net operating cash flows are assumed to be 1% for the Micro Focus CGU (2016: 1%) and 5% for the SUSE CGU (2016: 5%).
The Group considers that the long-term growth rates could change and that a change to 0% for Micro Focus and 2.0% for SUSE is reasonably possible. If the absolute value of the long-term growth used in the VIU calculations for all CGUs were 0% for Micro Focus and 2.0% for SUSE lower than managements estimates, the Group would not have recognized any goodwill impairment charge.
F-29
11. Other intangible assets
|
|
|
Purchased intangibles
|
|
||||||||||||||
|
Purchased
software |
Product
Development costs |
Technology
|
Trade
names |
Customer
relationships |
Total
|
||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
22,028
|
|
|
185,546
|
|
|
303,672
|
|
|
217,510
|
|
|
761,634
|
|
|
1,490,390
|
|
Acquisitions (note 39).
|
|
—
|
|
|
—
|
|
|
95,245
|
|
|
22,111
|
|
|
210,744
|
|
|
328,100
|
|
Additions
|
|
3,162
|
|
|
27,664
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
30,826
|
|
Additions – external consultants
|
|
—
|
|
|
612
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
612
|
|
Exchange adjustments
|
|
(555
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(555
|
)
|
At April 30, 2017
|
|
24,635
|
|
|
213,822
|
|
|
398,917
|
|
|
239,621
|
|
|
972,378
|
|
|
1,849,373
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
20,061
|
|
|
142,297
|
|
|
153,888
|
|
|
22,854
|
|
|
184,735
|
|
|
523,835
|
|
Charge for the year
|
|
1,175
|
|
|
22,398
|
|
|
69,098
|
|
|
15,995
|
|
|
127,768
|
|
|
236,434
|
|
Exchange adjustments
|
|
(266
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(266
|
)
|
At April 30, 2017
|
|
20,970
|
|
|
164,695
|
|
|
222,986
|
|
|
38,849
|
|
|
312,503
|
|
|
760,003
|
|
Net book amount at April 30, 2017
|
|
3,665
|
|
|
49,127
|
|
|
175,931
|
|
|
200,772
|
|
|
659,875
|
|
|
1,089,370
|
|
|
|
|
Purchased intangibles
|
|
|||||||||||||||||
|
Purchased
software |
Product
Development costs |
Technology
|
Trade
names |
Customer
relationships |
Non-compete
agreements |
Total
|
||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
19,283
|
|
|
154,151
|
|
|
301,127
|
|
|
217,510
|
|
|
760,823
|
|
|
1,303
|
|
|
1,454,197
|
|
Acquisition of Authasas BV (note 39)
|
|
—
|
|
|
—
|
|
|
2,545
|
|
|
—
|
|
|
811
|
|
|
—
|
|
|
3,356
|
|
Additions
|
|
3,093
|
|
|
30,877
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
33,970
|
|
Additions - external consultants
|
|
—
|
|
|
518
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
518
|
|
Disposals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,303
|
)
|
|
(1,303
|
)
|
Exchange adjustments
|
|
(348
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(348
|
)
|
At April 30, 2016
|
|
22,028
|
|
|
185,546
|
|
|
303,672
|
|
|
217,510
|
|
|
761,634
|
|
|
—
|
|
|
1,490,390
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
18,348
|
|
|
122,782
|
|
|
78,661
|
|
|
7,814
|
|
|
93,068
|
|
|
1,303
|
|
|
321,976
|
|
Charge for the year
|
|
1,864
|
|
|
19,515
|
|
|
75,227
|
|
|
15,040
|
|
|
91,667
|
|
|
—
|
|
|
203,313
|
|
Disposals
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,303
|
)
|
|
(1,303
|
)
|
Exchange adjustments
|
|
(151
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(151
|
)
|
At April 30, 2016
|
|
20,061
|
|
|
142,297
|
|
|
153,888
|
|
|
22,854
|
|
|
184,735
|
|
|
—
|
|
|
523,835
|
|
Net book amount at April 30, 2016
|
|
1,967
|
|
|
43,249
|
|
|
149,784
|
|
|
194,656
|
|
|
576,899
|
|
|
—
|
|
|
966,555
|
|
Net book amount at April 30, 2015
|
|
935
|
|
|
31,369
|
|
|
222,466
|
|
|
209,696
|
|
|
667,755
|
|
|
—
|
|
|
1,132,221
|
|
Intangible assets, with the exception of purchased software and internally generated development costs, relate to identifiable assets purchased as part of the Groups business combinations. Intangible assets are amortized on a straight-line basis over their expected useful economic life – see Group accounting policy I(d).
F-30
Expenditure for the year ended April 30, 2017 totaling $31.4m (2016: $34.5m) was made in the year, including $28.3m in respect of product development costs and $3.2m of purchased software. The acquisitions of Serena, GWAVA and OpenATTIC in the year ended April 30, 2017 gave rise to an addition of $328.1m to purchased intangibles. In the year ended April 30, 2016 the acquisition of Authasas BV gives rise to an addition of $3.4m to purchased intangibles (note 39).
Of the $28.3m of additions to product development costs, $27.7m (2016: $30.9m) relates to internal product development costs and $0.6m (2016: $0.5m) to external consultants product development costs.
At April 30, 2017, the unamortized lives of technology assets were in the range of two to 10 years, customer relationships in the range of one to 10 years and trade names in the range of 10 to 20 years.
Included in the consolidated statement of comprehensive income for the years ended April 30, 2017, 2016 and 2015 was:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Cost of sales:
|
|
|
|
|
|
|
|
|
|
– amortization of product development costs
|
|
22,398
|
|
|
19,515
|
|
|
18,605
|
|
– amortization of acquired purchased technology
|
|
69,098
|
|
|
75,227
|
|
|
30,452
|
|
Selling and distribution:
|
|
|
|
|
|
|
|
|
|
– amortization of acquired purchased trade names and customer relationships
|
|
143,763
|
|
|
106,707
|
|
|
57,846
|
|
Administrative expenses:
|
|
|
|
|
|
|
|
|
|
– Amortization of purchased software
|
|
1,175
|
|
|
1,864
|
|
|
2,189
|
|
Total amortization charge for the year
|
|
236,434
|
|
|
203,313
|
|
|
106,903
|
|
Research and development:
|
|
|
|
|
|
|
|
|
|
– capitalization of product development costs
|
|
(27,664
|
)
|
|
(30,877
|
)
|
|
19,490
|
|
In the year ended April 30, 2017, the Company has reviewed its consolidated income statement presentation and has decided to re-classify both amortization of capitalized product development costs and amortization of acquired technology intangibles from research and development expenses to costs of sales. The years ended April 30, 2016 and April 30, 2015 comparatives have also been re-classified and additional detail is provided on the face of the consolidated income statement.
The reconciliation of previously reported cost of sales to the presentation after the reclassification in the year ended April 30, 2016 and 2015 is as follows:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Cost of sales
|
|
|
|
|
|
|
|
|
|
As previously reported
|
|
145,673
|
|
|
135,432
|
|
|
91,490
|
|
amortization of product development costs
|
|
22,398
|
|
|
19,515
|
|
|
18,605
|
|
amortization of acquired purchased technology
|
|
69,098
|
|
|
75,227
|
|
|
30,452
|
|
After re-classification
|
|
237,169
|
|
|
230,174
|
|
|
140,547
|
|
12. Assets classified as held for sale
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
At May 1
|
|
888
|
|
|
888
|
|
Reclassified to property, plant and equipment
|
|
(888
|
)
|
|
—
|
|
Assets classified as held for sale
|
|
—
|
|
|
888
|
|
F-31
At April 30, 2016, the Group had $0.9m in property held-for-sale consisting of a building in South Africa. During the year ended April 30, 2017, the decision was made to utilize the property in the future and as a result the property has been reclassified as property, plant and equipment.
13. Property, plant and equipment
|
Freehold
land and buildings |
Leasehold
improvements |
Computer
equipment |
Fixtures
and fittings |
Total
|
||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
15,183
|
|
|
23,418
|
|
|
25,455
|
|
|
5,604
|
|
|
69,660
|
|
Reclassified from assets held for sale
|
|
888
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
888
|
|
Acquisition – Serena (note 39)
|
|
—
|
|
|
1,068
|
|
|
648
|
|
|
211
|
|
|
1,927
|
|
Acquisition – GWAVA (note 39)
|
|
—
|
|
|
—
|
|
|
111
|
|
|
84
|
|
|
195
|
|
Additions
|
|
75
|
|
|
3,536
|
|
|
7,739
|
|
|
377
|
|
|
11,727
|
|
Disposals
|
|
—
|
|
|
(450
|
)
|
|
(589
|
)
|
|
(218
|
)
|
|
(1,257
|
)
|
Exchange adjustments
|
|
(1,783
|
)
|
|
(303
|
)
|
|
(749
|
)
|
|
(21
|
)
|
|
(2,856
|
)
|
At April 30, 2017
|
|
14,363
|
|
|
27,269
|
|
|
32,615
|
|
|
6,037
|
|
|
80,284
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
1,571
|
|
|
8,814
|
|
|
16,741
|
|
|
1,667
|
|
|
28,793
|
|
Charge for the year
|
|
454
|
|
|
4,170
|
|
|
6,132
|
|
|
1,038
|
|
|
11,794
|
|
Disposals
|
|
—
|
|
|
(79
|
)
|
|
(560
|
)
|
|
(98
|
)
|
|
(737
|
)
|
Exchange adjustments
|
|
(174
|
)
|
|
(154
|
)
|
|
(250
|
)
|
|
56
|
|
|
(522
|
)
|
At April 30, 2017
|
|
1,851
|
|
|
12,751
|
|
|
22,063
|
|
|
2,663
|
|
|
39,328
|
|
Net book amount at April 30, 2017
|
|
12,512
|
|
|
14,518
|
|
|
10,552
|
|
|
3,374
|
|
|
40,956
|
|
Net book amount at May 1, 2016
|
|
13,612
|
|
|
14,604
|
|
|
8,714
|
|
|
3,937
|
|
|
40,867
|
|
|
Freehold
land and buildings |
Leasehold
improvements |
Computer
equipment |
Fixtures
and fittings |
Total
|
||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
15,888
|
|
|
20,385
|
|
|
20,556
|
|
|
5,046
|
|
|
61,875
|
|
Acquisition of Authasas BV (note 39)
|
|
—
|
|
|
—
|
|
|
14
|
|
|
—
|
|
|
14
|
|
Additions
|
|
—
|
|
|
3,636
|
|
|
5,386
|
|
|
1,259
|
|
|
10,281
|
|
Disposals
|
|
—
|
|
|
(434
|
)
|
|
(397
|
)
|
|
(658
|
)
|
|
(1,489
|
)
|
Exchange adjustments
|
|
(705
|
)
|
|
(169
|
)
|
|
(104
|
)
|
|
(43
|
)
|
|
(1,021
|
)
|
At April 30, 2016
|
|
15,183
|
|
|
23,418
|
|
|
25,455
|
|
|
5,604
|
|
|
69,660
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
1,235
|
|
|
5,740
|
|
|
11,051
|
|
|
953
|
|
|
18,979
|
|
Charge for the year
|
|
403
|
|
|
3,541
|
|
|
6,127
|
|
|
1,348
|
|
|
11,419
|
|
Disposals
|
|
—
|
|
|
(434
|
)
|
|
(344
|
)
|
|
(602
|
)
|
|
(1,380
|
)
|
Exchange adjustments
|
|
(67
|
)
|
|
(33
|
)
|
|
(93
|
)
|
|
(32
|
)
|
|
(225
|
)
|
At April 30, 2016
|
|
1,571
|
|
|
8,814
|
|
|
16,741
|
|
|
1,667
|
|
|
28,793
|
|
Net book amount at April 30, 2016
|
|
13,612
|
|
|
14,604
|
|
|
8,714
|
|
|
3,937
|
|
|
40,867
|
|
Net book amount at May 1, 2015
|
|
14,653
|
|
|
14,645
|
|
|
9,505
|
|
|
4,093
|
|
|
42,896
|
|
Depreciation for the year ended April 30, 2017 of $11.8m (2016: $11.4m, 2015: $7.7m) is included within administrative expenses in the consolidated statement of comprehensive income.
F-32
14. Group entities
Subsidiaries
Details of subsidiaries as at April 30, 2017 are provided below.
Company name
|
Country of incorporation
|
Principal activities
|
Holding companies:
|
|
|
Micro Focus Midco Limited (1)
|
UK
|
Holding company
|
Micro Focus Group Limited (1)
|
UK
|
Holding company
|
Micro Focus CHC Limited (1)
|
UK
|
Holding company
|
Micro Focus MHC Limited (1)
|
UK
|
Holding company
|
Micro Focus Holdings Limited (1)
|
UK
|
Holding company
|
Micro Focus (IP) Limited (1)
|
UK
|
Holding company
|
Micro Focus (US) Holdings Unlimited (1)
|
UK
|
Holding company
|
Micro Focus IP Limited (21)
|
Cayman Islands
|
Holding company
|
Novell Holdings Deutschland GmbH (33)
|
Germany
|
Holding company
|
Micro Focus Finance Ireland Limited (44)
|
Ireland
|
Holding company
|
Micro Focus Group Holdings Unlimited (44)
|
Ireland
|
Holding company
|
Micro Focus International Holdings Limited (44)
|
Ireland
|
Holding company
|
NetIQ Ireland Limited (44)
|
Ireland
|
Holding company
|
Novell Cayman Software Unlimited (44)
|
Ireland
|
Holding company
|
Novell Cayman Software International Limited (44)
|
Ireland
|
Holding company
|
Novell Ireland Real Estate Unlimited (44)
|
Ireland
|
Holding company
|
SUSE Linux Holdings Limited (44)
|
Ireland
|
Holding company
|
Novell Software International Limited (44)
|
Ireland
|
Holding company
|
Micro Focus Finance S.à.r.l. (56)
|
Luxembourg
|
Holding company
|
Minerva Finance S.à.r.l. (56)
|
Luxembourg
|
Holding company
|
Borland Corporation Inc. (2)
|
USA
|
Holding company
|
Micro Focus (US) Group Inc. (2)
|
USA
|
Holding company
|
M A Finance Co LLC (2)
|
USA
|
Holding company
|
The Attachmate Group Inc. (2)
|
USA
|
Holding company
|
Novell Holdings, Inc. (2)
|
USA
|
Holding company
|
Novell International Holdings Inc. (2)
|
USA
|
Holding company
|
Micro Focus (US) International Holdings Inc. (2)
|
USA
|
Holding company
|
|
|
|
Trading companies:
|
|
|
Attachmate Sales Argentina S.R.L. (6)
|
Argentina
|
Sale and support of software
|
Attachmate Group Australia Pty Limited (8)
|
Australia
|
Sale and support of software
|
Borland Australia Pty Limited (8)
|
Australia
|
Sale and support of software
|
Micro Focus Pty Limited (8)
|
Australia
|
Sale and support of software
|
Attachmate Group Austria GmbH (10)
|
Austria
|
Sale and support of software
|
Borland Entwicklung GmbH (11)
|
Austria
|
Development of software
|
Attachmate Group Belgium BVBA (12)
|
Belgium
|
Sale and support of software
|
Micro Focus NV (13)
|
Belgium
|
Sale and support of software
|
Borland Latin America Ltda (14)
|
Brazil
|
Sale and support of software
|
Micro Focus Programacao de Computadores Ltda (14)
|
Brazil
|
Sale and support of software
|
Novell do Brazil Software Limited (14)
|
Brazil
|
Sale and support of software
|
Micro Focus APM Solutions EOOD (17)
|
Bulgaria
|
Development of software
|
Micro Focus Software (Canada) Limited (18)
|
Canada
|
Development, sale and support of software
|
Micro Focus Software (Canada) Inc. (20)
|
Canada
|
Sale and support of software
|
Novell Software (Beijing) Ltd (22)
|
China
|
Development, sale and support of software
|
F-33
Company name
|
Country of incorporation
|
Principal activities
|
SUSE Linux s.r.o (24)
|
Czech Republic
|
Development, sale and support of software
|
Attachmate Group Denmark A/S (25)
|
Denmark
|
Sale and support of software
|
Micro Focus Middle East FZ-LLC (26)
|
Dubai
|
Sale and support of software
|
Attachmate Group France S.à.r.l. (28)
|
France
|
Sale and support of software
|
Borland France S.à.r.l. (29)
|
France
|
Sale and support of software
|
Micro Focus SAS (29)
|
France
|
Sale and support of software
|
Attachmate Group Germany GmbH (31)
|
Germany
|
Sale and support of software
|
Micro Focus GmbH (32)
|
Germany
|
Sale and support of software
|
SUSE Linux GmbH (33)
|
Germany
|
Development, sale and support of software
|
Attachmate Group Hong Kong Limited (37)
|
Hong Kong
|
Sale and support of software
|
NetIQ Asia Ltd (39)
|
Hong Kong
|
Sale and support of software
|
Micro Focus India Private Limited (41)
|
India
|
Support of software
|
Micro Focus Software India Private Limited (formerly Novell Software Development (India) Private Limited) (41)
|
India
|
Development, sale and support of software
|
Relativity Technologies Private Limited (41)
|
India
|
Sale and support of software
|
Attachmate Ireland Limited (43)
|
Ireland
|
Sale and support of software
|
Micro Focus Ireland Limited (44)
|
Ireland
|
Development, sale and support of software
|
Micro Focus Software (Ireland) Limited (45)
|
Ireland
|
Development, sale and support of software
|
NetIQ Europe Limited (43)
|
Ireland
|
Sale and support of software
|
Micro Focus Israel Limited (46)
|
Israel
|
Development and support of software
|
Attachmate Group Italy Srl (49)
|
Italy
|
Sale and support of software
|
Micro Focus Srl (49)
|
Italy
|
Sale and support of software
|
Borland Co. Limited (50)
|
Japan
|
Sale and support of software
|
Micro Focus KK (51)
|
Japan
|
Sale and support of software
|
Novell Japan Ltd (52)
|
Japan
|
Sale and support of software
|
NetIQ KK (53)
|
Japan
|
Sale and support of software
|
Novell Corporation (Malaysia) Sdn Bhd (57)
|
Malaysia
|
Sale and support of software
|
Attachmate Group Netherlands BV (59)
|
Netherlands
|
Sale and support of software
|
Authasas BV (59)
|
Netherlands
|
Sale and support of software
|
Borland BV (59)
|
Netherlands
|
Sale and support of software
|
Micro Focus NV (59)
|
Netherlands
|
Sale and support of software
|
Novell New Zealand Limited (60)
|
New Zealand
|
Sale and support of software
|
Micro Focus AS (61)
|
Norway
|
Sale and support of software
|
Novell Portugal Informatica Lda (62)
|
Portugal
|
Sale and support of software
|
Attachmate Group Singapore Pte Ltd (63)
|
Singapore
|
Sale and support of software
|
Borland (Singapore) Pte. Ltd (64)
|
Singapore
|
Sale and support of software
|
Micro Focus Pte Limited (65)
|
Singapore
|
Sale and support of software
|
Attachmate Group South Africa (Proprietary) Limited (66)
|
South Africa
|
Sale and support of software
|
Micro Focus South Africa (Pty) Ltd (67)
|
South Africa
|
Sale and support of software
|
Micro Focus Korea Limited (54)
|
South Korea
|
Sale and support of software
|
Novell Korea Co. Ltd (55)
|
South Korea
|
Sale and support of software
|
Attachmate Group Spain SL (68)
|
Spain
|
Sale and support of software
|
Micro Focus S.L.U. (69)
|
Spain
|
Sale and support of software
|
Attachmate Group Sweden AB (71)
|
Sweden
|
Sale and support of software
|
Attachmate Group Schweiz AG (72)
|
Switzerland
|
Sale and support of software
|
Micro Focus AG (73)
|
Switzerland
|
Sale and support of software
|
Novell (Taiwan) Co. Ltd (74)
|
Taiwan
|
Sale and support of software
|
Attachmate Teknoloji Satis ve Pazarlama Ltd Sti. (75)
|
Turkey
|
Sale and support of software
|
Attachmate Sales UK Ltd (1)
|
UK
|
Sale and support of software
|
Micro Focus IP Development Limited (1)
|
UK
|
Development and support of software
|
F-34
Company name
|
Country of incorporation
|
Principal activities
|
Micro Focus Limited (1)
|
UK
|
Sale and support of software
|
Novell U.K. Ltd (1)
|
UK
|
Sale and support of software
|
Novell UK Software Limited (1)
|
UK
|
Sale and support of software
|
Micro Focus Software Inc. (formerly Novell Inc.) (2)
|
USA
|
Development, sale and support of software
|
Attachmate Corporation Inc. (3)
|
USA
|
Development, sale and support of software
|
Micro Focus (US) Inc. (2)
|
USA
|
Development, sale and support of software
|
NetIQ Corporation Inc. (2)
|
USA
|
Development, sale and support of software
|
SUSE LLC (5)
|
USA
|
Development, sale and support of software
|
Borland Software Corporation Inc. (2)
|
USA
|
Development, sale and support of software
|
|
|
|
Dormant companies:
|
|
|
Cambridge Technology Partners do Brasil s.c. Ltda (15)
|
Brazil
|
Dormant
|
Netmanage Canada Inc. (18)
|
Canada
|
Dormant
|
Borland Canada, Inc. (18)
|
Canada
|
Dormant
|
Micro Focus International Limited (21)
|
Cayman Islands
|
Dormant
|
NetIQ Software International Ltd (23)
|
Cyprus
|
Dormant
|
NOVL Czech s.r.o (24)
|
Czech Republic
|
Dormant
|
Attachmate Middle East LLC (27)
|
Egypt
|
Dormant
|
Borland GmbH (34)
|
Germany
|
Dormant
|
Attachmate (Hong Kong) Ltd (37)
|
Hong Kong
|
Dormant
|
Borland (H.K) Limited (38)
|
Hong Kong
|
Dormant
|
Borland Magyarorszag KFT
|
Hungary
|
Dormant
|
Attachmate India Private Ltd (40)
|
India
|
Dormant
|
Borland Software India Private Limited (41)
|
India
|
Dormant
|
Cambridge Technology Partners India Private Limited (41)
|
India
|
Dormant
|
Novell India Pvt. Ltd. (42)
|
India
|
Dormant
|
SUSE Linux Ireland Limited (44)
|
Ireland
|
Dormant
|
N.Y. NetManage (Yerushalayim) Ltd (47)
|
Israel
|
Dormant
|
Novell Israel Software Limited (48)
|
Israel
|
Dormant
|
Cambridge Technology Partners (Mexico) S.A. de C.V. (58)
|
Mexico
|
Dormant
|
CTP Mexico Services SA de CV (58)
|
Mexico
|
Dormant
|
Authasas Advanced Authentication BV (59)
|
Netherlands
|
Dormant
|
Borland (Holding) UK Ltd (1)
|
UK1
|
Dormant
|
Borland (UK) Limited (1)
|
UK1
|
Dormant
|
Micro Focus APM Solutions Limited (1)
|
UK1
|
Dormant
|
Micro Focus UK Limited (1)
|
UK1
|
Dormant
|
NetIQ Ltd (1)
|
UK1
|
Dormant
|
Ryan McFarland Ltd (1)
|
UK1
|
Dormant
|
XDB (UK) Limited (1)
|
UK1
|
Dormant
|
Borland Technology Corporation Inc. (2)
|
USA
|
Dormant
|
CJDNLD LLC (2)
|
USA
|
Dormant
|
|
|
|
Acquisitions in the year ended April 30, 2017:
|
|
|
Serena:
|
|
|
Spartacus Acquisition Holdings Corp. (4)
|
USA
|
Holding
|
Spartacus Acquisition Corp. (4)
|
USA
|
Holding
|
Serena Software Inc. (4)
|
USA
|
Holding
|
Serena Holdings Limited (1)
|
UK
|
Holding
|
F-35
Company name
|
Country of incorporation
|
Principal activities
|
Merant Holdings Limited (1)
|
UK
|
Holding
|
Serena Software Pty Limited (9)
|
Australia
|
Sale and support of software
|
Serena Software Benelux BVBA (13)
|
Belgium
|
Sale and support of software
|
Serena Software Do Brasil Ltda (16)
|
Brazil
|
Sale and support of software
|
Serena Software SAS (30)
|
France
|
Sale and support of software
|
Serena Software GmbH (36)
|
Germany
|
Sale and support of software
|
Serena Software Japan KK (50)
|
Japan
|
Sale and support of software
|
Serena Software Pte. Ltd (63)
|
Singapore
|
Sale and support of software
|
Serena Software SA (70)
|
Spain
|
Sale and support of software
|
Serena Software Europe Limited (1)
|
UK
|
Sale and support of software
|
Serena Software Ukraine LLC (76)
|
Ukraine
|
Sale and support of software
|
GWAVA:
|
|
|
GWAVA Inc. (19)
|
Canada
|
Holding
|
GWAVA Technologies Inc. (4)
|
Canada
|
Sale and support of software
|
GWAVA EMEA GmbH (35)
|
Germany
|
Sale and support of software
|
New companies incorporated in the year ended April 30, 2017:
|
|
|
Seattle Holdings Inc. (4)
|
USA
|
Holding
|
Seattle MergerSub Inc. (4)
|
USA
|
Holding
|
Miami Escrow Borrower LLC (2)
|
USA
|
Holding
|
Micro Focus (IP) Holdings Limited (1)
|
UK
|
Dormant
|
Micro Focus (IP) Ireland Limited (44)
|
Ireland
|
Dormant
|
1 | The above companies incorporated in the UK are exempt from audit and from preparing Annual Accounts. |
These companies, with the exception of Novell Japan Ltd (note 34) are all 100% owned, operate principally in the country in which they are incorporated and are all included in the consolidated statement of comprehensive income.
Registered office addresses:
(1) | The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, United Kingdom, RG14 1QN |
(2) | The Corporation Trust Company, Corporation Trust Center 1209 Orange St, Wilmington, New Castle, DE 19801, U.S.A. |
(3) | 505 Union Ave SE STE120, Olympia, WA 98501, U.S.A. |
(4) | The Company Corporation, 2711 Centerville Rd, STE 400, Wilmington, New Castle, DE 19808, U.S.A. |
(5) | CT Corporation, 155 Federal St. Suite 700, Boston, MA 02110, U.S.A. |
(6) | Paraguay 1866, C1121ABB – Bs.As Argentina |
(7) | Level 18, 201 Miller Street, North Sydney, NSU, 2060 AS, Australia |
(8) | Level 23, Northpoint Tower, 100 Miller Street, North Sydney, NSW 2060, Australia |
(9) | C/O Teamwork Accounting Pty Ltd, Sanctuary Lakes Shopping Centre, Shop 28A, 300 Point Cook Road, Point Cook, Vic 3030, Australia |
(10) | Parkring 2, 1010, Vienna, Austria |
(11) | DonauCentre, Haupstrasse 4-10, Linz, 4040, Austria |
(12) | Bourgetlaan 40, 1130 Brussel 13, Belgium |
(13) | EU Parliament, 4th Floor, 37 De Meeussquare, Brussels, 1000, Belgium |
(14) | Rua Joaquim Floriano, 466-12 Ander, Sao Paulo, CEP 04534-002 Brazil |
(15) | Rua Arizonia, 1349 10th Floor, Sao Paulo, 04567-003, Brazil |
F-36
(16) | Rua Dom Jose de Barros, 177, 3rd Floor, Suite 302, Villa Buarque, Sao Paulo 01038-100 Brazil |
(17) | 76A James Bourchier Blvd, Lozenetz, Sofia, 1407, Bulgaria |
(18) | 199 Bay Street, Suite 4000, Toronto, Ontario, M5L 1A9, Canada |
(19) | 100 Alexis Nihon, Suite 500, St Laurent QC, H4M 251, Canada |
(20) | 340 King Street East, Suite 200, Toronto, Ontario, M5A 1K8, Canada |
(21) | PO Box 309, Ugland House, South Church Street, George Town, South Cayman, KY1-1104, Cayman Islands |
(22) | 3603-3606 Off Tow A, No.7, Dongsanhuan, Beijing, 100020, People’s Republic of China |
(23) | 54 Digeni Akrita, Akrita 2nd Floor, Office 201-202, PC 1061, Nicosia, Cyprus |
(24) | Krizikova 148/34, Karlin, 186 00 Praha 8, Czech Republic |
(25) | Lyngsø Alle 3b, Hørsholm, 2970, Denmark |
(26) | Dubai Internet City, DIC Building 2, 3rd Floor, Suite 315, Dubai, UAE |
(27) | 19 Helmy Elmasry Street, Almaza, Cairo, Egypt |
(28) | Tour Franklin, La Defense 8, Cedex, Paris, 92042, France |
(29) | Tour Atlantque, La Defense 9, 1 Place de la Pyramide, La Defense, Cedex, Paris 92911, France |
(30) | Immeuble Jean Monnet, 11 Place des Vosges, 92400 Courbevoie, La Defense 5, Paris, France |
(31) | Amtsgericht, München, Germany |
(32) | Fraunhoferstrasse 7, Ismaning, 85737, Germany |
(33) | Amtsgericht, Nürnberg, Germany |
(34) | Ismaning, Landkries, München, Germany |
(35) | Industrietstrasse 15, Ahaus, 48683, Germany |
(36) | Nöerdlicher Zubringer 9-11, 40470, Düsseldorf, Germany |
(37) | Unit 2002A, 20th Floor, The Centrium, 60 Wyndham, Central Hong Kong, Hong Kong |
(38) | Level 54, Hopewell Centre, 183 Queens Road East, Hong Kong, Hong Kong |
(39) | 4/F Three Pacific Place, 1 Queen’s Road East, Hong Kong |
(40) | U&I Corporation Centre, 47 Echelon, Sector 32, Gurgaon Harayana, India |
(41) | Laurel, Block D, 65/2, Bagmane Tech Park, C.V. Raman Nagar, Byrasandra Post Bangalore – 560093, India |
(42) | Leela Galleria, 1st Floor, Andheri Kurla Road, Andheri (East), Mumbai – 400059, India |
(43) | Building 2, 2nd Floor, Parkmore East Business Park, Galway, Ireland |
(44) | 70 Sir John Rogerson’s Quay, Dublin 2, Ireland |
(45) | Corrig Court, Corrig Road, Sandyford Industrial Estate, Sandyford, Dublin 18, Ireland |
(46) | Matam Advanced Tech Center, Building 5/1, Haifa, 31 905, Israel |
(47) | Scientific Industries Center, Haifa, 33262, Israel |
(48) | 17 Hatidhar St, Raannana, 43665, Israel |
(49) | Via Enrico Cialdini 16, Milan, 20161, Italy |
(50) | Sumitomo Fudosan Roppongi-dori, Building 9F, 7-18-18 Roppongi, Minato-ku, Tokyo, 106-0032, Japan |
F-37
(51) | Simitomo-Fudosan Takanawa Park Tower 6F, 30-20-14 Higashi-Gotanda, Shinagawa-ku, Tokyo, 141-0022, Japan |
(52) | Akaska Biz Tower 29F, 5-3-1 Akasaka, Minatato-ku, Tokyo, 107-6329, Japan |
(53) | 1-1 Ichigayahonmuracho, Shinjuku-ku, Tokyo, Japan |
(54) | 41/F Gangnam Finance Center, 737 Yeoksam-dong, Gangnam-gu, Seoul, 135 984, Korea, Republic of South Korea |
(55) | 13th Floor, Hanwha Sec. Building, 23-5, Yoido-Dong, Seoul, Republic of South Korea |
(56) | 20, rue des Peupliers, 2328, Luxembourg |
(57) | Unit 501 Level 5 Uptown 1, 1 Jalan SS2, Selangor Darul Ehsan, Malaysia |
(58) | Homero 440-773, col, Palanco, Mexico, D.F. 11560, Mexico |
(59) | Raoul Wallenbergplein 23, 2404 ND Alphen a/d Rijn, Netherlands |
(60) | Level 27, Lumley Centre, 88 Shortland Street Aukland 1141, New Zealand |
(61) | 7th Floor, Dronning Eufemias gate 16, 0191 Oslo, Norway |
(62) | Centro Empresarial Torres de Lisboa, Torre G 1* Andar Sala 111, Rue Tomas da Fonseca, Lisboa, Portugal |
(63) | 80 Robinson Road #02-00, 068898, Singapore |
(64) | 24 Raffles Place, #15-00 Clifford Centre, 048621, Singapore |
(65) | 77 Robinson Road, #13-00 Robinson 77, 068896, Singapore |
(66) | Morning View Office Park 255 Rivonia Road, Morningside, South Africa |
(67) | 4th Floor Aloe Grove, Houghton Estate Office Park, 2 Osborn Road, Houghton, 2198, South Africa |
(68) | C/Jose Echegaray 8, Las Rozas, Madrid 28230, Spain |
(69) | Paseo de la Castellana 42, Madrid, 28046, Spain |
(70) | Ronda General Mitre 28-30, Barcelona 08017, Spain |
(71) | Kronborgsgränd 1, 164 46 Kista, Stockholm, Sweden |
(72) | Office Center 1, Flughafenstrasse 90, 8058 Zurich-Flughafen, Switzerland |
(73) | Lindenstrasse 26, Zurich, 8008, Switzerland |
(74) | Room B 26/F #26 Tun-Hwa S Road Sec, Taipei ROC 106, Taiwan |
(75) | Palladium Ofis Binasi, Halk Cad, No.8/A Kat 2, Atasehir 34748, Istanbul, Turkey |
(76) | 13 Pimonenko str, building 1, Office 1B/22, Kiev 04050, Ukraine |
15. Investments in associates
Open Invention Network LLC (OIN), a strategic partnership for the Group, licences its global defensive patent pool in exchange for a pledge of non-aggression which encourages freedom of action in Linux and the sharing of new ideas and inventions. There are no significant restrictions on the ability of associated undertakings to transfer funds to the parent. There are no contingent liabilities to the Groups interest in associates.
At April 30, 2017 the Group had a 12.5% interest ($11.5m) (2016: 14.3%, $12.7m) investment in OIN. There are eight (2016: seven) equal shareholders of OIN, all holding 12.5% (2016: 14.3%) interest, and each shareholder has one board member and one alternative board member. The Group exercises significant influence over OINs operation and therefore accounts for its investment in OIN as an associate.
F-38
The Group uses the equity method of accounting for its interest in associates. The following table shows the aggregate movement in the Groups investment in associates:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
At May 1,
|
|
12,711
|
|
|
14,901
|
|
|
|
|
|
|
|
|
Gain on dilution of investment
|
|
966
|
|
|
—
|
|
Share of post-tax loss of associates
|
|
(2,220
|
)
|
|
(2190
|
)
|
|
|
(1,254
|
)
|
|
(2,190
|
)
|
At April 30,
|
|
11,457
|
|
|
12,711
|
|
Details of the Groups principal associates are provided below.
Company name
|
Country of
incorporation and principal place of business |
Principal
activities |
2017
Proportion Held |
2016
Proportion Held |
2015
Proportion Held |
Open Invention Network LLC
|
USA
|
Sale and support of software
|
12.5%
|
14.3%
|
14.3%
|
The accounting year end date of the associate consolidated within the Groups financial statements is December 31, and we obtain its results on a quarterly basis. The Group records an adjustment within the consolidated financial statements to align the reporting period of the associate and the Group. The assets, liabilities, and equity of the Groups associate as at March 31, and the revenue and loss of the Groups associate for the period ended March 31, with the corresponding adjustment to align the reporting period was as follows:
|
March 31,
2017 |
March 31,
2016 |
||||
|
$’000
|
$’000
|
||||
Non-current assets
|
|
43,649
|
|
|
45,666
|
|
Current assets
|
|
50,137
|
|
|
44,058
|
|
Current liabilities
|
|
(604
|
)
|
|
(584
|
)
|
Non-current liabilities
|
|
(527
|
)
|
|
(270
|
)
|
Equity
|
|
(92,655
|
)
|
|
(88,870
|
)
|
|
March 31,
2017 |
March 31,
2016 |
March 31,
2015 |
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Revenue
|
|
—
|
|
|
—
|
|
|
—
|
|
Net loss
|
|
(16,212
|
)
|
|
(15,867
|
)
|
|
(3,328
|
)
|
Loss attributable to the Group for the period ended March, 31 (14.3% ownership to June 6, 2016, 12.5% thereafter)
|
|
(2,095
|
)
|
|
(2,267
|
)
|
|
(476
|
)
|
Adjustment on estimated April result attributable to the Group
|
|
(125
|
)
|
|
77
|
|
|
(312
|
)
|
Loss attributable to the Group for the period ended April 30, (14.3% ownership to June 6, 2016, 12.5% thereafter)
|
|
(2,220
|
)
|
|
(2,190
|
)
|
|
(788
|
)
|
16. Other non-current assets
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Long-term rent deposits
|
|
2,844
|
|
|
3,697
|
|
Other
|
|
249
|
|
|
305
|
|
|
|
3,093
|
|
|
4,002
|
|
F-39
17. Inventories
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Work in progress
|
|
13
|
|
|
42
|
|
Finished goods
|
|
51
|
|
|
51
|
|
Total
|
|
64
|
|
|
93
|
|
The Group utilized $0.1m (2016: $0.1m, 2015: $nil of inventories included in cost of sales during the year.
18. Trade and other receivables
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Trade receivables
|
|
266,225
|
|
|
248,759
|
|
Less: provision for impairment of trade receivables
|
|
(2,599
|
)
|
|
(4,486
|
)
|
Trade receivables net
|
|
263,626
|
|
|
244,273
|
|
Prepayments
|
|
23,239
|
|
|
21,694
|
|
Other receivables
|
|
1,534
|
|
|
1,651
|
|
Accrued income
|
|
1,110
|
|
|
568
|
|
Total
|
|
289,509
|
|
|
268,186
|
|
Concentrations of credit risk with respect to trade receivables are limited due to the Groups customer base being large and unrelated. The Group considers the credit quality of trade and other receivables on a customer by customer basis. The Group considers that the carrying value of the trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. This is considered to be the case as there is a low risk of default due to the high number of recurring customers and credit control policies. In determining the recoverability of a trade receivable, the Group considers the ageing of each debtor and any change in the circumstances of the individual receivable. Due to this, management believes there is no further credit risk provision required in excess of the normal provision for doubtful receivables. At April 30, 2017 and 2016, the carrying amount approximates the fair value of the instrument due to the short-term nature of the instrument.
At April 30, 2017, trade receivables of $39.9m (2016: $28.8m) were past due but not impaired. These relate to a large number of independent companies for whom there is no recent history of default. The amounts are regarded as recoverable. The average age of these receivables was 24 days in excess of due date (2016: 20 days).
At April 30, 2017, trade receivables of $2.6m (2016: $4.5m) were either partially or fully impaired. The amount of the provision was $2.6m (2016: $4.5m). The ageing of these receivables is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Up to three months
|
|
48
|
|
|
233
|
|
Three to four months
|
|
731
|
|
|
473
|
|
Over four months
|
|
1,820
|
|
|
3,780
|
|
Total
|
|
2,599
|
|
|
4,486
|
|
Movements in the Group provision for impairment of trade receivables were as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
At May 1,
|
|
4,486
|
|
|
2,520
|
|
Provision for receivables impairment
|
|
2,023
|
|
|
2,531
|
|
Receivables written off as uncollectable
|
|
(1,271
|
)
|
|
(361
|
)
|
Receivables previously provided for but now collected
|
|
(2,542
|
)
|
|
(244
|
)
|
Exchange adjustments
|
|
(97
|
)
|
|
40
|
|
At April 30,
|
|
2,599
|
|
|
4,486
|
|
F-40
The creation and release of provision for impaired receivables have been included in selling and distribution costs in the consolidated statement of comprehensive income. Amounts charged in the allowance account are generally written off when there is no expectation of recovering additional cash. The Group does not hold any collateral as security.
19. Cash and cash equivalents
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Cash at bank and in hand
|
|
146,832
|
|
|
662,757
|
|
Short-term bank deposits
|
|
4,151
|
|
|
4,421
|
|
Cash and cash equivalents
|
|
150,983
|
|
|
667,178
|
|
At April 30, 2017 and 2016, the carrying amount approximates to the fair value. The Groups credit risk on cash and cash equivalents is limited as the counterparties are well established banks with high credit ratings. The credit quality of cash and cash equivalents is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
S&P/Moody’s/Fitch rating:
|
|
|
|
|
|
|
AAA
|
|
33,057
|
|
|
—
|
|
AA-
|
|
69,814
|
|
|
615,941
|
|
A+
|
|
25,221
|
|
|
9,499
|
|
A
|
|
6,355
|
|
|
16,669
|
|
A-
|
|
5,820
|
|
|
3,977
|
|
BBB+
|
|
471
|
|
|
16,798
|
|
BBB
|
|
903
|
|
|
130
|
|
BBB-
|
|
165
|
|
|
338
|
|
BB+
|
|
357
|
|
|
218
|
|
BB
|
|
283
|
|
|
900
|
|
BB-
|
|
8,221
|
|
|
1,925
|
|
B+
|
|
24
|
|
|
160
|
|
CCC+
|
|
193
|
|
|
525
|
|
Not Rated
|
|
99
|
|
|
98
|
|
Total
|
|
150,983
|
|
|
667,178
|
|
20. Trade and other payables - current
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Trade payables
|
|
16,891
|
|
|
20,793
|
|
Tax and social security
|
|
3,032
|
|
|
10,425
|
|
Accruals
|
|
150,119
|
|
|
156,872
|
|
Total
|
|
170,042
|
|
|
188,090
|
|
At April 30, 2017 and 2016, the carrying amount approximates to the fair value. Accruals include employee taxes, acquisition fees, vacation and payroll accruals including bonuses and commissions.
21. Borrowings
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Bank loan secured
|
|
1,595,188
|
|
|
1,787,250
|
|
Unamortized prepaid facility arrangement fees and original issue discounts
|
|
(33,652
|
)
|
|
(42,041
|
)
|
|
|
1,561,536
|
|
|
1,745,209
|
|
F-41
|
2017
|
2016
|
||||||||||||||||
|
Bank loan
secured |
Unamortized
prepaid facility arrangement fees and original issue discounts |
Total
|
Bank loan
secured |
Unamortized
prepaid facility arrangement fees and original issue discounts |
Total
|
||||||||||||
Reported within:
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
Current liabilities
|
|
83,788
|
|
|
(12,604
|
)
|
|
71,184
|
|
|
287,750
|
|
|
(12,494
|
)
|
|
275,256
|
|
Non-current liabilities
|
|
1,511,400
|
|
|
(21,048
|
)
|
|
1,490,352
|
|
|
1,499,500
|
|
|
(29,547
|
)
|
|
1,469,953
|
|
|
|
1,595,188
|
|
|
(33,652
|
)
|
|
1,561,536
|
|
|
1,787,250
|
|
|
(42,041
|
)
|
|
1,745,209
|
|
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Cash and cash equivalents
|
|
150,983
|
|
|
667,178
|
|
Less borrowings
|
|
(1,561,536
|
)
|
|
(1,745,209
|
)
|
Net debt
|
|
(1,410,553
|
)
|
|
(1,078,031
|
)
|
During the year ended April 30, 2017 the Group renegotiated its debt facilities.
On August 1, 2016 the Company allocated a re-pricing of its senior secured Term Loan B which reduced its ongoing interest payments. The interest rate was reduced from 4.25% to 3.75% and the LIBOR floor was reduced from 1.00% to 0.75%. All other terms of the Groups Credit Facilities remained the same.
The terms of the Micro Focus debt facilities from August 1, 2016 to April 28, 2017 were as follows:
• | Syndicated senior secured tranche B term loan facility (Term Loan B), with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 1.00% per annum, with an original issue discount of 1.00% and a seven year term; |
• | A syndicated senior secured tranche C term loan facility (Term Loan C), with an interest rate of 3.75% above LIBOR (subject to a LIBOR floor of 0.75%), repayable at 10.00% per annum, with an original issue discount of 1.50% and a five year term; and |
• | A senior secured revolving credit facility of $375.0m, (Revolving Facility), with an interest rate of 3.50% above LIBOR on amounts drawn (and 0.50% on amounts undrawn) thereunder and an original issue discount of 0.50%. |
The Revolving Facility was increased to from $225.0m to $375.0m on May 2, 2016 as part of the funding for the Serena acquisition (note 39).
New Facilities
The Company announced on April 21, 2017 the successful syndication of the new credit facilities (the New Facilities) on behalf of both MA FinanceCo, LLC, a wholly owned subsidiary of Micro Focus, and Seattle SpinCo. Inc., a wholly owned subsidiary of HPE that will hold HPE Software. Post April 30, 2017, Seattle SpinCo. Inc. will be merged with a wholly owned subsidiary of Micro Focus in the HPE Software Transaction.
The New Facilities comprise a $500.0m Revolving Credit Facility effective at Closing LIBOR plus 3.50% (subject to a LIBOR floor of 0.00%) placed with a number of financial institutions and $5,000.0m of term loans. The new term loans are priced as follows:
New facilities drawn down as at April 30, 2017 were as follows
• | in relation to the existing senior secured term loans issued by MA FinanceCo, LLC the lenders in the Term Loan C of $412.5m due November 2019 were offered a cashless roll of their investment into the existing Term Loan B, becoming Term Loan B-2, due November 2021 and this loan was re-priced to LIBOR plus 2.50% (subject to a LIBOR floor of 0.00%) and as a result of the cashless rollover increased in size from $1,102.7m to $1,515.2m, effective from April 28, 2017. |
F-42
Facilities not drawn down as at April 30, 2017 were as follows:
HPE Software facilities:
• | The new $2,600.0m senior secured seven year Term Loan B issued by Seattle SpinCo. Inc. is priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%. |
Micro Focus facilities:
• | The new $385.0m senior secured seven year Term Loan B issued by MA FinanceCo LLC is also priced at LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%) with an original issue discount of 0.25%; and |
• | The new Euro 470.0m (equivalent to $500.0 million) senior secured seven year Term Loan B issued by MA FinanceCo LLC is priced at EURIBOR plus 3.00% (subject to a EURIBOR floor of 0.00%) with an original issue discount of 0.25%. |
The above new facilities are a modification only of the existing facilities and the unamortized prepaid facility arrangement fees and original issue discounts have not been accelerated as a result. The remaining unamortized prepaid facility arrangement fees and original issue discounts will be recognized over the life of the new debt.
As part of the HPE Software merger, due to complete in the third quarter of calendar year 2017, the New Facilities will be used to:
(i) | Fund the pre-Completion cash payment by Seattle SpinCo. Inc. to HPE of $2,500.0m (subject to certain adjustments in limited circumstances); |
(ii) | Fund the Return of Value to Micro Focus' existing Shareholders of $500.0m; and |
(iii) | Pay transaction costs relating to the acquisition of HPE Software. |
The balance will be used for general corporate and working capital purposes.
The only financial covenant attaching to these facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end.
At April 30, 2017, $80.0m of the available Revolving Facility of $375.0m was drawn, representing 21.3%. The facility was less than 35% drawn at April 30, 2017 and therefore no covenant test is applicable.
The movements on the Group loans in the year were as follows:
|
Term Loan B-2
|
Term Loan B
|
Term Loan C
|
Revolving
Facility |
Total
|
||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
At May 1, 2016
|
|
—
|
|
|
1,112,250
|
|
|
450,000
|
|
|
225,000
|
|
|
1,787,250
|
|
Repayments
|
|
—
|
|
|
(9,562
|
)
|
|
(37,500
|
)
|
|
(325,000
|
)
|
|
(372,062
|
)
|
Drawdowns
|
|
—
|
|
|
—
|
|
|
—
|
|
|
180,000
|
|
|
180,000
|
|
Transfer
|
|
1,515,188
|
|
|
(1,102,688
|
)
|
|
(412,500
|
)
|
|
—
|
|
|
—
|
|
At April 30, 2017
|
|
1,515,188
|
|
|
—
|
|
|
—
|
|
|
80,000
|
|
|
1,595,188
|
|
Borrowings are stated after deducting unamortized prepaid facility fees and original issue discounts. Facility arrangement costs and original issue discounts are amortized between four and six years. The fair value of borrowings equals their carrying amount.
F-43
Maturity of borrowings
The maturity profile of the anticipated future cash flows including interest in relation to the Groups borrowings on an undiscounted basis which, therefore, differs from both the carrying value and fair value, is as follows:
|
Term Loan B-2
|
Revolving
Facility |
Total
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Within one year
|
|
60,168
|
|
|
80,000
|
|
|
140,168
|
|
In one to two years
|
|
71,181
|
|
|
—
|
|
|
71,181
|
|
In two to three years
|
|
70,769
|
|
|
—
|
|
|
70,769
|
|
In three to four years
|
|
70,053
|
|
|
—
|
|
|
70,053
|
|
In four to five years
|
|
1,497,867
|
|
|
—
|
|
|
1,497,867
|
|
|
|
1,770,038
|
|
|
80,000
|
|
|
1,850,038
|
|
Unamortized prepaid facility arrangement fees and original issue discounts
|
|
(29,059
|
)
|
|
(4,593
|
)
|
|
(33,652
|
)
|
At April 30, 2017
|
|
1,740,979
|
|
|
75,407
|
|
|
1,816,386
|
|
|
Term Loan B
|
Term Loan C
|
Revolving
Facility |
Total
|
||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||
Within one year
|
|
71,702
|
|
|
69,683
|
|
|
233,983
|
|
|
375,368
|
|
In one to two years
|
|
71,023
|
|
|
67,402
|
|
|
—
|
|
|
138,425
|
|
In two to three years
|
|
70,344
|
|
|
65,120
|
|
|
—
|
|
|
135,464
|
|
In three to four years
|
|
69,666
|
|
|
307,444
|
|
|
—
|
|
|
377,110
|
|
In four to five years
|
|
68,987
|
|
|
—
|
|
|
—
|
|
|
68,987
|
|
In more than five years
|
|
1,135,434
|
|
|
—
|
|
|
—
|
|
|
1,135,434
|
|
|
|
1,487,156
|
|
|
509,649
|
|
|
233,983
|
|
|
2,230,788
|
|
Unamortized prepaid facility arrangement fees and original issue discounts
|
|
(28,088
|
)
|
|
(10,183
|
)
|
|
(3,770
|
)
|
|
(42,041
|
)
|
At April 30, 2016
|
|
1,459,068
|
|
|
499,466
|
|
|
230,213
|
|
|
2,188,747
|
|
Assets pledged as collateral
As part of the new facilities above that became available on April 28, 2017, the assets pledged as collateral was changed. An all assets security has been granted in the US and England & Wales by certain members of the Micro Focus Group organized in such jurisdictions, including security over intellectual property rights and shareholdings of such members of the Micro Focus Group.
Prior to the renegotiation of the debt facilities, all asset security was granted in US, Canada, England & Wales and Ireland by certain members of the Micro Focus Group. Additional security over specific shareholdings of members of the Micro Focus Group incorporated in England and Ireland has also been provided, together with security over certain types of intellectual property rights in the US. In the Cayman Islands, Luxembourg, France and Germany security was granted over shares in certain members of the Micro Focus Group incorporated in each jurisdiction. Additionally, pledges over receivables, financial securities accounts and certain property, plant, and equipment and intangible assets of certain members of the Micro Focus Group were given in France and pledges over receivables were also granted in Luxembourg.
22. Current tax receivables and liabilities
Current tax receivables
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Corporation tax
|
|
1,637
|
|
|
18,016
|
|
F-44
The current tax receivable is $1.6m (2016: $18.0m). The brought forward current tax receivable balance relates mainly to the US and has been partially refunded, with the balance offset against current year tax liabilities.
Current tax liabilities
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Corporation tax
|
|
42,679
|
|
|
22,426
|
|
The current tax creditor is $42.7m (2016: $22.4m). The current tax creditor includes liabilities in respect of uncertain tax positions, net of overpayments. The increase in the year relates mainly to various tax provision movements.
23. Deferred income – current
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Deferred income
|
|
640,650
|
|
|
565,480
|
|
Revenue not recognized in the consolidated statement of comprehensive income under the Groups accounting policy for revenue recognition is classified as deferred income in the consolidated statement of financial position to be recognized in future periods. Deferred income primarily relates to undelivered maintenance and subscription services on billed contracts.
24. Deferred income – non-current
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Deferred income
|
|
223,786
|
|
|
196,483
|
|
Revenue not recognized in the consolidated statement of comprehensive income under the Groups accounting policy for revenue recognition is classified as deferred income in the consolidated statement of financial position to be recognized in future periods in excess of one year. Deferred income primarily relates to undelivered maintenance and subscription services on multi-year billed contracts.
25. Provisions
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Onerous leases and dilapidations
|
|
16,243
|
|
|
18,176
|
|
Restructuring and integration
|
|
12,132
|
|
|
3,523
|
|
Legal
|
|
3,220
|
|
|
1,920
|
|
Other
|
|
484
|
|
|
1,280
|
|
Total
|
|
32,079
|
|
|
24,899
|
|
|
|
|
|
|
|
|
Current
|
|
20,142
|
|
|
10,545
|
|
Non-current
|
|
11,937
|
|
|
14,354
|
|
Total
|
|
32,079
|
|
|
24,899
|
|
F-45
|
Onerous
leases and dilapidations |
Restructuring
and integration |
Legal
|
Other
|
Total
|
||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
At May 1, 2016
|
|
18,176
|
|
|
3,523
|
|
|
1,920
|
|
|
1,280
|
|
|
24,899
|
|
Acquisitions (note 39)
|
|
—
|
|
|
1,201
|
|
|
2,844
|
|
|
—
|
|
|
4,045
|
|
Additional provision in the year
|
|
4,584
|
|
|
48,498
|
|
|
98
|
|
|
501
|
|
|
53,681
|
|
Utilization of provision
|
|
(5,527
|
)
|
|
(37,712
|
)
|
|
(120
|
)
|
|
(117
|
)
|
|
(43,476
|
)
|
Released
|
|
(857
|
)
|
|
(2,886
|
)
|
|
(1,492
|
)
|
|
(1,180
|
)
|
|
(6,415
|
)
|
Exchange adjustments
|
|
(133
|
)
|
|
(492
|
)
|
|
(30
|
)
|
|
—
|
|
|
(655
|
)
|
At April 30, 2017
|
|
16,243
|
|
|
12,132
|
|
|
3,220
|
|
|
484
|
|
|
32,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
4,406
|
|
|
12,132
|
|
|
3,220
|
|
|
384
|
|
|
20,142
|
|
Non-current
|
|
11,837
|
|
|
—
|
|
|
—
|
|
|
100
|
|
|
11,937
|
|
Total
|
|
16,243
|
|
|
12,132
|
|
|
3,220
|
|
|
484
|
|
|
32,079
|
|
|
Onerous
leases and dilapidations |
Restructuring
and integration |
Legal
|
Other
|
Total
|
||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||
At May 1, 2015
|
|
22,630
|
|
|
30,921
|
|
|
3,065
|
|
|
10,637
|
|
|
67,253
|
|
Additional provision in the year
|
|
7,735
|
|
|
26,897
|
|
|
—
|
|
|
—
|
|
|
34,632
|
|
Hindsight adjustment (note 39)
|
|
—
|
|
|
—
|
|
|
677
|
|
|
—
|
|
|
677
|
|
Utilization of provision
|
|
(10,049
|
)
|
|
(43,867
|
)
|
|
(1,258
|
)
|
|
(465
|
)
|
|
(55,639
|
)
|
Released
|
|
(1,771
|
)
|
|
(10,594
|
)
|
|
(390
|
)
|
|
(8,892
|
)
|
|
(21,647
|
)
|
Unwinding of discount
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Exchange adjustments
|
|
(375
|
)
|
|
166
|
|
|
(174
|
)
|
|
—
|
|
|
(383
|
)
|
At April 30, 2016
|
|
18,176
|
|
|
3,523
|
|
|
1,920
|
|
|
1,280
|
|
|
24,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
5,056
|
|
|
3,523
|
|
|
966
|
|
|
1,000
|
|
|
10,545
|
|
Non-current
|
|
13,120
|
|
|
—
|
|
|
954
|
|
|
280
|
|
|
14,354
|
|
Total
|
|
18,176
|
|
|
3,523
|
|
|
1,920
|
|
|
1,280
|
|
|
24,899
|
|
Onerous leases and dilapidations provisions
The onerous lease and dilapidations provision relates to leased Group properties and this position is expected to be fully utilized within nine years. The provision was increased by $4.6m, mostly due to a lengthening in the estimated time to sublease a North American property.
The provision was increased by $7.7m in the year ended April 30, 2016 due to a lengthening in the estimated time to sublease certain properties and reduced by $1.8m due to the shortening in the estimated time to sublease two properties.
Restructuring and integration provisions
Restructuring and integration provision additions in the year ended April 30, 2017 includes severance and integration work undertaken in bringing together the Base Micro Focus, TAG, Serena and GWAVA organizations into one organization. This includes, amongst other activities; development of a new Group intranet and website and system integration costs. Restructuring and integration provisions also included provisions relating to activities in readiness for the HPE Software acquisition across all functions of the existing Micro Focus business. Releases in the period relate to IT programs no longer continuing in light of the HPE Software acquisition (none of which was capitalized) and the release of provisions established for the Group reorganization in March 2016. The provisions as at April 30, 2017 are expected to be fully utilized within 12 months.
F-46
In the year ended April 30, 2016, restructuring and integration provisions related mostly to severance and integration work undertaken during the year. Integration provisions arose from the work done in bringing together the Base Micro Focus and TAG organizations into one organization. This includes, amongst other activities; email migration, system integration and legal entity reorganization. Severance releases in the year ended April 30, 2016 related to the change in estimates made for integrating the TAG business in the year ended April 30, 2015, including the redeployment of staff previously notified of redundancy.
Legal provisions
Legal provisions in the year ended April 30, 2017 and 2016 include managements best estimate of the likely outflow of economic benefits associated with ongoing legal matters. Releases of legal provisions in the year ended April 30, 2017 relate to legal matters now resolved.
Other provisions
Other provisions as at April 30, 2017 include primarily:
• | $0.5m relating to potential future fees; |
• | $nil relating to tax due for pension and bonus payments prior to July 2011 for a subsidiary in Brazil (2016: $0.2m); and |
• | $nil remaining provision for potential customer claims (2016: $1.0m). |
Releases of other provisions in the year ended April 30, 2017 related to the potential customer claims and Brazil tax matters now resolved.
26. Pension commitments
a) Defined contribution
The Group has established a number of pension schemes around the world covering many of its employees. The principal funds are those in the US, UK and Germany. These were funded schemes of the defined contribution type. Outside of these territories, the schemes are also of the defined contribution type, except for France and Japan which is a defined benefit scheme, but which has few members and therefore is not significant to the Group.
Pension costs for defined contributions schemes are as follows:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Defined contribution schemes (note 35)
|
|
13,483
|
|
|
12,848
|
|
|
9,815
|
|
b) Defined benefit
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Within non-current assets:
|
|
|
|
|
|
|
Long-term pension assets
|
|
22,031
|
|
|
22,272
|
|
|
|
|
|
|
|
|
Within non-current liabilities:
|
|
|
|
|
|
|
Retirement benefit obligations
|
|
(30,773
|
)
|
|
(31,669
|
)
|
There are four (2016: three) defined benefit plans in Germany under broadly similar regulatory frameworks. All of the plans are final salary pension plans, which provide benefits to members in the form of a guaranteed level of pension payable for life in the case of retirement, disability and death. The level of benefits provided depends not only on the final salary but also on members length of service, social security ceiling and other factors. Final pension entitlements are calculated by our Actuary in Swiss Life. They also complete calculations for cases of death in service and disability. There is no requirement for the appointment of Trustees in Germany. The schemes are administered locally with the assistance of German pension experts. All four plans were closed for new membership.
F-47
During the year ended April 30, 2017 a pension scheme arrangement in Germany was identified as requiring reclassification under German law from a defined contribution scheme to a defined benefit scheme.
Long-term pension assets
Long-term pension assets relate to the reimbursement right under insurance policies held by the Company with guaranteed interest rates that do not meet the definition of a qualifying insurance policy as they have not been pledged to the plan and are subject to the creditors of the Group. Such reimbursement right assets are recorded separately in the consolidated statement of financial position as long-term pension assets. Fair value of the reimbursement right asset is deemed to be the present value of the related obligation because the right to reimbursement under the insurance policies exactly matches the amount and timing of some or all of the benefits payable under the defined benefit plan.
The movement on the long-term pension asset is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
As at May 1,
|
|
22,272
|
|
|
14,076
|
|
Hindsight adjustment (note 39)
|
|
—
|
|
|
3,917
|
|
Interest on non-plan assets (note 6)
|
|
404
|
|
|
333
|
|
Benefits paid
|
|
(110
|
)
|
|
(8
|
)
|
Contributions
|
|
442
|
|
|
475
|
|
Included within other comprehensive income:
|
|
|
|
|
|
|
Actuarial (loss)/gain on non-plan assets
|
|
(2,134
|
)
|
|
3,104
|
|
Reclassification from defined contribution scheme to defined benefit scheme
|
|
2,264
|
|
|
—
|
|
|
|
130
|
|
|
3,104
|
|
Foreign currency exchange (loss)/gain
|
|
(1,107
|
)
|
|
375
|
|
As at April 30,
|
|
22,031
|
|
|
22,272
|
|
The non-plan assets were not subject to an actuarial revaluation until after April 30, 2015 and therefore a hindsight adjustment has been made in respect of this and reflected in last years consolidated statement of comprehensive income.
Retirement benefit obligations
The following amounts have been included in the consolidated statement of comprehensive income in respect of the German defined benefit pension arrangements:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Current service charge
|
|
625
|
|
|
760
|
|
|
330
|
|
Charge to operating profit
|
|
625
|
|
|
760
|
|
|
330
|
|
|
|
|
|
|
|
|
|
|
|
Interest on pension scheme liabilities
|
|
660
|
|
|
546
|
|
|
320
|
|
Interest on pension scheme assets
|
|
(95
|
)
|
|
(79
|
)
|
|
(59
|
)
|
Charge to finance costs
|
|
565
|
|
|
467
|
|
|
261
|
|
|
|
|
|
|
|
|
|
|
|
Total charge to consolidated statement of comprehensive income
|
|
1,190
|
|
|
1,227
|
|
|
591
|
|
The contributions for the year ending April 30, 2018 are expected to be broadly in line with the current year.
F-48
The following amounts have been recognized as movements in equity:
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Actuarial return on assets excluding amounts included in interest income
|
|
9
|
|
|
108
|
|
|
229
|
|
Experience gains and losses arising on scheme liabilities
|
|
|
|
|
|
|
|
|
|
Changes in assumptions underlying the present value of scheme liabilities:
|
|
|
|
|
|
|
|
|
|
-Demographic
|
|
—
|
|
|
—
|
|
|
—
|
|
-Financial
|
|
2,821
|
|
|
2,024
|
|
|
(4,565
|
)
|
-Experience
|
|
568
|
|
|
565
|
|
|
140
|
|
|
|
3,389
|
|
|
2,589
|
|
|
(4,425
|
)
|
Reclassification from defined contribution scheme to defined benefit scheme
|
|
(2,996
|
)
|
|
—
|
|
|
—
|
|
Exchange rate movement
|
|
—
|
|
|
—
|
|
|
—
|
|
Movement in the year
|
|
402
|
|
|
2,697
|
|
|
(4,196
|
)
|
The key assumptions used for the German scheme were:
|
2017
|
2016
|
||||
Rate of increase in final pensionable salary
|
|
2.00
|
%
|
|
2.60
|
%
|
Rate of increase in pension payments
|
|
2.00
|
%
|
|
2.00
|
%
|
Discount rate
|
|
1.95
|
%
|
|
1.70
|
%
|
Inflation
|
|
2.00
|
%
|
|
2.00
|
%
|
The net present value of the defined benefit obligations of the German scheme is sensitive to both the actuarial assumptions used and to market conditions. If the discount rate assumption was 0.5% lower, the obligation would be expected to increase by $4.5m as at April 30, 2017 (2016: $4.8m) and if it was 0.5% higher, they would be expected to decrease by $3.9m (2016: $4.1m). If the inflation assumption was 0.25% lower, the obligations would be expected to decrease by $1.2m as at April 30, 2017 (2016: $1.3m) and if it was 0.25% higher, they would be expected to increase by $1.3m (2016: $1.4m).
The mortality assumptions for the German scheme are set based on actuarial advice in accordance with published statistics and experience in the territory, specifically German pension table ‘Richttafeln 2005 G by Prof. Dr. Klaus Heubeck.
These assumptions translate into an average life expectancy in years for a pensioner retiring at age 65:
|
2017
|
2016
|
||||
Retiring at age 65 at the end of the reporting year:
|
|
|
|
|
|
|
Male
|
|
19
|
|
|
19
|
|
Female
|
|
23
|
|
|
23
|
|
Retiring 15 years after the end of the reporting year:
|
|
|
|
|
|
|
Male
|
|
19
|
|
|
19
|
|
Female
|
|
24
|
|
|
24
|
|
The net present value of the defined benefit obligations of the German Schemes are sensitive to the life expectancy assumption. If there was an increase of one year to this assumption the obligation would be expected to increase by $1.1m (2.9%) as at April 30, 2017 (2016: $1.1m, 2.9%).
The net liability included in the consolidated statement of financial position arising from obligations in respect of defined benefit schemes is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Present value of funded obligations
|
|
36,480
|
|
|
37,524
|
|
Fair value of plan assets
|
|
(5,707
|
)
|
|
(5,855
|
)
|
|
|
30,773
|
|
|
31,669
|
|
F-49
The retirement benefit obligation has moved as follows:
|
2017
|
2016
|
||||||||||||||||
|
Defined
benefit obligations |
Scheme
assets |
Retirement
benefit obligations |
Defined
benefit obligations |
Scheme
assets |
Retirement
benefit obligations |
||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
At May 1,
|
|
37,524
|
|
|
(5,855
|
)
|
|
31,669
|
|
|
38,224
|
|
|
(5,482
|
)
|
|
32,742
|
|
Current service cost
|
|
625
|
|
|
—
|
|
|
625
|
|
|
760
|
|
|
—
|
|
|
760
|
|
Benefits paid
|
|
(197
|
)
|
|
87
|
|
|
(110
|
)
|
|
(100
|
)
|
|
84
|
|
|
(16
|
)
|
Contributions by plan participants
|
|
—
|
|
|
(114
|
)
|
|
(114
|
)
|
|
—
|
|
|
(126
|
)
|
|
(126
|
)
|
Interest cost/(income) (note 6)
|
|
660
|
|
|
(95
|
)
|
|
565
|
|
|
546
|
|
|
(79
|
)
|
|
467
|
|
Included within other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remeasurements - actuarial losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-Demographic
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
-Financial
|
|
(2,821
|
)
|
|
—
|
|
|
(2,821
|
)
|
|
(2,024
|
)
|
|
—
|
|
|
(2,024
|
)
|
-Experience
|
|
(568
|
)
|
|
—
|
|
|
(568
|
)
|
|
(565
|
)
|
|
—
|
|
|
(565
|
)
|
-Actuarial return on assets excluding amounts included in interest income
|
|
—
|
|
|
(9
|
)
|
|
(9
|
)
|
|
—
|
|
|
(108
|
)
|
|
(108
|
)
|
Reclassification from defined contribution scheme to defined benefit scheme
|
|
2,996
|
|
|
—
|
|
|
2,996
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(393
|
)
|
|
(9
|
)
|
|
(402
|
)
|
|
(2,589
|
)
|
|
(108
|
)
|
|
(2,697
|
)
|
Foreign currency exchange changes
|
|
(1,739
|
)
|
|
279
|
|
|
(1,460
|
)
|
|
683
|
|
|
(144
|
)
|
|
539
|
|
At April 30,
|
|
36,480
|
|
|
(5,707
|
)
|
|
30,773
|
|
|
37,524
|
|
|
(5,855
|
)
|
|
31,669
|
|
None of the plan assets are represented by financial instruments of the Group. None of the plan assets are occupied or used by the Group. The plan assets comprise of re-insurance with guaranteed interest rates. The majority of the plan assets have guaranteed interest rates of 4.0%, with the remaining at 3.25% or 2.75%.
Through its defined benefit schemes the Group is exposed to a number of risks, the most significant of which are detailed below:
• | Changes in bond yields – A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the pledged and unpledged re-insurance holdings. |
• | Inflation – Some of the Group pension obligations are linked to inflation, and higher inflation will lead to higher liabilities. There is a cap on the level of inflationary increase on one of the plans which protects the plan against extreme inflation. The majority of the plan assets are either unaffected by or loosely correlated with inflation, meaning an increase in inflation will also increase the deficit. |
• | Life expectancy – The majority of the plan obligations are to provide benefits for the life of the member, so increases in life expectancy will result in an increase in the plan liabilities. |
• | In the case of the defined benefit plans, the Company ensures that the investment positions are managed within an asset liability matching (ALM) that has been developed by the Company to achieve long term investments that are in line with the obligations under the pension schemes. In addition to the plan assets outlined above, the Company had re-insurance assets valued at $22.1m as at April 30, 2017 (2016: $22.3m). These assets are designated to fund the pension obligation and do not qualify as plan assets as they have not been pledged to the plan and are subject to the creditors of the Company. Within this framework the Company’s objective is to match assets to the pension obligations by investing in re-insurances that match the benefit payments as they fall due and in the appropriate currency. |
F-50
Sensitivities
The table below provides information on the sensitivity of the defined benefit obligation to changes to the most significant actuarial assumptions. The table shows the impact of changes to each assumption in isolation, although, in practice, changes to assumptions may occur at the same time and can either offset or compound the overall impact on the defined benefit obligation.
These sensitivities have been calculated using the same methodology as used for the main calculations. The weighted average duration of the defined benefit obligation is 25 years.
|
Change in
assumption |
Change in
defined benefit obligation |
||||
Discount rate for scheme liabilities
|
|
0.50
|
%
|
|
(10.6
|
%)
|
Price inflation
|
|
0.25
|
%
|
|
3.60
|
%
|
Salary growth rate
|
|
0.50
|
%
|
|
1.40
|
%
|
An increase of one year in the assumed life expectancy for both males and females would increase the defined benefit obligation by 2.9% as at April 30, 2017 (2016: 2.9%). The methods and types of assumptions used in preparing the sensitivity analysis did not change compared to previous years.
27. Other non-current liabilities
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Accruals
|
|
4,191
|
|
|
3,671
|
|
Other non-current liabilities relate mostly to deferred rent accruals and employee taxes on share-based payments.
28. Financial instruments
The table below sets out the values of financial assets and liabilities.
|
2017
|
2016
|
||||||||||||||||
|
Financial
|
Non-
financial |
Total
|
Financial
|
Non-
financial |
Total
|
||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
Financial assets– loans and receivables
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents (note 19)
|
|
150,983
|
|
|
—
|
|
|
150,983
|
|
|
667,178
|
|
|
—
|
|
|
667,178
|
|
Trade and other receivables (note 18)
|
|
263,626
|
|
|
25,883
|
|
|
289,509
|
|
|
244,273
|
|
|
23,913
|
|
|
268,186
|
|
At April 30,
|
|
414,609
|
|
|
25,883
|
|
|
440,492
|
|
|
911,451
|
|
|
23,913
|
|
|
935,364
|
|
|
2017
|
2016
|
||||||||||||||||
|
Financial
|
Non-
financial |
Total
|
Non-
financial |
Financial
|
Total
|
||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
Financial liabilities– financial liabilities at amortized cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (note 21)
|
|
1,511,400
|
|
|
—
|
|
|
1,511,400
|
|
|
1,499,500
|
|
|
—
|
|
|
1,499,500
|
|
Provisions (note 25)
|
|
11,837
|
|
|
100
|
|
|
11,937
|
|
|
13,120
|
|
|
1,234
|
|
|
14,354
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings (note 21)
|
|
83,788
|
|
|
—
|
|
|
83,788
|
|
|
287,750
|
|
|
—
|
|
|
287,750
|
|
Trade and other payables (note 20)
|
|
16,891
|
|
|
153,151
|
|
|
170,042
|
|
|
20,793
|
|
|
167,297
|
|
|
188,090
|
|
Provisions (note 25)
|
|
4,406
|
|
|
15,736
|
|
|
20,142
|
|
|
5,056
|
|
|
5,489
|
|
|
10,545
|
|
At April 30,
|
|
1,628,322
|
|
|
168,987
|
|
|
1,797,309
|
|
|
1,826,219
|
|
|
174,020
|
|
|
2,000,239
|
|
F-51
Credit risk
The carrying amount of financial assets represents the maximum credit exposure. The maximum exposure to credit risk as at April 30, 2017 and 2016 was:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Trade receivables (note 18)
|
|
263,626
|
|
|
244,273
|
|
Cash and cash equivalents (note 19)
|
|
150,983
|
|
|
667,178
|
|
Total
|
|
414,609
|
|
|
911,451
|
|
Market risk
The Groups treasury function aims to reduce exposures to interest rate, foreign exchange and other financial risks, to ensure liquidity is available as and when required, and to invest cash assets safely and profitably. The Group does not typically engage in speculative trading in financial instruments. The treasury functions policies and procedures are reviewed and monitored by the audit committee and are subject to internal audit review.
Foreign exchange risk
The Groups currency exposures comprise those that give rise to net currency gains and losses to be recognized in the consolidated statement of comprehensive income as well as gains and losses on consolidation which go to reserves. Such exposures reflect the monetary assets and liabilities of the Group that are not denominated in the operating or functional currency of the operating unit involved and the Groups investment in net assets in currencies other than US$. Note 5 shows the impact on the consolidated statement of comprehensive income of foreign exchange gain for the year ended April 30, 2017 (2016: gain).
Sensitivity analysis
The Groups principal exposures in relation to market risks are the changes in the exchange rates between the US dollar and the Euro, British Pound and Japanese Yen as well as changes in US LIBOR interest rates. The table below illustrates the sensitivities of the Groups results to changes in these key variables as at the consolidated statement of financial position date. The analysis covers only financial assets and liabilities held at the consolidated statement of financial position date.
|
2017
|
2016
|
2015
|
|||||||||||||||
|
Consolidated
statement of comprehensive income |
Equity
|
Consolidated
statement of comprehensive income |
Equity
|
Consolidated
statement of comprehensive income |
Equity
|
||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||
Euro / USD exchange rate +5%
|
|
457
|
|
|
1,205
|
|
|
2,449
|
|
|
1,639
|
|
|
1,295
|
|
|
162
|
|
GBP / USD exchange rate +5%
|
|
530
|
|
|
1,747
|
|
|
1,340
|
|
|
1,227
|
|
|
1,658
|
|
|
977
|
|
YEN / USD exchange rate 5%
|
|
161
|
|
|
1,424
|
|
|
161
|
|
|
818
|
|
|
306
|
|
|
617
|
|
US LIBOR +1%
|
|
(15,952
|
)
|
|
—
|
|
|
(17,873
|
)
|
|
—
|
|
|
(17,000
|
)
|
|
—
|
|
Capital risk management
The Groups objective when managing its capital structures is to minimize the cost of capital while maintaining adequate capital to protect against volatility in earnings and net asset values. The strategy is designed to maximize shareholder return over the long-term. The relative proportion of debt to equity will be adjusted over the medium-term depending on the cost of debt compared to equity and the level of uncertainty facing the industry and the Group.
The only financial covenant attaching to these new facilities relates to the Revolving Facility, which is subject to an aggregate net leverage covenant only in circumstances where more than 35% of the Revolving Facility is outstanding at a fiscal quarter end. The facility was less than 35% drawn at April 30, 2017 and therefore no covenant test is applicable.
F-52
The capital structure of the Group at the consolidated statement of financial position date is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Bank and other borrowings (note 21)
|
|
1,561,536
|
|
|
1,745,209
|
|
Less cash and cash equivalents (note 19)
|
|
(150,983
|
)
|
|
(667,178
|
)
|
Total net debt
|
|
1,410,553
|
|
|
1,078,031
|
|
Total equity
|
|
1,613,490
|
|
|
1,593,728
|
|
Debt/equity%
|
|
87.42
|
%
|
|
67.64
|
%
|
The cash and cash equivalents as at April 30, 2016 included amounts held which were paid on acquisition of Serena on May 2, 2016.
29. Deferred tax
The analysis of deferred tax assets and deferred tax liabilities is as follows:
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Deferred tax assets:
|
|
|
|
|
|
|
-Deferred tax asset to be recovered after more than 12 months
|
|
144,063
|
|
|
123,876
|
|
-Deferred tax asset to be recovered within 12 months
|
|
64,190
|
|
|
74,881
|
|
|
|
208,253
|
|
|
198,757
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
-Deferred tax liability to be settled after more than 12 months
|
|
(273,151
|
)
|
|
(212,067
|
)
|
-Deferred tax liability to be settled within 12 months
|
|
(53,580
|
)
|
|
(51,971
|
)
|
|
|
(326,731
|
)
|
|
(264,038
|
)
|
Deferred tax liability
|
|
(118,478
|
)
|
|
(65,281
|
)
|
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Net deferred tax liability
|
|
|
|
|
|
|
At May 1,
|
|
(65,281
|
)
|
|
(54,706
|
)
|
Credited/(debited) to consolidated statement of comprehensive income
|
|
26,871
|
|
|
(12,885
|
)
|
Credited directly to equity
|
|
22,996
|
|
|
8,490
|
|
Debited to other comprehensive income
|
|
(325
|
)
|
|
(1,745
|
)
|
Acquisition of subsidiary (note 39)
|
|
(97,615
|
)
|
|
(966
|
)
|
Hindsight adjustments (note 39)
|
|
—
|
|
|
(4,255
|
)
|
Foreign exchange adjustment
|
|
(6,415
|
)
|
|
—
|
|
Effect of change in tax rates– charged to consolidated statement of comprehensive income
|
|
1,291
|
|
|
786
|
|
At April 30,
|
|
(118,478
|
)
|
|
(65,281
|
)
|
F-53
|
Tax losses
|
Share
based payments |
Deferred
revenue |
Tax credits
|
Intangible
fixed assets |
Other
temporary differences |
Total
|
||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||
Deferred tax assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
96,860
|
|
|
11,859
|
|
|
69,133
|
|
|
28,873
|
|
|
6,451
|
|
|
36,710
|
|
|
249,886
|
|
Hindsight adjustments (note 39)
|
|
(6,617
|
)
|
|
—
|
|
|
—
|
|
|
5,595
|
|
|
—
|
|
|
62
|
|
|
(960
|
)
|
(Charged)/credited to consolidated statement of comprehensive income
|
|
(39,294
|
)
|
|
2,746
|
|
|
(31,171
|
)
|
|
19,192
|
|
|
45
|
|
|
(8,104
|
)
|
|
(56,586
|
)
|
Credited directly to equity
|
|
—
|
|
|
8,490
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,490
|
|
Debited to other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,745
|
)
|
|
(1,745
|
)
|
Effect of change in tax rates– credited to consolidated statement of comprehensive income
|
|
—
|
|
|
(328
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(328
|
)
|
At April 30, 2016
|
|
50,949
|
|
|
22,767
|
|
|
37,962
|
|
|
53,660
|
|
|
6,496
|
|
|
26,923
|
|
|
198,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
50,949
|
|
|
22,767
|
|
|
37,962
|
|
|
53,660
|
|
|
6,496
|
|
|
26,923
|
|
|
198,757
|
|
Acquisition of subsidiaries (note 39)
|
|
10,619
|
|
|
—
|
|
|
2,471
|
|
|
152
|
|
|
—
|
|
|
2,105
|
|
|
15,347
|
|
(Charged)/credited to consolidated statement of comprehensive income
|
|
(4,894
|
)
|
|
4,405
|
|
|
4,057
|
|
|
(20,024
|
)
|
|
(609
|
)
|
|
(4,964
|
)
|
|
(22,029
|
)
|
Credited directly to equity
|
|
—
|
|
|
22,996
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22,996
|
|
Debited to other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(325
|
)
|
|
(325
|
)
|
Foreign exchange adjustment
|
|
—
|
|
|
(6,415
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,415
|
)
|
Effect of change in tax rates– credited to consolidated statement of comprehensive income
|
|
—
|
|
|
(78
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(78
|
)
|
At April 30, 2017
|
|
56,674
|
|
|
43,675
|
|
|
44,490
|
|
|
33,788
|
|
|
5,887
|
|
|
23,739
|
|
|
208,253
|
|
A deferred tax credit to equity of $23.0m (2016: $8.5m) arises during the year in relation to share based payments. The increase in this credit as compared to the prior year is due to the significant increase in the companys share price during the year ended April 30, 2017.
The deferred tax asset relating to other temporary differences of $23.7m as at April 30, 2017 (2016: $26.9m) includes temporary differences arising on fixed assets, short-term timing differences and the defined benefit pension scheme.
F-54
Deferred tax assets are recognized for tax loss carry-forwards to the extent that the realization of the related tax benefit through the utilization of future taxable profits is probable. The Group did not recognize deferred tax assets in relation to the following gross temporary differences, the expiration of which is determined by the tax law of each jurisdiction:
|
Expiration:
|
|||||||||||||||||||||||
|
2018
|
2019
|
2020
|
2021
|
2022
|
Thereafter
|
No
expiry |
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
At April 30, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of temporary difference:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
1,107
|
|
|
635
|
|
|
972
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
19,773
|
|
|
22,487
|
|
Credits
|
|
2,131
|
|
|
2,147
|
|
|
1,909
|
|
|
2,138
|
|
|
1,334
|
|
|
5,583
|
|
|
8,338
|
|
|
23,580
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,859
|
|
|
23,859
|
|
Total
|
|
3,238
|
|
|
2,782
|
|
|
2,881
|
|
|
2,138
|
|
|
1,334
|
|
|
5,583
|
|
|
51,970
|
|
|
69,926
|
|
|
Expiration:
|
|||||||||||||||||||||||
|
2017
|
2018
|
2019
|
2020
|
2021
|
Thereafter
|
No
expiry |
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
At April 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Type of temporary difference:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses
|
|
1,536
|
|
|
191
|
|
|
9,646
|
|
|
157
|
|
|
—
|
|
|
6,415
|
|
|
22,830
|
|
|
40,775
|
|
Credits
|
|
2,131
|
|
|
2,147
|
|
|
1,909
|
|
|
2,138
|
|
|
1,334
|
|
|
5,070
|
|
|
5,576
|
|
|
20,305
|
|
Other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23,859
|
|
|
23,859
|
|
Total
|
|
3,667
|
|
|
2,338
|
|
|
11,555
|
|
|
2,295
|
|
|
1,334
|
|
|
11,485
|
|
|
52,265
|
|
|
84,939
|
|
|
Intangible fixed
assets |
Other temporary
differences |
Total
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
|
At May 1, 2015
|
|
(296,677
|
)
|
|
(7,915
|
)
|
|
(304,592
|
)
|
Hindsight adjustments (note 39)
|
|
(3,295
|
)
|
|
—
|
|
|
(3,295
|
)
|
Acquisition of subsidiary (note 39)
|
|
(966
|
)
|
|
—
|
|
|
(966
|
)
|
Charged/(credited) to consolidated statement of comprehensive income
|
|
44,666
|
|
|
(965
|
)
|
|
43,701
|
|
Effect of change in tax rates– charged to consolidated statement of comprehensive income
|
|
1,114
|
|
|
—
|
|
|
1,114
|
|
At April 30, 2016
|
|
(255,158
|
)
|
|
(8,880
|
)
|
|
(264,038
|
)
|
|
|
|
|
|
|
|
|
|
|
At May 1, 2016
|
|
(255,158
|
)
|
|
(8,880
|
)
|
|
(264,038
|
)
|
Acquisition of subsidiary (note 39)
|
|
(110,334
|
)
|
|
(2,628
|
)
|
|
(112,962
|
)
|
Charged/(credited) to consolidated statement of comprehensive income
|
|
52,438
|
|
|
(3,538
|
)
|
|
48,900
|
|
Effect of change in tax rates– charged to consolidated statement of comprehensive income
|
|
1,369
|
|
|
—
|
|
|
1,369
|
|
At April 30, 2017
|
|
(311,685
|
)
|
|
(15,046
|
)
|
|
(326,731
|
)
|
No deferred tax liability was recognized in respect of unremitted earnings of overseas subsidiaries as the Group is in a position to control the timing of the reversal of the temporary differences and it is probable that such differences will not reverse in the foreseeable future. The deferred tax liability relating to other temporary differences of $15.1m as at April 30, 2017 (2016: $8.9m) includes temporary differences on capitalized research and development expenditure of $14.9m as at April 30, 2016 (2016: $11.1m).
F-55
30. Share capital
Ordinary shares at 10 pence each as at April 30, 2017 (2016: 10 pence each)
|
2017
|
2016
|
||||||||||
|
Shares
|
$’000
|
Shares
|
$’000
|
||||||||
Issued and fully paid
|
|
|
|
|
|
|
|
|
|
|
|
|
At May 1,
|
|
228,706,210
|
|
|
39,573
|
|
|
228,587,397
|
|
|
39,555
|
|
Shares issued to satisfy option awards
|
|
968,269
|
|
|
127
|
|
|
118,313
|
|
|
18
|
|
Share placement issues
|
|
—
|
|
|
—
|
|
|
500
|
|
|
—
|
|
At April 30,
|
|
229,674,479
|
|
|
39,700
|
|
|
228,706,210
|
|
|
39,573
|
|
Share issued during the year
During the year ended April 30, 2017, 968,269 ordinary shares of 10 pence each (2016: 118,313) were issued by the Company to settle exercised share options. The gross consideration received was $2.0m (2016: $1.0m). Shares issued to satisfy option awards options related to exercises of the Incentive Plan 2005 and Sharesave and Employee Stock Purchase Plan 2006. Of these exercises in the year ended April 30, 2017 the majority were settled by new share issues and some were settled by utilizing the remaining treasury shares and shares from an employee benefit trust.
On the March 22, 2016, the Group announced its intention to conduct a placing with institutional investors to raise approximately £150m in order to partially fund the acquisition of Serena Software Inc. which was completed on May 2, 2016 (note 39). 500 new ordinary 10 pence shares and 10,872,680 treasury shares were issued at a price of £14.55 resulting in gross proceeds of £158.2m ($225.7m) and incurring costs of $3.0m. A $49.5m retained reserves movement relating to the issue of treasury shares reflecting their original issue costs, $176.2m of share premium and transaction costs of $3.0m were recorded.
At April 30, 2017 no treasury shares were held (2016: 29,924). The voting rights and number of listed shares as at April 30, 2017 were 229,674,479 (2016: 228,676,286 ). Treasury shares were fully utilized during the year to satisfy share option exercises.
Potential issues of shares
Certain employees hold options to subscribe for shares in the Company at prices ranging from nil pence to 1,875.58 pence under the following share option schemes approved by shareholders in 2005 and 2006: the Long-Term Incentive Plan 2005, the Additional Share Grants, the Sharesave Plan 2006 and the Employee Stock Purchase Plan 2006.
The number of shares subject to options as at April 30, 2017 was 8,607,889 (2016: 9,264,743). Further information on these options is disclosed in note 35.
During the year ended April 30, 2015, the Group restructured its share capital by offering pro rata to each shareholder the ability to receive either B, or C shares which were then repurchased by the Group with the resulting effect of cash paid by the Group being the equivalent of a share buy-back when combined with the reverse stock split of the common shares. Each shareholder received the same amount of cash for B or C shares. The issuance and repurchase of B or C shares combined with the reverse share split of common shares resulted in the economic equivalent of the purchase of shares from shareholders, which was accounted for prospectively for purposes of shares outstanding and in the determination of earnings per share.
‘B shares at 60 pence each
|
2015
|
|||||
|
Shares
|
$’000
|
||||
Issued and fully paid
|
|
|
|
|
|
|
At May 1,
|
|
—
|
|
|
—
|
|
Issue of ‘B’ shares
|
|
50,568,360
|
|
|
47,477
|
|
Redemption of ‘B’ shares
|
|
(50,568,360
|
)
|
|
(47,477
|
)
|
At April 30,
|
|
—
|
|
|
—
|
|
F-56
On November 20, 2014, 50,568,360 ‘B shares were issued at 60 pence each, resulting in a total of $47.5m being credited to the ‘B share capital account. On November 20, 2014, 50,568,360 ‘B shares were redeemed at 60p each and an amount of $47.5m was deducted from the ‘B share capital account. The ‘B shares were issued to each shareholder with the resultant economic impact that is equivalent to the buyback of shares. As a result, EPS was not retrospectively adjusted for this change.
‘C shares at 0.0000001 pence each
|
2015
|
|||||
|
Shares
|
$’000
|
||||
Issued and fully paid
|
|
|
|
|
|
|
At May 1,
|
|
—
|
|
|
—
|
|
Issue of ‘C’ shares
|
|
89,328,151
|
|
|
—
|
|
Cancellation of ‘C’ shares
|
|
(89,328,151
|
)
|
|
—
|
|
At April 30,
|
|
—
|
|
|
—
|
|
On November 20, 2014, 89,328,151 ‘C shares were issued at 0.0000001 pence each, resulting in a total of 14 cents being credited to the ‘C share capital account. On November 20, 2014 a dividend of 60 pence per C share was declared and was payable on November 20, 2014. The ‘C shares were subsequently reclassified as Deferred Shares and repurchased by the Company for an aggregate consideration of 1 pence and then subsequently cancelled and an amount of 14 cents was deducted from the ‘C share capital account. The ‘C shares were issued to each shareholder with the resultant economic impact that is equivalent to the buyback of shares. As a result, EPS was not retrospectively adjusted for this change.
Deferred D Shares at 0.041667 pence each
|
2015
|
|||||
|
Shares
|
$’000
|
||||
Issued and fully paid
|
|
|
|
|
|
|
At May 1,
|
|
—
|
|
|
—
|
|
Issue of ‘Deferred’ shares
|
|
15,606,772,650
|
|
|
11,903
|
|
Cancellation of ‘Deferred’ shares
|
|
(15,606,772,650
|
)
|
|
(11,903
|
)
|
At April 30,
|
|
—
|
|
|
—
|
|
On November 20, 2014, as a consequence of the share consolidation, 15,606,772,650 deferred D shares were issued at 0.041667 pence each, resulting in a total of $11.9m being credited to the ‘Deferred D share capital account. The deferred D shares were repurchased by the Company for an aggregate consideration of 1 pence and cancelled. An amount of $11.9m was deducted from the ‘Deferred D share capital account. The ‘D shares were issued to each shareholder with the resultant economic impact that is equivalent to the buyback of shares. As a result, EPS was not retrospectively adjusted for this change.
31. Return of Value to shareholders
There has not been a Return of Value to shareholders in the year ended April 30, 2017 or 2016.
In December 2014 the Company completed a Return of Value to shareholders amounting to £83.9m ($131.6m) in cash (60 pence per share, equivalent to 94.02 cents per share), by way of a B and C share scheme, which gave shareholders (other than certain overseas shareholders) a choice between receiving the cash in the form of income or capital. The Return of Value was accompanied by a 0.9285 share consolidation to maintain broad comparability of the share price and return per share of the ordinary shares before and after the creation of the B and C shares.
This was the Groups 4th Return of Value to shareholders. Since March 25, 2011 the Company has returned a total of £625.1m to shareholders through share buy-backs, Returns of Value and ordinary dividends which represented 98.4% of the Market Capitalization at that time.
As part of the corporate entity restructuring resulting from the acquisition a merger reserve was created of approximately $1.4bn, which is expected to become a distributable reserve in future periods.
F-57
32. Share premium account
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
At May 1,
|
|
190,293
|
|
|
16,087
|
|
Share placement issues
|
|
—
|
|
|
176,235
|
|
Share placement costs
|
|
—
|
|
|
(2,979
|
)
|
Movement in relation to share options exercised (note 35)
|
|
1,852
|
|
|
950
|
|
At April 30,
|
|
192,145
|
|
|
190,293
|
|
On March 22, 2016, the Group announced its intention to conduct a placing with institutional investors to raise approximately £150m in order to partially fund the acquisition of Serena Software Inc. which was completed on May 2, 2016 (note 39). 500 new ordinary 10 pence shares and 10,872,680 treasury shares were issued at a price of £14.55. $176.2m of share premium was recorded from this transaction and the costs of $3.0m were deducted from this.
33. Other reserves
|
Note
|
Capital
redemption reserve 2,5 |
Merger reserve 1,3,4,5
|
Total
|
||||||||
|
|
$’000
|
$’000
|
$’000
|
||||||||
As at May 1, 2015
|
|
|
|
|
163,363
|
|
|
1,168,104
|
|
|
1,331,467
|
|
Reallocation of merger reserve
|
|
|
|
|
—
|
|
|
(180,000
|
)
|
|
(180,000
|
)
|
As at April 30, 2016
|
|
|
|
|
163,363
|
|
|
988,104
|
|
|
1,151,467
|
|
Reallocation of merger reserve
|
|
|
|
|
—
|
|
|
(650,000
|
)
|
|
(650,000
|
)
|
As at April 30, 2017
|
|
|
|
|
163,363
|
|
|
338,104
|
|
|
501,467
|
|
1. | On May 17, 2005, the Company acquired the entire issued share capital of Micro Focus International Limited by way of a share for share exchange, pursuant to which the previous shareholders of Micro Focus International Limited were issued and allotted three ordinary shares in the capital of the Company for every one ordinary share they previously held in Micro Focus International Limited. This increase in share capital created a merger reserve deficit of $27.1 million. |
2. | In January 2012, a Return of Value was made to all shareholders amounting to $129.0 million in cash after including a foreign exchange contract gain of $0.6 million. As a result of this a capital redemption reserve was created following the redemption of the B shares. In November 2012 a further Return of Value was made to all shareholders amounting to $128.2 million in cash after including a foreign exchange contract gain of $2.4 million. In the year ended April 30, 2014 a further $47.1 million was added to the capital redemption reserve following the redemption of the B shares. |
3. | On November 20, 2014, the TAG acquisition was completed (note 39). As a result of this a merger reserve was created of $1.372.7 million. The acquisition of TAG was structured by way of a share for share exchange; this transaction fell within the provisions of section 612 of the Companies Act 2006 (merger relief) such that no share premium was recorded in respect of the shares issued. The Company chose to record its investment in TAG at fair value and therefore recorded a merger reserve equal to the value of the share premium which would have been recorded had section 612 of the Companies Act 2006 not been applicable (i.e. equal to the difference between the fair value of TAG and the aggregate nominal value of the shares issued). This merger reserve was initially considered unrealized on the basis it was represented by the investment in TAG, which is not considered to represent qualifying consideration (in accordance with Tech 02/10 (Guidance on the determination of realized profits and losses in the context of distributions under the Companies Act 2006)). Immediately following the acquisition of TAG, the Company’s investment in TAG was transferred to another Group company in exchange for an intercompany loan. To the extent this loan is settled in qualifying consideration, the related proportion of the merger reserve is considered realized. |
4. | The Company has transferred an amount from the merger reserve to retained earnings pursuant to the UK company law. The parent company transferred the investment in TAG to a wholly owned sub for an intercompany receivable in the amount of $1,373 million. To the extent the loan is settled in qualifying consideration, an amount of $650.0 million from the merger reserve is transferred to retained earnings (2016: $180.0 million, 2015: $130.0 million) that is available for dividend distribution to the parent company shareholders. |
5. | In December 2014, a Return of Value was made to all shareholders amounting to $131.6 million in cash (note 31). The Return of Value was accompanied by a 0.9285 share consolidation and resulted in a net $11.9 million reduction in share capital and an $11.9 million increase in the capital redemption reserve. In addition $47.5 million was transferred from the merger reserve to the capital redemption reserve. |
The Company has transferred an amount from the merger reserve to retained earnings pursuant to the UK company law. The parent company transferred the investment in TAG to a wholly owned sub for an
F-58
intercompany receivable in the amount of $1,373m. To the extent the loan is settled in qualifying consideration, an amount of $650.0m from the merger reserve is transferred to retained earnings (2016: $180.0m) that is available for dividend distribution to the parent company shareholders.
34. Non-controlling interests
On December 22, 2016 a payment of 170,350 JPY ($1,533) was made to a minority shareholder of Novell Japan Ltd to acquire 170,350 ordinary 1 JYP shares held. As a result of this the Groups shareholding increased from 71.5% to 74.7%.
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
At May 1,
|
|
1,057
|
|
|
979
|
|
Share of (loss)/profit after tax
|
|
(103
|
)
|
|
78
|
|
At April 30,
|
|
954
|
|
|
1,057
|
|
Non-controlling interests relate to the companies detailed below:
Company name
|
Country of
incorporation and principal place of business |
2017
Proportion held |
2016
Proportion held |
2015
Proportion Held |
||||||||
Novell Japan Ltd
|
|
Japan
|
|
|
74.7
|
%
|
|
71.5
|
%
|
|
68.3
|
%
|
35. Employees and directors
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Staff costs
|
|
|
|
|
|
|
|
|
|
Wages and salaries
|
|
474,343
|
|
|
433,198
|
|
|
300,516
|
|
Redundancy and termination costs (non-exceptional)
|
|
2,235
|
|
|
3,722
|
|
|
—
|
|
Social security costs
|
|
63,349
|
|
|
59,205
|
|
|
37,544
|
|
Other pension costs
|
|
14,108
|
|
|
13,608
|
|
|
10,145
|
|
Cost of employee share schemes
|
|
34,506
|
|
|
28,793
|
|
|
15,561
|
|
Total
|
|
588,541
|
|
|
538,526
|
|
|
363,766
|
|
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Pension costs comprise:
|
|
|
|
|
|
|
|
|
|
Defined benefit schemes (note 26)
|
|
625
|
|
|
760
|
|
|
330
|
|
Defined contribution schemes (note 26)
|
|
13,483
|
|
|
12,848
|
|
|
9,815
|
|
Total
|
|
14,108
|
|
|
13,608
|
|
|
10,145
|
|
|
2017
|
2016
|
2015
|
||||||
|
Number
|
Number
|
Number
|
||||||
Average monthly number of people (including executive directors) employed by the Group:
|
|
|
|
|
|
|
|
|
|
Sales and distribution
|
|
2,141
|
|
|
1,958
|
|
|
1,319
|
|
Research and development
|
|
1,876
|
|
|
1,676
|
|
|
897
|
|
General and administration
|
|
646
|
|
|
584
|
|
|
299
|
|
Total
|
|
4,663
|
|
|
4,218
|
|
|
2,515
|
|
F-59
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Key management compensation
|
|
|
|
|
|
|
|
|
|
Short-term employee benefits
|
|
8,051
|
|
|
9,297
|
|
|
9,512
|
|
Share based payments
|
|
9,391
|
|
|
10,146
|
|
|
6,421
|
|
Total
|
|
17,442
|
|
|
19,443
|
|
|
15,933
|
|
The key management figures above include the executive management team and directors. There are no post-employment benefits. Directors remuneration is shown below.
This is the share based payment charge arising under IFRS 2 ‘Share based Payment.
|
2017
|
2016
|
2015
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Directors
|
|
|
|
|
|
|
|
|
|
Aggregate emoluments
|
|
4,052
|
|
|
3,612
|
|
|
4,814
|
|
Aggregate gains made on the exercise of share options
|
|
6,265
|
|
|
3,764
|
|
|
6,139
|
|
Company contributions to money purchase pension scheme
|
|
359
|
|
|
228
|
|
|
285
|
|
Total
|
|
10,676
|
|
|
7,604
|
|
|
11,238
|
|
F-60
Share based payments
The Group has various equity-settled share based compensation plans details of which are provided below.
a) Incentive Plan 2005
On April 27, 2005 the remuneration committee approved the rules of the Incentive Plan 2005 (LTIP) which permits the granting of share options to executive directors and senior management. The total number of options they receive is determined by the performance criteria set by the remuneration committee over a three year performance period. Prior to April 18, 2011 performance conditions required that cumulative EPS growth over a three year vesting period is at least equal to the Retail Prices Index (RPI) plus 11% (at which point 25% of awards will vest), 60% of shares will vest for cumulative EPS growth of RPI plus 13% and for full vesting the cumulative EPS growth will be required to be RPI plus 15% per annum. RPI is the general index of the UK retail prices (for all items) published by the Office for National Statistics or any similar index replacing it. Straight-line vesting will apply between these points.
Awards granted on or after April 18, 2011 are subject to either Absolute Shareholder Returns (ASR) over a three year period, cumulative EPS growth or a combination of both. ASR is defined as the average closing share price over the period of 5 days ending on the day prior to the vesting date less the reference price plus the total of all dividends and cash distributions and any other measures as determined by the Remuneration Committee between the award date and vesting date. Where the cumulative EPS growth over a three year period is at least equal to RPI plus 3% per annum 25% of awards will vest, with full vesting is achieved when the cumulative EPS growth is RPI plus 9% per annum. Straight line vesting will apply between these points. Where the award is subject to ASR, the resulting level of vesting will be reduced by 25% if the ASR is below 150 pence or increased by 50% if ASR is 300 pence or more.
|
2017
|
2016
|
2015
|
|||||||||||||||
|
|
Weighted
average exercise price |
|
Weighted
average exercise price |
|
Weighted
average exercise price |
||||||||||||
|
Options
|
pence
|
Options
|
pence
|
Options
|
pence
|
||||||||||||
Outstanding at May 1,
|
|
5,186,360
|
|
|
41
|
|
|
4,927,511
|
|
|
45
|
|
|
3,938,339
|
|
|
63
|
|
Exercised
|
|
(1,008,721
|
)
|
|
85
|
|
|
(506,225
|
)
|
|
20
|
|
|
(765,618
|
)
|
|
29
|
|
Forfeited
|
|
(120,272
|
)
|
|
14
|
|
|
(76,469
|
)
|
|
7
|
|
|
(259,373
|
)
|
|
10
|
|
Granted
|
|
604,285
|
|
|
6
|
|
|
841,543
|
|
|
—
|
|
|
2,014,163
|
|
|
2
|
|
Outstanding at April 30,
|
|
4,661,652
|
|
|
29
|
|
|
5,186,360
|
|
|
41
|
|
|
4,927,511
|
|
|
45
|
|
Exercisable at April 30,
|
|
1,261,194
|
|
|
92
|
|
|
1,581,754
|
|
|
127
|
|
|
890,844
|
|
|
231
|
|
The weighted average share price for the year ended April 30, 2017 for options on the date of exercise was 2,027 pence (2016: 1,406 pence, 2015: 991 pence).
The amount charged to the consolidated statement of comprehensive income in respect of the scheme for the year ended April 30, 2017 was $16.2m (2016: $15.1m, 2015: $8.7m). In addition to this, $3.6m (2016: $2.4m, 2015: $2.6m) was charged to the consolidated statement of comprehensive income in respect of national insurance on these share options.
|
2017
|
2016
|
2015
|
||||||||||||||||||||||||
|
Weighted
average exercise price |
Number
of shares |
Weighted
average remaining contractual life |
Weighted
average exercise price |
Number
of shares |
Weighted
average remaining contractual life |
Weighted
average exercise price |
Number
of shares |
Weighted
average remaining contractual life |
||||||||||||||||||
Range of
exercise prices |
pence
|
‘000
|
years
|
pence
|
‘000
|
years
|
pence
|
‘000
|
years
|
||||||||||||||||||
£0.10 or less
|
|
4
|
|
|
3,856
|
|
|
7.4
|
|
|
1
|
|
|
3,776
|
|
|
7.8
|
|
|
1
|
|
|
3,140
|
|
|
8.3
|
|
£0.11–£1.00
|
|
13
|
|
|
506
|
|
|
6.6
|
|
|
13
|
|
|
761
|
|
|
7.5
|
|
|
12
|
|
|
1,117
|
|
|
8.1
|
|
£1.01–£2.00
|
|
—
|
|
|
—
|
|
|
—
|
|
|
114
|
|
|
33
|
|
|
0.2
|
|
|
115
|
|
|
34
|
|
|
0.9
|
|
£2.01–£3.00
|
|
281
|
|
|
5
|
|
|
0.5
|
|
|
246
|
|
|
309
|
|
|
2.0
|
|
|
246
|
|
|
319
|
|
|
3.0
|
|
£3.01 -£4.00
|
|
358
|
|
|
146
|
|
|
2.2
|
|
|
358
|
|
|
146
|
|
|
3.2
|
|
|
358
|
|
|
151
|
|
|
4.2
|
|
More than £4.00
|
|
402
|
|
|
149
|
|
|
3.2
|
|
|
402
|
|
|
161
|
|
|
4.2
|
|
|
402
|
|
|
166
|
|
|
5.2
|
|
|
|
29
|
|
|
4,662
|
|
|
7.0
|
|
|
41
|
|
|
5,186
|
|
|
7.1
|
|
|
45
|
|
|
4,927
|
|
|
7.6
|
|
F-61
The weighted average fair value of options granted during the year ended April 30, 2017 determined using the Black-Scholes valuation model was £18.56 (2016: £12.96, 2015: £9.14). The significant inputs into the model for the year ended April 30, 2017 were weighted average share price of £20.22 (2016: £14.10, 2015: £10.12) at the grant date, exercise price shown above, expected volatility of between 26.96% and 27.98% (2016: between 24.80% and 26.40%, 2015: between 25.78% and 30.30%), expected dividend yield of between 2.70% and 3.10% (2016: between 2.60% and 3.00%, 2015: between 2.90% and 3.60%), an expected option life of three years and an annual risk-free interest rate of between 0.71% and 1.09% (2016: between 1.40% and 2.10%, 2015: between 1.60% and 2.60%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
b) Additional Share Grants
|
2017
|
2016
|
2015
|
|||||||||||||||
|
|
Weighted
average exercise price |
|
Weighted
average exercise price |
|
Weighted
average exercise price |
||||||||||||
|
Options
|
pence
|
Options
|
pence
|
Options
|
pence
|
||||||||||||
Outstanding at May 1,
|
|
3,262,420
|
|
|
—
|
|
|
3,262,420
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,803,643
|
|
|
—
|
|
Forfeited
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(541,223
|
)
|
|
—
|
|
Outstanding at April 30,
|
|
3,262,420
|
|
|
—
|
|
|
3,262,420
|
|
|
—
|
|
|
3,262,420
|
|
|
—
|
|
Exercisable at April 30
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The Remuneration Committee also awarded a number of Additional Share Grants (ASGs) to a number of senior managers and executives, critical to delivering the anticipated results of the acquisition. Grants can be made to no more than 15 people within 18 months of the Completion date. ASGs are nil cost options over Ordinary Shares. The number of Ordinary Shares subject to the ASGs will be a maximum of 2.5% of the Share Capital. The ASGs will become exercisable, subject to the satisfaction of the performance condition, on the third anniversary of the TAG acquisition or November 1, 2017, whichever is earlier (the ‘vesting date) and will remain exercisable until the tenth anniversary of the TAG acquisition.
The performance condition is that the percentage of Ordinary Shares subject to the ASG which may be acquired on exercise on or after the vesting date is as follows:
(i) | 0 % if the Shareholder Return Percentage (as defined below) is 50% or less; |
(ii) | 100% if the Shareholder Return Percentage is 100% or more; and |
(iii) | A percentage determined on a straight line basis between (i) and (ii) above. |
The ‘Shareholder Return Percentage will be calculated by deducting 819.4 pence per share (the Reference Price), being the average of the 20 days before June 3, 2014 (being the date of the heads of agreement relating to the proposed combination of Micro Focus and Attachmate between Micro Focus, Wizard, Golden Gate Capital and Francisco Partners Management LP), from the sum of the ‘Vesting Price (calculated as the average closing share price over the period of 20 days ending on the day prior to the vesting date) plus the total of all dividends per share between November 20, 2014 and the vesting date. This will be divided by the Reference Price, multiplying the resulting figure by 100 to obtain the Shareholder Return Percentage.
The amount charged to the consolidated statement of comprehensive income in respect of the scheme was $6.6m for the year ended April 30, 2017 (2016: $7.6m, 2015: $3.0m). In addition to this $7.0m (2016: $2.8m, 2015: $0.7m) was charged to the consolidated statement of comprehensive income in respect of national insurance on these share options.
F-62
|
2017
|
2016
|
2015
|
||||||||||||||||||||||||
|
Weighted
average price |
Number
of shares |
Weighted
average remaining contractual life |
Weighted
average exercise price |
Number
of shares |
Weighted
average remaining contractual life |
Weighted
average exercise price |
Number
of shares |
Weighted
average remaining contractual life |
||||||||||||||||||
Range of exercise prices
|
pence
|
’000
|
years
|
pence
|
’000
|
years
|
pence
|
’000
|
years
|
||||||||||||||||||
£0.00
|
|
—
|
|
|
3,262
|
|
|
7.6
|
|
|
—
|
|
|
3,262
|
|
|
8.6
|
|
|
—
|
|
|
3,262
|
|
|
9.6
|
|
|
|
—
|
|
|
3,262
|
|
|
7.6
|
|
|
—
|
|
|
3,262
|
|
|
8.6
|
|
|
—
|
|
|
3,262
|
|
|
9.6
|
|
The weighted average fair value of options granted was £6.47, determined using the Monte-Carlo simulation model. The significant inputs into the model were weighted average share price of £11.05 at the grant date, exercise price shown above, expected volatility of between 25.81% and 26.11%, expected dividend yield of between 2.90% and 3.30%, an expected option life of three years and an annual risk-free interest rate of between 1.71% and 2.08%. The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
c) Sharesave and Employee Stock Purchase Plan 2006
In August 2006, the Company introduced the Micro Focus Employee Stock Purchase Plan 2006 and the Micro Focus Sharesave Plan 2006, approved by members on July 25, 2006. The Group operates several plans throughout the world but the two main plans are the Sharesave Plan (Sharesave) primarily for UK employees and the Employee Stock Purchase Plan (ESPP) for employees in the USA and Canada. The Sharesave and ESPP provide for an annual award of options at a discount to the market price and are open to all eligible Group employees. Under this plan employees make monthly savings over a period of three years linked to the grant of an option over Micro Focus shares with an option price which can be at a discount of up to 20% of the market value of the shares on grant. The option grants are subject to employment conditions and continuous savings. Further Sharesave and ESPP grants were made during the year ended April 30, 2017.
|
2017
|
2016
|
2015
|
|||||||||||||||
|
|
Weighted
average exercise price |
|
Weighted
average exercise price |
|
Weighted
average exercise price |
||||||||||||
Sharesave
|
Options
|
pence
|
Options
|
pence
|
Options
|
pence
|
||||||||||||
Outstanding at May 1,
|
|
543,657
|
|
|
862
|
|
|
549,229
|
|
|
693
|
|
|
527,410
|
|
|
364
|
|
Exercised
|
|
(89,946
|
)
|
|
618
|
|
|
(110,236
|
)
|
|
464
|
|
|
(289,592
|
)
|
|
231
|
|
Forfeited
|
|
(27,815
|
)
|
|
1,001
|
|
|
(53,985
|
)
|
|
793
|
|
|
(28,178
|
)
|
|
544
|
|
Granted
|
|
133,526
|
|
|
1,466
|
|
|
158,649
|
|
|
1,148
|
|
|
339,589
|
|
|
798
|
|
Outstanding at April 30,
|
|
559,422
|
|
|
1,039
|
|
|
543,657
|
|
|
862
|
|
|
549,229
|
|
|
693
|
|
Exercisable at April 30,
|
|
—
|
|
|
—
|
|
|
4,866
|
|
|
482
|
|
|
2,669
|
|
|
337
|
|
|
|
Exercise price per share
|
|
Options
|
Date of grant
|
pence
|
Exercise period
|
6,466
|
February 5, 2014
|
612.0
|
May 1, 2017– September 30, 2017
|
84,155
|
August 1, 2014
|
695.0
|
October 1, 2017– March 31, 2018
|
196,859
|
February 10, 2015
|
838.4
|
April 1, 2018– September 30, 2018
|
92,723
|
August 7, 2015
|
1,112.0
|
October 1, 2018– March 31, 2019
|
48,515
|
February 9, 2016
|
1,200.0
|
April 1, 2019– September 30, 2019
|
130,704
|
August 12, 2016
|
1,465.6
|
October 1, 2019 – February 1, 2020
|
559,422
|
|
|
|
F-63
|
2017
|
2016
|
2015
|
|||||||||||||||
|
|
Weighted
average exercise price |
|
Weighted
average exercise price |
|
Weighted
average exercise price |
||||||||||||
ESPP
|
Options
|
pence
|
Options
|
pence
|
Options
|
pence
|
||||||||||||
At May 1,
|
|
272,306
|
|
|
1,080
|
|
|
179,919
|
|
|
948
|
|
|
84,342
|
|
|
528
|
|
Exercised
|
|
(92,950
|
)
|
|
998
|
|
|
(10,082
|
)
|
|
663
|
|
|
(30,935
|
)
|
|
504
|
|
Forfeited
|
|
(142,461
|
)
|
|
1,220
|
|
|
(16,012
|
)
|
|
671
|
|
|
(36,964
|
)
|
|
499
|
|
Granted
|
|
87,498
|
|
|
1,836
|
|
|
118,481
|
|
|
1,189
|
|
|
163,476
|
|
|
980
|
|
Outstanding at April 30,
|
|
124,393
|
|
|
1,510
|
|
|
272,306
|
|
|
1,080
|
|
|
179,919
|
|
|
948
|
|
Exercisable at April 30,
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Exercise price per share
|
|
Options
|
Date of grant
|
pence
|
Exercise period
|
34,879
|
October 1, 2015
|
1,004.0
|
October 1, 2017 – December 31, 2017
|
28,637
|
April 1, 2016
|
1,023.0
|
April 1, 2018– June 30, 2018
|
60,877
|
October 1, 2016
|
1,334.0
|
October 1, 2018 – December 31, 2018
|
124,393
|
|
|
|
The amount charged to the consolidated statement of comprehensive income in respect of the Sharesave and ESPP schemes was $1.1m for the year ended April 30, 2017 (2016: $0.9m, 2015: $0.5m).
The weighted average fair value of options granted in the Sharesave and ESPP schemes during the year ended April 30, 2017 determined using the Black-Scholes valuation model was £5.36 (2016: £4.15, 2015: £3.38). The significant inputs into the model were weighted average share price of £20.56 (2016: £14.21, 2015: £11.53) at the grant date, exercise price shown above, expected volatility of 26.95% (2016: between 25.09% and 26.36%, 2015: between 25.81% and 27.38%), expected dividend yield of 2.60% (2016: between 2.80% and 3.10%, 2015: between 2.90% and 3.60%), an expected option life of two or three years and an annual risk-free interest rate of 0.61% (2016: between 1.40% and 1.70%, 2015: between 1.71% and 2.56%). The volatility measured at the standard deviation of continuously compounded share returns is based on statistical daily share prices over the last three years.
36. Operating lease commitments – minimum lease payments
At April 30, 2017 the Group has a number of lease agreements in respect of properties, vehicles, plant and equipment, for which the payments extend over a number of years.
|
2017
|
2016
|
||||
|
$’000
|
$’000
|
||||
Future minimum lease payments under non-cancellable operating leases expiring:
|
|
|
|
|
|
|
No later than one year
|
|
28,330
|
|
|
27,177
|
|
Later than one year and no later than five years
|
|
85,008
|
|
|
73,273
|
|
Later than five years
|
|
28,749
|
|
|
40,583
|
|
Total
|
|
142,087
|
|
|
141,033
|
|
The Group leases various offices under non-cancellable operating lease agreements that are included in the table. The leases have various terms, escalation clauses and renewal rights. The minimum lease payments payable under operating leases recognized as an expense in the year to April 30, 2017 were $26.3m (2016: $23.4m, 2015: $18.7m).
37. Contingent liabilities
The Company and several of its subsidiaries are, from time to time, parties to legal proceedings and claims which arise in the ordinary course of business. The directors do not anticipate that the outcome of these proceedings, actions and claims, either individually or in aggregate, will have a material adverse effect upon the Groups financial position.
F-64
HPE Termination Payment
Micro Focus has agreed to pay HPE a termination payment equal to approximately $60m in cash under certain circumstances, including among other circumstances if;
(a) A competing proposal has been publicly announced or communicated to the Micro Focus board and not withdrawn at least five business days prior to the termination of the Merger Agreement, and such competing proposal, or a different competing proposal, is consummated (or a definitive agreement entered into with respect thereto) within 12 months following the Merger Agreement being terminated in specified circumstances; or
(b) The Merger Agreement is terminated as a result of, among other things, Micro Focus breaching in any material respect the specified undertakings in the Merger Agreement prohibiting it and its representatives from soliciting competing proposals.
38. Related party transactions
Transactions between the Company and its subsidiaries have been eliminated on consolidation. The remuneration of key management personnel of the Group (which is defined as members of the executive committee) including executive directors is set out in note 35.
On November 20, 2014, the Group acquired the entire share capital of TAG, in exchange for the issue of 86.6m Consideration Shares to TAGs parent Company, Wizard Parent LLC (Wizard). At the beginning of the 2016 fiscal year, Wizard held 39.9% of the issued share capital of the Company and during the year they reduced their holding to 13.8% by April 30, 2016. On May 13, 2016 Wizard announced that it had sold 24,078,342 ordinary shares in Micro Focus in a placing. Following completion of the placing, Wizard held 6,017,369 ordinary shares in the Company, representing approximately 2.6% of the Companys issued ordinary shares. These remaining shares were to be distributed to certain members of Wizard and certain partners and investors of such members (including entities managing funds for any such member, partner or investor) who wish to retain a residual stake in Micro Focus and benefit from their ongoing ownership. There are three major shareholders of Wizard and one of these shareholders held a major shareholding in a technology company with which Micro Focus has traded with during the year. These transactions were at arms length and the goods and services were based on the price lists in force and terms that would be available to third parties.
The value of sales made to this third party for the year ended April 30, 2017 was $11.2m (2016: $12.2m, 2015: $5.0m) and the value of goods purchased was $0.1m (2016: $0.8m, 2015: $0.1m). The value of receivables due from this third party as at April 30, 2017 was $1.6m (2016: $2.2m) and the value of payables due was $nil (2016: $nil).
39. Business combinations
Summary of acquisitions for the year ended April 30, 2017, 2016, and 2015:
|
|
|
|
|
Consideration
|
|||||||||||||||||||
|
Carrying
value at acquisition |
Fair
value adjustments |
Hindsight
adjustments |
Goodwill
|
Shares
|
Cash
|
Deferred
|
Total
|
||||||||||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||||||||||
Acquisitions for the year ended April 30, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Serena Software Inc.
|
|
147,260
|
|
|
(249,306
|
)
|
|
—
|
|
|
379,669
|
|
|
—
|
|
|
277,623
|
|
|
—
|
|
|
277,623
|
|
GWAVA Inc.
|
|
618
|
|
|
3,062
|
|
|
—
|
|
|
12,767
|
|
|
—
|
|
|
16,447
|
|
|
—
|
|
|
16,447
|
|
OpenATTIC
|
|
—
|
|
|
4,991
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,991
|
|
|
—
|
|
|
4,991
|
|
OpenStack
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
147,878
|
|
|
(241,253
|
)
|
|
—
|
|
|
392,436
|
|
|
—
|
|
|
299,061
|
|
|
—
|
|
|
299,061
|
|
Acquisitions for the year ended April 30, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Authasas BV
|
|
1,110
|
|
|
10
|
|
|
—
|
|
|
8,840
|
|
|
—
|
|
|
9,960
|
|
|
—
|
|
|
9,960
|
|
Acquisitions for the year ended April 30, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TAG
|
|
(501,338
|
)
|
|
(225,796
|
)
|
|
(5,583
|
)
|
|
2,118,933
|
|
|
1,386,216
|
|
|
—
|
|
|
—
|
|
|
1,386,216
|
|
|
|
(352,350
|
)
|
|
(467,039
|
)
|
|
(5,583
|
)
|
|
2,520,209
|
|
|
1,386,216
|
|
|
309,021
|
|
|
—
|
|
|
1,695,237
|
|
F-65
1. Acquisition of Serena Software Inc.
On May 2, 2016, the Group acquired the entire share capital of Spartacus Acquisition Holdings Corp. the holding company of Serena Software Inc. (Serena) and its subsidiaries for $277.6m, payable in cash at completion. The Group then repaid the outstanding Serena bank borrowings of $316.7m as at May 2, 2016, making the total cash outflow for the Group of $528.5m, net of cash acquired of $65.8m. The transaction costs for the Serena acquisition were $0.9m ($0.5m was incurred in the year ended April 30, 2016).
The acquisition is highly consistent with the Groups established acquisition strategy and focus on the efficient management of mature infrastructure software products.
Serena is a leading provider of enterprise software focused on providing Application Lifecycle Management products for both mainframe and distributed systems. Whilst Serena is headquartered in San Mateo, California the operations are effectively managed from offices in Hillsboro, Oregon and St. Albans in the United Kingdom. It operates in a further 10 countries. The Serena Groups customers are typically highly regulated large enterprises, across a variety of sectors including banking, insurance, telco, manufacturing and retail, healthcare and government.
Serena was integrated into the Micro Focus Product Portfolio and the revenues reported in the Development and IT Operations Management Tools sub-portfolio.
The transaction was funded through the Groups existing cash resources together with additional debt and equity finance arranged through Barclays, HSBC, the Royal Bank of Scotland and Numis Securities. On the May 2, 2016, the Groups existing revolving credit facility was extended from $225m to $375m and the Group raised approximately £158.2m (approximately $225.7m) through a Placing underwritten by Numis Securities incurring $3.0m of costs associated with the Placing in March 2016.
A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Details of the net assets acquired and goodwill are as follows:
|
Carrying value
at acquisition |
Fair value
adjustments |
Fair value
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Goodwill
|
|
462,400
|
|
|
(462,400
|
)
|
|
—
|
|
Intangible assets - purchased 1
|
|
—
|
|
|
317,700
|
|
|
317,700
|
|
Intangible assets - other
|
|
79
|
|
|
—
|
|
|
79
|
|
Property, plant and equipment
|
|
1,927
|
|
|
—
|
|
|
1,927
|
|
Other non-current assets
|
|
167
|
|
|
—
|
|
|
167
|
|
Deferred tax asset
|
|
15,347
|
|
|
—
|
|
|
15,347
|
|
Trade and other receivables
|
|
27,362
|
|
|
—
|
|
|
27,362
|
|
Cash and cash equivalent
|
|
65,784
|
|
|
—
|
|
|
65,784
|
|
Borrowings– short-term
|
|
(27,712
|
)
|
|
—
|
|
|
(27,712
|
)
|
Trade and other payables
|
|
(11,766
|
)
|
|
—
|
|
|
(11,766
|
)
|
Provisions– short-term
|
|
(4,045
|
)
|
|
—
|
|
|
(4,045
|
)
|
Current tax liabilities
|
|
(3,173
|
)
|
|
—
|
|
|
(3,173
|
)
|
Deferred income– short-term 2
|
|
(72,217
|
)
|
|
3,761
|
|
|
(68,456
|
)
|
Deferred income– long-term 2
|
|
(14,853
|
)
|
|
798
|
|
|
(14,055
|
)
|
Borrowings– long-term
|
|
(288,938
|
)
|
|
—
|
|
|
(288,938
|
)
|
Other non-current liabilities
|
|
(717
|
)
|
|
—
|
|
|
(717
|
)
|
Deferred tax liabilities 3
|
|
(2,385
|
)
|
|
(109,165
|
)
|
|
(111,550
|
)
|
Net assets/(liabilities)
|
|
147,260
|
|
|
(249,306
|
)
|
|
(102,046
|
)
|
Goodwill (note 10)
|
|
|
|
|
|
|
|
379,669
|
|
Consideration
|
|
|
|
|
|
|
|
277,623
|
|
Consideration satisfied by:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
277,623
|
|
The fair value adjustments relate to:
1. | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Serena Software Inc.; |
2. | Deferred income has been valued taking account of the remaining performance obligations; and |
3. | A deferred tax liability has been established relating to the purchase of intangibles. |
F-66
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 11):
|
Fair value
|
||
|
$’000
|
||
Technology
|
|
86,100
|
|
Customer relationships
|
|
210,200
|
|
Trade names
|
|
21,400
|
|
|
|
317,700
|
|
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Companys existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $379.7m has been capitalized.
From the date of acquisition, May 2, 2016 to April 30, 2017, the acquisition contributed $144.8m to revenue and $72.2m to profit, before any allocation of management costs and tax. There is no difference in results between May 1, and May 2, 2016.
2. Acquisition of GWAVA Inc.
On September 30, 2016, the Group acquired the entire share capital of GWAVA Inc. (GWAVA) and its subsidiaries for $16.4m, payable in cash at completion. The transaction costs for the GWAVA acquisition were $1.5m.
The acquisition is highly consistent with the Groups established acquisition strategy and focus on the efficient management of mature infrastructure software products.
GWAVA is a leading company in email security and enterprise information archiving (EIA). GWAVA has approximately 90 employees, based in the US, Canada and Germany. More than a million users across 60 countries rely on its products in over 3,000 customer organizations, supported by GWAVAs global team, with a further 1,000 GWAVA business partners collaborating closely to ensure successful customer solutions. In addition to GWAVAs award winning EIA product Retain, GWAVA has a full suite of products to protect, optimize, secure and ensure compliance for customers running Micro Focus GroupWise.
A provisional fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. At the time these consolidated financial statements were authorized for issue, the Group had not yet fully completed its assessments of the GWAVA acquisition.
F-67
Details of the net assets acquired and goodwill are as follows:
|
Carrying value
at acquisition |
Fair value
adjustments |
Fair value
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Intangible assets - purchased 1
|
|
—
|
|
|
5,330
|
|
|
5,330
|
|
Intangible assets - other 2
|
|
1,180
|
|
|
(1,180
|
)
|
|
—
|
|
Property, plant and equipment
|
|
195
|
|
|
—
|
|
|
195
|
|
Trade and other receivables
|
|
3,096
|
|
|
—
|
|
|
3,096
|
|
Cash and cash equivalent
|
|
2,389
|
|
|
—
|
|
|
2,389
|
|
Trade and other payables
|
|
(1,331
|
)
|
|
—
|
|
|
(1,331
|
)
|
Deferred income– short-term 3
|
|
(4,094
|
)
|
|
324
|
|
|
(3,770
|
)
|
Deferred income– long-term
|
|
(817
|
)
|
|
—
|
|
|
(817
|
)
|
Deferred tax liabilities 4
|
|
—
|
|
|
(1,412
|
)
|
|
(1,412
|
)
|
Net assets
|
|
618
|
|
|
3,062
|
|
|
3,680
|
|
Goodwill (note 10)
|
|
|
|
|
|
|
|
12,767
|
|
Consideration
|
|
|
|
|
|
|
|
16,447
|
|
Consideration satisfied by:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
16,447
|
|
The fair value adjustments relate to:
1. | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of GWAVA Inc.; |
2. | Other intangible assets relating to historic IP has been written down to $nil; |
3. | Deferred income has been valued taking account of the remaining performance obligations; and |
4. | A deferred tax liability has been established relating to the purchase of intangibles. |
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 11):
|
Fair value
|
||
|
$’000
|
||
Technology
|
|
4,075
|
|
Customer relationships
|
|
544
|
|
Trade names
|
|
711
|
|
|
|
5,330
|
|
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Companys existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $12.8m has been capitalized. From the date of acquisition, September 30, 2016 to April 30, 2017, the acquisition contributed $5.8m to revenue and a profit of $0.4m to profit for the period.
The estimated results of the above acquisition if it had been made at the beginning of the accounting year, May 1, 2016, to April 30, 2017 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
9.6
|
|
Profit for the year
|
|
0.5
|
|
F-68
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, May 1, 2016, to April 30, 2017 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
1,384.5
|
|
Profit for the year
|
|
157.0
|
|
The above figures are based on information provided to Micro Focus by GWAVA and the results since acquisition.
3. Acquisition of OpenATTIC
On November 1, 2016 the Group acquired the OpenATTIC storage management technology and engineering talent from the company it-novum GmbH for a cash consideration of 4.7m Euros ($5.0m). The OpenATTIC technology aligns perfectly with our strategy to provide open source, software defined infrastructure solutions for the enterprise and will strengthen SUSE Enterprise Storage solution by adding enterprise grade storage management capabilities to the portfolio. The transaction costs for the OpenATTIC acquisition were $1.2m.
A provisional fair value review was carried out on the assets and liabilities of the acquired business, resulting in the identification of intangible assets. The fair value review will be finalized in the next reporting period.
Details of the net assets acquired and goodwill are as follows:
|
Carrying value
at acquisition |
Fair value
adjustments |
Fair value |
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Intangible assets – purchased technology
|
|
—
|
|
|
4,991
|
|
|
4,991
|
|
Net assets
|
|
—
|
|
|
4,991
|
|
|
4,991
|
|
Goodwill
|
|
|
|
|
|
|
|
—
|
|
Consideration
|
|
|
|
|
|
|
|
4,991
|
|
Consideration satisfied by:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
4,991
|
|
From date of acquisition, November 1, 2016 to April 30, 2017 the acquisition contributed the following:
|
$m
|
||
Revenue
|
|
—
|
|
Loss for the period
|
|
(0.4
|
)
|
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, May 1, 2016, to April 30, 2017 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
1,380.7
|
|
Profit for the year
|
|
157.1
|
|
4. Acquisition of OpenStack
During the year, the Group acquired purchased technology and talent from HPE for $nil consideration that will expand SUSEs OpenStack Infrastructure-as-a-Service (IaaS) solution and accelerate SUSEs entry into the growing Cloud Foundry Platform-as-a-Service (PaaS) market, subject to regulatory clearances. The last regulatory clearance was received on the March 8, 2017 and the deal was completed then.
The acquired OpenStack technology assets were integrated into SUSE OpenStack Cloud and the acquired Cloud Foundry and PaaS assets will enable SUSE in the future to bring to market a certified, enterprise-ready SUSE Cloud Foundry PaaS solution for all customers and partners in the SUSE ecosystem. Additionally, SUSE has increased engagement with the Cloud Foundry Foundation, becoming a platinum member and taking a seat on the Cloud Foundry Foundation Board.
F-69
As part of the transaction, HPE has named SUSE as its preferred open source partner for Linux, OpenStack IaaS and Cloud Foundry PaaS. HPEs choice of SUSE as their preferred open source partner further cements SUSEs reputation for delivering high-quality, enterprise-grade open source solutions and services.
The Group has carried out a provisional fair value assessment of the OpenStack assets and liabilities, resulting in the identification of intangible assets and liabilities with a $nil value. The Group will continue to assess and finalize this in the next reporting period.
From the date of acquisition, March 8, 2017, to April 30, 2017 the acquisition contributed the following:
|
$m
|
||
Revenue
|
|
0.3
|
|
Loss for the period
|
|
(2.7
|
)
|
The estimated results of the Group if the acquisition had been made at the beginning of the accounting year, May 1, 2016, to April 30, 2017 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
1,382.8
|
|
Profit for the year
|
|
141.5
|
|
Acquisitions in the year ended April 30, 2016
Acquisition of Authasas BV
On July 17, 2015, the Group acquired the entire share capital of Authasas BV, a company registered in The Hague, the Netherlands. The activities of Authasas BV mainly consist of the developing, producing and publishing/selling of authentication software. The consideration was $10.0m and was satisfied using Micro Focus existing bank facilities. The acquisition costs incurred of $0.5m were expensed as exceptional items through administrative expenses in the consolidated statement of comprehensive income for the year ended April 30, 2016.
A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
Details of the net assets acquired and goodwill are as follows:
|
Carrying value
at acquisition |
Fair value
adjustments |
Fair value
|
||||||
|
$’000
|
$’000
|
$’000
|
||||||
Intangible assets - purchased 1
|
|
—
|
|
|
3,356
|
|
|
3,356
|
|
Intangible assets - other 2
|
|
1,973
|
|
|
(1,973
|
)
|
|
—
|
|
Property, plant and equipment
|
|
14
|
|
|
—
|
|
|
14
|
|
Inventory
|
|
11
|
|
|
—
|
|
|
11
|
|
Deferred tax asset 3
|
|
339
|
|
|
(339
|
)
|
|
—
|
|
Trade and other receivables
|
|
463
|
|
|
—
|
|
|
463
|
|
Cash and cash equivalent
|
|
106
|
|
|
—
|
|
|
106
|
|
Trade and other payables 4
|
|
(1,796
|
)
|
|
(68
|
)
|
|
(1,864
|
)
|
Deferred tax liabilities 5
|
|
—
|
|
|
(966
|
)
|
|
(966
|
)
|
Net assets
|
|
1,110
|
|
|
10
|
|
|
1,120
|
|
Goodwill (note 10)
|
|
|
|
|
|
|
|
8,840
|
|
Consideration
|
|
|
|
|
|
|
|
9,960
|
|
Consideration satisfied by:
|
|
|
|
|
|
|
|
|
|
Cash
|
|
|
|
|
|
|
|
9,960
|
|
The fair value adjustments relate to:
1. | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of Authasas BV; |
2. | Other intangible assets relating to development costs have been written down to nil; |
3. | The deferred tax asset on acquisition has been written down to nil; |
4. | Deferred income has been valued taking account of the remaining performance obligations; and |
5. | A deferred tax liability has been established relating to the purchase of intangibles. |
F-70
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows (note 11):
|
Fair value
|
||
|
$’000
|
||
Technology
|
|
2,545
|
|
Customer relationships
|
|
811
|
|
|
|
3,356
|
|
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Companys existing customer base with those of the acquired business. The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $8.8m has been capitalized. From the date of acquisition, July 17, 2015, to April 30, 2016, the acquisition contributed $0.1m to revenue and a loss of $0.8m to profit.
The estimated results of the above acquisition, excluding intercompany royalties, if it had been made at the beginning of the accounting year, May 1, 2015 to April 30, 2016 would have been as follows:
Pro-forma
|
$’m
|
||
Revenue
|
|
0.1
|
|
Loss for the year
|
|
(1.0
|
)
|
The estimated results of the Enlarged Group if the acquisition had been made at the beginning of the accounting year, May 1, 2015 to April 30, 2016 would have been as follows:
Pro-forma
|
$’m
|
||
Revenue
|
|
1,245.0
|
|
Loss for the year
|
|
162.8
|
|
The above figures are based on information provided to Micro Focus by Authasas BV and the results since acquisition.
Acquisitions in the year ended April 30, 2015
Acquisition of TAG
On November 20, 2014, the Group acquired from Wizard, TAG, a US Company based in Houston.
The Company acquired the entire share capital of TAG, in exchange for the issue of 86.6m Consideration Shares to TAGs parent Company, Wizard. The value of the Consideration Shares allotted to Wizard was $1,386.2m.
Of the consideration of $1,386.2m, $13.5m was credited to share capital and $1,372.7m was credited to the merger reserve. The Group qualifies for merger accounting under S612 of the Companies Act 2006.
A fair value review was carried out and finalized on the assets and liabilities of the acquired business, resulting in the identification of intangible assets.
F-71
Details of the net liabilities acquired and goodwill are as follows:
|
Carrying
value at acquisition |
Fair value
adjustments |
Hindsight
period adjustments 6 |
Fair value
|
||||||||
|
$’000
|
$’000
|
$’000
|
$’000
|
||||||||
Goodwill
|
|
906,052
|
|
|
(906,052
|
)
|
|
—
|
|
|
—
|
|
Intangible assets– purchased 1
|
|
214,222
|
|
|
913,410
|
|
|
—
|
|
|
1,127,632
|
|
Intangible assets– other 3
|
|
17,282
|
|
|
(5,519
|
)
|
|
—
|
|
|
11,763
|
|
Property, plant and equipment
|
|
25,965
|
|
|
—
|
|
|
—
|
|
|
25,965
|
|
Assets held for sale
|
|
888
|
|
|
—
|
|
|
—
|
|
|
888
|
|
Investment in associates
|
|
15,689
|
|
|
—
|
|
|
—
|
|
|
15,689
|
|
Long-term pension assets
|
|
15,472
|
|
|
—
|
|
|
3,917
|
|
|
19,389
|
|
Other non-current assets
|
|
4,952
|
|
|
—
|
|
|
—
|
|
|
4,952
|
|
Deferred tax assets
|
|
204,566
|
|
|
(13,334
|
)
|
|
(960
|
)
|
|
190,272
|
|
Non-current assets
|
|
1,405,088
|
|
|
(11,495
|
)
|
|
2,957
|
|
|
1,396,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
16
|
|
|
—
|
|
|
—
|
|
|
16
|
|
Trade and other receivables
|
|
158,226
|
|
|
—
|
|
|
—
|
|
|
158,226
|
|
Current tax recoverable
|
|
10,857
|
|
|
—
|
|
|
(2,942
|
)
|
|
7,915
|
|
Cash and cash equivalents
|
|
165,946
|
|
|
—
|
|
|
—
|
|
|
165,946
|
|
Current assets
|
|
335,045
|
|
|
—
|
|
|
(2,942
|
)
|
|
332,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade and other payables 4
|
|
(205,806
|
)
|
|
3,344
|
|
|
(1,626
|
)
|
|
(204,088
|
)
|
Borrowings
|
|
(1,294,726
|
)
|
|
—
|
|
|
—
|
|
|
(1,294,726
|
)
|
Short-term provisions
|
|
(8,852
|
)
|
|
—
|
|
|
(677
|
)
|
|
(9,529
|
)
|
Short-term deferred income 2
|
|
(433,261
|
)
|
|
29,367
|
|
|
—
|
|
|
(403,894
|
)
|
Current liabilities
|
|
(1,942,645
|
)
|
|
32,711
|
|
|
(2,303
|
)
|
|
(1,912,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term deferred income 2
|
|
(203,519
|
)
|
|
13,301
|
|
|
—
|
|
|
(190,218
|
)
|
Long-term provisions
|
|
(2,614
|
)
|
|
—
|
|
|
—
|
|
|
(2,614
|
)
|
Retirement benefit obligations
|
|
(31,257
|
)
|
|
—
|
|
|
—
|
|
|
(31,257
|
)
|
Other non-current liabilities
|
|
(9,406
|
)
|
|
—
|
|
|
—
|
|
|
(9,406
|
)
|
Deferred tax liabilities 5
|
|
(50,749
|
)
|
|
(260,313
|
)
|
|
(3,295
|
)
|
|
(314,357
|
)
|
Non-current liabilities
|
|
(297,545
|
)
|
|
(247,012
|
)
|
|
(3,295
|
)
|
|
(547,852
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest
|
|
(1,281
|
)
|
|
—
|
|
|
—
|
|
|
(1,281
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net liabilities acquired
|
|
(501,338
|
)
|
|
(225,796
|
)
|
|
(5,583
|
)
|
|
(732,717
|
)
|
Goodwill (note 10)
|
|
|
|
|
|
|
|
|
|
|
2,118,933
|
|
Consideration
|
|
|
|
|
|
|
|
|
|
|
1,386,216
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consideration satisfied by:
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
|
|
|
|
|
|
|
1,386,216
|
|
The fair value adjustments relate to:
1. | Purchased intangible assets have been valued based on a market participant point of view and the fair value has been based on various characteristics of the product lines and intangible assets of TAG; |
2. | Deferred income has been valued taking account of the remaining performance obligations; |
3. | Other intangible assets relating to development costs have been written down to nil; |
4. | Deferred rent within ‘Trade and other payables’ has been reassessed; and |
5. | A deferred tax liability has been established relating to the purchased intangibles. |
F-72
At April 30, 2016 the hindsight adjustments that have been identified to finalize the acquisition fair value, are long-term pension assets, accruals and legal provisions. The valuation of long-term pension assets was reassessed, additional accruals were identified and additional legal provisions were made relating to a claim. The tax impact of these adjustments has been included. The valuation of current and deferred tax balances has also been reassessed. As the amounts involved were not material, related adjustments were recorded during year ended April 30, 2016.
The purchased intangible assets acquired as part of the acquisition can be analyzed as follows:
|
Fair value
|
||
|
$’000
|
||
Technology
|
|
225,064
|
|
Trade Names
|
|
216,335
|
|
Customer relationships
|
|
686,233
|
|
|
|
1,127,632
|
|
The value of the goodwill represents the value of the assembled workforce at the time of the acquisition with specific knowledge and technical skills. It also represents the prospective future economic benefits that are expected to accrue from enhancing the portfolio of products available to the Companys existing customer base with those of the acquired business.
The Group has used acquisition accounting for the purchase and the goodwill arising on consolidation of $2,113.4m has been capitalized. From the date of acquisition to April 30, 2015, the acquisition contributed $416.0m to revenue (note 2) and $80.9m to profit for the period.
The estimated results of the above acquisition if it had been made at the beginning of the accounting year to April 30, 2015 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
902.1
|
|
Profit for the year
|
|
9.9
|
|
The estimated results of the Enlarged Group if the acquisition had been made at the beginning of the accounting year to April 30, 2015 would have been as follows:
Pro-forma
|
$m
|
||
Revenue
|
|
1,320.7
|
|
Profit for the year
|
|
88.4
|
|
The above figures are based on information provided to Micro Focus by TAG and the results since acquisition.
40. Post Balance Sheet Events
1. Proposed merger with HPE Software
On September 7, 2016 the Group announced that it had entered into a definitive agreement with HPE on the terms of a transaction (the Transaction) which provided for the combination of HPEs software business segment (HPE Software) with the Company by way of a merger (the Merger) with a wholly owned subsidiary of HPE incorporated to hold the business of HPE Software for the purposes of the Transaction. At the time of announcement HPE Software was valued at $8.8bn.
The Transaction is expected to complete in the third quarter of calendar year 2017. Following shareholder approval of the Transaction the return of value will be made to Micro Focus shareholders immediately prior to Completion of the Transaction.
2. Dividends
The directors announced a second interim dividend of 58.33 cents per share (2016: 49.74 cents per share). The dividend will be paid in Sterling equivalent to 45.22 pence per share, based on an exchange rate of £1 = $1.29 being the rate applicable on July 11, 2017, the date on which the board resolved to propose the dividend. The dividend will be paid on August 25, 2017 to shareholders on the register at August 4, 2017.
F-73
THE ATTACHMATE GROUP, INC. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
As at September 30, 2014 and March 31, 2014
(Amounts in thousands, except share and per share amounts)
|
September 30,
2014 |
March 31,
2014 |
||||
|
$
|
$
|
||||
Assets
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
149,679
|
|
|
151,415
|
|
Restricted cash
|
|
2,814
|
|
|
803
|
|
Accounts receivable, net of allowance of $355 as of September 30, 2014 and $1,126 as of March 31, 2014
|
|
146,035
|
|
|
186,206
|
|
Deferred income taxes — net
|
|
66,121
|
|
|
60,748
|
|
Prepaid expenses and other
|
|
25,866
|
|
|
26,244
|
|
Total current assets
|
|
390,515
|
|
|
425,416
|
|
|
|
|
|
|
|
|
Property and equipment — net
|
|
26,837
|
|
|
25,293
|
|
Property held-for-sale — net
|
|
888
|
|
|
888
|
|
Goodwill
|
|
700,769
|
|
|
700,769
|
|
Intangible assets — net
|
|
252,763
|
|
|
279,704
|
|
Deferred income taxes — net
|
|
115,004
|
|
|
102,910
|
|
Other long-term assets, net of note receivable allowance of $3,384 as of September 30, 2014 and $3,298 as of March 31, 2014
|
|
54,564
|
|
|
55,894
|
|
Total
|
$
|
1,541,340
|
|
$
|
1,590,874
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ deficit
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
13,042
|
|
|
19,978
|
|
Accrued compensation and employee benefits
|
|
42,859
|
|
|
69,820
|
|
Income tax payable — net
|
|
15,460
|
|
|
3,644
|
|
Current portion of deferred revenue
|
|
463,974
|
|
|
498,642
|
|
Other accrued liabilities
|
|
58,897
|
|
|
55,033
|
|
Current portion of long-term debt
|
|
73,634
|
|
|
32,383
|
|
Accrued restructuring costs
|
|
619
|
|
|
3,396
|
|
Total current liabilities
|
|
668,485
|
|
|
682,896
|
|
Deferred revenue — Less current portion
|
|
202,936
|
|
|
218,710
|
|
Long-term debt — Less current portion
|
|
1,221,092
|
|
|
1,262,343
|
|
Other long-term liabilities
|
|
58,889
|
|
|
61,477
|
|
Total liabilities
|
|
2,151,402
|
|
|
2,225,426
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
Common stock; $.001 par value — 1,000 shares authorized and issued as of September 30, 2014 and March 31, 2014
|
|
—
|
|
|
—
|
|
Additional paid-in capital
|
|
13,307
|
|
|
11,750
|
|
Accumulated deficit
|
|
(612,003
|
)
|
|
(639,786
|
)
|
Accumulated other comprehensive loss
|
|
(11,366
|
)
|
|
(6,516
|
)
|
Total stockholders’ deficit
|
|
(610,062
|
)
|
|
(634,552
|
)
|
Total
|
|
1,541,340
|
|
|
1,590,874
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-74
The Attachmate Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)
For the Six months ended September 30, 2014 and 2013
|
Six months ended September 30,
|
|||||
(Amounts in thousands)
|
2014
|
2013
|
||||
|
$
|
$
|
||||
Revenue
|
|
436,889
|
|
|
447,415
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of revenue
|
|
75,810
|
|
|
80,743
|
|
Sales and marketing
|
|
116,080
|
|
|
125,358
|
|
Research and development
|
|
79,284
|
|
|
82,545
|
|
General and administrative
|
|
36,855
|
|
|
32,962
|
|
(Release) provision for restructuring charges
|
|
(336
|
)
|
|
7,082
|
|
Amortization of intangible assets
|
|
33,636
|
|
|
46,439
|
|
Total operating expenses
|
|
341,329
|
|
|
375,129
|
|
|
|
|
|
|
|
|
Operating income
|
|
95,560
|
|
|
72,286
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
Interest income
|
|
166
|
|
|
218
|
|
Interest expense
|
|
(55,168
|
)
|
|
(59,620
|
)
|
Interest expense — loan fees
|
|
(545
|
)
|
|
(548
|
)
|
Unrealized gain on mark-to-market derivatives
|
|
—
|
|
|
388
|
|
Foreign currency exchange rate income (loss) — net
|
|
3,762
|
|
|
(2,875
|
)
|
Other (expense) income — net
|
|
(1,110
|
)
|
|
(1,344
|
)
|
Total other expense
|
|
(52,895
|
)
|
|
(63,781
|
)
|
|
|
|
|
|
|
|
Income before income taxes
|
|
42,665
|
|
|
8,505
|
|
Income tax provision
|
|
(14,882
|
)
|
|
(6,353
|
)
|
Net income
|
|
27,783
|
|
|
2,152
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-75
The Attachmate Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
For the Six months ended September 30, 2014 and 2013
|
Six months ended September 30,
|
|||||
(Amounts in thousands)
|
2014
|
2013
|
||||
|
$
|
$
|
||||
Net income
|
|
27,783
|
|
|
2,152
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
Net foreign currency translation adjustment
|
|
(5,856
|
)
|
|
2,694
|
|
Net pension adjustment
|
|
679
|
|
|
—
|
|
Other comprehensive (loss) income
|
|
(5,177
|
)
|
|
2,694
|
|
Comprehensive income attributable to noncontrolling interests
|
|
327
|
|
|
195
|
|
Comprehensive income
|
|
22,933
|
|
|
5,041
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-76
The Attachmate Group, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
For the Six months ended September 30, 2014 and 2013
|
Six months ended September 30,
|
|||||
(Amounts in thousands)
|
2014
|
2013
|
||||
|
$
|
$
|
||||
Cash flows from operating activities:
|
|
|
|
|
|
|
Net income
|
|
27,783
|
|
|
2,152
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
39,496
|
|
|
52,705
|
|
Impairment of long-lived asset
|
|
2,124
|
|
|
—
|
|
Unrealized gain on mark-to-market derivatives
|
|
—
|
|
|
(388
|
)
|
Debt issuance cost amortization
|
|
374
|
|
|
374
|
|
Deferred income tax and uncertainties
|
|
(19,417
|
)
|
|
39
|
|
Stock-based compensation
|
|
1,558
|
|
|
1,592
|
|
Gain on facility sales
|
|
(471
|
)
|
|
(470
|
)
|
Other non-cash items
|
|
(2,090
|
)
|
|
3,987
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
Accounts receivable
|
|
39,221
|
|
|
8,963
|
|
Prepaid expenses and other
|
|
(1,877
|
)
|
|
8,996
|
|
Accounts payable
|
|
(6,652
|
)
|
|
(7,334
|
)
|
Accrued compensation and employee benefits
|
|
(25,887
|
)
|
|
896
|
|
Accrued restructuring costs
|
|
(3,391
|
)
|
|
1,264
|
|
Income tax payable/receivable
|
|
12,580
|
|
|
(4,009
|
)
|
Deferred revenue
|
|
(46,916
|
)
|
|
(36,966
|
)
|
Other accrued liabilities
|
|
3,334
|
|
|
(4,160
|
)
|
Net cash provided by operating activities
|
|
19,769
|
|
|
27,641
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
(8,330
|
)
|
|
(4,434
|
)
|
Purchases of intangible assets
|
|
(6,701
|
)
|
|
(1,985
|
)
|
Changes in restricted cash
|
|
(2,087
|
)
|
|
(692
|
)
|
Other investing activities
|
|
58
|
|
|
575
|
|
Net cash used in investing activities
|
|
(17,060
|
)
|
|
(6,536
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Repayment of long-term debt obligations
|
|
—
|
|
|
(53,924
|
)
|
Net cash used in financing activities
|
|
—
|
|
|
(53,924
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
(4,445
|
)
|
|
70
|
|
Net decrease in cash and cash equivalents
|
|
(1,736
|
)
|
|
(32,749
|
)
|
Cash and cash equivalents — Beginning of period
|
|
151,415
|
|
|
160,229
|
|
Cash and cash equivalents — End of period
|
|
149,679
|
|
|
127,480
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
54,553
|
|
|
59,596
|
|
Cash paid during the period for income taxes
|
|
15,182
|
|
|
10,847
|
|
Non-cash investing — leasehold improvements from tenant allowance
|
|
1,657
|
|
|
—
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-77
The Attachmate Group, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
(Amounts in thousands, except share, units and per share amounts)
1. | Basis of Presentation |
The condensed consolidated financial statements herein represent the consolidation of The Attachmate Group, Inc., (TAG) a Delaware corporation with ownership of both direct and indirect subsidiaries. Intercompany transactions and balances have been eliminated in consolidation. When the terms the Company, we, us, or our are used in this document, it refers to The Attachmate Group, Inc. and its consolidated subsidiaries.
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The condensed consolidated financial statements have been prepared from the accounting records and all amounts as of September 30, 2014 are unaudited. In the opinion of management, these condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) that are necessary for a fair presentation of the results for and as of the periods shown. Certain information or footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations of the SEC. These condensed consolidated financial statements should be read in conjunction with the financial statements and related notes for the year ended March 31, 2014 included elsewhere in this information statement/prospectus.
Estimates and Assumptions — In preparing our condensed consolidated financial statements in accordance with GAAP, we make a number of estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent upon future events. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. In preparing our condensed consolidated financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to our accounting for asset impairments, valuation allowances for receivables and deferred tax assets, the accrual for loss contingencies, and stock-based compensation. Actual results could differ from those estimates.
New Accounting Pronouncements — In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective for annual reporting periods beginning after December 15, 2018 (our fiscal year 2020), and early application is permitted as of an annual reporting period beginning after December 15, 2016 (our fiscal year 2018). The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
2. | Line of Credit |
At September 30, 2014 and March 31, 2014, we had a revolving line of credit with a limit up to $40,000. This line of credit has a maturity date of May 22, 2017 and bears interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin that is no greater than 4.75%, with an optional Eurodollar rate also available. The interest rate on this line of credit was 7.25% at September 30, 2014. We had no outstanding borrowings under our $40,000 line of credit during the six months ended September 30, 2014 and 2013 and therefore no interest expense was incurred during those periods. During the six months ended September 30, 2014 and 2013, we were charged 0.50% of the available balance for lack of utilization of this line which is included in the line item, interest expense — loan fees in the condensed consolidated statements of operations. This charge amounted to $125 and $103 for the six months ended September 30, 2014 and 2013, respectively.
F-78
3. | Long-term Debt |
We had two term loan credit agreements that had outstanding principal balances at September 30, 2014 and March 31, 2014, of $1,294,726. These term loans were secured by substantially all of our assets.
Term loans entered into on May 22, 2012 — On May 22, 2012, we entered into two term loan credit agreements in order to repay our previous loans and to help fund an equity distribution to our shareholders. We incurred loan fees and costs associated with these new credit agreements in the amount of $2,282 which is being amortized over the terms of the respective agreements. The term loans contained certain restrictions related to the sale of assets and dividend payments.
We had borrowings under the First Lien Credit Agreement (First Lien) in the amount of $905,508 at September 30, 2014 and March 31, 2014. The First Lien matures on November 22, 2017 at which time the remaining principal balance is due to be repaid. We are required to make quarterly payments that vary over time. Borrowings under the First Lien bear interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin that is no greater than 4.75%, with an optional Eurodollar rate also available. Interest expense on the First Lien for the six months ended September 30, 2014 and 2013 was $33,372 and $37,139, respectively, and the applicable interest rate was 7.25% for both periods.
Per the terms of the First Lien, we have the option to make prepayments in place of mandatory quarterly payments. On February 24, 2014 we prepaid $50,000 in lieu of our scheduled quarterly payments as at March 31, 2014, June 30, 2014, September 30, 2014, and approximately 45% as at December 31, 2014. Therefore, for the six months ended September 30, 2014 we made no principal repayments.
Borrowings under the Second Lien Credit Agreement (Second Lien) in the original amount of $400,000 do not require any principal payments until the loan matures on November 22, 2018. However, during fiscal year 2014, certain creditors under the First Lien waived prepayments required due to our excess cash flow position at year end. The Second Lien is subordinated to the First Lien and thus when this was waived we made the payment of $10,782 during the fiscal year 2014 to the creditors of the Second Lien resulting in a remaining principal balance of $389,218 at September 30, 2014 and March 31, 2014. Borrowings under the Second Lien bear interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin of 8.5%, with an optional Eurodollar rate also available. Interest expense on the Second Lien for the six months ended September 30, 2014 and 2013 was $21,764 and $22,097, respectively and the applicable interest rate for both periods was 11.0%.
The First Lien and Second Lien are subject to affirmative and negative financial covenants. We are in compliance with all financial covenants as of September 30, 2014.
4. | Employee Benefit Plans |
We sponsor a qualified retirement plan (the 401(k) Plan). The 401(k) Plan is for all eligible U.S. employees under the provisions of the Internal Revenue Code. Participants may defer a portion of their annual compensation on a pre-tax basis subject to tax limitations. The 401(k) Plan allows us the flexibility to adjust the match percentage. Any matching contributions we elect to make under the 401(k) Plan vest ratably over a period of three years.
We also have other retirement plans in certain foreign countries in which we employ personnel. Each plan is consistent with local laws and business practices. During the six months ended September 30, 2014 and 2013, we made matching contributions on our 401(k) Plan and other retirement plans and expensed $5,638 and $5,863, respectively.
We have a defined benefit pension plan sponsored by a German subsidiary that covers 53 current employees and 241 former employees or retirees as of September 30, 2014. The plan was closed to new members as of November 2004. Actuarial gains or losses are being amortized over a 13 year period, and the amortization charges are included within the overall net periodic pension costs, which are charged to the statements of operations.
5. | Commitments and Contingencies |
Unconditional Obligations for Outside Services and Royalties — The agreements we maintain for certain outside services and royalties expire at various dates through fiscal year 2022. However, most of these contracts
F-79
renew automatically upon expiration unless specifically canceled within the contract terms. Additionally, under the terms of some contracts, prepayment was required and these are currently reflected as prepaid assets.
In certain instances we also have an obligation to make royalty payments that fluctuates based on the monthly sales of various products. Royalty terms range from a percentage of total sales to a set fee per license or maintenance sold. The amount incurred under these royalty obligations was $8,655 and $10,483 for the six months ended September 30, 2014 and 2013, respectively, and is included within cost of revenue.
Legal Proceedings — From time to time, we are a defendant in claims or lawsuits involving matters which are routine to the nature of our business such as claims involving former employees, or claims for infringement of patents. Management is of the opinion that the ultimate resolution of all such matters will not have a material adverse effect on its results of operations, cash flows, or financial position.
Following the announcement of the proposed acquisition of Novell, certain of Novells shareholders filed class action lawsuits challenging the proposed transaction alleging the Novell directors breached their fiduciary duties to the Novell shareholders. At the beginning of fiscal year 2013, we had accrued $5,000 for this claim but during that year $4,568 of these lawsuits were dismissed and $432 were settled. As a result, during the six months ended September 30, 2013, we reduced our $5,000 accrual to $nil, There are no further claims against us regarding this matter.
Tax Contingencies — Our tax filings for various periods are subjected to audit by tax authorities in jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. We believe that we have adequately provided for any assessments that could result from those proceedings where it is more likely than not that we will pay some amount.
6. | Restructuring Charges and Merger Liabilities |
Restructuring costs represent actions to realign our cost structure based on current and expected near-term growth rates for the business and to eliminate redundant functions resulting from business acquisitions. Restructuring costs, which include termination benefits and facility closure costs, are recorded at estimated fair value. Termination benefits are comprised of severance payments for terminated employees and facility closure costs represent costs to terminate leases in conjunction with the consolidation of facilities. Restructuring costs are shown in the line item, provision for restructuring charges in the condensed consolidated statements of operations.
Activities related to the restructuring actions during the six months ended September 30, 2014 and 2013, were as follows:
|
2014
|
2013
|
||||
Beginning balance (March 31)
|
$
|
4,320
|
|
$
|
736
|
|
|
|
|
|
|
|
|
Expense
|
|
|
|
|
|
|
Severance/benefit costs
|
|
116
|
|
|
6,252
|
|
Facility closure (reversals) / costs
|
|
(452
|
)
|
|
491
|
|
Contract termination and other
|
|
—
|
|
|
339
|
|
Total expense
|
|
(336
|
)
|
|
7,082
|
|
|
|
|
|
|
|
|
Payments
|
|
|
|
|
|
|
Severance/benefit costs
|
|
(2,591
|
)
|
|
(5,048
|
)
|
Facility closure costs
|
|
(503
|
)
|
|
(372
|
)
|
Contract termination and other
|
|
—
|
|
|
(351
|
)
|
Total payments
|
|
(3,094
|
)
|
|
(5,771
|
)
|
|
|
|
|
|
|
|
Ending balance (September 30)
|
$
|
890
|
|
$
|
2,047
|
|
F-80
Of the total restructuring balance outstanding as of September 30, 2014 and March 31, 2014, $271 and $923, respectively, are included within other long-term liabilities and are the estimated costs for the remaining lease obligations. The remainder of the restructuring balance for both periods is included within current liabilities.
Merger liabilities — Acquired during fiscal year 2012 as part of the Novell acquisition was $5,475 of merger liabilities related to a leased facility associated with an acquisition that Novell completed in 2001. This liability relates to the amount expected to be paid over the remaining lease term which extends to 2025. At September 30, 2014 and March 31, 2014, the liability associated with this facility is $3,442 and $4,172, of which $109 and $624 is shown in the line item other accrued liabilities and $3,334 and $3,548 is shown in the line item, other long-term liabilities on our condensed consolidated balance sheets, respectively.
7. | Stock-Based Compensation |
The Companys employees have 2,019,107 Legacy Common Units (LCUs) in Wizard Parent, LLC, (Wizard) the parent company of TAG. The LCUs were issued to certain key employees. Even though these LCUs are in Wizard, these units are in substance for work performed for the benefit of TAG. Therefore, TAG records the stock-based compensation expense and related capital contribution for these awards. Total stock-based compensation expense for these legacy units was $101 and $135 during the six months ended September 30, 2014 and 2013, respectively, and are included within general and administrative expense on our condensed consolidated statements of operations.
Wizard has granted 2,499,650 Management Incentive Units (MIU)s in Wizard to TAG employees. TAG records stock-based compensation expense and a related capital contribution for these awards. Total stock-based compensation expense was $1,457 during the six months ended September 30, 2014 and 2013, and is included within general and administrative expense on our condensed consolidated statements of operations.
8. | Related Parties |
Advisors — We have an advisory agreement with certain private equity firms (the Advisors). Our required payment to the Advisors is $2,000 per year. We are responsible for reimbursement to the Advisors for any reasonable out-of-pocket expenses.
Advisory fees of $1,097 and $1,011 were recognized in general and administrative expense for the six months ended September 30, 2014 and 2013, respectively. As of September 30, 2014 and March 31, 2014, $nil and $87, respectively, was payable to advisors for quarter advisory services.
Novell Intellectual Property Holdings Inc. – Novell Intellectual Property Holdings Inc. (NIPH) is a separate company also owned by Wizard, TAGs parent, but NIPH is not part of the TAG consolidated entity. NIPH is a separate holding company without any operations. TAG is serving as NIPHs billing agent and as of September 30, 2014 and March 31, 2014 has advanced NIPH $nil and $36, respectively, to pay certain legal and patent maintenance fees on behalf of NIPH. As this service is insignificant, the service is being performed without charge to NIPH and likewise NIPH is not charging TAG interest on the cash advance. The cash advance is included in the line item, other accrued liabilities in the current liability section of the condensed consolidated balance sheets.
9. | Subsequent Events |
On 20 November 2014, TAG was acquired by Micro Focus International plc (Micro Focus), a public limited Company incorporated and domiciled in the UK. Micro Focus acquired the entire share capital of the Company, in exchange for the issue of 86.6m Micro Focus shares to our parent company, Wizard Parent LLC (Wizard). The value of the Micro Focus shares allotted to Wizard was $1,386,216.
F-81
THE ATTACHMATE GROUP, INC. AND SUBSIDIARIES
Report of Independent Certified Public Accountants
Board of Directors
The Attachmate Group, Inc. and Subsidiaries
We have audited the accompanying consolidated financial statements of The Attachmate Group, Inc. (a Delaware Corporation) and subsidiaries, which comprise the consolidated balance sheets as of March 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), stockholders (deficit) equity, and cash flows for each of the three years in the period ended March 31, 2014, and the related notes to the financial statements.
Managements responsibility for the financial statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.
Auditors responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entitys preparation and fair presentation of the consolidated financial statements 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 entitys internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Attachmate Group, Inc. and subsidiaries as of March 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2014 in accordance with accounting principles generally accepted in the United States of America.
/s/ Grant Thornton LLP
Houston, Texas
June 26, 2014
F-82
The Attachmate Group, Inc. and Subsidiaries
Consolidated Balance Sheets
As at March 31, 2014 and 2013
(Amounts in thousands, except share and per share amounts)
|
|
|
||||
Assets
|
2014
|
2013
|
||||
|
$
|
$
|
||||
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
151,415
|
|
|
160,229
|
|
Restricted cash
|
|
803
|
|
|
137
|
|
Accounts receivable, net of allowance of $1,126 in 2014 and $1,130 in 2013
|
|
186,206
|
|
|
165,168
|
|
Income tax receivable — net
|
|
—
|
|
|
3,143
|
|
Deferred income taxes — net
|
|
60,748
|
|
|
55,689
|
|
Prepaid expenses and other
|
|
26,244
|
|
|
36,241
|
|
Total current assets
|
|
425,416
|
|
|
420,607
|
|
|
|
|
|
|
|
|
Property and equipment — net
|
|
25,293
|
|
|
32,753
|
|
Property held-for-sale — net
|
|
888
|
|
|
—
|
|
Goodwill
|
|
700,769
|
|
|
700,769
|
|
Intangible assets — net
|
|
279,704
|
|
|
367,075
|
|
Deferred income taxes — net
|
|
102,910
|
|
|
121,618
|
|
Other long-term assets, net of note receivable allowance of $3,298 in 2014 and $3,313 in 2013
|
|
55,894
|
|
|
53,022
|
|
Total
|
|
1,590,874
|
|
|
1,695,844
|
|
|
|
|
|
|
|
|
Liabilities and stockholders’ deficit
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Accounts payable
|
|
19,978
|
|
|
24,499
|
|
Accrued compensation and employee benefits
|
|
69,820
|
|
|
44,536
|
|
Income tax payable — net
|
|
3,644
|
|
|
—
|
|
Current portion of deferred revenue
|
|
498,642
|
|
|
470,598
|
|
Other accrued liabilities
|
|
55,033
|
|
|
61,059
|
|
Current portion of long-term debt
|
|
32,383
|
|
|
115,799
|
|
Accrued restructuring costs
|
|
3,396
|
|
|
561
|
|
Total current liabilities
|
|
682,896
|
|
|
717,052
|
|
Deferred revenue — Less current portion
|
|
218,710
|
|
|
248,242
|
|
Long-term debt — Less current portion
|
|
1,262,343
|
|
|
1,322,326
|
|
Other long-term liabilities
|
|
61,477
|
|
|
60,336
|
|
Total liabilities
|
|
2,225,426
|
|
|
2,347,956
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
Common stock; $.001 par value — 1,000 shares authorized and issued
as of March 31, 2014 and March 31, 2013 |
|
—
|
|
|
—
|
|
Additional paid-in capital
|
|
11,750
|
|
|
8,566
|
|
Accumulated deficit
|
|
(639,786
|
)
|
|
(651,025
|
)
|
Accumulated other comprehensive loss
|
|
(6,516
|
)
|
|
(9,653
|
)
|
Total stockholders’ deficit
|
|
(634,552
|
)
|
|
(652,112
|
)
|
Total
|
|
1,590,874
|
|
|
1,695,844
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-83
The Attachmate Group, Inc. and Subsidiaries
Consolidated Statements of Operations
For the Years Ended March 31, 2014, 2013 and 2012
(Amounts in thousands)
|
|
|
|
||||||
|
2014
|
2013
|
2012
|
||||||
|
$
|
$
|
$
|
||||||
Revenue
|
|
939,189
|
|
|
946,106
|
|
|
833,224
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Cost of revenue
|
|
162,199
|
|
|
167,299
|
|
|
175,147
|
|
Sales and marketing
|
|
263,692
|
|
|
280,697
|
|
|
265,665
|
|
Research and development
|
|
165,638
|
|
|
164,440
|
|
|
171,518
|
|
General and administrative
|
|
67,820
|
|
|
78,349
|
|
|
111,099
|
|
Provision for restructuring charges
|
|
18,314
|
|
|
2,504
|
|
|
59,332
|
|
Amortization of intangible assets
|
|
90,200
|
|
|
108,891
|
|
|
105,085
|
|
Impairment of trademark
|
|
3,916
|
|
|
—
|
|
|
—
|
|
(Gain) loss on facility sales
|
|
(942
|
)
|
|
7,892
|
|
|
—
|
|
Total operating expenses
|
|
770,837
|
|
|
810,072
|
|
|
887,846
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
168,352
|
|
|
136,034
|
|
|
(54,622
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
320
|
|
|
644
|
|
|
673
|
|
Interest expense
|
|
(116,099
|
)
|
|
(118,081
|
)
|
|
(82,893
|
)
|
Interest expense — loan fees
|
|
(1,093
|
)
|
|
(2,389
|
)
|
|
(8,385
|
)
|
Loss on early extinguishment of debt
|
|
—
|
|
|
(106,885
|
)
|
|
(5,643
|
)
|
Realized loss on derivative settlements
|
|
(384
|
)
|
|
(4,804
|
)
|
|
(4,927
|
)
|
Unrealized gain on mark-to-market derivatives
|
|
388
|
|
|
4,354
|
|
|
2,659
|
|
Foreign currency exchange rate (loss) income — net
|
|
(4,540
|
)
|
|
(1,854
|
)
|
|
4,944
|
|
Other income (expense) — net
|
|
(2,471
|
)
|
|
3,667
|
|
|
(1,528
|
)
|
Total other expense
|
|
(123,879
|
)
|
|
(225,348
|
)
|
|
(95,100
|
)
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
44,473
|
|
|
(89,314
|
)
|
|
(149,722
|
)
|
Income tax (provision) benefit
|
|
(33,234
|
)
|
|
87,927
|
|
|
37,949
|
|
Net income (loss)
|
|
11,239
|
|
|
(1,387
|
)
|
|
(111,773
|
)
|
Accretion of preferred stock dividends
|
|
—
|
|
|
—
|
|
|
(383
|
)
|
Net income (loss) attributable to common stockholders
|
|
11,239
|
|
|
(1,387
|
)
|
|
(112,156
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
F-84
The Attachmate Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
For the Years Ended March 31, 2014, 2013 and 2012
(Amounts in thousands)
|
|
|
|
||||||
|
2014
|
2013
|
2012
|
||||||
|
$
|
$
|
$
|
||||||
Net income (loss)
|
|
11,239
|
|
|
(1,387
|
)
|
|
(111,773
|
)
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation adjustment
|
|
3,414
|
|
|
3,651
|
|
|
(12,245
|
)
|
Net pension adjustment
|
|
(633
|
)
|
|
(3,394
|
)
|
|
52
|
|
Other comprehensive income (loss)
|
|
2,781
|
|
|
257
|
|
|
(12,193
|
)
|
Comprehensive income (loss) attributable to noncontrolling interests
|
|
356
|
|
|
183
|
|
|
(218
|
)
|
Comprehensive income (loss)
|
|
14,376
|
|
|
(947
|
)
|
|
(124,184
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
F-85
The Attachmate Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
For the Years Ended March 31, 2014, 2013 and 2012
(Amounts in thousands)
|
|
|
|
||||||
|
2014
|
2013
|
2012
|
||||||
|
$
|
$
|
$
|
||||||
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
11,239
|
|
|
(1,387
|
)
|
|
(111,773
|
)
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
102,382
|
|
|
122,066
|
|
|
125,016
|
|
Impairment of trademark
|
|
3,916
|
|
|
—
|
|
|
—
|
|
Unrealized gain on mark-to-market derivatives
|
|
(388
|
)
|
|
(4,354
|
)
|
|
(2,659
|
)
|
Debt issuance cost amortization/write-off
|
|
751
|
|
|
103,412
|
|
|
13,582
|
|
Provision for doubtful note receivable
|
|
(15
|
)
|
|
274
|
|
|
3,039
|
|
Deferred income tax and uncertainties
|
|
14,575
|
|
|
(109,353
|
)
|
|
(57,300
|
)
|
Stock-based compensation
|
|
3,184
|
|
|
2,024
|
|
|
6,581
|
|
(Gain) loss on facility sales
|
|
(942
|
)
|
|
7,892
|
|
|
—
|
|
Other non-cash items
|
|
4,161
|
|
|
757
|
|
|
(9,261
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
(21,852
|
)
|
|
13,259
|
|
|
(7,651
|
)
|
Prepaid expenses and other
|
|
6,270
|
|
|
(8,862
|
)
|
|
27,354
|
|
Accounts payable
|
|
(4,701
|
)
|
|
(4,441
|
)
|
|
(9,209
|
)
|
Accrued compensation and employee benefits
|
|
24,897
|
|
|
(10,386
|
)
|
|
(42,878
|
)
|
Accrued restructuring costs
|
|
3,545
|
|
|
(2,690
|
)
|
|
(30,766
|
)
|
Income tax payable/receivable
|
|
6,545
|
|
|
(5,734
|
)
|
|
(91,926
|
)
|
Deferred revenue
|
|
591
|
|
|
20,207
|
|
|
331,243
|
|
Other accrued liabilities
|
|
(5,772
|
)
|
|
(3,388
|
)
|
|
8,226
|
|
Net cash provided by operating activities
|
|
148,386
|
|
|
119,296
|
|
|
151,618
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Acquisition of business – net of cash acquired of $1,503,489
|
|
—
|
|
|
—
|
|
|
(615,441
|
)
|
Purchases of property and equipment
|
|
(7,567
|
)
|
|
(7,563
|
)
|
|
(7,251
|
)
|
Purchases of intangible assets
|
|
(6,745
|
)
|
|
(2,163
|
)
|
|
(466
|
)
|
Changes in restricted cash
|
|
(673
|
)
|
|
827
|
|
|
288
|
|
Liquidation of acquired deferred compensation plan
|
|
—
|
|
|
—
|
|
|
9,502
|
|
Net proceeds from building sale (net of fees of $1,513 through March 31, 2013)
|
|
—
|
|
|
116,936
|
|
|
—
|
|
Other investing activities
|
|
562
|
|
|
116
|
|
|
(644
|
)
|
Net cash provided by (used in) investing activities
|
|
(14,423
|
)
|
|
108,153
|
|
|
(614,012
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt obligations
|
|
—
|
|
|
1,500,000
|
|
|
1,150,000
|
|
Repayment of long-term debt obligations
|
|
(143,399
|
)
|
|
(1,190,000
|
)
|
|
(631,930
|
)
|
Payment of debt issuance costs
|
|
—
|
|
|
(63,462
|
)
|
|
(50,283
|
)
|
Shareholder (distribution) contribution
|
|
—
|
|
|
(687,571
|
)
|
|
230,055
|
|
Net cash (used in) provided by financing activities
|
|
(143,399
|
)
|
|
(441,033
|
)
|
|
697,842
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash
|
|
622
|
|
|
(2,056
|
)
|
|
(3,858
|
)
|
Net decrease in cash and cash equivalents
|
|
(8,814
|
)
|
|
(215,640
|
)
|
|
231,590
|
|
Cash and cash equivalents — Beginning of year
|
|
160,229
|
|
|
375,869
|
|
|
144,279
|
|
Cash and cash equivalents — End of year
|
|
151,415
|
|
|
160,229
|
|
|
375,869
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
118,568
|
|
|
115,603
|
|
|
75,864
|
|
Cash paid during the period for income taxes
|
|
16,882
|
|
|
21,951
|
|
|
93,023
|
|
Non-cash investing — leasehold improvements from tenant allowance
|
|
—
|
|
|
4,005
|
|
|
—
|
|
Non-cash financing activity — accretion of preferred stock dividends
|
|
—
|
|
|
—
|
|
|
383
|
|
Non-cash financing activity — shareholder acquisition contribution
|
|
—
|
|
|
—
|
|
|
97,941
|
|
Non-cash financing activity — retirement of preferred stock
|
|
—
|
|
|
—
|
|
|
42,158
|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-86
The Attachmate Group, Inc. and Subsidiaries
Consolidated Statements of Stockholders’ (Deficit) Equity
For the Years Ended March 31, 2014, 2013 and 2012
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Redeemable
Convertible Preferred Stock |
Common Stock
|
Additional
Paid-In Capital |
Accumulated
(Deficit) Income |
Accumulated
Other Comprehensive Loss |
Stockholders’
(Deficit) Equity |
||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
||||||||||||||||||||
|
|
$
|
|
$
|
$
|
$
|
$
|
$
|
||||||||||||||||
Balance – April 1, 2011
|
|
21,665
|
|
|
41,775
|
|
|
7,961
|
|
|
—
|
|
|
—
|
|
|
(220,104
|
)
|
|
2,318
|
|
|
(176,011
|
)
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(111,773
|
)
|
|
—
|
|
|
(111,773
|
)
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(12,411
|
)
|
|
(12,411
|
)
|
Common stock issue
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock and preferred stock conversion
|
|
(21,665
|
)
|
|
(42,158
|
)
|
|
(7,961
|
)
|
|
—
|
|
|
—
|
|
|
42,158
|
|
|
—
|
|
|
—
|
|
Shareholder contribution
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
327,996
|
|
|
—
|
|
|
327,996
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,581
|
|
|
—
|
|
|
—
|
|
|
6,581
|
|
Accretion of preferred stock dividends
|
|
—
|
|
|
383
|
|
|
—
|
|
|
—
|
|
|
(39
|
)
|
|
(344
|
)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — March 31, 2012
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
6,542
|
|
|
37,933
|
|
|
(10,093
|
)
|
|
34,382
|
|
Net loss
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,387
|
)
|
|
—
|
|
|
(1,387
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
440
|
|
|
440
|
|
Shareholder distribution
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(687,571
|
)
|
|
—
|
|
|
(687,571
|
)
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,024
|
|
|
—
|
|
|
—
|
|
|
2,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — March 31, 2013
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
8,566
|
|
|
(651,025
|
)
|
|
(9,653
|
)
|
|
(652,112
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,239
|
|
|
—
|
|
|
11,239
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,137
|
|
|
3,137
|
|
Stock-based compensation expense
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,184
|
|
|
—
|
|
|
—
|
|
|
3,184
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance — March 31, 2014
|
|
—
|
|
|
—
|
|
|
1,000
|
|
|
—
|
|
|
11,750
|
|
|
(639,786
|
)
|
|
(6,516
|
)
|
|
(634,552
|
)
|
The accompanying notes are an integral part of these consolidated financial statements.
F-87
The Attachmate Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
Years ended March 31, 2014, 2013 and 2012
(Amounts in thousands, except share, units and per share amounts)
1. | Business Information |
The consolidated financial statements herein represent the consolidation of The Attachmate Group, Inc., (TAG) a Delaware holding corporation with ownership of both direct and indirect subsidiaries. When the terms the Company, we, us, or our are used in this document, it refers to The Attachmate Group, Inc. and its consolidated subsidiaries.
Our principal brands include Attachmate, NetIQ, Novell and SUSE. We develop, sell and install enterprise-quality software that is positioned in the operating systems and infrastructure software layers of the information technology (IT) industry. Our enterprise solutions include systems and security management and host connectivity to corporations and government agencies worldwide. We also develop and deliver Linux operating system software for a range of computers from desktops to servers.
With innovative solutions, quality products, and exceptional service, we support the tactical and strategic business requirements of our customers. We deliver our solutions through direct channels, by serving large organizations directly, with systems integration partners, a network of distributors and resellers, or through telemarketing or web sales. Our most significant international operations are based in Ireland, United Kingdom, Germany, India, and Australia.
2. | Significant Accounting Policies |
Principles of Consolidation — The accompanying consolidated financial statements include the accounts of the Company and our wholly owned and majority-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Estimates and Assumptions — In preparing our consolidated financial statements in accordance with generally accepted accounting principles, we make a number of estimates and assumptions that affect the accounting for and recognition and disclosure of assets, liabilities, equity, revenues and expenses. We must make these estimates and assumptions because certain information that we use is dependent upon future events. In some cases, these estimates are particularly difficult to determine and we must exercise significant judgment. In preparing our financial statements, the most difficult, subjective and complex estimates and the assumptions that deal with the greatest amount of uncertainty relate to our accounting for asset impairments, valuation allowances for receivables and deferred tax assets, the accrual for loss contingencies, and stock-based compensation. Actual results could differ from those estimates.
Reclassifications — Certain amounts reported in the prior period have been reclassified within the operating expense section of the income statement to conform to the current years presentation. These reclassifications are immaterial to the financial statements and did not change total operating expenses, operating income or net income on the consolidated statement of operations.
Cash and Cash Equivalents — Cash equivalents consist of highly liquid investments with original maturities of three months or less. Cash and cash equivalents exclude cash that is not available to us due to restrictions related to our use. Such amounts are presented in the consolidated balance sheets as restricted cash.
Restricted Cash — We maintain cash in deposit accounts that are reserved primarily to meet our performance obligations in relation to certain leasing arrangements.
Accounts Receivable — Accounts receivable are recorded at the invoiced amount and do not bear interest. Accounts receivable includes amounts owed by geographically dispersed end-users, distributors, resellers, original equipment manufacturers and other customers. We do not require collateral or other security to support credit sales. Accounts receivable are not sold or factored.
We base our estimate of probable credit losses in our existing accounts receivable on (1) historical collection trends and (2) the collection risk of specific customer accounts due to a change in their financial condition
F-88
identified subsequent to the sales transaction. Account balances are written off after all means of collection have been exhausted and the potential for recovery is considered remote. We do not have any off-balance-sheet credit exposure related to our customers.
Concentrations of Risk — Financial instruments, which potentially subject us to concentrations of credit risk, consist of our holdings of cash and cash equivalents in banks wherein our balance exceeds the Federal Deposit Insurance Corporation limits, our accounts receivable, our other receivables and amounts due under subleases. We manage these credit risks by (1) maintaining our cash in several financial institutions and monitoring the stability of the financial institutions in which the cash is deposited and by (2) maintaining strict policies over credit extension that include credit evaluations, credit limits and monitoring procedures.
Our overall credit risk associated with trade receivables is mitigated due to the large number of geographically diverse customers we service. Accepted orders for customers located outside the United States totaled $551,339, $517,179 and $594,107 for the years ended March 31, 2014, 2013, and 2012, respectively. In fiscal year 2014, accepted orders for customers located in the United States and Germany represented approximately 44% and 13% of our total orders, respectively. No other country outside of the United States and Germany accounted for 10% or more of our total orders. No customer represented greater than 10% of world-wide revenue for the years ended March 31, 2014, 2013, and 2012, respectively. We generally have not experienced any material losses related to receivables from individual customers or groups of customers.
Our other receivables are included in the line items, prepaid expenses and other or other long-term assets in the consolidated balance sheets based upon the current or long-term classification of the receivable. Our credit risk for other receivables is isolated to a specific note issued to an entity that purchased one of our product lines in fiscal year 2009. As of March 31, 2014, the outstanding note issued was $3,298. The note is due June 30, 2016 and bears interest. As of March 31, 2014 and 2013 we have fully reserved for this note based upon the financial condition of that entity and their lack of payments to date, including interest, and thus the likelihood of receiving payment for the sale (or this note) is remote.
Our assets, exclusive of intercompany positions, for the Europe, Middle East, Asia region (EMEA) and the Asia Pacific region (APAC) are $197,551 and $26,728 at March 31, 2014, respectively, and $191,272 and $29,781 at March 31, 2013, respectively.
Our subleases are with many different parties and thus no concentration of credit risk exists as of March 31, 2014 or 2013 with respect to our subleases.
Equity Investments — We account for our equity investments under the equity method of accounting where we have the ability to significantly influence the operations or financial decisions of the investee. We initially record the investment at cost and adjust the carrying amount each period to recognize our share of the earnings or losses of the investee based on our percentage of ownership. At March 31, 2014, we had a 14.29% interest, or $16,685 investment, in Open Invention Network, LLC (OIN), which we account for as an equity investment given our significant influence over OINs operations. OIN is a privately-held company that acquires patents to promote Linux and open source by offering its patents on a royalty-free basis to any company, institution or individual that agrees not to assert its patents against the Linux operating system or certain Linux-related applications. During fiscal year 2014, 2013, and 2012, we recorded a loss of $1,586, income of $4,228, and a loss of $899, respectively, related to OIN, which is shown in the line item, other income (expense) — net within the other income (expense) section of the accompanying consolidated statements of operations. We review our equity investments periodically for indicators of impairment. We incurred no impairment during the periods.
Property and Equipment — Property and equipment are carried at cost, less accumulated depreciation and amortization, with the exception of certain fixed assets of Novell that were valued at estimated fair value at the time of our acquisition of this brand in fiscal year 2012. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, or lease term, if shorter. We assume no salvage value for our depreciable property and equipment. Expenditures for maintenance and repairs are expensed as incurred. The estimated useful lives of our assets are as follows:
Asset Classification
|
Useful Lives
|
Buildings
|
30 years
|
Furniture and equipment
|
2-7 years
|
Leasehold improvements and other
|
3-10 years
|
F-89
Property Held-for-Sale — Property held for sale is measured at the lower of its carrying amount or estimated fair value less costs to sell. As of March 31, 2014, we had $888 in property held-for-sale consisting of a building in South Africa. We have received proper management approval and are anticipating selling this building in fiscal year 2015.
During fiscal year 2013, we sold most of the buildings we own along with the related land that we had been holding for sale. We received net proceeds of $116,936 for these properties, after deducting $1,513 for broker commissions and title fees, and these proceeds are shown as a component of cash provided by investing activities within our consolidated cash flows.
Simultaneously with the sale of certain of these buildings, we entered into an agreement whereby we will lease these buildings back from the buyer. Under the terms of the agreement, all risks and rewards of ownership were transferred and we are the only tenant with the buyer. The lease term is for twelve and a half years. The average annual rent cost over the lease term is $7,941. Due to the lease back, the $11,778 gain on the sale of these buildings is being deferred and recognized ratably over the lease term which results in a gain of $942 per year. As of March 31, 2014, the remaining deferred gain on the sale of the buildings was $942 and $9,110 within other accrued liabilities and other long-term liabilities, respectively, on our consolidated balance sheets.
The remaining disposed properties were sold out right at a loss of $8,677. Thus, we had a net loss of $7,892 as shown in the line item, loss on facility sales in the consolidated statements of operations during fiscal year 2013. Included within the $7,892 net loss on the disposed properties was $1,107 of furniture and other equipment that was sold as part of the building sales and $829 of legal and other fees and foreign currency impacts.
Goodwill — Goodwill represents the excess of the acquisition cost over the fair value of assets acquired and liabilities assumed in business combinations. We do not amortize goodwill or intangible assets with indefinite useful lives resulting from acquisitions.
We evaluate the recoverability of goodwill annually as of January 1, or more frequently if events or changes in circumstances warrant, such as a material adverse change in the business. For fiscal year 2013, as a full evaluation occurred the year prior and there had been no significant change, we performed the qualitative assessment to determine whether it was more likely than not that the fair value of our sole reporting unit, TAG, was greater than its carrying value. We concluded that the fair value of TAG was greater than its carrying value and thus it was not necessary to perform any additional testing. For fiscal year 2014, we deemed it appropriate to have a recent fair value calculation performed to have an updated valuation. We determined the fair value of TAG using a weighting of fair values derived primarily from the income approach and to a lesser extent the market approach. TAGs fair value exceeded the carrying value. Since the calculations of TAGs fair value exceeded its carrying value, it was not necessary to perform any additional testing. Thus, there were no goodwill impairment charges in fiscal year 2014, 2013 or 2012.
Intangible Assets — Intangible assets consist primarily of existing customer relationships, developed technology, in-process research and development, non-competition agreements, and trade names, trademarks and other. Intangible assets with finite lives are presented net of accumulated amortization and are being amortized on a straight-line basis over the estimated life of the asset, ranging from two to twelve years. We assume no residual value for any of our intangible assets.
Our indefinite-lived assets are trademarks which are considered to be indefinite because they are expected to generate perpetual cash flows. Our intangible assets with indefinite lives are tested for impairment annually on January 1.
For fiscal year 2013, we utilized the option to qualitatively assess whether it was more likely than not that the fair value of the trademarks were greater than their carrying values. There were no impairment charges for indefinite-lived assets in fiscal year 2013.
In fiscal year 2014, we tested our trademarks for impairment by estimating the royalty rates for each trademark and applying these rates to a projected net sales stream and discounting the resulting cash flows to determine the fair values. Estimations and projections were based on judgments, and assumptions that management believes were appropriate in the circumstances. As a result, we recorded an impairment charge of $3,916 caused by the carrying value being greater than the estimated fair value for our Novell trademark. The decrease in the fair value of this trademark is primarily driven by a decrease in projected sales.
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Impairment of Long-Lived Assets — We periodically review the carrying value of our long-lived assets, such as property and equipment and intangible assets with finite lives, whenever current events or circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carrying amount of the asset to its estimated undiscounted future cash flows expected to be generated by the asset or an actual third-party valuation. An impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset. There were no impairment charges for the long-lived assets during fiscal year 2014, 2013, and 2012.
Debt Issuance Costs — Costs incurred in connection with originating our long-term debt, excluding fees paid to existing creditors, have been capitalized and are included in the line item, other long-term assets in the accompanying consolidated balance sheets. The related expenses are included in the line item, interest expense — loan fees within the other income (expense) section of the accompanying consolidated statements of operations. Debt issuance costs are being amortized over the life of the underlying debt obligation utilizing the effective interest method. Fees paid to existing creditors at the time of the refinancing are expensed and included in the line item loss on early extinguishment of debt within the other income (expense) section of the accompanying consolidated statements of operations.
In fiscal year 2012, we capitalized $50,283 in costs related to the debt agreements issued on April 27, 2011. In fiscal year 2011, we had capitalized $670 of costs related to this debt, such that the total capitalized cost related to the debt issued on April 27, 2011 was $50,953.
During fiscal year 2012, we expensed $5,643 of debt issuance costs related to the prior debt that was extinguished and amortized $7,939 of debt issuance costs that totals the $13,582 of debt issuance cost amortization that is shown in the line item, debt issuance cost amortization/write-off in our consolidated statements of cash flows.
In fiscal year 2013, we capitalized $2,282 in costs related to the new debt agreements issued in May 2012. Refer to Note 8, Long-Term Debt for more information.
During fiscal year 2013, we expensed $40,205 of debt issuance costs related to the prior debt, expensed $61,180 of fees paid to existing creditors related to the refinancing, and paid $5,500 in breakage fees on our pre-existing debt, totaling $106,885. This $106,885 is shown in the line item, loss on early extinguishment of debt within the other income (expense) section of the accompanying consolidated statements of operations. During fiscal year 2013, we amortized $2,027 of debt issuance costs and when combined with the $61,180 of fees paid to existing creditors and the additional $40,205 of debt issuance costs written off as part of the refinancing, totals the $103,412 that is shown in the line item, debt issuance cost amortization/write-off in our consolidated statements of cash flows. In addition to the $2,027 amortization of debt issuance costs, we also expensed an additional $362 in administrative and non-utilization loan fees for a total of $2,389, which is shown in the line item, interest expense – loan fees in our consolidated statements of operations.
In fiscal year 2014, we had no new debt offerings and thus no capitalization of debt issuance costs. We amortized $751 of debt issuance costs in fiscal year 2014 as well as expensed $342 in administrative and non-utilization loan fees. Thus a total of $1,093 is reflected in the line item, interest expense – loan fees in our consolidated statements of operations.
Self-Insurance Reserves — We retain a significant portion of the risk related to our employee health programs. The exposure for unpaid claims and associated expenses, including incurred but not reported losses, generally is estimated by factoring in (1) pending claims and historical trends and data and (2) the assessment of external actuaries. We limit our exposure by having specific stop-loss coverage per individual per year. The total liability is calculated at the end of the plan year based on the enrollment each month throughout the plan year. The gross estimated liability associated with settling unpaid claims is included in the line item, accrued compensation and employee benefits in our consolidated balance sheets.
Derivative Financial Instruments — From time-to-time, we have entered into interest rate swap and interest rate cap contracts to manage interest rate risk in order to reduce the proportion of total debt that is subject to variable interest rates since all of our outstanding debt is at variable rates. We do not use interest rate derivatives for trading or speculative purposes. Historically, the derivatives have not been designated as hedges for accounting purposes and thus are not linked to our debt obligations. Accordingly, the adjustment to the derivatives fair value is recognized in the period of change in the accompanying consolidated statements of
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operations within the line item, unrealized gain on mark-to-market derivatives and actual settlements are recognized in the period incurred and are reflected in the accompanying consolidated statements of operations within the line item, realized loss on derivative settlements. The estimated fair values of our derivatives fluctuate over time and should be viewed in relation to the underlying hedged transaction and the overall management of our exposure to fluctuations in the underlying risk.
We did not have any outstanding interest rate swaps as of March 31, 2014. Our interest rate swap agreements that were outstanding as of March 31, 2013 are set forth in the table below:
As of
|
Notional
Amount |
Receive
|
Pay
|
Maturity Date
|
||
March 31, 2013
|
$
|
400,000
|
|
Floating
|
0.500% - 2.500%
|
Through
April 27, 2013 |
In August 2011, we entered into two interest rate cap contracts. A total of $139 was paid for both contracts at the inception of the agreements for the right to receive payment if interest rates go above the contractual rate of 1.5%. Both contracts terminated on April 27, 2013 and had a combined notional amount of $175,000. We did not have any outstanding interest rate cap contracts as of March 31, 2014.
Fair Value — Due to the short-term nature of our financial instruments, which include cash, accounts receivable, accounts payable and other accrued liabilities, we believe that the carrying amount reported on the balance sheet approximates fair value. The carrying value of our long-term debt obligations approximates fair value as the interest rates vary with market rates. The carrying value of our investment in OIN approximates fair value as most of OINs assets are comprised of cash, and short and long-term investments.
Fair value is estimated market value that one could obtain when settling an asset or transferring a liability. Authoritative guidance associated with fair value measurements provides a framework for measuring fair value and establishes a fair value hierarchy that prioritizes the inputs used to measure fair value, giving the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 inputs) and the lowest priority to unobservable inputs (Level 3 inputs).
Our interest rate swaps and caps at March 31, 2013 were level 2, meaning that the fair value of these financial instruments were not determined by quoted market prices in active markets but by observable inputs, either directly or indirectly, such as quoted prices for similar assets. Specifically, our interest rate swaps and interest rate cap contracts were recorded at their estimated fair values based on quotes received from the financial institutions that trade these accounts.
The fair value of our interest rate swaps were liabilities of $439 and an asset of $50 at March 31, 2013. As of March 31, 2013, the liability amount is shown in the line item, other accrued liabilities, and the asset amount is shown in the line item, prepaid expenses and other in our consolidated balance sheet as of March 31, 2013. The fair value of our interest rate cap contracts was estimated at zero as of March 31, 2013 due to the short remaining life of the contracts.
The fair value of our assets that have been designated to fund one of our defined benefit plans (refer to Note 10, Employee Benefit Plans for more details on the plan) are Level 2 financial instruments, as the fair value is determined based on quotes received from the financial institution that holds these assets. The fair values of these assets are $20,274 and $17,866 as of March 31, 2014 and March 31, 2013, respectively, and are shown as a component of the line item, other long-term assets in our consolidated balance sheets.
As of March 31, 2014 and 2013, we had no Level 3 financial instruments.
Revenue Recognition — Our revenue is derived primarily from the sale of software licenses, software maintenance, subscriptions of SUSE Linux Enterprise Server (SLES), technical support, training, and professional services. Our customers include: distributors, who sell our products to resellers, and value added resellers (VARs) who provide solutions across multiple vertical market segments which usually include services; original equipment manufacturers (OEMs), who integrate our products with their products or solutions; and end-users, who may purchase our products and services directly from us or from other partners or resellers. Except for our SUSE Linux product, distributors do not order to stock and only order products when
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they have an end customer order. With respect to our SUSE Linux product, distributors often place orders and the product is then sold to end customers. OEMs report the number of copies duplicated and sold via an activity or royalty report. Software maintenance, technical support, and subscriptions of SLES typically involve one- to three-year contract terms.
Revenue from the license of software is generally recognized when the related products are shipped to end users (physical shipment or email delivery), provided that there are no remaining significant vendor or company obligations, evidence of an arrangement has been obtained, the fee is fixed or determinable, and collection of the arrangement fee is deemed probable. Software license fees for sales through OEMs are recognized upon receipt of license activity or royalty report. Our software licenses rarely include acceptance provisions. An acceptance provision allows a customer to test the software for a defined period of time before committing to license the software.
If the fee due from the customer is not fixed or determinable, revenue is recognized as payments become due from the customer. If collection is not considered probable, revenue is recognized when the fee is collected. We record provisions against revenue for estimated sales returns and allowances on product and service-related sales in the same period as the related revenue is recorded.
Maintenance fees, technical support, and subscriptions of SLES are recognized as revenue ratably over the contract period. Revenues from training and consulting are either time-and-materials or fixed price contracts. Revenue from time-and-materials contracts is recognized as the services are performed. Revenue from fixed-price contracts is recognized based on the proportional performance method, generally using estimated time to complete, to measure the completed effort. The cumulative impact of any revision in estimates to complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known.
For multiple element arrangements that include software licenses, we primarily follow the residual method to allocate the arrangement value to the various components. Under the residual method, each undelivered element (typically maintenance) is allocated value based on vendor specific objective evidence (VSOE) of fair value for that element and the remainder of the total arrangement fee is allocated to the delivered element, typically the software. If sufficient VSOE of fair value does not exist for all undelivered elements and the arrangement involves rights to unspecified additional software products, all revenue is recognized ratably over the term of the arrangement. If the arrangement involves rights to unspecified additional software products, all revenue is initially deferred until the only remaining undelivered element is software maintenance or technical support, at which time the entire fee is recognized ratably over the remaining maintenance or support term.
For some product lines we sell software licenses on a standalone basis, allowing us to establish VSOE of fair value on these software licenses. Accordingly, we follow the relative fair value, or proportional, revenue accounting method to allocate the value of multi-element arrangements proportionally to the software license and other components.
In the case of multiple-element arrangements that involve significant modification or customization of the software or involve services that are considered essential to the functionality of the software, contract accounting is applied. When VSOE of fair value exists for software maintenance or technical support in arrangements requiring contract accounting, the professional services and license fees are combined and revenue is recognized on the percentage of completion basis. The percentage of completion is generally calculated using hours incurred to date relative to the total expected hours for the entire project. The cumulative impact of any revision in estimates to complete or recognition of losses on contracts is reflected in the period in which the changes or losses become known. The maintenance or support fee is unbundled from the other elements and revenue is recognized ratably over the maintenance or support term. When VSOE of fair value does not exist for software maintenance or support, then all revenue is deferred until completion of the professional services, at which time the entire fee is recognized ratably over the remaining maintenance or support period.
We are required to charge certain taxes on our revenue transactions. These amounts are not included in revenue. Instead, we record the appropriate tax liability upon the sale and collect the tax remittance from the customer. The liability is relieved when we submit payment to the applicable government agency.
Microsoft Agreements – related revenue
On November 2, 2006, Novell entered into the Microsoft agreements, which were comprised of three different agreements; the Business Collaboration Agreement, (BCA), the Technical Collaboration Agreement (TCA)
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and the Patent Cooperation Agreement (PCA). On November 21, 2010 Attachmate and Microsoft Corporation entered into an agreement to extend the existing agreements between Novell, Inc. and Microsoft, contingent upon successful closing of the merger between Novell, Inc. and a subsidiary of Attachmate. The agreements extend the PCA for an additional 4 years, through January 1, 2016, in exchange for cash consideration. The extended BCA included a purchase of additional certificates as described below.
Under the BCA, we are marketing a combined offering with Microsoft. The combined offering consists of a subscription for SLES support along with various Microsoft products and is offered to customers desiring to deploy Linux and Windows in a virtualized setting. Microsoft made an upfront payment to us for SLES subscription certificates, which Microsoft may use, resell or otherwise distribute over the term of the agreement, allowing the certificate holder to redeem single or multi-year subscriptions for SLES support from us (entitling the certificate holder to upgrades, updates and technical support).
Under the TCA, Microsoft agreed to provide funding to help accomplish the development of certain technologies to optimize certain of each companys products so that they can run on the other companys related products.
Under the PCA, Microsoft agreed to covenant with our customers not to assert its patents against our customers for their use of our products and services, with certain exceptions. Likewise, we agreed to covenant with Microsofts customers not to assert our patents against Microsofts customers for their use of Microsoft products and services, with certain exceptions. We have continuing payment obligations to Microsoft under the Patent Cooperation Agreement.
Under the BCA, we recognize the revenue ratably over the respective subscription terms beginning upon customer activation, or for subscriptions which expire un-activated, if any, we recognize revenue upon subscription expiration. Under the PCA and TCA, we are recognizing this revenue ratably over the contractual term of the agreements. Our periodic payment obligations to Microsoft are recorded as a reduction of revenue.
Cost of Revenue — Cost of revenue primarily includes distribution and royalty costs for programs licensed, costs incurred to support and maintain products and services, and costs associated with the delivery of consulting and technical support services.
Research and Development — Research and development expenses include costs attributable to the development of new software and improvements on our existing software. Costs related to research, design, and development of computer software are charged to product development expense as incurred. Historically, costs incurred subsequent to the establishment of technological feasibility but prior to the general release of the product have not been significant and therefore have not been capitalized.
Advertising Costs — Advertising costs are expensed as incurred and consist of costs such as online advertising, public relations, promotions within business publications, and trade show promotions. Advertising expense was approximately $22,671, $26,300, and $23,300 for the years ended March 31, 2014, 2013, and 2012, respectively, and is included in the line item, sales and marketing in the accompanying consolidated statements of operations.
Stock-Based Compensation — The parent company of TAG has issued stock awards to certain TAG employees. As these awards are in substance for work performed for the benefit of TAG, stock-based compensation expense and the related capital contribution is recorded for these awards. Refer to Note 14, Stock-Based Compensation for more information about the termination of TAG stock awards and the stock awards from the parent company. We have recorded compensation cost for all stock-based awards made to employees based on estimated fair values and recognize compensation over the service period for awards expected to vest.
Translation of Foreign Currency — The functional currency of our foreign subsidiaries is the local currency, except for an Ireland entity and a German holding company, where the functional currency is the US dollar. Assets and liabilities of foreign subsidiaries, except for the Ireland entity and the German holding company, are translated into U.S. dollars at current month-end exchange rates. Revenues and expenses are translated monthly at the average monthly exchange rate.
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Translation adjustments are included in the line item, accumulated other comprehensive loss which is a component of stockholders (deficit) equity in the consolidated balance sheets. Transaction gains and losses arising from transactions denominated in a currency other than the functional currency of the entity involved are included in the line item, foreign currency exchange rate (loss) income– net in the other income (expense) section of the consolidated statements of operations.
Income Taxes — We recognize deferred income taxes for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred taxes of a change in tax rates is recognized in income in the period that includes the enactment date. We establish a valuation allowance when necessary to reduce deferred tax assets to amounts expected to be realized.
Provision for U.S. income taxes has been made for dividends received and cumulative undistributed earnings available for future distribution from international subsidiaries. A valuation allowance has been recorded for foreign tax credits that would be realized upon the repatriation of earnings by our controlled foreign corporations and other matters. Foreign net operating loss benefits are not recognized until the benefits and credits are more likely than not realizable.
Guarantees and Warranties — Indemnification and warranty provisions are sometimes contained within our customer license and service agreements. These are standard terms generally consistent with those prevalent in our industry. The duration of product warranties generally does not exceed 90 days following delivery of products. We have not incurred significant costs under customer indemnification or warranty provisions historically and management does not expect to incur significant obligations in the future. Accordingly, we do not record a liability for potential costs to rectify customer indemnification or warranty-related obligations unless and until we conclude the likelihood of a material obligation is probable and estimable. We review our receivables that may not be collected due to warranty related issues and provide an allowance as necessary.
The debt obligations on the consolidated balance sheets are obligations of our subsidiaries Attachmate, NetIQ and Novell. We have fully and unconditionally guaranteed all the bank debt obligations of Attachmate, NetIQ and Novell. Performance under this guaranty agreement would be required if there was a default on the obligation. No additional liabilities have been recorded for these guarantees because the underlying obligations are reflected in our consolidated balance sheets. Refer to Note 7, Line of Credit and Note 8, Long-Term Debt for more information on our debt obligations.
Disclosure of Subsequent Events — We have evaluated subsequent events through the date and time the financial statements were available to be issued, which was on June 26, 2014. We have experienced no material subsequent event since March 31, 2014 which require recognition or disclosure in our current period financial statements.
New Accounting Pronouncements — In May 2014, the FASB issued guidance on revenue from contracts with customers, which implements a five step process of how an entity should recognize revenue in order to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This guidance will be effective at the beginning of fiscal year 2019, and early application is not permitted. The standard permits the use of either the retrospective or cumulative effect transition method. We are currently evaluating the impact that the adoption will have on our consolidated financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In February 2013, the FASB issued guidance and disclosure requirements related to reclassifying items out of accumulated other comprehensive income. The guidance requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income. The new requirement for nonpublic entities is effective for fiscal years beginning after December 15, 2013 (our fiscal year 2015). The adoption of this guidance is not expected to have a material impact on the Companys consolidated financial results. This guidance is only disclosure-related and it will not have a material impact to our consolidated financial statements.
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3. | Acquisition |
On April 27, 2011, we acquired 100% of the stock of Novell, a leader in intelligent workload management. Under the terms of the acquisition, we acquired all the stock of Novell for a total of $2,216,870, comprised of $2,118,929 in cash and $97,941 in equity consideration. The $97,941 in equity consideration is shown in the line item, noncash financing activity – shareholder acquisition contribution in the consolidated statements of cash flows. During fiscal year 2012, we incurred $8,120 in acquisition costs that were expensed and that are shown as a component of the line item, general and administrative in the consolidated statements of operations.
The transaction was financed with cash on hand, new cash borrowings, cash contributions by our shareholders, and from equity contributions from an existing Novell shareholder. The results of Novells operations have been included in the consolidated financial statements beginning April 27, 2011.
All identifiable assets and liabilities were assigned a portion of the cost of acquisition based on their respective estimated fair values. The determination of fair value is a critical and complex calculation that involves significant assumptions and estimates. These assumptions and estimates were based on managements best judgments. We have not assumed any residual value for any of the acquired intangible assets.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed at the date of acquisition.
|
Estimated
Fair Value |
Estimated
Useful life |
||
Cash acquired(a)
|
$
|
1,503,489
|
|
N/A
|
Accounts receivable(b)
|
|
95,839
|
|
1 year
|
Property and equipment(c)
|
|
161,774
|
|
1-30 years
|
Deferred income taxes(d)
|
|
247,319
|
|
N/A
|
Other assets acquired(e)
|
|
99,390
|
|
N/A
|
Deferred revenue assumed(f)
|
|
(242,755
|
)
|
Up to 5 years
|
Deferred tax liability assumed(g)
|
|
(213,357
|
)
|
N/A
|
Other liabilities assumed(h)
|
|
(295,425
|
)
|
N/A
|
Net tangible assets acquired
|
|
1,356,274
|
|
|
|
|
|
|
|
Identifiable intangible assets:
|
|
|
|
|
Customer relationships(i)
|
|
205,196
|
|
5-7 years
|
Developed technology(j)
|
|
94,867
|
|
2-5 years
|
In process research and development(k)
|
|
44,703
|
|
2-5 years
|
Non-competition agreements(l)
|
|
11,700
|
|
2 years
|
Tradename and trademarks-indefinite lives(m)
|
|
76,765
|
|
N/A
|
Tradename and trademarks-finite lives(m)
|
|
4,463
|
|
5 years
|
Goodwill (n)
|
|
422,902
|
|
N/A
|
Total net assets acquired
|
$
|
2,216,870
|
|
|
Purchase price:
|
|
|
|
|
Cash
|
$
|
2,118,929
|
|
|
Fair value of equity(o)
|
|
97,941
|
|
|
Total consideration
|
$
|
2,216,870
|
|
|
(a) | Of the cash acquired, $1,385,888 was utilized for the purchase. |
(b) | The accounts receivable listed in the table above have been collected. |
(c) | The fair value of certain property and equipment, such as buildings, land, and fixed assets with a cost greater than $500 were estimated through the use of third party valuations. For the remaining property and equipment, which represents assets with minimal cost, net book value was utilized as this was management’s best estimate of fair value. These assets were comprised primarily of computer equipment. |
(d) | Deferred income taxes were adjusted to primarily reflect the tax impact of the adjustment to deferred revenue as well as the impact of the change in assertion related to foreign earnings that are no longer considered to be permanently invested. |
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(e) | Other assets acquired include prepaid expenses and other current assets whose carrying value was utilized as the estimate for fair value due to their short-term nature. Also included in other assets are Novell’s equity investment in Open Invention Network LLC as well as Novell’s investment in assets for its German pension plan which are both carried at estimated fair value. |
(f) | The fair value of deferred revenue was estimated through the use of third party valuations at the value of the remaining obligation to be performed. |
(g) | Deferred tax liabilities were adjusted primarily to reflect the tax liability associated with the addition of the intangible assets. |
(h) | Included within the fair value of other liabilities assumed are contingent liabilities related to ongoing litigation of $24,811 as of April 27, 2011. Other liabilities also include the obligation for other current liabilities, such as accounts payable, accrued payroll and other compensation, and current restructuring liabilities. As these liabilities will be paid within a year, their carrying value was utilized as the best estimate of fair value. |
(i) | Customer relationships relate primarily to customers under maintenance agreements. The fair value of these relationships was determined through the use of third party valuations based on discounted expected cash flows to be received as a result of the agreements and assumptions about their renewal rates. |
(j) | Developed technology relates to products that were commercially available and could be combined with our products and services. Discounted expected future cash flows attributable to the products were utilized by a third party to determine the fair value of developed technology that had reached technological feasibility. |
(k) | In-process research and development pertained to technology that was not technologically feasible at the acquisition date, meaning it had not reached the working model stage, did not contain all of the major functions planned for the product, and was not ready for initial customer testing. The fair value was estimated through the use of third party valuations based on discounting estimated future cash flows from the related products. No in-process research and development was written off during the period. |
(l) | Non-competition agreements relate to agreements with Novell’s former executives. The fair value of the non-competition agreements was estimated through the use of third party valuations based on comparing the discounted cash flows of Novell with and without the covenants in place. This difference was then probability weighted based on the likelihood of the executive competing. |
(m) | The fair value of trade names and trademarks were estimated through the use of third party valuations using the relief-from-royalty method, which assigns a royalty rate to the revenue streams that were expected from the products using the trade name. The royalty rates were determined based on the history of Novell’s trade names and trademarks, the expected life, and information from comparable market transactions, applied to the product revenue and discounted to a present value. The indefinite life trade names and trademarks relate to the Novell and SUSE trade names. |
(n) | We paid a premium over the fair value of the net tangible and identifiable intangible assets acquired and this premium is recorded as goodwill. We were willing to pay this premium due to our belief that the open source, identity management, security management and collaboration products developed by Novell are a valuable addition to our product lines and will help us remain competitive and increase our revenue. Additionally contributing to the goodwill is the acquisition of the assembled workforce, complimentary distribution channels, and cost synergies. The goodwill is not tax deductible. |
(o) | The fair value of equity that was contributed was based on the contribution of 16,055,930 Novell Inc. shares at the acquisition price of $6.10 per share. |
4. | Property and Equipment |
Property and equipment at March 31, 2014 and 2013, consists of the following:
|
2014
|
2013
|
||||
Buildings and land
|
$
|
1,570
|
|
$
|
2,719
|
|
Furniture and equipment
|
|
56,305
|
|
|
54,952
|
|
Leasehold improvements and other
|
|
17,295
|
|
|
16,796
|
|
Property and equipment — at cost
|
|
75,170
|
|
|
74,467
|
|
Less accumulated depreciation
|
|
(49,877
|
)
|
|
(41,714
|
)
|
Property and equipment — net
|
$
|
25,293
|
|
$
|
32,753
|
|
Depreciation was $12,182, $13,175, and $19,931 for the years ended March 31, 2014, 2013, and 2012, respectively. During fiscal year 2014 and 2013, changes in foreign currency rates decreased the value of our fixed assets by $753 and $1,088, respectively. For fiscal year 2014 we retired $1,204 in assets primarily due to the merging of our international legal entities.
During fiscal year 2013 and 2012, we incurred a loss of $1,168 and $885, respectively, for the disposal of assets not associated with the building sales discussed in Note 2, section - Property and Equipment. The disposals for fiscal year 2013 relate primarily to the write-off of leasehold improvements for leases that were vacated during fiscal year 2013 and were recorded as restructuring charges. Refer to Note 13, Restructuring Charges and Merger Liabilities for more information on the restructuring actions. Additionally during fiscal year 2013, the lease of our Seattle office building expired and we moved to a new location and entered into a new lease. As part of the new Seattle lease, we received a $4,005 tenant improvement allowance from our landlord. In accordance with accounting rules, we capitalized the $4,005 tenant improvement allowance as a leasehold improvement, along with the leasehold improvements costs that we incurred.
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The carrying amount of our long-lived assets by geographical location which are comprised of our fixed assets:
|
2014
|
2013
|
||||
U.S.
|
$
|
18,759
|
|
$
|
21,402
|
|
Rest of Americas
|
|
56
|
|
|
4,161
|
|
EMEA
|
|
5,188
|
|
|
5,795
|
|
APAC
|
|
1,290
|
|
|
1,395
|
|
Total foreign long-lived assets at fiscal year-end
|
|
6,534
|
|
|
11,351
|
|
Total long-lived assets at fiscal year end
|
$
|
25,293
|
|
$
|
32,753
|
|
5. | Goodwill and Intangible Assets |
There were no changes in the goodwill balance of $700,769 during fiscal year 2014 or 2013.
Intangible assets at March 31, 2014 and 2013, consist of the following:
|
March 31, 2014
|
|||||||||||
|
Gross
Amount |
Accumulated
Amortization |
Net Book
Value |
Lives
(in years) |
||||||||
Definite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
388,775
|
|
$
|
(252,908
|
)
|
$
|
135,867
|
|
5-12
|
||
Developed technology
|
|
198,034
|
|
|
(180,287
|
)
|
|
17,747
|
|
2-7
|
||
In process research and development
|
|
44,703
|
|
|
(36,160
|
)
|
|
8,543
|
|
2-5
|
||
Non-competition agreements
|
|
11,700
|
|
|
(11,700
|
)
|
|
—
|
|
2
|
||
Trade names, trademarks and other
|
|
17,307
|
|
|
(6,990
|
)
|
|
10,317
|
|
3-8
|
||
Net definite life intangible assets
|
|
660,519
|
|
|
(488,045
|
)
|
|
172,474
|
|
|
||
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
||
Trade names and trademarks
|
|
107,230
|
|
|
—
|
|
|
107,230
|
|
N/A
|
||
Net intangible assets
|
$
|
767,749
|
|
$
|
(488,045
|
)
|
$
|
279,704
|
|
|
|
March 31, 2013
|
|||||||||||
|
Gross
Amount |
Accumulated
Amortization |
Net Book
Value |
Lives
(in years) |
||||||||
Definite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
$
|
388,775
|
|
$
|
(202,978
|
)
|
$
|
185,797
|
|
5-12
|
||
Developed technology
|
|
198,022
|
|
|
(152,711
|
)
|
|
45,311
|
|
2-7
|
||
In process research and development
|
|
44,703
|
|
|
(25,147
|
)
|
|
19,556
|
|
2-5
|
||
Non-competition agreements
|
|
11,700
|
|
|
(11,212
|
)
|
|
488
|
|
2
|
||
Trade names, trademarks and other
|
|
10,574
|
|
|
(5,797
|
)
|
|
4,777
|
|
3-8
|
||
Net definite life intangible assets
|
|
653,774
|
|
|
(397,845
|
)
|
|
255,929
|
|
|
||
Indefinite life intangible assets:
|
|
|
|
|
|
|
|
|
|
|
||
Trade names and trademarks
|
|
111,146
|
|
|
—
|
|
|
111,146
|
|
N/A
|
||
Net intangible assets
|
$
|
764,920
|
|
$
|
(397,845
|
)
|
$
|
367,075
|
|
|
During fiscal year 2014, we adjusted down our projected revenue streams for our Novell brand and incurred an impairment to the indefinite life Novell tradename of $3,916. We acquired $6,745 of intangible assets primarily related to software development projects for internal use during fiscal year 2014. Of the software development projects capitalized during fiscal year 2014, $5,311 is for the realization phase of implementing one enterprise resource planning platform across TAG.
During fiscal year 2013, we acquired $613 of technology intangible assets and $1,550 of trade names, trademark and other intangible assets related to software development projects for internal use. Of the software development projects capitalized during fiscal year 2013, $1,031 is for the design phase of implementing one enterprise resource planning platform across TAG.
F-98
Amortization expense was $90,200, $108,891 and $105,085 for the years ended March 31, 2014, 2013, and 2012, respectively.
The following is a summary of the remaining weighted average amortization period of our intangible assets:
|
Amortization
Period (Years) |
||
Definite life intangible assets:
|
|
|
|
Customer relationships
|
|
3.1
|
|
Developed technology
|
|
1.9
|
|
In process research and development
|
|
1.9
|
|
Non-competition agreements
|
|
—
|
|
Trade names, trademarks and other
|
|
1.8
|
|
Amortization of intangible assets for the next five fiscal years and thereafter is expected to be as follows:
Years Ending March 31
|
|
||
2015
|
$
|
65,053
|
|
2016
|
|
55,575
|
|
2017
|
|
29,193
|
|
2018
|
|
13,386
|
|
2019
|
|
1,522
|
|
Amortization has not yet started
|
|
7,745
|
|
|
$
|
172,474
|
|
There are $7,745 of software assets that are currently in development as of March 31, 2014 and therefore amortization has not yet begun. Since the implementation dates of these assets are dependent upon the completion of the respective projects, amortization is not included in the above tables as there are no definitive start dates.
6. | Other Long-Term Assets |
Other assets at March 31, 2014 and 2013, consist of the following:
|
2014
|
2013
|
||||
Equity investment in Open Invention Network
|
$
|
16,685
|
|
$
|
18,272
|
|
German Pension Asset (Note 10)
|
|
20,274
|
|
|
17,866
|
|
Long-term income tax receivable
|
|
10,047
|
|
|
10,047
|
|
Debt issuance costs (Note 8)
|
|
2,541
|
|
|
3,291
|
|
Other assets
|
|
6,347
|
|
|
3,546
|
|
|
$
|
55,894
|
|
$
|
53,022
|
|
7. | Line of Credit |
At March 31, 2014 and 2013, we had a revolving line of credit with a limit up to $40,000. This line of credit has a maturity date of May 22, 2017 and bears interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin that is no greater than 4.75%, with an optional Eurodollar rate also available. The interest rate on this line of credit was 7.25% at March 31, 2014. We had no outstanding borrowings under our $40,000 line of credit during the fiscal years ended March 31, 2014, 2013, and 2012 and therefore no interest expense was incurred during those periods. During the fiscal years ended March 31, 2014 and 2013, we were charged 0.50% of the available balance and during the fiscal year ended March 31, 2012, we were charged 0.75% of the available balance for lack of utilization of this line which is included in the line item, interest expense — loan fees in the consolidated statements of operations. This charge amounted to $204, $216 and $282 for the years ended March 31, 2014, 2013, and 2012, respectively.
F-99
8. | Long-term Debt |
We had two term loan credit agreements that had outstanding principal balances at March 31, 2014 and 2013, of $1,294,726 and $1,438,125. These term loans were secured by substantially all of our assets.
Term loans entered into on May 22, 2012 — On May 22, 2012, we entered into two term loan credit agreements in order to repay our previous loans and to help fund an equity distribution to our shareholders. Refer to Note 15, Stockholders (Deficit) Equity for more information about the equity distribution. We incurred loan fees and costs associated with these new credit agreements in the amount of $2,282 which is being amortized over the terms of the respective agreements. The term loans contained certain restrictions related to the sale of assets and dividend payments.
We had borrowings under the First Lien Credit Agreement (First Lien) in the amount of $905,508 and $1,038,125 as of March 31, 2014 and 2013. The First Lien matures on November 22, 2017 at which time the remaining principal balance is due to be repaid. We are required to make quarterly payments that vary over time. Borrowings under the First Lien bear interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin that is no greater than 4.75%, with an optional Eurodollar rate also available. Interest expense on the First Lien for the years ended March 31, 2014 and 2013 was $72,324 and $68,140, respectively, and the applicable interest rate was 7.25% for both periods.
Borrowings under the Second Lien Credit Agreement (Second Lien) in the original amount of $400,000 do not require any principal payments until the loan matures on November 22, 2018. However, during fiscal year 2014, certain creditors under the First Lien waived prepayments required due to our excess cash flow position at year end. The Second Lien is subordinated to the First Lien and thus when this was waived we made the payment of $10,782 to the creditors of the Second Lien resulting in a remaining principal balance of $389,218 at March 31, 2014. Borrowings under the Second Lien bear interest at a base rate equal to the higher of the prime rate or 0.5% above the overnight federal funds rate or 1.0% above the one month Eurodollar rate, plus an applicable margin of 8.5%, with an optional Eurodollar rate also available. Interest expense on the Second Lien for the year ended March 31, 2014 and 2013 was $43,741 and $38,378, respectively, and the applicable interest rate for both periods was 11.0%.
The First Lien and Second Lien are subject to affirmative and negative financial covenants. We are in compliance with all financial covenants as of March 31, 2014.
The repayment schedule of the principal portion of the outstanding debt as of March 31, 2014, is as follows:
Years Ending March 31
|
|
||
2015
|
$
|
32,383
|
|
2016
|
|
82,500
|
|
2017
|
|
103,125
|
|
2018
|
|
687,500
|
|
2019
|
|
389,218
|
|
|
|
1,294,726
|
|
Less current portion
|
|
(32,383
|
)
|
Long-term debt — less current portion
|
$
|
1,262,343
|
|
As of March 31, 2014, we do not have any required accelerated payments due for payment.
Term loans entered into on April 27, 2011 — The two term loan credit agreements that were repaid and replaced in May 2012 were entered into on April 27, 2011, in order to fund our acquisition of Novell and repay previous loans. Refer to Note 3, Acquisition for more information about the Novell acquisition. We incurred loan fees and costs associated with these credit agreements in the amount of $50,953 which was being amortized over the terms of the respective agreements, with the residual amount of $40,205 written off in May 2012 as part of the extinguishment of these loans.
We incurred interest expense related to these loans of $11,557 and $78,202 in fiscal year 2013 and 2012, respectively, prior to their extinguishment in May 2012. During fiscal year 2013, we also recorded $6 of other miscellaneous interest expense related to other items.
F-100
Term loans entered into on June 30, 2006 — During fiscal year 2012, we incurred interest expense of $4,589 related to the two term loans that were extinguished on April 27, 2011 in order to purchase Novell. As a result of the April 27, 2011 extinguishment, we recognized $5,643 in costs related to the write-off of unamortized issuance costs during fiscal year 2012 related to these loans.
9. | Income Taxes |
Provision for Income Taxes — Our income tax provision (benefit) consists of the following for the years ended March 31, 2014 and 2013:
|
2014
|
2013
|
||||
Current:
|
|
|
|
|
|
|
Federal
|
$
|
7,206
|
|
$
|
(28
|
)
|
Foreign
|
|
12,380
|
|
|
12,138
|
|
State and local
|
|
2,006
|
|
|
(5,993
|
)
|
Total current income tax provision
|
|
21,592
|
|
|
6,117
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
|
6,095
|
|
|
(84,104
|
)
|
Foreign
|
|
4,400
|
|
|
3,313
|
|
State and local
|
|
1,147
|
|
|
(13,253
|
)
|
Total deferred income tax provision (benefit)
|
|
11,642
|
|
|
(94,044
|
)
|
Income tax provision (benefit)
|
$
|
33,234
|
|
$
|
(87,927
|
)
|
The total deferred income tax expense and benefit above for fiscal year 2014 and 2013, respectively, does not include $(2,030) and $7,239, respectively, of deferred taxes that resulted from other accumulated comprehensive income.
A reconciliation of the income tax benefit computed at the statutory federal income tax rate with our effective income tax rate is as follows for the years ended March 31, 2014, 2013, and 2012:
|
2014
|
2013
|
2012
|
||||||
Tax benefit at federal statutory rate
|
$
|
15,565
|
|
$
|
(31,260
|
)
|
$
|
(52,403
|
)
|
State income taxes — net of federal benefit
|
|
2,024
|
|
|
(5,924
|
)
|
|
(1,714
|
)
|
Tax credits
|
|
(1,969
|
)
|
|
(2,012
|
)
|
|
(1,825
|
)
|
Change in valuation allowance
|
|
(18,053
|
)
|
|
(16,665
|
)
|
|
3,031
|
|
Foreign earnings
|
|
38,934
|
|
|
(16,258
|
)
|
|
9,991
|
|
Prior year adjustments
|
|
877
|
|
|
(11,565
|
)
|
|
179
|
|
Uncertain tax positions
|
|
(4,414
|
)
|
|
(6,337
|
)
|
|
(442
|
)
|
Intellectual property transfer
|
|
—
|
|
|
(59
|
)
|
|
—
|
|
Other
|
|
270
|
|
|
2,153
|
|
|
5,234
|
|
Income tax provision (benefit)
|
$
|
33,234
|
|
$
|
(87,927
|
)
|
$
|
(37,949
|
)
|
The domestic and foreign components of income (loss) before income taxes are as follows:
|
2014
|
2013
|
2012
|
||||||
Domestic
|
$
|
(41,841
|
)
|
$
|
(179,870
|
)
|
$
|
(163,129
|
)
|
Foreign
|
|
86,314
|
|
|
90,556
|
|
|
13,407
|
|
Total income (loss) before income taxes
|
$
|
44,473
|
|
$
|
(89,314
|
)
|
$
|
(149,722
|
)
|
F-101
Deferred tax assets (liabilities) — Deferred taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of our deferred tax assets and liabilities are as follows as of March 31, 2014 and 2013:
|
2014
|
2013
|
||||
Deferred tax assets:
|
|
|
|
|
|
|
Accrued liabilities
|
$
|
2,341
|
|
$
|
20,780
|
|
Capital loss carryforwards
|
|
—
|
|
|
11,678
|
|
Investment impairments
|
|
9,915
|
|
|
9,891
|
|
Credit carryforwards
|
|
54,551
|
|
|
55,997
|
|
Excess foreign tax credits
|
|
14,218
|
|
|
37,208
|
|
Compensation accruals
|
|
7,784
|
|
|
2,834
|
|
Unearned revenue
|
|
61,497
|
|
|
56,745
|
|
Deductible basis in fixed assets
|
|
3,446
|
|
|
3,103
|
|
Net operating loss carryforwards
|
|
43,322
|
|
|
54,463
|
|
Other
|
|
19,497
|
|
|
19,912
|
|
Total gross deferred tax assets
|
|
216,571
|
|
|
272,611
|
|
Less valuation allowance
|
|
(38,455
|
)
|
|
(50,139
|
)
|
|
|
178,116
|
|
|
222,472
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Intangibles
|
|
(11,758
|
)
|
|
(42,715
|
)
|
Other
|
|
(2,700
|
)
|
|
(2,450
|
)
|
Total gross deferred tax liabilities
|
|
(14,458
|
)
|
|
(45,165
|
)
|
Net deferred tax asset
|
$
|
163,658
|
|
$
|
177,307
|
|
At March 31, 2014, we had approximately $89,478 in federal net operating loss carryforwards from acquired companies that will expire in fiscal years 2020 to 2028. The approximately $89,478 of federal net loss carryforwards from acquired companies can be utilized to offset future taxable income, but are subject to certain limitations. We have federal research credit carryforwards of approximately $33,124 which expire in fiscal years 2017 through 2034, foreign tax credit carryforwards of approximately $14,218 that expire in fiscal years 2022 through 2024, and alternative minimum tax credit carryforwards of approximately $13,906 which can be carried forward indefinitely. We also have various state and foreign net operating loss and credit carryforwards that expire in accordance the respective statutes.
A valuation allowance has been recorded for certain state net operating losses and state tax credits, certain research tax credits, net operating losses and foreign tax credits. These attributes are subject to various changes of ownership limitations. Utilization of these carryforward items depends on the recognition of future taxable income in the respective taxable jurisdictions.
Liabilities for Uncertain Tax Positions — The total balance of unrecognized tax benefits was $22,161 and $26,384 as of March 31, 2014 and 2013, respectively, excluding interest. Of the $22,161 as of March 31, 2014, $20,812 would favorably impact our effective tax rate if recognized.
During fiscal year 2014, we decreased our accrual for interest by $125 related to unrecognized tax benefits. During fiscal year 2013, we increased our accrual for interest by $71 related to unrecognized tax benefits. We had $4,941 and $5,066 accrued for the payment of interest related to unrecognized tax benefits as of March 31, 2014 and 2013, respectively.
As of March 31, 2014, we have recorded a $25,753 liability for unrecognized tax benefits and related interest in the line item Other long-term liabilities on our consolidated balance sheets.
F-102
With respect to the unrecognized tax benefits as of March 31, 2014, we believe it is reasonably possible that $764 of unrecognized tax benefits and accrued interest will decrease within the next twelve months as a result of statutes of limitations expiring in varying jurisdictions.
|
Total Gross
Unrecognized Tax Benefits |
||
Balance at March 31, 2012
|
$
|
32,922
|
|
Increases related to fiscal 2013 tax positions
|
|
1,884
|
|
Decreases related to prior fiscal year tax positions
|
|
(102
|
)
|
Expiration of statute of limitations for assessment of taxes
|
|
(8,320
|
)
|
Balance at March 31, 2013
|
|
26,384
|
|
Increases related to fiscal 2014 tax positions
|
|
567
|
|
Decreases related to prior fiscal year tax positions
|
|
(3,143
|
)
|
Expiration of statute of limitations for assessment of taxes
|
|
(1,647
|
)
|
Balance at March 31, 2014
|
$
|
22,161
|
|
Due to the presence of net operating loss carryforwards in most jurisdictions, we have tax years open for examination by taxing authorities back to 2000. Due to inherent complexities arising from the nature of our business, future changes in income tax law, tax sharing arrangements or variances between actual and anticipated operating results, certain judgments and estimates are made. Therefore, actual income taxes could vary materially from these estimates.
10. | Employee Benefit Plans |
We sponsor a qualified retirement plan (the 401(k) Plan). The 401(k) Plan is for all eligible U.S. employees under the provisions of the Internal Revenue Code. Participants may defer a portion of their annual compensation on a pre-tax basis subject to tax limitations. The 401(k) Plan allows us the flexibility to adjust the match percentage. Any matching contributions we elect to make under the 401(k) Plan vest ratably over a period of three years.
We also have other retirement plans in certain foreign countries in which we employ personnel. Each plan is consistent with local laws and business practices. During fiscal years 2014, 2013, and 2012, we made matching contributions on our 401(k) Plan and other retirement plans and expensed $12,228, $11,481 and $13,163, respectively.
We have a defined benefit pension plan sponsored by a German subsidiary that covers 53 current employees and 241 former employees or retirees as of March 31, 2014. The plan was closed to new members as of November 2004. Actuarial gains or losses are being amortized over a 15 year period, and the amortization charges are included within the overall net periodic pension costs, which are charged to the statements of operations.
The related defined benefit plan information is as follows:
|
2014
|
2013
|
||||
Change in benefit obligation:
|
|
|
|
|
|
|
Benefit obligation at beginning of fiscal year
|
$
|
22,248
|
|
$
|
16,790
|
|
Service cost
|
|
759
|
|
|
459
|
|
Interest cost
|
|
855
|
|
|
814
|
|
Actuarial loss (gain)
|
|
879
|
|
|
4,901
|
|
Benefits paid
|
|
(96
|
)
|
|
(40
|
)
|
Foreign exchange
|
|
1,670
|
|
|
(676
|
)
|
Benefit obligation at end of fiscal year
|
$
|
26,315
|
|
$
|
22,248
|
|
Accrued benefit cost
|
$
|
26,315
|
|
$
|
22,248
|
|
Component of accumulated other comprehensive income:
|
|
|
|
|
|
|
Pension actuarial gain
|
$
|
5,232
|
|
$
|
4,210
|
|
Weighted-average assumptions:
|
|
|
|
|
|
|
Discount rate
|
|
3.4
|
%
|
|
3.7
|
%
|
Rate of salary increase
|
|
2.0
|
%
|
|
2.0
|
%
|
Post-retirement pension increases
|
|
2.0
|
%
|
|
2.0
|
%
|
Net periodic pension cost
|
$
|
1,805
|
|
$
|
1,262
|
|
F-103
Estimated benefit payments are as follows:
Years Ending March 31
|
|
||
2015
|
$
|
163
|
|
2016
|
|
198
|
|
2017
|
|
239
|
|
2018
|
|
280
|
|
2019
|
|
320
|
|
2020 and thereafter
|
|
2,812
|
|
|
$
|
4,012
|
|
The benefit obligations at March 31, 2014 and 2013 are components of the line items, accrued compensation and employee benefits and other long-term liabilities in our consolidated balance sheets. At March 31, 2014 and 2013, we had assets valued at $20,274 and $17,866, respectively, designated to fund the pension obligation, which do not qualify as plan assets as they have not been funded to the plan and are subject to the creditors of the Company.
We have a separate immaterial defined benefit plan for another German subsidiary that as of March 31, 2014, 2013, and 2012 had losses of $493, $493 and $170, respectively, in accumulated other comprehensive loss, benefit obligations at March 31, 2014 and 2013 of $2,414 and $2,015, respectively, and plan assets at March 31, 2014 and 2013 with a fair value of $1,966 and $1,646, respectively.
The tax effect of the pension amounts in accumulated other comprehensive loss for the two German plans described above for fiscal year 2014 and 2013 was $2,176 and $1,787, respectively.
11. | Other Accrued Liabilities |
Other accrued liabilities consist of the following:
|
2014
|
2013
|
||||
Accrued interest payable
|
$
|
19,883
|
|
$
|
22,002
|
|
Accrued sales and other taxes
|
|
5,834
|
|
|
11,839
|
|
Accrued royalties
|
|
9,398
|
|
|
8,991
|
|
Accrued marketing expense
|
|
6,227
|
|
|
4,421
|
|
Other accrued expense
|
|
13,691
|
|
|
13,806
|
|
|
$
|
55,033
|
|
$
|
61,059
|
|
12. | Commitments and Contingencies |
Leases — We lease most of our office facilities, certain equipment, and vehicles under operating leases expiring at various dates through 2025, though many of our lease agreements have renewal options. We are committed under these lease agreements for the following gross minimum rental payments which includes payments for leases that are included within restructuring:
Years Ending March 31
|
|
||
2015
|
$
|
24,606
|
|
2016
|
|
22,948
|
|
2017
|
|
19,884
|
|
2018
|
|
17,073
|
|
2019
|
|
15,667
|
|
2020 and thereafter
|
|
70,339
|
|
|
$
|
170,517
|
|
Certain leases contain escalation clauses that require us to recognize rent expense straight line over the life of the respective lease. We recognized rent expense of approximately $22,652, $21,650 and $16,250 for the years ended March 31, 2014, 2013, and 2012, respectively.
F-104
This rent expense is net of sublease rental income of approximately $1,186, $3,900 and $5,250 for the years ended March 31, 2014, 2013, and 2012, respectively. Our sublease agreements terminate up through fiscal year 2022. As of March 31, 2014, for these non-cancelable subleases, we anticipate recognizing a total reduction to rental expense of approximately $776 through the end of the sublease terms.
Unconditional Obligations for Outside Services and Royalties — The agreements we maintain for certain outside services and royalties expire at various dates through fiscal year 2022. However, most of these contracts renew automatically upon expiration unless specifically canceled within the contract terms. Additionally, under the terms of some contracts, prepayment was required and these are currently reflected as prepaid assets.
Our future required minimum obligation for outside services and royalties, which represents future contracted payments entered into as a part of the normal course of business that are not recorded as liabilities as of March 31, 2014 are as follows:
Years Ending March 31
|
|
||
2015
|
$
|
15,785
|
|
2016
|
|
13,421
|
|
2017
|
|
9,502
|
|
Thereafter
|
|
56
|
|
|
$
|
38,764
|
|
In addition to the minimum payments listed above, in certain instances we also have an obligation to make royalty payments that fluctuates based on the monthly sales of various products. Royalty terms range from a percentage of total sales to a set fee per license or maintenance sold. The amount incurred under these royalty obligations was $22,125, $22,716 and $24,006 for the years ended March 31, 2014, 2013, and 2012, respectively, and is included within cost of revenue.
Legal Proceedings — From time to time, we are a defendant in claims or lawsuits involving matters which are routine to the nature of our business such as claims involving former employees, or claims for infringement of patents. Management is of the opinion that the ultimate resolution of all such matters will not have a material adverse effect on its results of operations, cash flows, or financial position.
Following the announcement of the proposed acquisition of Novell, certain of Novells shareholders filed class action lawsuits challenging the proposed transaction alleging the Novell directors breached their fiduciary duties to the Novell shareholders. At the beginning of fiscal year 2013, we accrued $5,000 for this claim but during that year certain of these lawsuits were dismissed and others were settled. As a result, during fiscal year 2013, we reduced our $5,000 accrual to $432, which is the settlement amount we paid in fiscal year 2014. There are no further claims against us regarding this matter.
We inherited the outstanding litigation that Novell had when we acquired Novell.
In 2004, Novell filed an antitrust complaint against Microsoft related to unfair trade practices committed by Microsoft which significantly damaged the value of WordPerfect during the time period that Novell owned and marketed the WordPerfect products. Microsofts initial Motion to Dismiss was granted in part and denied in part. Both Microsoft and Novell appealed to the U.S. 4th Circuit Court of Appeals. On October 15, 2007, the U.S. 4th Circuit Court of Appeals affirmed the District Courts ruling allowing Novell to proceed with its claims against Microsoft. Microsofts petition to the U.S. Supreme Court was rejected in March 2008. After extensive discovery in the case, Novell and Microsoft filed certain Motions for Summary Judgment. On March 30, 2010, the District Court issued an order granting Microsofts Motion for Summary Judgment as to the issue of whether Novell had previously transferred its claims now being asserted against Microsoft. The Court determined that a previous agreement by Novell and related to the DR DOS business sold to Caldera in 1995, included any claims related to the Operating System Market including the claims Novell asserted against Microsoft. Novell filed a notice of appeal to the U.S. Fourth Circuit Court of Appeals and the case was fully briefed. On May 3, 2011, the Fourth Circuit Court of Appeals, reversed and remanded the District Courts decision and held that Novells claim as to Count 1 had not been transferred to Caldera and that substantial issues of fact remained relative to such claim. Accordingly, the case was remanded to the District Court for trial. Jury trial began in Salt Lake City on October 17, 2011 and concluded December 16, 2011 with a hung verdict. Microsoft renewed its Rule 50 motion for a Judgment as a Matter of Law (JMAL). Briefing on the Motion for JMAL was filed March 9, 2012 and a
F-105
hearing was held on June 7, 2012. Both parties participated in mediation before a magistrate judge on April 24, 2012. The Court granted Microsofts motion to dismiss the lawsuit. Novell appealed that dismissal. On appeal the dismissal was upheld by the appellate court and the US Supreme Court denied a higher court review effectively upholding the dismissal of all of Novells claims against Microsoft. This matter is resolved.
Tax Contingencies — Our tax filings for various periods are subjected to audit by tax authorities in jurisdictions in which we do business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. We believe that we have adequately provided for any assessments that could result from those proceedings where it is more likely than not that we will pay some amount.
13. | Restructuring Charges and Merger Liabilities |
Restructuring costs represent actions to realign our cost structure based on current and expected near-term growth rates for the business and to eliminate redundant functions resulting from business acquisitions. Restructuring costs, which include termination benefits and facility closure costs, are recorded at estimated fair value. Termination benefits are comprised of severance payments for terminated employees and facility closure costs represent costs to terminate leases in conjunction with the consolidation of facilities. Restructuring costs are shown in the line item, provision for restructuring charges in the consolidated statements of operations.
Activities related to the restructuring actions during the years ended March 31, 2014, 2013, and 2012, were as follows:
|
2014
|
2013
|
2012
|
||||||
Beginning balance
|
$
|
736
|
|
$
|
3,498
|
|
$
|
663
|
|
Acquired Novell balances:
|
|
|
|
|
|
|
|
|
|
Severance/benefit costs
|
|
—
|
|
|
—
|
|
|
31,447
|
|
Facility closure costs
|
|
—
|
|
|
—
|
|
|
2,274
|
|
Total acquired Novell balances
|
|
—
|
|
|
—
|
|
|
33,721
|
|
|
|
|
|
|
|
|
|
|
|
Expense:
|
|
|
|
|
|
|
|
|
|
Severance/benefit costs
|
|
15,585
|
|
|
(51
|
)
|
|
56,168
|
|
Facility closure costs
|
|
2,298
|
|
|
2,555
|
|
|
3,164
|
|
Contract termination and other
|
|
431
|
|
|
—
|
|
|
—
|
|
Total expense
|
|
18,314
|
|
|
2,504
|
|
|
59,332
|
|
|
|
|
|
|
|
|
|
|
|
Payments:
|
|
|
|
|
|
|
|
|
|
Severance/benefit costs
|
|
(13,666
|
)
|
|
(1,715
|
)
|
|
(85,569
|
)
|
Facility closure costs
|
|
(638
|
)
|
|
(3,551
|
)
|
|
(4,649
|
)
|
Contract termination and other
|
|
(426
|
)
|
|
—
|
|
|
—
|
|
Total payments
|
|
(14,730
|
)
|
|
(5,266
|
)
|
|
(90,218
|
)
|
Ending balance
|
$
|
4,320
|
|
$
|
736
|
|
$
|
3,498
|
|
TAG had restructuring events in fiscal year 2014 due to identifying additional redundancies from our initial acquisition of Novell in fiscal year 2012. We eliminated these redundancies in order to further streamline our operations. The restructuring plans included involuntary employee terminations that resulted in severance and benefit costs of $15,672. As a result of these headcount reductions, there were also facility charges and termination costs of other contractual obligations of $2,220 and $431, respectively.
Upon acquiring Novell in fiscal year 2012, management reviewed the go-forward state needed when combining the entities and determined that redundant positions could be eliminated and that we could also close redundant facilities. $755 of severance and benefit costs fell into fiscal year 2012 for payment. During fiscal year 2014, our remaining lease exited under this redundancy was terminated.
During fiscal year 2013, we incurred an additional $2,578 related to the closures of additional redundant facilities, all of which were paid out during the fiscal year. We also incurred $201 of severance during fiscal year 2013, of which all but $15 was paid during fiscal year 2013.
F-106
As a result of the Novell acquisition during fiscal year 2012, we also acquired the liabilities that Novell had incurred for restructuring actions taken prior to the acquisition. During fiscal year 2013, we recorded net restructuring releases of $614 for these liabilities. The $614 net restructuring release was comprised of releasing $252 severance and benefit costs related primarily to final legal settlements and to medical benefits that were both lower than originally estimated and $362 of releases related to facility charges that were less than originally estimated. The final payment of $40 was made in fiscal year 2014.
From historical restructurings we have remaining leases that extend to May 2015. During fiscal years 2013, we increased the estimated fair value of the termination costs for these leases by a total of $339. The remaining balances of these actions, which relate to lease costs for redundant facilities are not material to the consolidated financial statements. The remaining leases related to these actions extend to May 2015.
Of the total restructuring balance outstanding as of March 31, 2014 and 2013, $923 and $176, respectively, are included within other long-term liabilities and are the estimated costs for the remaining lease obligations. The remainder of the restructuring balance for both periods is included within current liabilities.
Merger liabilities — Acquired during fiscal year 2012 as part of the Novell acquisition was $5,475 of merger liabilities related to a leased facility associated with an acquisition that Novell completed in 2001. This liability relates to the amount expected to be paid over the remaining lease term which extends to 2025. At March 31, 2014, the liability associated with this facility is $4,172, of which $624 is shown in the line item other accrued liabilities and $3,548 is shown in the line item, other long-term liabilities on our consolidated balance sheets.
14. | Stock-based Compensation |
The Companys employees have 2,019,107 Legacy Common Units (LCUs) in Wizard Parent, LLC, (Wizard) the parent company of TAG. The LCUs were issued to certain key employees. Even though these LCUs are in Wizard, these units are in substance for work performed for the benefit of TAG. Therefore, TAG records the stock-based compensation expense and related capital contribution for these awards. The fair value of the LCUs was calculated using the fair value of the business based on a market approach and the fair value was allocated to the classes of units based on a waterfall approach. The LCUs vest over four years. Total stock-based compensation expense for these legacy units was $270, $286 and $424 during the fiscal years ended March 31, 2014, 2013, and 2012, respectively, and are included within general and administrative expense on our consolidated statements of operations. At March 31, 2014, there was $606 of total unrecognized compensation expense expected to be recognized over a weighted average period of 2 years.
Below summarizes the activity for the Legacy Common Units:
Nonvested Units
|
Legacy
Common Units |
Weighted Average
Grant Date Fair Value Per Unit |
||||
Nonvested at April 1, 2011
|
|
—
|
|
$
|
—
|
|
Exchanged/granted
|
|
2,019,107
|
|
|
0.84
|
|
Vested
|
|
(615,950
|
)
|
|
0.87
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2012
|
|
1,403,157
|
|
|
0.83
|
|
Vested
|
|
(341,060
|
)
|
|
0.84
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2013
|
|
1,062,097
|
|
|
0.82
|
|
Vested
|
|
(323,832
|
)
|
|
0.83
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2014
|
|
738,265
|
|
$
|
0.82
|
|
Wizard has granted 2,499,650 Management Incentive Units (MIU)s in Wizard to TAG employees. TAG records stock-based compensation expense and a related capital contribution for these awards. The fair value for the MIUs was calculated using the fair value of the business based on a market approach and the fair value was allocated to the classes of units based on a waterfall approach. Total stock-based compensation expense was $2,914, $1,738 and $6,118 during the fiscal years ended March 31, 2014, 2013, and 2012, and is included within general and administrative expense on our consolidated statements of operations. The MIU grants vest over
F-107
4 years. According to the MIU agreement any unvested MIUs held by stockholders shall become vested immediately prior to the consummation of a change of control. At March 31, 2014, there was $3,156 of total unrecognized compensation expense expected to be recognized over the next year.
Below summarizes the activity for the MIUs:
Nonvested Units
|
Legacy
Common Units |
Weighted Average
Grant Date Fair Value Per Unit |
||||
Nonvested at April 1, 2011
|
|
—
|
|
$
|
—
|
|
Granted
|
|
2,499,650
|
|
|
7.21
|
|
Vested
|
|
(853,539
|
)
|
|
7.21
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2012
|
|
1,646,111
|
|
|
7.21
|
|
Granted
|
|
67,064
|
|
|
9.00
|
|
Vested
|
|
(531,938
|
)
|
|
5.76
|
|
Forfeited
|
|
(41,915
|
)
|
|
5.60
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2013
|
|
1,139,322
|
|
|
5.72
|
|
Vested
|
|
(487,737
|
)
|
|
5.97
|
|
Forfeited
|
|
(41,915
|
)
|
|
9.00
|
|
|
|
|
|
|
|
|
Nonvested at March 31, 2014
|
|
609,670
|
|
$
|
5.60
|
|
15. | Stockholders’ Deficit (Equity) |
Common Stock — We have authorized 1,000 shares of common stock at $.001. As of March 31, 2014 and 2013, 1,000 shares of common stock were outstanding. All future distributions must be within the guidelines of our debt agreements and are determined by our Board of Directors.
Additional Paid-in-Capital — As discussed in Note 14, Stock-Based Compensation, Wizard is contributing stock-based awards to certain employees of TAG and TAG is recognizing the related compensation.
Accumulated Deficit — During fiscal year 2013, distributions to common stockholders were made totaling $687,571. All future distributions must be within the guidelines of our debt agreements and are determined by our Board of Directors.
Accumulated Other Comprehensive Loss — Our other accumulated comprehensive loss is comprised of the following as of March 31:
|
2014
|
2013
|
||||
Cumulative translation adjustment
|
$
|
(3,722
|
)
|
$
|
(7,136
|
)
|
Noncontrolling interest
|
|
755
|
|
|
399
|
|
Pension adjustment
|
|
(3,549
|
)
|
|
(2,916
|
)
|
Total accumulated other comprehensive loss
|
$
|
(6,516
|
)
|
$
|
(9,653
|
)
|
Included within the cumulative translation adjustment and pension adjustment amount for fiscal year 2014 is a reduction of $2,419 and an increase of $389 of taxes, respectively. For fiscal year 2013, the taxes included within the cumulative translation adjustment and pension adjustment amounts were $5,452 and $1,787, respectively.
16. | Related Parties |
Advisors — We have an advisory agreement with certain private equity firms (the Advisors). Our required payment to the Advisors is $2,000 per year. We are responsible for reimbursement to the Advisors for any reasonable out-of-pocket expenses. Additionally during fiscal year 2013, we paid the Advisors $10,000 for financial services directly related to the new financing and this amount is included in the line item, general and administrative in the accompanying consolidated statements of operations.
F-108
Advisory fees of $2,011, $1,989 and $1,933 were recognized in general and administrative expense for the years ended March 31, 2014, 2013, and 2012. The $1,989 of advisory fees for fiscal year 2013 is slightly lower than the $2,000 agreement as one of the advisors had waived $11 of their fees that was due to them for the year ending March 31, 2013. In fiscal year 2014, they requested payment of the previously waived $11 which we provided to them. The $1,933 of advisory fees for fiscal year 2012 is slightly lower than the $2,000 agreement as the new agreement was not in force for the entire fiscal year. As of March 31, 2014 and 2013, $173 and $163, respectively, was payable to advisors for fourth quarter advisory services.
Novell Intellectual Property Holdings Inc. – Novell Intellectual Property Holdings Inc. (NIPH) is a separate company also owned by Wizard, TAGs parent, but NIPH is not part of the TAG consolidated entity. NIPH is a separate holding company without any operations. TAG is serving as NIPHs billing agent and as of March 31, 2014 has been advanced $36 to pay certain legal and patent maintenance fees on behalf of NIPH. As this service is insignificant, the service is being performed without charge to NIPH and likewise NIPH is not charging TAG interest on the cash advance. The cash advance is included in the line item, other accrued liabilities in the current liability section of the consolidated balance sheets.
F-109
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
Hewlett Packard Enterprise Company
We have audited the accompanying combined balance sheets of the Software Segment of Hewlett Packard Enterprise Company (“Seattle SpinCo, Inc.” or the “Company”) as of October 31, 2016 and 2015, and the related combined statements of operations, comprehensive income, cash flows, and equity for each of the three years in the period ended October 31, 2016. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of the Company at October 31, 2016 and 2015, and the combined results of its operations and its cash flows for each of the three years in the period ended October 31, 2016, in conformity with U.S. generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
San Jose, California
April 14, 2017
F-110
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Combined Statements of Operations
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Net revenue:
|
|
|
|
|
|
|
|
|
|
License
|
$
|
884
|
|
$
|
1,008
|
|
$
|
1,163
|
|
Support
|
|
1,621
|
|
|
1,878
|
|
|
1,980
|
|
Professional services
|
|
396
|
|
|
424
|
|
|
465
|
|
Software-as-a-service
|
|
294
|
|
|
312
|
|
|
325
|
|
Total net revenue
|
|
3,195
|
|
|
3,622
|
|
|
3,933
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
Cost of license revenue
|
|
88
|
|
|
120
|
|
|
137
|
|
Cost of support revenue
|
|
270
|
|
|
308
|
|
|
304
|
|
Cost of professional services revenue
|
|
360
|
|
|
366
|
|
|
417
|
|
Cost of software-as-a-service revenue
|
|
160
|
|
|
177
|
|
|
188
|
|
Research and development
|
|
603
|
|
|
670
|
|
|
673
|
|
Selling, general and administrative
|
|
1,101
|
|
|
1,305
|
|
|
1,493
|
|
Amortization of intangible assets
|
|
153
|
|
|
224
|
|
|
248
|
|
Restructuring charges
|
|
113
|
|
|
35
|
|
|
48
|
|
Acquisition and other related charges
|
|
3
|
|
|
5
|
|
|
10
|
|
Separation costs
|
|
106
|
|
|
91
|
|
|
—
|
|
Total costs and expenses
|
|
2,957
|
|
|
3,301
|
|
|
3,518
|
|
Earnings from operations
|
|
238
|
|
|
321
|
|
|
415
|
|
Interest and other, net
|
|
(3
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Earnings before taxes
|
|
235
|
|
|
318
|
|
|
412
|
|
(Provision for) benefit from taxes
|
|
(155
|
)
|
|
73
|
|
|
(51
|
)
|
Net earnings
|
$
|
80
|
|
$
|
391
|
|
$
|
361
|
|
The accompanying notes are an integral part of these Combined Financial Statements.
F-111
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Combined Statements of Comprehensive Income
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Net earnings
|
$
|
80
|
|
$
|
391
|
|
$
|
361
|
|
Other comprehensive income (loss) before taxes:
|
|
|
|
|
|
|
|
|
|
Change in net unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Net unrealized gains arising during the year
|
|
—
|
|
|
1
|
|
|
—
|
|
Gains reclassified into earnings
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
Change in net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the year
|
|
2
|
|
|
8
|
|
|
(4
|
)
|
Net gains reclassified into earnings
|
|
(1
|
)
|
|
(3
|
)
|
|
(1
|
)
|
|
|
1
|
|
|
5
|
|
|
(5
|
)
|
Change in cumulative translation adjustment
|
|
5
|
|
|
(32
|
)
|
|
(4
|
)
|
Other comprehensive income (loss) before taxes
|
|
6
|
|
|
(26
|
)
|
|
(10
|
)
|
(Provision for) benefit from taxes
|
|
—
|
|
|
(2
|
)
|
|
2
|
|
Other comprehensive income (loss), net of taxes
|
|
6
|
|
|
(28
|
)
|
|
(8
|
)
|
Comprehensive income
|
$
|
86
|
|
$
|
363
|
|
$
|
353
|
|
The accompanying notes are an integral part of these Combined Financial Statements.
F-112
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
130
|
|
$
|
150
|
|
Accounts receivable
|
|
665
|
|
|
706
|
|
Other current assets
|
|
97
|
|
|
141
|
|
Total current assets
|
|
892
|
|
|
997
|
|
Property, plant and equipment
|
|
140
|
|
|
134
|
|
Goodwill
|
|
8,089
|
|
|
8,313
|
|
Intangible assets
|
|
409
|
|
|
597
|
|
Deferred tax assets
|
|
1,024
|
|
|
813
|
|
Other assets
|
|
93
|
|
|
125
|
|
Total assets
|
$
|
10,647
|
|
$
|
10,979
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Capital lease obligations, short-term
|
$
|
15
|
|
$
|
10
|
|
Accounts payable
|
|
65
|
|
|
76
|
|
Employee compensation and benefits
|
|
273
|
|
|
291
|
|
Taxes on earnings
|
|
204
|
|
|
175
|
|
Deferred revenue
|
|
765
|
|
|
860
|
|
Accrued restructuring
|
|
45
|
|
|
2
|
|
Other accrued liabilities
|
|
142
|
|
|
189
|
|
Total current liabilities
|
|
1,509
|
|
|
1,603
|
|
Capital lease obligations, long-term
|
|
21
|
|
|
22
|
|
Other liabilities
|
|
526
|
|
|
608
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
Parent company investment
|
|
8,636
|
|
|
8,797
|
|
Accumulated other comprehensive loss
|
|
(45
|
)
|
|
(51
|
)
|
Total equity
|
|
8,591
|
|
|
8,746
|
|
Total liabilities and equity
|
$
|
10,647
|
|
$
|
10,979
|
|
The accompanying notes are an integral part of these Combined Financial Statements.
F-113
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Combined Statements of Cash Flows
|
For the fiscal years ended
October 31 |
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
$
|
80
|
|
$
|
391
|
|
$
|
361
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
221
|
|
|
336
|
|
|
363
|
|
Stock-based compensation expense
|
|
70
|
|
|
58
|
|
|
60
|
|
Provision for doubtful accounts
|
|
9
|
|
|
3
|
|
|
(6
|
)
|
Restructuring charges
|
|
113
|
|
|
35
|
|
|
48
|
|
Deferred taxes on earnings
|
|
(200
|
)
|
|
(364
|
)
|
|
(249
|
)
|
Excess tax benefit from stock-based compensation
|
|
(2
|
)
|
|
(10
|
)
|
|
(6
|
)
|
Other, net
|
|
(81
|
)
|
|
(11
|
)
|
|
(4
|
)
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
32
|
|
|
51
|
|
|
163
|
|
Accounts payable
|
|
(8
|
)
|
|
1
|
|
|
(22
|
)
|
Taxes on earnings
|
|
(3
|
)
|
|
(6
|
)
|
|
23
|
|
Restructuring
|
|
(51
|
)
|
|
(41
|
)
|
|
(65
|
)
|
Other assets and liabilities
|
|
(57
|
)
|
|
(208
|
)
|
|
42
|
|
Net cash provided by operating activities
|
|
123
|
|
|
235
|
|
|
708
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Investment in property, plant and equipment
|
|
(28
|
)
|
|
(17
|
)
|
|
—
|
|
Proceeds from sale of property, plant and equipment
|
|
1
|
|
|
18
|
|
|
13
|
|
Purchases of available-for-sale securities and other investments
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Maturities and sales of available-for-sale securities and other investments
|
|
1
|
|
|
3
|
|
|
6
|
|
Payments made in connection with business acquisitions, net of cash acquired
|
|
(12
|
)
|
|
(138
|
)
|
|
(20
|
)
|
Proceeds from business divestitures, net
|
|
249
|
|
|
174
|
|
|
—
|
|
Net cash provided by (used in) investing activities
|
|
211
|
|
|
40
|
|
|
(16
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
(12
|
)
|
|
(8
|
)
|
|
(4
|
)
|
Net transfers to Parent
|
|
(344
|
)
|
|
(324
|
)
|
|
(815
|
)
|
Excess tax benefit from stock-based compensation
|
|
2
|
|
|
10
|
|
|
6
|
|
Net cash used in financing activities
|
|
(354
|
)
|
|
(322
|
)
|
|
(813
|
)
|
Decrease in cash and cash equivalents
|
|
(20
|
)
|
|
(47
|
)
|
|
(121
|
)
|
Cash and cash equivalents at beginning of year
|
|
150
|
|
|
197
|
|
|
318
|
|
Cash and cash equivalents at end of year
|
$
|
130
|
|
$
|
150
|
|
$
|
197
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow disclosures:
|
|
|
|
|
|
|
|
|
|
Income taxes paid (refunded), net
|
$
|
3
|
|
$
|
6
|
|
$
|
(23
|
)
|
Interest expense paid
|
$
|
4
|
|
$
|
3
|
|
$
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment acquired through capital leases
|
$
|
16
|
|
$
|
19
|
|
$
|
20
|
|
The accompanying notes are an integral part of these Combined Financial Statements.
F-114
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
|
Parent
Company Investment |
Accumulated
Other Comprehensive Loss |
Total Equity
|
||||||
|
In millions
|
||||||||
Balance at October 31, 2013
|
$
|
9,901
|
|
$
|
(15
|
)
|
$
|
9,886
|
|
Net earnings
|
|
361
|
|
|
|
|
|
361
|
|
Other comprehensive loss
|
|
|
|
|
(8
|
)
|
|
(8
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
353
|
|
Net transfers to Parent
|
|
(856
|
)
|
|
|
|
|
(856
|
)
|
Balance at October 31, 2014
|
|
9,406
|
|
|
(23
|
)
|
|
9,383
|
|
Net earnings
|
|
391
|
|
|
|
|
|
391
|
|
Other comprehensive loss
|
|
|
|
|
(28
|
)
|
|
(28
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
363
|
|
Net transfers to Parent
|
|
(1,000
|
)
|
|
|
|
|
(1,000
|
)
|
Balance at October 31, 2015
|
|
8,797
|
|
|
(51
|
)
|
|
8,746
|
|
Net earnings
|
|
80
|
|
|
|
|
|
80
|
|
Other comprehensive income
|
|
|
|
|
6
|
|
|
6
|
|
Comprehensive income
|
|
|
|
|
|
|
|
86
|
|
Net transfers to Parent
|
|
(241
|
)
|
|
|
|
|
(241
|
)
|
Balance at October 31, 2016
|
$
|
8,636
|
|
$
|
(45
|
)
|
$
|
8,591
|
|
The accompanying notes are an integral part of these Combined Financial Statements.
F-115
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Notes to Combined Financial Statements
Note 1: Overview and Summary of Significant Accounting Policies
Background
The Software Segment (Seattle SpinCo, Inc. or Seattle) of Hewlett Packard Enterprise Company (HPE) provides big data platform analytics, security and information governance, application testing and delivery management, and IT operations management solutions for businesses and other enterprises of all sizes. Seattles offerings include licenses, support, professional services and software-as-a-service (SaaS). Seattle consists of one reportable segment, the development and sale of software solutions.
HPE was spun off by Hewlett-Packard Company in a November 1, 2015 transaction in which HP Inc. (former Parent), formerly known as Hewlett-Packard Company, separated into two independent publicly traded companies. Accordingly, the term Parent refers to the Hewlett-Packard Company for periods prior to November 1, 2015 and to HPE from November 1, 2015 onward.
On September 7, 2016, HPE announced plans for a spin-off and merger of Seattle with Micro Focus International plc (Micro Focus) (the Transactions), which will create a pure-play enterprise software company. Upon the completion of the Transactions, which are currently anticipated to close on September 1, 2017, shareholders of HPE will own shares of both HPE and 50.1% of the new combined company. The Transactions are subject to certain customary closing conditions.
Business Transferred to Parent
Prior to HP Inc.s spin-off of HPE, HP Inc. conducted a strategic review of Seattle and decided that the marketing optimization software product group, which has historically been managed by Seattle and included in Seattles results of operations, no longer aligned with Seattles strategic charter, as it was outside Seattles go-to-market focus of selling to IT departments. However, HP Inc. determined that these software assets primarily aligned with a document management and solutions ecosystem that would complement its printing business. As a result of this strategic review process, the marketing optimization software product group was realigned to become a part of HP Inc. as of the beginning of the fourth quarter of the fiscal year ended October 31, 2015. This realignment is reflected in Seattles Combined Financial Statements as a transfer of the marketing optimization software product group from Seattle to its Parent during the fiscal year ended October 31, 2015. (See Note 12, Related Party Transactions and Parent Company Investment). The following table presents the carrying value of the marketing optimization software product groups assets and liabilities at the date of transfer:
|
In millions
|
||
Goodwill(1)
|
$
|
512
|
|
Amortizable intangible assets
|
|
91
|
|
Net liabilities transferred
|
|
(37
|
)
|
Parent company investment
|
$
|
566
|
|
(1) | Goodwill was allocated on a relative fair value basis. |
Net revenue and Earnings before taxes related to the marketing optimization software product group included in Seattles Combined Statements of Operations for fiscal 2015 and 2014 were as follows:
|
For the fiscal years
ended October 31 |
|||||
|
2015
|
2014
|
||||
|
In millions
|
|||||
Net revenue
|
$
|
163
|
|
$
|
232
|
|
Earnings before taxes
|
$
|
7
|
|
$
|
9
|
|
There was no impact to Seattles fiscal 2016 Combined Financial Statements from the fiscal 2015 transfer of the marketing optimization software product group to HP Inc.
F-116
Basis of Presentation
These Combined Financial Statements of Seattle were derived from the Consolidated and Combined Financial Statements and accounting records of Parent as if Seattle were operated on a standalone basis during the periods presented and were prepared in accordance with U.S. generally accepted accounting principles (GAAP).
The Combined Statements of Operations and Comprehensive Income of Seattle reflect allocations of general corporate expenses from Parent including, but not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of Seattle and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Seattle. These allocations may not, however, reflect the expenses Seattle would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if Seattle had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
The Combined Balance Sheets of Seattle include Parent assets and liabilities that were specifically identifiable or otherwise attributable to Seattle, including subsidiaries and affiliates in which Parent has a controlling financial interest or is the primary beneficiary. Parents cash has not been assigned to Seattle for any of the periods presented because those cash balances are not directly attributable to Seattle. Seattle reflects transfers of cash to and from Parents cash management system as a component of Parent company investment in the Combined Balance Sheets. Parents long-term debt has not been attributed to Seattle for any of the periods presented because Parents borrowings are not the legal obligation of Seattle.
Parent maintains various benefit and stock-based compensation plans. Seattles employees participate in those programs and a portion of the cost of those plans is included in Seattles Combined Financial Statements. However, Seattles Combined Balance Sheets do not include any net benefit plan obligations as no Parent benefit plan included only active, retired and other former Seattle employees. Seattles Combined Balance Sheets also do not include any equity related to stock-based compensation plans. See Note 3, Retirement and Post-Retirement Benefit Plans, and Note 4, Stock-Based Compensation, for a further discussion.
Principles of Combination
The Combined Financial Statements include Seattles net assets and results of operations as described above. All intercompany transactions and accounts within the combined businesses of Seattle have been eliminated.
Intercompany transactions between Seattle and Parent other than leases with Parents wholly-owned leasing subsidiary (see below) are considered to be effectively settled in the Combined Financial Statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Combined Statements of Cash Flows within financing activities and in the Combined Balance Sheets within Parent company investment.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in Seattles Combined Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. These estimates form the basis for making judgments that affect the carrying amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond Seattles control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on Seattles results of operations, financial position and cash flows.
F-117
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of Seattles Combined Financial Statements:
• | revenue recognition; |
• | restructuring; |
• | taxes on earnings; |
• | business combinations; |
• | goodwill; |
• | intangible assets and long-lived assets; and |
• | loss contingencies. |
Foreign Currency Translation
Seattle predominately uses the U.S. dollar as its functional currency. Assets and liabilities denominated in non-U.S. currencies are remeasured into U.S. dollars at current exchange rates for monetary assets and liabilities and at historical exchange rates for nonmonetary assets and liabilities. Net revenue, costs and expenses denominated in non-U.S. currencies are recorded in U.S. dollars at the average rates of exchange prevailing during the period. Seattle includes gains or losses from foreign currency remeasurement in Interest and other, net, in the Combined Statements of Operations and gains and losses from cash flow hedges in Net revenue as the hedged revenue is recognized. Certain non-U.S. subsidiaries designate the local currency as their functional currency, and Seattle records the translation of their assets and liabilities into U.S. dollars at the balance sheet date as translation adjustments and includes them as a component of Accumulated other comprehensive loss in the Combined Balance Sheets. The effect of changes in foreign currency exchange rates on cash and cash equivalents was not material for any of the fiscal years presented.
Parent Company Investment
Parent company investment in the Combined Balance Sheets and Statements of Equity represents Parents historical investment in Seattle, the net effect of transactions with and allocations from Parent and Seattles accumulated earnings. See Note 12, Related Party Transactions and Parent Company Investment, for further information about transactions between Seattle and Parent.
Leases with Parents Wholly-owned Leasing Subsidiary
Seattle enters into leasing arrangements with Parents wholly-owned leasing subsidiary, HPE Financial Services, which are cash settled on a recurring basis in accordance with the contractual terms of the leasing arrangements. These leasing arrangements are accounted for as capital leases or operating leases based on the contractual terms of the leasing arrangements. Capital lease obligations are presented on the face of the Combined Balance Sheets at the outstanding principal amount which approximates fair value, and principal payments on these obligations are reflected on a separate line within financing activities in the Combined Statements of Cash Flows.
Revenue Recognition
General
Seattle recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred or services are rendered, the sales price or fee is fixed or determinable, and collectability is reasonably assured. Seattle generally recognizes revenue for its standalone software sales to channel partners on receipt of evidence that the software has been sold to a specific end user. Seattle limits the amount of revenue recognized for delivered elements to the amount that is not contingent on the future delivery of products or services, future performance obligations or subject to customer-specified refund or return rights.
F-118
Seattle reports revenue net of any taxes collected from customers for remittance to government authorities. The collected taxes are recorded as current liabilities until they are remitted to the relevant government authority.
Multiple element arrangements
When a sales arrangement contains multiple elements or deliverables, Seattle allocates revenue to each element based on a selling price hierarchy. The selling price for a deliverable is based on its vendor specific objective evidence (VSOE) of selling price, if available, third-party evidence (TPE) if VSOE of selling price is not available, or estimated selling price (ESP) if neither VSOE of selling price nor TPE is available. Seattle establishes VSOE of selling price using the price charged for a deliverable when sold separately and, in rare instances, using the price established by management having the relevant authority. Seattle establishes TPE of selling price by evaluating largely similar and interchangeable competitor products or services in standalone sales to similarly situated customers. Seattle establishes ESP based on management judgment considering internal factors such as margin objectives, pricing practices and controls, customer segment pricing strategies and the product life-cycle. Consideration is also given to market conditions such as competitor pricing strategies and technology industry life-cycles. In most arrangements with multiple elements, Seattle allocates the transaction price to the individual units of accounting at inception of the arrangement based on their relative selling price.
Seattle evaluates each deliverable in an arrangement to determine whether it represents a separate unit of accounting. A deliverable constitutes a separate unit of accounting when it has standalone value to the customer. For elements with no standalone value, Seattle recognizes revenue consistent with the pattern of the undelivered elements. If the arrangement includes a customer-negotiated refund or return right or other contingency relative to the delivered items, and the delivery and performance of the undelivered items is considered probable and substantially within Seattles control, the delivered element constitutes a separate unit of accounting. In arrangements with combined units of accounting, changes in the allocation of the transaction price among elements may impact the timing of revenue recognition for the contract but will not change the total revenue recognized for the contract.
Software revenue
Seattle recognizes revenue from perpetual software licenses at the inception of the license term, assuming all revenue recognition criteria have been satisfied. Term-based software license revenue is generally recognized ratably over the term of the license. Seattle uses the residual method to allocate revenue to software licenses at inception of the arrangement when VSOE of fair value for all undelivered elements, such as post-contract customer support, exists and all other revenue recognition criteria have been satisfied. Seattle recognizes revenue for SaaS arrangements as the service is delivered, generally on a straight-line basis, over the contractual period of performance. In SaaS arrangements, Seattle considers the rights provided to the customer (e.g. whether the customer has the contractual right to take possession of the software at any time during the contractual period without significant penalty, and the feasibility of the customer to operate or contract with another vendor to operate the software) in determining whether the arrangement includes the sale of a software license. In SaaS arrangements where software licenses are sold, license revenue is generally recognized according to whether perpetual or term licenses are sold, when all other revenue recognition criteria are satisfied.
Services revenue
Seattle recognizes revenue from fixed-price support or maintenance contracts, including software post-contract customer support agreements, ratably over the contract period and recognizes the costs associated with these contracts as incurred. For time and material-based professional services contracts, Seattle recognizes revenue as services are rendered and recognizes costs as they are incurred. Seattle recognizes revenue from fixed-price professional services contracts as work progresses over the contract period on a proportional performance basis, as determined by the percentage of labor costs incurred to date compared to the total estimated labor costs of a contract. Estimates of total project costs for fixed-price contracts are regularly reassessed during the life of a contract.
Deferred revenue
Seattle records amounts invoiced to customers in excess of revenue recognized as deferred revenue until the revenue recognition criteria are satisfied. Seattle records revenue that is earned and recognized in excess of amounts invoiced on services contracts as unbilled accounts receivable.
F-119
Deferred revenue also includes amounts invoiced in advance for post-contract customer support agreements.
Stock-Based Compensation
Seattles employees have historically participated in Parents stock-based compensation plans. Stock-based compensation expense has been allocated to Seattle based on the awards and terms previously granted to Seattles employees as well as an allocation of Parents corporate and shared functional employee expenses. Stock-based compensation expense is based on the measurement date fair value of the award and is recognized only for those awards expected to meet the service and performance vesting conditions on a straight-line basis over the requisite service period of the award. Stock-based compensation expense is determined at the aggregate grant level for service-based awards and at the individual vesting tranche level for awards with performance and/or market conditions. The forfeiture rate is estimated based on Parents historical experience.
Retirement and Post-Retirement Plans
Certain of Seattles eligible employees, retirees and other former employees participate in certain U.S. and international defined benefit pension plans and other postemployment plans offered by Parent. These plans, which included participants that were both Seattle employees and other employees of Parent (Shared plans), are accounted for as multiemployer benefit plans and the related net benefit plan obligations were not included in Seattles historical Combined Balance Sheets. The related benefit plan expenses were allocated to Seattle based on Seattles labor costs and allocations of corporate and other shared functional personnel.
Allocated benefit plan expenses generally reflect Parents amortization of unrecognized actuarial gains and losses on a straight-line basis over the average remaining estimated service life or, in the case of frozen plans, life expectancy of participants. In some cases, actuarial gains and losses are amortized using the corridor approach.
Advertising
Costs to produce advertising are expensed as incurred. Such costs totaled approximately $53 million in fiscal 2016, $40 million in fiscal 2015 and $39 million in fiscal 2014.
Restructuring
Seattle records charges associated with Parent-approved restructuring plans to reorganize Seattles business, to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes and accelerate innovation. Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations, and contract cancellation costs. Seattle records restructuring charges based on estimated employee terminations and site closure and consolidation plans. Seattle accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The rates used in determining severance accruals are based on existing plans, historical experiences and negotiated settlements.
Separation Costs
Separation costs for fiscal 2016 consist of allocated third-party consulting, contractor fees and other incremental costs arising from the November 1, 2015 separation of Seattles Parent, HPE, from HP Inc., formerly known as Hewlett-Packard Company and all such costs from the planned Transactions with Micro Focus.
Separation costs for fiscal 2015 consist of allocated third-party consulting, contractor fees and other incremental costs arising from the November 1, 2015 separation of Seattles Parent, HPE, from HP Inc., formerly known as Hewlett-Packard Company.
Taxes on Earnings
Seattles operations have historically been included in the tax returns filed by the respective Parent entities of which Seattles businesses are a part. The (Provision for) benefit from taxes and other income tax related information contained in these Combined Financial Statements are presented on a separate return basis as if Seattle filed its own tax returns. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if Seattle were a separate taxpayer and a standalone enterprise for the
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periods presented. Current income tax liabilities related to entities which file jointly with Parent are assumed to be immediately settled with Parent and are relieved through the Parent company investment account and the Net transfers to Parent in the Combined Statements of Cash Flows.
Seattle recognizes deferred tax assets and liabilities for the expected tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts using enacted tax rates in effect for the year the differences are expected to reverse. Seattle records a valuation allowance to reduce the deferred tax assets to the amount that is more likely than not to be realized.
Seattle records accruals for uncertain tax positions when Seattle believes that it is not more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. Seattle makes adjustments to these accruals when facts and circumstances change, such as the closing of a tax audit or the refinement of an estimate. The provision for income taxes includes the effects of adjustments for uncertain tax positions, as well as any related interest and penalties.
Accounts Receivable
Accounts receivable include both amounts billed and currently due from customers and amounts earned but unbilled.
Seattle establishes an allowance for doubtful accounts for accounts receivable. Seattle records a specific reserve for individual accounts when Seattle becomes aware of specific customer circumstances, such as in the case of a bankruptcy filing or deterioration in the customers operating results or financial position. If there are additional changes in circumstances related to the specific customer, Seattle further adjusts estimates of the recoverability of receivables. Seattle maintains bad debt reserves for all other customers based on a variety of factors, including the use of third-party credit risk models that generate quantitative measures of default probabilities based on market factors, the financial condition of customers, the length of time receivables are past due, trends in the weighted-average risk rating for the portfolio, macroeconomic conditions, information derived from competitive benchmarking, significant one-time events and historical experience. The past due or delinquency status of a receivable is based on the contractual payment terms of the receivable.
Concentrations of Risk
Financial instruments that potentially subject Seattle to significant concentrations of credit risk consist principally of cash and cash equivalents, investments, receivables from trade customers and derivatives.
Seattle participates in cash management, funding arrangements and risk management programs managed by Parent. Seattle also maintains cash and cash equivalents, investments, derivatives and certain other financial instruments with various financial institutions. These financial institutions are located in many different geographic regions, and Seattles policy is designed to limit exposure from any particular institution. As part of its risk management processes, Seattle performs periodic evaluations of the relative credit standing of these financial institutions. Seattle has not sustained material credit losses from instruments held at these financial institutions. Seattle utilizes derivative contracts to protect against the effects of foreign currency exposures. Such contracts involve the risk of non-performance by the counterparty, which could result in a material loss.
Credit risk with respect to accounts receivable is generally diversified due to the large number of entities comprising Seattles customer base and their dispersion across many different industries and geographic regions. Seattle performs ongoing credit evaluations of the financial condition of its third-party distributors, resellers and other customers and may require collateral, such as letters of credit and bank guarantees, in certain circumstances. As of October 31, 2016 and 2015, no single customer accounted for more than 10% of Seattles gross accounts receivable balance.
Property, Plant and Equipment
Seattle states property, plant and equipment at cost less accumulated depreciation. Seattle capitalizes additions and improvements and expenses maintenance and repairs as incurred. Depreciation expense is recognized on a straight-line basis over the estimated useful lives of the assets. Amortization of assets acquired through capital leases is included in depreciation expense. Estimated useful lives are five to 40 years for buildings and improvements and three to 15 years for equipment and other. Seattle depreciates leasehold improvements over the life of the lease or the asset, whichever is shorter. Seattle depreciates equipment held under capital leases
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over the initial term of the lease to the equipments estimated residual value. On retirement or disposition, the asset cost and related accumulated depreciation are removed from the Combined Balance Sheets with any gain or loss recognized in the Combined Statements of Operations.
Seattle capitalizes certain internal and external costs incurred to acquire or create internal use software, principally related to software coding, designing system interfaces and installation and testing of the software. Seattle amortizes capitalized internal use software costs using the straight-line method over the estimated useful lives of the software, generally from three to five years.
Software Development Costs
Seattle capitalizes costs incurred to acquire or develop software for resale subsequent to establishing technological feasibility for the software, if significant. Seattle amortizes capitalized software development costs using the greater of the straight-line amortization method or the ratio that current gross revenues for a product bear to the total current and anticipated future gross revenues for that product. The estimated useful life for capitalized software for resale is generally three years or less. Software development costs incurred subsequent to establishing technological feasibility are generally not significant.
Business Combinations
Seattle includes the results of operations of acquired businesses in its combined results prospectively from the date of acquisition. Seattle allocates the fair value of purchase consideration to the assets acquired, including in-process research and development (IPR&D) and liabilities assumed in the acquired entity generally based on their fair values at the acquisition date. IPR&D is initially capitalized at fair value as an intangible asset with an indefinite life and assessed for impairment thereafter. When the IPR&D project is complete, it is reclassified as an amortizable purchased intangible asset and is amortized over its estimated useful life. If an IPR&D project is abandoned, Seattle will record a charge for the value of the related intangible asset to its Combined Statement of Operations in the period it is abandoned. The excess of the fair value of purchase consideration over the fair value of the assets acquired, liabilities assumed and non-controlling interests in the acquired entity is recorded as goodwill. The primary items that generate goodwill include the value of the synergies between the acquired company and Seattle and the value of the acquired assembled workforce, neither of which qualifies for recognition as an intangible asset. Acquisition-related expenses and post-acquisition restructuring costs are recognized separately from the business combination and are expensed as incurred.
Goodwill
Seattle reviews goodwill for impairment annually and whenever events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable. Seattle is permitted to conduct a qualitative assessment to determine whether it is necessary to perform a two-step quantitative goodwill impairment test.
Goodwill is tested for impairment at the reporting unit level. Seattle consists of one reporting unit consistent with Seattles reportable segment. In the first step of the goodwill impairment test, Seattle compares the fair value of its reporting unit to its carrying amount. Seattle estimates the fair value of its reporting unit using a weighting of fair values derived from both the income approach and the market approach. Under the income approach, Seattle estimates the fair value of the reporting unit based on the present value of estimated future cash flows. Seattle prepares cash flow projections based on managements estimates of revenue growth rates and operating margins, taking into consideration industry and market conditions. Seattle bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting units ability to execute on the projected cash flows. Under the market approach, Seattle estimates fair value based on market multiples of revenue and earnings derived from comparable publicly traded companies with similar operating and investment characteristics as the reporting unit. Seattle weights the fair value derived from the market approach depending on the level of comparability of these publicly traded companies to its reporting unit.
If the fair value of the reporting unit exceeds the carrying amount of the net assets assigned to the reporting unit, goodwill is not impaired and no further testing is required. If the fair value of the reporting unit is less than its carrying amount, then Seattle performs the second step of the goodwill impairment test to measure the amount of impairment loss, if any. In the second step, Seattle measures the reporting units assets, including any
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unrecognized intangible assets and liabilities at fair value in a hypothetical analysis to calculate the implied fair value of goodwill for the reporting unit in the same manner as if the reporting unit was being acquired in a business combination. If the implied fair value of the reporting units goodwill is less than its carrying amount, the difference is recorded as an impairment loss.
At its annual goodwill impairment test, performed as of the first day of the fourth quarter of fiscal 2016, Seattle conducted a qualitative assessment and determined no quantitative goodwill impairment test was necessary. The qualitative assessment considered, among other things, the Transactions with Micro Focus.
Intangible Assets and Long-Lived Assets
Seattle reviews intangible assets with finite lives and long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Seattle assesses the recoverability of assets based on the estimated undiscounted future cash flows expected to result from the use and eventual disposition of the asset. If the undiscounted future cash flows are less than the carrying amount, the asset is impaired. Seattle measures the amount of impairment loss, if any, as the difference between the carrying amount of the asset and its fair value using an income approach or, when available and appropriate, using a market approach. Seattle amortizes intangible assets with finite lives using the straight-line method over the estimated economic lives of the assets, ranging from one to ten years.
Debt and Marketable Equity Securities
Debt and marketable equity securities are generally considered available-for-sale and are reported at fair value with unrealized gains and losses, net of applicable taxes, in Accumulated other comprehensive loss in the Combined Balance Sheets. Realized gains and losses for available-for-sale securities are calculated based on the specific identification method and included in Interest and other, net, in the Combined Statements of Operations. Seattle monitors its investment portfolio for potential impairment on a quarterly basis. When the carrying amount of an investment in debt securities exceeds its fair value and the decline in value is determined to be other-than-temporary, Seattle records an impairment charge to Interest and other, net, in the amount of the credit loss and the balance, if any, is recorded in Accumulated other comprehensive loss in the Combined Balance Sheets.
Derivatives
Seattle uses derivative financial instruments, primarily forwards and swaps, to hedge certain foreign currency exposures. Seattle also may use other derivative instruments not designated as hedges, such as forwards, to hedge foreign currency balance sheet exposures. Seattle does not use derivative financial instruments for speculative purposes. See Note 11, Financial Instruments, for a full description of Seattles derivative financial instrument activities and related accounting policies.
Loss Contingencies
Seattle is involved in various lawsuits, claims, investigations and proceedings that arise in the ordinary course of business. Seattle records a liability for contingencies when it believes it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. See Note 14, Litigation and Contingencies, for a full description of Seattles loss contingencies and related accounting policies.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) amended the existing accounting standards for income taxes. The amendments require companies to report their deferred tax assets and liabilities each as a single non-current item on their classified balance sheets. Seattle elected to early adopt the amendments and applied them retrospectively to all periods presented in Seattles Combined Financial Statements, as permitted by the standard.
In September 2015, the FASB amended existing accounting standards to simplify the accounting for measurement period adjustments to provisional amounts recognized in a business combination. The amendments require all such adjustments to be recognized in the period they are determined. Adjustments related to previous
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reporting periods since the acquisition date must be disclosed by income statement line item, either on the face of the income statement or within the footnotes. Seattle elected to early adopt the amendments in the first quarter of fiscal 2016, as permitted by the standard. The adoption of the amendments did not have a material impact on Seattles Combined Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The amendments also eliminate the practice of accounting for software licenses as executory contracts which may result in more software assets being capitalized. Seattle adopted the amendments in the first quarter of fiscal 2017. The adoption of the amendments did not have a material impact on Seattles Combined Financial Statements.
Recently Enacted Accounting Pronouncements
In January 2017, the FASB amended the existing accounting standards for intangible assets. The amendments simplify how an entity is required to test goodwill for impairment by eliminating the second step of the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. The amendments will be applied on a prospective basis. Seattle is required to adopt the guidance in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
In October 2016, the FASB amended the existing accounting standards for income taxes. The amendments require the recognition of the income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs. Under current U.S. GAAP, current and deferred income taxes for intra-entity asset transfers are not recognized until the asset has been sold to an outside party. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Seattle is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
In August 2016, the FASB amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. Seattle is required to adopt the guidance in the first quarter of fiscal 2019. The amendments should be applied retrospectively to all periods presented. For issues that are impracticable to apply retrospectively, the amendments may be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
In June 2016, the FASB amended the existing accounting standards for the measurement of credit losses. The amendments require an entity to estimate its lifetime expected credit loss for most financial instruments, including trade and lease receivables, and record an allowance for the portion of the amortized cost the entity does not expect to collect. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Seattle is required to adopt the guidance in the first quarter of fiscal 2021. Early adoption is permitted beginning in fiscal 2020. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover personal income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. Seattle is required to adopt the guidance in the first quarter of fiscal 2018. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
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In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use (ROU) asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received and the lessees initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis over the lease term. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. Seattle is required to adopt the guidance in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Combined Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date, with an option of applying the standard on the original effective date, which for Seattle is the first quarter of fiscal 2018. In accordance with this deferral, Seattle is required to adopt these amendments in the first quarter of fiscal 2019. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Seattle plans to adopt the new revenue standard in the first quarter of fiscal 2019, beginning on November 1, 2018, using the modified retrospective method and is currently evaluating the impact on its Combined Financial Statements.
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Note 2: Restructuring
Summary of Restructuring Plans
Restructuring charges of $113 million, $35 million and $48 million have been recorded by Seattle during fiscal 2016, 2015 and 2014, respectively, based on restructuring activities impacting Seattles employees and infrastructure as well as an allocation of restructuring charges related to Parents corporate and shared functional employees and infrastructure. Allocated restructuring charges related to Parents corporate and shared functional employees and infrastructure were $10 million, $3 million and $12 million in fiscal 2016, 2015 and 2014, respectively. Restructuring activities related to Seattles employees and infrastructure (Direct Restructuring), summarized by plan were as presented in the table below:
|
Fiscal 2015 Plan
|
Fiscal 2012
Plan |
|
|||||||||
|
Employee
Severance |
Infrastructure
and other |
Employee
Severance and EER |
Total
|
||||||||
|
In millions
|
|||||||||||
Liability as of October 31, 2013
|
$
|
—
|
|
$
|
—
|
|
$
|
46
|
|
$
|
46
|
|
Charges
|
|
—
|
|
|
—
|
|
|
36
|
|
|
36
|
|
Cash payments
|
|
—
|
|
|
—
|
|
|
(65
|
)
|
|
(65
|
)
|
Non-cash items
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
Liability as of October 31, 2014
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
Charges
|
|
6
|
|
|
—
|
|
|
26
|
|
|
32
|
|
Cash payments
|
|
—
|
|
|
—
|
|
|
(41
|
)
|
|
(41
|
)
|
Non-cash items
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Liability as of October 31, 2015
|
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Charges
|
|
69
|
|
|
20
|
|
|
14
|
|
|
103
|
|
Cash payments
|
|
(32
|
)
|
|
(7
|
)
|
|
(12
|
)
|
|
(51
|
)
|
Non-cash items
|
|
—
|
|
|
(4
|
)
|
|
1
|
|
|
(3
|
)
|
Liability as of October 31, 2016
|
$
|
43
|
|
$
|
9
|
|
$
|
3
|
|
$
|
55
|
|
Total costs incurred to date as of October 31, 2016
|
$
|
75
|
|
$
|
20
|
|
$
|
193
|
|
$
|
288
|
|
Total costs expected to be incurred as of October 31, 2016
|
$
|
115
|
|
$
|
24
|
|
$
|
193
|
|
$
|
332
|
|
The current restructuring liability reported in Accrued restructuring in the Combined Balance Sheets at October 31, 2016 and 2015 was $45 million and $2 million, respectively. The long-term restructuring liability reported in Other liabilities in the Combined Balance Sheets at October 31, 2016 and 2015 was $10 million and $4 million, respectively.
Fiscal 2015 Restructuring Plan
On September 14, 2015, Parents Board of Directors approved a restructuring plan (the 2015 Plan) which will be implemented through fiscal 2018. As part of the 2015 Plan, Seattle expects up to approximately 2,000 employees to exit Seattle by the end of 2018. The changes to the workforce will vary by country, based on local legal requirements and consultations with employee works councils and other employee representatives, as appropriate. Seattle estimates that it will incur aggregate pre-tax charges in connection with the 2015 plan of approximately $139 million through fiscal 2018, of which approximately $115 million relates to workforce reductions and approximately $24 million primarily relates to real estate consolidation.
Fiscal 2012 Restructuring Plan
On May 23, 2012, Parent adopted a multiyear restructuring plan (the 2012 Plan) designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. As of October 31, 2016 Seattle had eliminated approximately 2,500 positions in connection with the 2012 Plan, with a portion of those employees exiting Seattle as part of voluntary enhanced early retirement (EER) programs in the U.S. and in certain other countries. The 2012 Plan is substantially complete, with no further positions being
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eliminated. Seattle recognized $193 million in total aggregate charges in connection with the 2012 Plan, all related to workforce reductions, including the EER programs.
Note 3: Retirement and Post-Retirement Benefit Plans
Defined Benefit Plans
Certain eligible employees, retirees and other former employees of Seattle participate in certain U.S. and international defined benefit pension plans offered by Parent. These plans whose participants included both Seattle employees and other employees of Parent are accounted for as multiemployer benefit plans and as such, the related net benefit plan obligations of these Shared plans are not included in the Combined Balance Sheets. The related benefit plan expense has been allocated to Seattle based on Seattles labor costs and allocations of corporate and other shared functional personnel. Parent contributions to these Shared plans were $237 million in fiscal 2016, $518 million in fiscal 2015 and $277 million in fiscal 2014.
Post-Retirement Benefit Plans
Prior to July 31, 2015, Parent sponsored retiree health and welfare benefit plans, of which the most significant plans were in the U.S. All of these plans were accounted for as multiemployer benefit plans. Seattles post-retirement benefit expense was less than $1 million in fiscal 2016. Seattle recognized post-retirement benefit credits of $2 million in fiscal 2015 and $2 million in fiscal 2014 in the Combined Statements of Operations.
Defined Contribution Plans
Parent offers various defined contribution plans for U.S. and non-U.S. employees. Seattles defined contribution expense was approximately $40 million in fiscal 2016, $46 million in fiscal 2015 and $48 million in fiscal 2014.
Pension Benefit Expense
Seattles total net pension benefit expense recognized in the Combined Statements of Operations was $5 million in fiscal 2016. Total net pension benefit credits recognized in the Combined Statements of Operations were $19 million in fiscal 2015 and $11 million in fiscal 2014.
In January 2015, Parent offered certain terminated vested participants of the U.S. HP Pension Plan, a Shared plan, a onetime voluntary window during which they could elect to receive their pension benefit as a lump sum payment. As a result, the Parent pension plan trust made lump sum payments to eligible participants who elected to receive their pension benefit under this lump sum program. The defined benefit plan settlement net credit of $1 million recorded in the Combined Statement of Operations for the year ended October 31, 2015, primarily includes the net settlement and periodic benefit credit resulting from this lump sum program incurred by the Parent, which was determined to be directly attributable to Seattle, as well as the impact of remeasurement of the related U.S. defined benefit plans.
Note 4: Stock-Based Compensation
Certain of Seattles employees participate in stock-based compensation plans sponsored by Parent. Parents stock-based compensation plans include incentive compensation plans and an employee stock purchase plan (ESPP). All awards granted under the plans are based on Parents common shares and, as such, are not reflected in Seattles Combined Statements of Equity. Stock-based compensation expense includes expense attributable to Seattle based on the awards and terms previously granted under Parents incentive compensation plan to Seattles employees and an allocation of Parents corporate and shared functional employee expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that Seattle would have experienced as an independent company for the periods presented.
Parents Stock-Based Incentive Compensation Plans
Parents stock-based incentive compensation plans include equity plans adopted in 2015, 2004 and 2000, as amended (Principal Equity Plans), as well as various equity plans assumed through acquisitions under which stock-based awards were outstanding. Stock-based awards granted from the Principal Equity Plans include restricted stock awards, stock options, and performance-based awards. Employees who meet certain employment qualifications are eligible to receive stock-based awards.
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Restricted stock awards are non-vested stock awards that may include grants of restricted stock or restricted stock units. Restricted stock awards and cash-settled awards are generally subject to forfeiture if employment terminates prior to the lapse of the restrictions. Such awards generally vest one to three years from the date of grant. During the vesting period, ownership of the restricted stock cannot be transferred. Restricted stock has the same dividend and voting rights as common stock and is considered to be issued and outstanding upon grant. The dividends paid on restricted stock are non-forfeitable. Restricted stock units have forfeitable dividend equivalent rights equal to the dividend paid on common stock. Restricted stock units do not have the voting rights of common stock, and the shares underlying restricted stock units are not considered issued and outstanding upon grant. The fair value of the restricted stock awards is the close price of Parents common stock on the grant date of the award. Seattle expenses the fair value of restricted stock awards ratably over the period during which the restrictions lapse.
Stock options granted under the Principal Equity Plans were generally non-qualified stock options, but the Principal Equity Plans permitted certain options granted to qualify as incentive stock options under the U.S. Internal Revenue Code. Stock options generally vest over three to four years from the date of grant. The exercise price of a stock option was equal to the closing price of Parents stock on the option grant date. The majority of stock options issued by Parent contained only service vesting conditions. However, starting in fiscal 2011, Parent began granting performance-contingent stock options that vest only on the satisfaction of both service and market conditions prior to the expiration of those awards.
Stock-Based Compensation Expense and Related Income Tax Benefits
Stock-based compensation expense and the resulting tax benefits recognized by Seattle were as follows:
|
For the fiscal years ended
October 31 |
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Cost of revenue
|
$
|
9
|
|
$
|
8
|
|
$
|
10
|
|
Research and development
|
|
17
|
|
|
15
|
|
|
15
|
|
Selling, general and administrative
|
|
39
|
|
|
35
|
|
|
35
|
|
Separation costs
|
|
5
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
|
70
|
|
|
58
|
|
|
60
|
|
Income tax benefit
|
|
(13
|
)
|
|
(13
|
)
|
|
(7
|
)
|
Stock-based compensation expense, net of tax
|
$
|
57
|
|
$
|
45
|
|
$
|
53
|
|
In May 2016, Parent modified its stock-based compensation program such that certain unvested equity awards outstanding on May 24, 2016 will vest on the earlier of: (i) the termination of an employees employment with HPE as a direct result of an announced sale, divestiture or spin-off of a subsidiary, division or other business; (ii) the termination of an employees employment with HPE without cause; or (iii) June 1, 2018. This modification also includes changes to the performance and market conditions of certain performance-based awards. As a result, for the fiscal year ended October 31, 2016, stock-based compensation in the table above includes pre-tax expense of $5 million, which has been recorded within Separation costs in the Combined Statements of Operations.
In connection with HPEs November 1, 2015 separation from the Hewlett-Packard Company, the Board of Directors approved amendments to certain outstanding long-term incentive awards on July 29, 2015. The amendments provided for the accelerated vesting on September 17, 2015 of certain stock-based awards that were otherwise scheduled to vest between September 18, 2015 and December 31, 2015. Seattles additional pre-tax stock-based compensation expense due to the acceleration was approximately $6 million in fiscal 2015.
Stock-based compensation expense includes an allocation of Parents corporate and shared functional employee expenses of $15 million, $15 million and $11 million in fiscal 2016, 2015 and 2014, respectively.
Cash received from option exercises and purchases under Parents ESPP by Seattle employees was $19 million in fiscal 2016, $30 million in fiscal 2015 and $44 million in fiscal 2014. The benefit realized for the tax deduction from option exercises in fiscal 2016, 2015 and 2014 was $3 million, $7 million and $11 million, respectively.
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Restricted Stock Awards
A summary of restricted stock award activity for Seattle employees is as follows:
|
Fiscal years ended October 31
|
|||||||||||||||||
|
2016
|
2015
|
2014
|
|||||||||||||||
|
Shares
|
Weighted-
Average Grant Date Fair Value Per Share |
Shares
|
Weighted-
Average Grant Date Fair Value Per Share |
Shares
|
Weighted-
Average Grant Date Fair Value Per Share |
||||||||||||
|
In
thousands |
|
In
thousands |
|
In
thousands |
|
||||||||||||
Outstanding at beginning of year(1)
|
|
—
|
|
|
—
|
|
|
3,858
|
|
$
|
24
|
|
|
3,783
|
|
$
|
21
|
|
Converted from former Parent’s plan(1)
|
|
2,690
|
|
$
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Granted and assumed through acquisition
|
|
4,922
|
|
$
|
16
|
|
|
1,434
|
|
$
|
36
|
|
|
2,114
|
|
$
|
29
|
|
Vested
|
|
(495
|
)
|
$
|
15
|
|
|
(2,530
|
)
|
$
|
26
|
|
|
(1,632
|
)
|
$
|
23
|
|
Forfeited
|
|
(696
|
)
|
$
|
15
|
|
|
(427
|
)
|
$
|
29
|
|
|
(407
|
)
|
$
|
23
|
|
Employee transition(2)
|
|
(13
|
)
|
$
|
17
|
|
|
(808
|
)
|
$
|
22
|
|
|
—
|
|
|
—
|
|
Outstanding at end of year
|
|
6,408
|
|
$
|
15
|
|
|
1,527
|
|
$
|
32
|
|
|
3,858
|
|
$
|
24
|
|
(1) | In connection with HPE’s November 1, 2015 separation from Hewlett-Packard Company, Seattle employees with outstanding former Parent restricted stock awards received HPE replacement restricted stock awards in an amount determined using a conversion ratio based on the closing market price of former Parent’s shares on the final pre-separation trading date divided by the opening market price of HPE shares on the first post-separation date. |
(2) | Employee transition amounts consist of restricted stock award activity for employees transitioning between Seattle and Parent. |
The total grant date fair value of restricted stock awards vested for Seattle employees in fiscal 2016, 2015 and 2014 was $6 million, $51 million and $33 million, respectively, net of taxes. As of October 31, 2016, total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards held by Seattle employees was $57 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.3 years.
Stock Options
Parent utilizes the Black-Scholes-Merton option pricing model to estimate the fair value of stock options subject to service-based vesting conditions. Parent estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value per share and the assumptions used to measure fair value were as follows:
|
For the fiscal years ended
October 31 |
||||||||
|
2016
|
2015
|
2014
|
||||||
Weighted-average fair value(1)
|
$
|
4
|
|
$
|
8
|
|
$
|
7
|
|
Expected volatility(2)
|
|
31.1
|
%
|
|
26.8
|
%
|
|
33.1
|
%
|
Risk-free interest rate(3)
|
|
1.7
|
%
|
|
1.7
|
%
|
|
1.8
|
%
|
Expected dividend yield(4)
|
|
1.5
|
%
|
|
1.8
|
%
|
|
2.1
|
%
|
Expected term in years(5)
|
|
5.4
|
|
|
5.9
|
|
|
5.7
|
|
(1) | The weighted-average fair value per share was based on stock options granted during the period. |
(2) | For options granted in fiscal 2016, expected volatility was estimated using average historical volatility of selected peer companies. For options granted in fiscal 2015, expected volatility was estimated using the implied volatility derived from options traded on Hewlett-Packard Company’s common stock. For options granted in fiscal 2014, expected volatility for options subject to service-based vesting was estimated using the implied volatility derived from options traded on Hewlett-Packard Company’s common stock, whereas for performance-contingent options, expected volatility was estimated using the historical volatility of Hewlett-Packard Company’s common stock. |
(3) | The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues. |
F-129
(4) | The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option. |
(5) | For options granted in fiscal 2016 subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110, since it was HPE’s first fiscal year as a separate stand-alone company. For options granted in fiscal 2015 and 2014, the expected term was estimated using historical exercise and post-vesting termination patterns. For performance-contingent stock options, the expected term represents an output from the lattice model. |
A summary of stock option activity for Seattle employees is as follows:
|
Fiscal years ended October 31
|
|||||||||||||||||||||||||||||||||||
|
2016
|
2015
|
2014
|
|||||||||||||||||||||||||||||||||
|
Shares
|
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
Shares
|
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
Shares
|
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
||||||||||||||||||||||||
|
In
thousands |
|
In
years |
In
millions |
In
thousands |
|
In
years |
In
millions |
In
thousands |
|
In
years |
In
millions |
||||||||||||||||||||||||
Outstanding at beginning of year(1)
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
3,975
|
|
$
|
23
|
|
|
|
|
|
|
|
|
7,932
|
|
$
|
20
|
|
|
|
|
|
|
|
Converted from former Parent’s plan(1)
|
|
3,828
|
|
$
|
15
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Granted and assumed through acquisitions
|
|
2,396
|
|
$
|
14
|
|
|
|
|
|
|
|
|
530
|
|
$
|
34
|
|
|
|
|
|
|
|
|
643
|
|
$
|
29
|
|
|
|
|
|
|
|
Exercised
|
|
(1,407
|
)
|
$
|
11
|
|
|
|
|
|
|
|
|
(1,148
|
)
|
$
|
18
|
|
|
|
|
|
|
|
|
(2,164
|
)
|
$
|
16
|
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
(371
|
)
|
$
|
19
|
|
|
|
|
|
|
|
|
(955
|
)
|
$
|
35
|
|
|
|
|
|
|
|
|
(2,436
|
)
|
$
|
22
|
|
|
|
|
|
|
|
Employee transition(2)
|
|
115
|
|
$
|
23
|
|
|
|
|
|
|
|
|
(427
|
)
|
$
|
16
|
|
|
|
|
|
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Outstanding at end of year
|
|
4,561
|
|
$
|
15
|
|
|
5.7
|
|
$
|
35
|
|
|
1,975
|
|
$
|
25
|
|
|
4.6
|
|
$
|
11
|
|
|
3,975
|
|
$
|
23
|
|
|
3.7
|
|
$
|
55
|
|
Vested and expected to vest at end of year
|
|
4,378
|
|
$
|
15
|
|
|
5.7
|
|
$
|
34
|
|
|
1,903
|
|
$
|
25
|
|
|
4.5
|
|
$
|
11
|
|
|
3,837
|
|
$
|
23
|
|
|
3.6
|
|
$
|
53
|
|
Exercisable at end of year
|
|
1,368
|
|
$
|
13
|
|
|
3.4
|
|
$
|
13
|
|
|
1,350
|
|
$
|
22
|
|
|
3.6
|
|
$
|
10
|
|
|
2,930
|
|
$
|
23
|
|
|
2.7
|
|
$
|
42
|
|
(1) | In connection with HPE’s November 1, 2015 separation from Hewlett-Packard Company, Seattle employees with outstanding former Parent stock options received HPE replacement stock options in an amount determined using a conversion ratio based on the closing market price of former Parent’s shares on the final pre-separation trading day divided by the opening market price of HPE shares on the first post-separation trading date. |
(2) | Employee transition amounts consist of option activity for employees transitioning between Seattle and Parent. |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that Seattle employee option holders would have realized had all Seattle employee option holders exercised their options on the last trading day of fiscal 2016, 2015 and 2014. The aggregate intrinsic value is the difference between Parents closing stock price on the last trading day of the fiscal year and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised by Seattle employees in fiscal 2016, 2015 and 2014 was $11 million, $18 million and $31 million, respectively. The total grant date fair value of options granted to Seattle employees which vested in fiscal 2016, 2015 and 2014 was $5 million, $8 million and $9 million, respectively, net of taxes.
The following table summarizes significant ranges of outstanding and exercisable stock options for Seattle employees:
|
As of October 31, 2016
|
||||||||||||||
|
Options Outstanding
|
Options Exercisable
|
|||||||||||||
Range of Exercise Prices
|
Shares
Outstanding |
Weighted-
Average Remaining Contractual Term |
Weighted-
Average Exercise Price |
Shares
Exercisable |
Weighted-
Average Exercise Price |
||||||||||
|
In thousands
|
In years
|
|
In thousands
|
|
||||||||||
$0-$9.99
|
|
569
|
|
|
2.1
|
|
$
|
7
|
|
|
556
|
|
$
|
7
|
|
$10-$19.99
|
|
3,294
|
|
|
6.4
|
|
$
|
15
|
|
|
652
|
|
$
|
16
|
|
$20-$29.99
|
|
698
|
|
|
5.8
|
|
$
|
21
|
|
|
160
|
|
$
|
22
|
|
|
|
4,561
|
|
|
5.7
|
|
$
|
15
|
|
|
1,368
|
|
$
|
13
|
|
F-130
As of October 31, 2016, total unrecognized pre-tax stock-based compensation expense related to stock option awards held by Seattle employees was $6 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.8 years.
Employee Stock Purchase Plan
Parent sponsors the ESPP, pursuant to which eligible employees may contribute up to 10% of their eligible compensation, subject to certain income limits, to purchase shares of Parents common stock. Pursuant to the terms of the ESPP, employees purchase stock under the ESPP at a price equal to 95% of Parents closing stock price on the purchase date. No stock-based compensation expense was recorded in connection with those purchases because the criteria of a non-compensatory plan were met.
Note 5: Taxes on Earnings
Seattles operating results are included in Parents various consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For purposes of Seattles Combined Financial Statements, provision for taxes and deferred tax balances have been recorded as if Seattle filed tax returns on a standalone basis separate from Parent using the separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if Seattle was a separate taxpayer and a standalone enterprise for the periods presented.
(Provision for) Benefit from Taxes
The domestic and foreign components of earnings before taxes were as follows:
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
U.S.
|
$
|
(55
|
)
|
$
|
(19
|
)
|
$
|
(76
|
)
|
Non-U.S.
|
|
290
|
|
|
337
|
|
|
488
|
|
|
$
|
235
|
|
$
|
318
|
|
$
|
412
|
|
The Provision for (benefit from) taxes on earnings were as follows:
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
U.S. federal taxes:
|
|
|
|
|
|
|
|
|
|
Current
|
$
|
244
|
|
$
|
180
|
|
$
|
191
|
|
Deferred
|
|
(170
|
)
|
|
(338
|
)
|
|
(205
|
)
|
Non U.S. taxes:
|
|
|
|
|
|
|
|
|
|
Current
|
|
82
|
|
|
94
|
|
|
79
|
|
Deferred
|
|
—
|
|
|
17
|
|
|
(5
|
)
|
State taxes:
|
|
|
|
|
|
|
|
|
|
Current
|
|
29
|
|
|
17
|
|
|
30
|
|
Deferred
|
|
(30
|
)
|
|
(43
|
)
|
|
(39
|
)
|
|
$
|
155
|
|
$
|
(73
|
)
|
$
|
51
|
|
F-131
The differences between the U.S. federal statutory income tax rate and Seattles effective tax rate were as follows:
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
U.S. federal statutory income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State income taxes, net of federal tax benefit
|
|
(5.4
|
)%
|
|
(2.3
|
)%
|
|
5.8
|
%
|
Lower rates in other jurisdictions, net
|
|
(45.2
|
)%
|
|
(75.6
|
)%
|
|
(37.4
|
)%
|
Uncertain tax positions
|
|
47.2
|
%
|
|
23.3
|
%
|
|
1.8
|
%
|
Divestiture of TippingPoint
|
|
29.5
|
%
|
|
—
|
|
|
—
|
|
Other, net
|
|
4.9
|
%
|
|
(3.4
|
)%
|
|
7.2
|
%
|
|
|
66.0
|
%
|
|
(23.0
|
)%
|
|
12.4
|
%
|
In fiscal 2016, Seattle recorded $61 million of net income tax benefits related to items unique to that year. These amounts included $139 million of income tax benefits on restructuring and separation related costs, $3 million of income tax benefits related to state income tax and $15 million of income tax benefits related to other items, the effects of which were partially offset by $96 million of income tax charges related to uncertain tax positions.
In fiscal 2015, Seattle recorded $6 million of net income tax charges related to items unique to that year. These amounts included $59 million of income tax charges related to uncertain tax positions and $1 million of income tax charges related to state income tax, the effects of which were partially offset by $31 million of income tax benefits on restructuring and separation related costs and $23 million of income tax benefits related to other items.
In fiscal 2014, Seattle recorded $29 million of net income tax charges related to items unique to that year. These amounts included $13 million of income tax charges related to state income tax impacts, $8 million of income tax charges related to uncertain tax positions and $38 million of income tax charges related to other items, the effects of which were partially offset by $24 million of income tax benefits related to restructuring costs and $6 million of income tax benefits related to provision to return adjustments.
As a result of certain employment actions and capital investments Seattle has undertaken, income from software development and production in certain countries is subject to reduced tax rates, and in some cases is wholly exempt from taxes, through 2024. The gross income tax benefits attributable to these actions and investments were estimated to be $4 million in fiscal 2016, zero in fiscal 2015 and $6 million in fiscal 2014.
Uncertain Tax Positions
A reconciliation of unrecognized tax benefits is as follows:
|
As of October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Balance at beginning of year
|
$
|
260
|
|
$
|
617
|
|
$
|
582
|
|
Increases:
|
|
|
|
|
|
|
|
|
|
For current year’s tax positions
|
|
191
|
|
|
3
|
|
|
32
|
|
For prior years’ tax positions
|
|
43
|
|
|
8
|
|
|
62
|
|
Decreases:
|
|
|
|
|
|
|
|
|
|
For prior years’ tax positions
|
|
(5
|
)
|
|
(329
|
)
|
|
(29
|
)
|
Statute of limitations expiration
|
|
(2
|
)
|
|
(7
|
)
|
|
(11
|
)
|
Settlements with taxing authorities
|
|
(8
|
)
|
|
(32
|
)
|
|
(19
|
)
|
Balance at end of year
|
$
|
479
|
|
$
|
260
|
|
$
|
617
|
|
Up to $204 million, $164 million and $492 million of Seattles unrecognized tax benefits at October 31, 2016, 2015 and 2014, respectively, would affect Seattles effective tax rate if realized.
F-132
Seattle recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in its (Provision for) benefit from taxes in the Combined Statements of Operations. Seattle had accrued $164 million and $95 million for interest and penalties as of October 31, 2016 and 2015, respectively.
For the periods presented, the unrecognized tax benefits reflected in the Combined Financial Statements have been determined using the separate return method. Parent engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Parent does not expect complete resolution of any U.S. Internal Revenue Service audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, Seattle believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $4 million within the next 12 months.
Seattle is subject to income tax in the U.S. and approximately 70 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, Parent is subject to numerous ongoing audits by federal, state and foreign tax authorities.
With respect to major foreign and state tax jurisdictions, Parent is no longer subject to tax authority examinations for years prior to 2005. Seattle is subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009. The relevant taxing authority has proposed an assessment of approximately $743 million. Parent is contesting this proposed assessment on behalf of Seattle.
Seattle believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. Seattle regularly assesses the likely outcomes of these audits in order to determine the appropriateness of Seattles tax provision. Seattle adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that Seattle will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the (Provision for) benefit from taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net earnings or cash flows.
Seattle has not provided for U.S. federal income and foreign withholding taxes on $5.0 billion of undistributed earnings from non-U.S. operations as of October 31, 2016 because Seattle intends to reinvest such earnings indefinitely outside of the U.S. If Seattle were to distribute these earnings, foreign tax credits may become available under current law to reduce the resulting U.S. income tax liability. Determination of the amount of unrecognized deferred tax liability related to these earnings is not practicable. Seattle will remit non-indefinitely reinvested earnings of its non-U.S. subsidiaries for which deferred U.S. federal and withholding taxes have been provided where excess cash has accumulated and Seattle determines that it is advantageous for business operations, tax or cash management reasons.
F-133
Deferred Income Taxes
Deferred income taxes result from temporary differences between the amount of assets and liabilities recognized for financial reporting and tax purposes. For purposes of Seattles Combined Balance Sheets, deferred tax balances and tax carryforwards and credits have been recorded under the separate return method. The significant components of deferred tax assets and deferred tax liabilities were as follows:
|
As of October 31
|
|||||||||||
|
2016
|
2015
|
||||||||||
|
Deferred
Tax Assets |
Deferred
Tax Liabilities |
Deferred
Tax Assets |
Deferred
Tax Liabilities |
||||||||
|
In millions
|
|||||||||||
Loss and credit carryforwards
|
$
|
86
|
|
$
|
—
|
|
$
|
81
|
|
$
|
—
|
|
Unremitted earnings of foreign subsidiaries
|
|
—
|
|
|
(31
|
)
|
|
—
|
|
|
(27
|
)
|
Intercompany transactions
|
|
792
|
|
|
—
|
|
|
718
|
|
|
—
|
|
Fixed assets
|
|
28
|
|
|
—
|
|
|
1
|
|
|
(61
|
)
|
Employee and retiree benefits
|
|
46
|
|
|
(1
|
)
|
|
46
|
|
|
(2
|
)
|
Accounts receivable allowance
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Intangible assets
|
|
4
|
|
|
(79
|
)
|
|
3
|
|
|
(113
|
)
|
Restructuring
|
|
28
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Deferred revenue
|
|
178
|
|
|
—
|
|
|
201
|
|
|
—
|
|
Other
|
|
48
|
|
|
(3
|
)
|
|
15
|
|
|
(11
|
)
|
Gross deferred tax assets and liabilities
|
|
1,211
|
|
|
(114
|
)
|
|
1,069
|
|
|
(214
|
)
|
Valuation allowance
|
|
(75
|
)
|
|
—
|
|
|
(46
|
)
|
|
—
|
|
Net deferred tax assets and liabilities
|
$
|
1,136
|
|
$
|
(114
|
)
|
$
|
1,023
|
|
$
|
(214
|
)
|
In the first quarter of fiscal 2016, Seattle adopted the amendment to the existing accounting standards for income taxes issued by the FASB in November 2015, and elected to apply it on a retrospective basis. As a result, all of Seattles deferred tax assets and liabilities are retrospectively classified as non-current as of October 31, 2016 and 2015. See Note 1, Overview and Summary of Significant Accounting Policies, for more details.
Deferred tax assets and liabilities included in the Combined Balance Sheets were as follows:
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Deferred tax assets
|
$
|
1,024
|
|
$
|
813
|
|
Deferred tax liabilities
|
|
(2
|
)
|
|
(4
|
)
|
Deferred tax assets net of deferred tax liabilities
|
$
|
1,022
|
|
$
|
809
|
|
Seattle periodically engages in intercompany advanced royalty payment and licensing arrangements that may result in advance payments between subsidiaries in different tax jurisdictions. When the local tax treatment of these arrangements differs from U.S. GAAP treatment, deferred taxes are recognized. Seattle executed intercompany advanced royalty payment arrangements resulting in advanced payments of $0.5 billion and $0.8 billion during fiscal 2016 and fiscal 2015, respectively. Payments related to these transactions were received in the U.S. from a foreign combined affiliate, with a deferral of intercompany revenues over the 5 year term of the agreements. Intercompany royalty revenue and the amortization expense related to the licensing rights are eliminated in Seattles Combined Financial Statements.
As of October 31, 2016, Seattle had $63 million and $596 million of federal and state net operating loss carryforwards, respectively. Amounts included in state net operating loss carryforwards will begin to expire in 2017 and amounts included in federal net operating loss carryforwards will begin to expire in 2023. Seattle has provided a valuation allowance of $10 million for deferred tax assets related to state net operating losses carryforwards.
F-134
As of October 31, 2016, Seattle had recorded deferred tax assets for various tax credit carryforwards as follows:
|
Carryforward
|
Valuation
Allowance |
Initial Year
of Expiration |
||||||
|
In millions
|
||||||||
U.S. research and development and other credits
|
$
|
20
|
|
$
|
—
|
|
|
2017
|
|
Tax credits in state jurisdictions
|
|
13
|
|
|
3
|
|
|
2017
|
|
Balance at end of year
|
$
|
33
|
|
$
|
3
|
|
|
|
|
Deferred Tax Asset Valuation Allowance
The deferred tax asset valuation allowance and changes were as follows:
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Balance at beginning of year
|
$
|
46
|
|
$
|
68
|
|
Provision for (benefit from) taxes
|
|
39
|
|
|
(20
|
)
|
Other comprehensive income, currency translation and charges to other accounts
|
|
(10
|
)
|
|
(2
|
)
|
Balance at end of year
|
$
|
75
|
|
$
|
46
|
|
Note 6: Balance Sheet Details
Balance sheet details were as follows:
Accounts Receivable
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Accounts receivable:
|
|
|
|
|
|
|
Billed
|
$
|
631
|
|
$
|
678
|
|
Unbilled
|
|
41
|
|
|
35
|
|
Accounts receivable, gross
|
|
672
|
|
|
713
|
|
Allowance for doubtful accounts
|
|
(7
|
)
|
|
(7
|
)
|
|
$
|
665
|
|
$
|
706
|
|
Seattle has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The recourse obligations associated with these short-term financing arrangements as of October 31, 2016 and 2015 were not material. The amount of trade receivables sold but not collected under these short-term financing arrangements was $2 million at October 31, 2016 and 2015.
The allowance for doubtful accounts related to accounts receivable and changes therein were as follows:
|
For the Year Ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Balance at beginning of year
|
$
|
7
|
|
$
|
11
|
|
$
|
24
|
|
Charges (reversals) to provision for doubtful accounts, net
|
|
9
|
|
|
3
|
|
|
(6
|
)
|
Deductions, net of recoveries
|
|
(9
|
)
|
|
(7
|
)
|
|
(7
|
)
|
Balance at end of year
|
$
|
7
|
|
$
|
7
|
|
$
|
11
|
|
F-135
Other Current Assets
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Prepaid expenses
|
$
|
27
|
|
$
|
26
|
|
Value-added taxes receivable
|
|
22
|
|
|
53
|
|
Inventory
|
|
20
|
|
|
23
|
|
Other
|
|
28
|
|
|
39
|
|
|
$
|
97
|
|
$
|
141
|
|
Inventory primarily consists of finished goods and purchased parts and fabricated assemblies related to the TippingPoint business, which was divested in March 2016. See Note 7, Acquisitions and Divestitures, for more details. Seattle has a Transition Services Agreement (TSA) with Trend Micro International, the acquirer of TippingPoint, to produce inventory for the divested business for an initial 12 month term ending in Seattles fiscal quarter ending April 30, 2017. Upon termination of the TSA, any remaining TippingPoint related inventory will be purchased by Trend Micro International.
Seattle values inventory at the lower of cost or market. Cost is computed using standard cost which approximates actual cost on a first-in, first-out basis. Adjustments to reduce the cost of inventory to its net realizable value are made, if required, for estimated excess or obsolescence.
Property, Plant and Equipment
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Buildings and leasehold improvements
|
$
|
64
|
|
$
|
56
|
|
Equipment and other
|
|
357
|
|
|
330
|
|
|
|
421
|
|
|
386
|
|
Accumulated depreciation
|
|
(281
|
)
|
|
(252
|
)
|
|
$
|
140
|
|
$
|
134
|
|
The gross property, plant and equipment and accumulated depreciation presented in the above table include property under capital leases and the related accumulated amortization, respectively. Property under capital leases is comprised primarily of equipment. Capital lease assets included in Property, plant and equipment in the Combined Balance Sheets were $60 million and $45 million as of October 31, 2016 and 2015, respectively. Accumulated amortization on the property under capital leases was $26 million and $13 million as of October 31, 2016 and 2015, respectively.
Depreciation expense was $62 million in fiscal 2016, $86 million in fiscal 2015 and $86 million in fiscal 2014. The increase in gross property, plant and equipment in fiscal 2016 was due primarily to purchases and acquisitions through capital leases of $42 million, the effects of which were offset by sales and retirements of $23 million. Accumulated depreciation associated with assets sold or retired was $20 million. The remainder of the change in gross property, plant and equipment and accumulated depreciation was due to currency and other impacts.
Other Accrued Liabilities
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Accrued taxes—other
|
$
|
64
|
|
$
|
68
|
|
Other
|
|
78
|
|
|
121
|
|
|
$
|
142
|
|
$
|
189
|
|
F-136
Other Liabilities
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
Tax liability
|
$
|
310
|
|
$
|
356
|
|
Deferred revenue—long-term
|
|
154
|
|
|
190
|
|
Deferred tax liability
|
|
2
|
|
|
4
|
|
Other
|
|
60
|
|
|
58
|
|
|
$
|
526
|
|
$
|
608
|
|
Note 7: Acquisitions and Divestitures
Acquisitions
In fiscal 2016, Seattle acquired Trilead, a provider of backup solutions targeted for virtualized environments, for a purchase price of $12 million. In connection with this acquisition, Seattle recorded $10 million of goodwill (which is not deductible for tax purposes), $4 million of amortizable intangible assets, and assumed $2 million of net liabilities.
In fiscal 2015, Seattle acquired Voltage Security, a data-centric security software solutions company, for a purchase price of $160 million. In connection with this acquisition, Seattle recorded $96 million of goodwill (which is not deductible for tax purposes), $48 million of amortizable intangible assets and acquired $16 million of net assets.
Pro forma results of operations for these acquisitions have not been presented because they are not material to Seattles combined results of operations, either individually or in the aggregate.
Divestitures
In fiscal 2016, Seattle completed the sale of its TippingPoint business to Trend Micro International for approximately $300 million. TippingPoint is a provider of next-generation intrusion prevention systems and related network security solutions. Cash proceeds from the sale of Seattles TippingPoint business included a $25 million deposit received in fiscal 2015, and $254 million, offset by $5 million of transaction costs, received in fiscal 2016. The remaining amount of approximately $21 million is related to inventory and tooling assets retained by Seattle in connection with a TSA with Trend Micro International under which Seattle will produce products for the divested business through an initial 12 month term ending in Seattles fiscal quarter ending April 30, 2017. Upon termination of the TSA, any remaining TippingPoint related inventory and tooling will be purchased by Trend Micro International. The $82 million gain related to the divestiture of TippingPoint was included in Selling, general and administrative expense in the Combined Statement of Operations and in Other, net in Net cash provided by operating activities in the Combined Statement of Cash Flows.
In fiscal 2015, Seattle completed the sales of its LiveVault and iManage businesses for combined proceeds of $149 million. The total gain of $7 million associated with these divestitures was included in Selling, general and administrative expense in the Combined Statement of Operations and in Other, net in Net cash provided by operating activities in the Combined Statement of Cash Flows.
Fiscal 2015 net cash proceeds from the 2015 divestitures of LiveVault and iManage combined with the deposit for the 2016 sale of TippingPoint totaled $174 million.
F-137
Note 8: Goodwill and Intangible Assets
Goodwill
Goodwill and related changes in the carrying amount were as follows:
|
In millions
|
||
Balance at October 31, 2014(1)
|
$
|
8,852
|
|
Goodwill acquired during the year
|
|
96
|
|
Goodwill divested during the year(2)
|
|
(123
|
)
|
Goodwill transferred to Parent(3)
|
|
(512
|
)
|
Balance at October 31, 2015(1)
|
|
8,313
|
|
Goodwill acquired during the year
|
|
10
|
|
Goodwill divested during the year(4)
|
|
(234
|
)
|
Balance at October 31, 2016(1)
|
$
|
8,089
|
|
(1) | Goodwill is net of accumulated impairment losses of $5.8 billion, which were recorded prior to October 31, 2014. |
(2) | Goodwill divested as part of the divestiture of the LiveVault and iManage businesses. |
(3) | In connection with the separation of HPE from Hewlett-Packard Company, Hewlett-Packard Company retained the marketing optimization software product group, which has historically been managed by and included in Seattle. The adjustment reflects the impact of removing the related goodwill allocated on a relative fair value basis from Seattle. |
(4) | Goodwill divested as part of the sale of the TippingPoint business. |
Based on the results of Seattles annual impairment tests for 2016, 2015 and 2014, Seattle determined that no impairment of goodwill existed.
Intangible Assets
Intangible assets consist of:
|
As of October 31, 2016
|
|||||||||||
|
Gross
|
Accumulated
Amortization |
Accumulated
Impairment Loss |
Net
|
||||||||
|
In millions
|
|||||||||||
Customer contracts, customer lists and distribution agreements
|
$
|
1,221
|
|
$
|
(278
|
)
|
$
|
(822
|
)
|
$
|
121
|
|
Developed and core technology and patents
|
|
3,153
|
|
|
(728
|
)
|
|
(2,144
|
)
|
|
281
|
|
Trade name and trade marks
|
|
127
|
|
|
(11
|
)
|
|
(109
|
)
|
|
7
|
|
Total intangible assets
|
$
|
4,501
|
|
$
|
(1,017
|
)
|
$
|
(3,075
|
)
|
$
|
409
|
|
|
As of October 31, 2015
|
|||||||||||
|
Gross
|
Accumulated
Amortization |
Accumulated
Impairment Loss |
Net
|
||||||||
|
In millions
|
|||||||||||
Customer contracts, customer lists and distribution agreements
|
$
|
1,338
|
|
$
|
(318
|
)
|
$
|
(822
|
)
|
$
|
198
|
|
Developed and core technology and patents
|
|
3,220
|
|
|
(690
|
)
|
|
(2,144
|
)
|
|
386
|
|
Trade name and trade marks
|
|
169
|
|
|
(47
|
)
|
|
(109
|
)
|
|
13
|
|
Total intangible assets
|
$
|
4,727
|
|
$
|
(1,055
|
)
|
$
|
(3,075
|
)
|
$
|
597
|
|
For fiscal 2016, the decrease in gross intangible assets was due primarily to the impact of $125 million of intangible assets related to the TippingPoint divestiture and $105 million of intangible assets that became fully amortized and were eliminated from gross intangible assets and accumulated amortization. The decrease was partially offset by $4 million of intangible assets resulting from an acquisition.
F-138
As of October 31, 2016, the weighted-average remaining useful lives of Seattles finite-lived intangible assets were as follows:
|
Weighted-
Average Remaining Useful Lives |
||
|
In years
|
||
Customer contracts, customer lists and distribution agreements
|
|
3
|
|
Developed and core technology and patents
|
|
4
|
|
Trade name and trade marks
|
|
4
|
|
As of October 31, 2016, estimated future amortization expense related to finite-lived intangible assets was as follows:
Fiscal year
|
In millions
|
||
2017
|
$
|
134
|
|
2018
|
|
109
|
|
2019
|
|
85
|
|
2020
|
|
77
|
|
2021
|
|
4
|
|
Total
|
$
|
409
|
|
Note 9: Capital Lease Obligations
Capital lease obligations primarily consist of contractual arrangements with Parents wholly-owned subsidiary, HPE Financial Services. As of October 31, 2016, future principal payments under capital leases were as follows:
Fiscal year
|
In millions
|
||
2017
|
$
|
17
|
|
2018
|
|
13
|
|
2019
|
|
8
|
|
2020
|
|
2
|
|
Total minimum lease payments
|
|
40
|
|
Less: amount representing interest
|
|
(4
|
)
|
Present value of minimum lease payments
|
|
36
|
|
Less: current portion
|
|
(15
|
)
|
Long-term portion
|
$
|
21
|
|
Note 10: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Seattle uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
F-139
Level 3—Unobservable inputs for the asset or liability.
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents Seattles assets and liabilities that are measured at fair value on a recurring basis:
|
As of October 31, 2016
|
As of October 31, 2015
|
||||||||||||||||||||||
|
Fair Value
Measured Using |
|
Fair Value
Measured Using |
|
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
In millions
|
|||||||||||||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents and Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
$
|
14
|
|
$
|
—
|
|
$
|
14
|
|
Money market funds
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Foreign bonds
|
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
28
|
|
|
—
|
|
|
28
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Total assets
|
$
|
95
|
|
$
|
41
|
|
$
|
—
|
|
$
|
136
|
|
$
|
84
|
|
$
|
44
|
|
$
|
—
|
|
$
|
128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
Total liabilities
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
For each of the fiscal years ended October 31, 2016 and 2015, there were no material transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: Seattle holds time deposits, money market funds and debt securities primarily consisting of foreign government bonds. Seattle values cash equivalents using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data. Investments are included in the Combined Balance Sheets as components of Other current assets and Other assets.
Derivative Instruments: Seattle uses forward contracts and total return swaps to hedge certain foreign currency exposures. Seattle uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, Parent and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies and interest rates. See Note 11, Financial Instruments, for a further discussion of Seattles use of derivative instruments.
Other Fair Value Disclosures
Other Financial Instruments: For the balance of Seattles financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in Other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Combined Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Financial Assets: Seattles non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Combined Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
F-140
Note 11: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
|
As of October 31, 2016
|
As of October 31, 2015
|
||||||||||||||||||||||
|
Cost
|
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
Cost
|
Gross
Unrealized Gains |
Gross
Unrealized Losses |
Fair
Value |
||||||||||||||||
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
95
|
|
$
|
—
|
|
$
|
—
|
|
$
|
95
|
|
$
|
84
|
|
$
|
—
|
|
$
|
—
|
|
$
|
84
|
|
Total cash equivalents
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Foreign bonds
|
|
20
|
|
|
7
|
|
|
—
|
|
|
27
|
|
|
21
|
|
|
7
|
|
|
—
|
|
|
28
|
|
Total debt securities
|
|
31
|
|
|
7
|
|
|
—
|
|
|
38
|
|
|
35
|
|
|
7
|
|
|
—
|
|
|
42
|
|
Total available-for-sale investments
|
|
31
|
|
|
7
|
|
|
—
|
|
|
38
|
|
|
35
|
|
|
7
|
|
|
—
|
|
|
42
|
|
Total cash equivalents and available-for-sale investments
|
$
|
126
|
|
$
|
7
|
|
$
|
—
|
|
$
|
133
|
|
$
|
119
|
|
$
|
7
|
|
$
|
—
|
|
$
|
126
|
|
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of October 31, 2016 and 2015, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Interest income related to cash, cash equivalents and debt securities was approximately $1 million in fiscal 2016, $1 million in fiscal 2015 and $2 million in fiscal 2014. Time deposits were primarily issued by institutions outside the U.S. as of October 31, 2016 and 2015. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
Contractual maturities of investments in available-for-sale debt securities were as follows:
|
As of October 31, 2016
|
|||||
|
Amortized
Cost |
Fair
Value |
||||
|
In millions
|
|||||
Due in more than five years
|
$
|
31
|
|
$
|
38
|
|
Derivative Instruments
Seattle is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, Seattle uses derivative instruments, primarily forward contracts and total return swaps, to hedge certain foreign currency exposures. Seattles objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. Seattle does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. Seattle may designate its derivative contracts as cash flow hedges. Additionally, for derivatives not designated as hedging instruments, Seattle categorizes those economic hedges as other derivatives. Derivative instruments directly attributable to Seattle are recognized at fair value in the Combined Balance Sheets. The change in fair value of the derivative instruments is recognized in the Combined Statements of Operations or Combined Statements of Comprehensive Income dependent upon the type of hedge as further discussed below. Seattle classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Combined Statements of Cash Flows.
As a result of its use of derivative instruments, Seattle is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, Seattle has a policy of only entering into
F-141
derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and Seattle maintains dollar risk limits that correspond to each financial institutions credit rating and other factors. Seattles established policies and procedures for mitigating credit risk include reviewing and establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Seattle participates in Parents master netting agreements, which further mitigates credit exposure to counterparties by permitting Seattle to net amounts due from Seattle to counterparty against amounts due to Seattle from the same counterparty under certain conditions.
To further mitigate credit exposure to counterparties, Seattle participates in Parents collateral security agreements, which allow Seattle to hold collateral from, or require Seattle to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of Parent and its counterparties. If Parents credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives net liability position. Conversely, if the counterpartys credit rating falls below a specified credit rating, the Parent has the right to request full collateralization of the derivatives net asset position. Collateral is generally posted within two business days.
Under Seattles derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting Seattle that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect Seattles financial position or cash flows as of October 31, 2016 and 2015.
Cash Flow Hedges
Seattle uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of revenue, operating expenses and intercompany loans denominated in currencies other than the U.S. dollar. Seattles foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with intercompany loans extend for the duration of the loan term, which typically range from two to five years.
For derivative instruments that are designated and qualify as cash flow hedges, Seattle initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss in the Combined Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in the Combined Statement of Operations. Seattle reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. Seattle also uses total return swaps based on equity or fixed income indices to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, Seattle recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net, in the Combined Statements of Operations in the period of change.
Hedge Effectiveness
For forward contracts designated as cash flow hedges, Seattle measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. Seattle recognizes any ineffective portion of the hedge in the Combined Statements of Operations in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Combined Statements of Operations in the period they arise.
F-142
Fair Value of Derivative Instruments in the Combined Balance Sheets
The gross notional and fair value of derivative instruments in the Combined Balance Sheets was as follows:
|
As of October 31, 2016
|
||||||||
|
|
Fair Value
|
|||||||
|
Outstanding
Gross Notional |
Other
Current Assets |
Other
Accrued Liabilities |
||||||
|
In millions
|
||||||||
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
155
|
|
$
|
3
|
|
$
|
1
|
|
Total derivatives designated as hedging instruments
|
|
155
|
|
|
3
|
|
|
1
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
|
11
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
11
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
$
|
166
|
|
$
|
3
|
|
$
|
1
|
|
|
As of October 31, 2015
|
||||||||
|
|
Fair Value
|
|||||||
|
Outstanding
Gross Notional |
Other
Current Assets |
Other
Accrued Liabilities |
||||||
|
In millions
|
||||||||
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
167
|
|
$
|
2
|
|
$
|
1
|
|
Total derivatives designated as hedging instruments
|
|
167
|
|
|
2
|
|
|
1
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
|
6
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
6
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
$
|
173
|
|
$
|
2
|
|
$
|
1
|
|
Offsetting of Derivative Instruments
Seattle recognizes all derivative instruments on a gross basis in the Combined Balance Sheets. Seattle participates in Parents master netting arrangements and collateral security arrangements. Seattle does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under Parents collateral security agreements. As of October 31, 2016 and 2015, information related to the potential effect of Seattles use of Parents master netting agreements and collateral security agreements was as follows:
F-143
|
As of October 31, 2016
|
|||||||||||||||||
|
In the Combined Balance Sheets
|
|
||||||||||||||||
|
(i)
|
(ii)
|
(iii) = (i)−(ii)
|
(iv)
|
(v)
|
(vi) =
(iii)−(iv)−(v) |
||||||||||||
|
Gross
Amount Recognized |
Gross
Amount Offset |
|
Gross Amounts Not Offset
|
|
|||||||||||||
|
Net Amount
Presented |
Derivatives
|
Financial
Collateral |
Net
Amount |
||||||||||||||
|
In millions
|
|||||||||||||||||
Derivative assets
|
$
|
3
|
|
$
|
—
|
|
$
|
3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3
|
|
Derivative liabilities
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
|
As of October 31, 2015
|
|||||||||||||||||
|
In the Combined Balance Sheets
|
|
||||||||||||||||
|
(i)
|
(ii)
|
(iii) = (i)−(ii)
|
(iv)
|
(v)
|
(vi) =
(iii)−(iv)−(v) |
||||||||||||
|
Gross
Amount Recognized |
Gross
Amount Offset |
|
Gross Amounts Not Offset
|
|
|||||||||||||
|
Net Amount
Presented |
Derivatives
|
Financial
Collateral |
Net
Amount |
||||||||||||||
|
In millions
|
|||||||||||||||||
Derivative assets
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
Derivative liabilities
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
Effect of Derivative Instruments on the Combined Statements of Operations
The pre-tax effect of derivative instruments in cash flow hedging relationships for the fiscal years ended October 31, 2016, 2015 and 2014 was as follows:
|
Gains (Losses) Recognized in Other
Comprehensive Income (Loss) on Derivatives (Effective Portion) |
Gains (Losses) Reclassified from Accumulated
Other Comprehensive Loss into Earnings (Effective Portion) |
|||||||||||||||||||
|
2016
|
2015
|
2014
|
Location
|
2016
|
2015
|
2014
|
||||||||||||||
|
In millions
|
|
In millions
|
||||||||||||||||||
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2
|
|
$
|
9
|
|
$
|
—
|
|
Net
revenue |
$
|
1
|
|
$
|
8
|
|
$
|
—
|
|
||
Foreign currency contracts
|
|
—
|
|
|
(1
|
)
|
|
(4
|
)
|
Other
operating expenses |
|
—
|
|
|
(5
|
)
|
|
1
|
|
||
Total currency hedges
|
$
|
2
|
|
$
|
8
|
|
$
|
(4
|
)
|
|
$
|
1
|
|
$
|
3
|
|
$
|
1
|
|
As of October 31, 2016, 2015 and 2014, no portion of the hedging instruments gains or losses were excluded from the assessment of effectiveness for cash flow hedges. Hedge ineffectiveness for cash flow hedges was not material for fiscal 2016, 2015 and 2014.
As of October 31, 2016, Seattle expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $2 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.
Derivative instruments not designated as hedging instruments had a less than $1 million effect in the Combined Statements of Operations for each of the fiscal years ended October 31, 2016, 2015 and 2014.
Note 12: Related Party Transactions and Parent Company Investment
Intercompany Revenue and Purchases
During fiscal 2016, 2015 and 2014, Seattle sold software to other businesses of Parent in the amount of $255 million, $255 million and $284 million, respectively.
During fiscal 2016, 2015 and 2014, Seattle purchased equipment and services from other businesses of Parent in the amount of $4 million, $3 million and $1 million, respectively. These intercompany purchases exclude leases
F-144
with Parents wholly-owned leasing subsidiary, which are discussed in Note 1, Overview and Summary of Significant Accounting Policies and Note 9, Capital Lease Obligations.
Allocation of Corporate Expenses
The Combined Statements of Operations and Comprehensive Income include an allocation of general corporate expenses from Parent for certain management and support functions which are provided on a centralized basis within Parent. These management and support functions include, but are not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. These allocations were $347 million, $378 million and $396 million in fiscal 2016, 2015 and 2014, respectively.
Management of Seattle and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Seattle. These allocations may not, however, reflect the expense Seattle would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if Seattle had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
Parent Company Investment
Parent company investment on the Combined Balance Sheets and Statements of Equity represents Parents historical investment in Seattle, the net effect of transactions with and allocations to Parent, and Seattles accumulated earnings.
Net Transfers to Parent
Net transfers to Parent are included within Parent company investment. The components of the Net transfers to Parent on the Combined Statements of Equity for all periods presented was as follows:
|
Fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Intercompany revenue
|
$
|
(255
|
)
|
$
|
(255
|
)
|
$
|
(284
|
)
|
Intercompany purchases
|
|
4
|
|
|
3
|
|
|
1
|
|
Cash pooling and general financing activities
|
|
(417
|
)
|
|
(822
|
)
|
|
(1,206
|
)
|
Corporate allocations
|
|
347
|
|
|
378
|
|
|
396
|
|
Income taxes
|
|
317
|
|
|
298
|
|
|
217
|
|
Net assets of marketing optimization software product group transferred to Parent
|
|
—
|
|
|
(566
|
)
|
|
—
|
|
Cash transfers (to) from Parent for business combinations and divestitures
|
|
(237
|
)
|
|
(36
|
)
|
|
20
|
|
Total net transfers to Parent per Combined Statements of Equity
|
$
|
(241
|
)
|
$
|
(1,000
|
)
|
$
|
(856
|
)
|
F-145
A reconciliation of Net transfers to Parent in the Combined Statements of Equity to the corresponding amount presented on the Combined Statements of Cash Flows for all periods presented was as follows:
|
Fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Net transfers to Parent per Combined Statements of Equity
|
$
|
(241
|
)
|
$
|
(1,000
|
)
|
$
|
(856
|
)
|
Income taxes paid by Parent
|
|
(56
|
)
|
|
(121
|
)
|
|
(70
|
)
|
Restructuring
|
|
(10
|
)
|
|
(3
|
)
|
|
(12
|
)
|
Stock-based compensation
|
|
(70
|
)
|
|
(58
|
)
|
|
(60
|
)
|
Net assets of marketing optimization software product group transferred to Parent
|
|
—
|
|
|
566
|
|
|
—
|
|
Transfer of deferred tax assets to (from) Parent
|
|
(10
|
)
|
|
(9
|
)
|
|
9
|
|
Other
|
|
43
|
|
|
301
|
|
|
174
|
|
Total net transfers to Parent per Combined Statements of Cash Flow
|
$
|
(344
|
)
|
$
|
(324
|
)
|
$
|
(815
|
)
|
Note 13: Other Comprehensive Income (Loss)
Taxes Related to Other Comprehensive Income (Loss)
|
Fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Taxes on change in net unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Tax provision on unrealized gains arising during the year
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Taxes on change in net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Tax (provision) benefit on net unrealized gains (losses) arising during the year
|
|
(1
|
)
|
|
—
|
|
|
1
|
|
Tax provision (benefit) on net gains reclassified into earnings
|
|
1
|
|
|
(2
|
)
|
|
1
|
|
|
|
—
|
|
|
(2
|
)
|
|
2
|
|
Taxes on change in cumulative translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
Tax (provision) benefit on other comprehensive income (loss)
|
$
|
—
|
|
$
|
(2
|
)
|
$
|
2
|
|
Changes and Reclassifications Related to Other Comprehensive Income (Loss), Net of Taxes
|
Fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Change in net unrealized gains (losses) on available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Net unrealized gains arising during the year
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
Gains reclassified into earnings
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
Change in net unrealized gains (losses) on cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the year
|
|
1
|
|
|
8
|
|
|
(3
|
)
|
Net gains reclassified into earnings(1)
|
|
—
|
|
|
(5
|
)
|
|
—
|
|
|
|
1
|
|
|
3
|
|
|
(3
|
)
|
Change in cumulative translation adjustment
|
|
5
|
|
|
(32
|
)
|
|
(4
|
)
|
Other comprehensive income (loss), net of taxes
|
$
|
6
|
|
$
|
(28
|
)
|
$
|
(8
|
)
|
(1) | Reclassification of pre-tax net (gains) losses on cash flow hedges into the Combined Statements of Operations was as follows: |
F-146
|
Fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
Net revenue
|
$
|
(1
|
)
|
$
|
(8
|
)
|
$
|
—
|
|
Other operating expenses
|
|
—
|
|
|
5
|
|
|
(1
|
)
|
|
$
|
(1
|
)
|
$
|
(3
|
)
|
$
|
(1
|
)
|
The components of Accumulated other comprehensive loss, net of taxes as of October 31, 2016 and changes during fiscal year 2016 were as follows:
|
Net unrealized
gains on available-for- sale securities |
Net unrealized
gains on cash flow hedges |
Cumulative
translation adjustment |
Accumulated
other comprehensive loss |
||||||||
|
In millions
|
|||||||||||
Balance at beginning of year
|
$
|
7
|
|
$
|
1
|
|
$
|
(59
|
)
|
$
|
(51
|
)
|
Other comprehensive income before reclassifications
|
|
—
|
|
|
1
|
|
|
5
|
|
|
6
|
|
Balance at end of year
|
$
|
7
|
|
$
|
2
|
|
$
|
(54
|
)
|
$
|
(45
|
)
|
Note 14: Litigation and Contingencies
Seattle is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, employment, employee benefits and environmental matters, which arise in the ordinary course of business. The Separation and Distribution Agreement between Seattle SpinCo, Inc. and Hewlett Packard Enterprise Company includes provisions that allocate liability and financial responsibility for litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. In addition, as part of the Separation and Distribution Agreement, HPE and Seattle have agreed to cooperate with each other in managing litigation that relates to both parties businesses. The Separation and Distribution Agreement also contains provisions that allocate liability and financial responsibility for such litigation relating to both parties businesses. Seattle records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Seattle reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Seattle believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Seattle believes it has recorded adequate provisions for any such matters and, as of October 31, 2016, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise Company: This purported class and collective action was filed on August 18, 2016 and an amended (and operative) complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise Company alleging defendants violated the Federal Age Discrimination in Employment Act (ADEA), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older who had their employment terminated by an HP entity pursuant to a work force reduction (WFR) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in non-deferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012.
F-147
Delaney and Haragos v. Hewlett-Packard Company and HP Enterprise Services, LLC: This purported California class action was filed on April 22, 2016 and a second (and operative) amended complaint was filed on September 2, 2016 in California Superior Court (San Diego County) against Hewlett-Packard Company, HP Inc., and Hewlett Packard Enterprise Services, LLC, alleging defendants violated the California Fair Employment and Housing Act and the California Unfair Competition Code by disproportionately laying off employees who were 40 or older and replacing them with younger workers. Plaintiff Haragos seeks to represent a Federal Rule of Civil Procedure Rule 23 state-law class comprised of all California employees who were terminated by defendants pursuant to a WFR plan between April 22, 2012 and the present. Plaintiff Delaneys claims were voluntarily dismissed effective November 28, 2016. On January 26, 2017, the court granted defendants motion to compel plaintiff Haragos to arbitration. Pursuant to the terms of Mr. Haragos WFR release, the parties engaged in mediation on March 1, 2017 and reached a confidential settlement of Haragos individual claims. On March 28, 2017, the court dismissed Haragos class claims without prejudice.
Wall v. Hewlett-Packard Enterprise Company and HP Inc.: This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and Hewlett Packard Enterprise Company on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. Trial is set to begin on May 22, 2017.
Realtime Data LLC: Realtime Data LLC (Realtime) filed three patent infringement actions in the Eastern District of Texas against HPE. The first was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services and Oracle (Oracle matter) and accuses HPs Proliant servers running Oracles Solaris, HPEs StoreOnce, and HPEs Vertica. Oracle has agreed to indemnify HPE for all claims against HPE related to Oracles Solaris, including databases running Solaris with the ZFS file system on HP ProLiant servers. Following a March 23, 2017 mediation, Oracle and Realtime reached a settlement. It is unclear whether their agreement has been finalized. No stipulated judgment or joint motion to dismiss has been filed to date, although the parties notified the Court that an agreement has been reached in principle. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (SAP matter) and accuses HPs Converged Systems running SAP Hana. SAP agreed to indemnify HPE and HPES for the SAP related products. On June 16, 2016, SAP reached a settlement agreement with Realtime, which led to the dismissal of all of HPEs products indemnified by SAP. The third lawsuit was filed on February 26, 2016 (amended on August 15, 2016) against Hewlett Packard Enterprise Company, HP Enterprise Services, and Silver Peak Systems, Inc. (Silver Peak), and accuses HPEs StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtimes joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuits. The patents generally relate to data compression techniques used to conserve storage space. HPE and the joint defense group have filed several inter partes review petitions with the Patent Trial and Appeal Board on all seven asserted patents. On February 3, 2017, the Magistrate Judge granted HPEs Motion to Stay Pending Inter Partes Review.
Environmental
Seattles operations are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the energy consumption of operations. Seattle could incur substantial costs and it could face other sanctions, if it were to violate or become liable under environmental laws. Seattles potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and cleanup costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, Seattle may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act known as Superfund, or other federal, state or foreign laws and regulations addressing the cleanup of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards cleanup costs. Seattle is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to the Separation and Distribution Agreement with Hewlett Packard Enterprise Company.
F-148
Note 15: Indemnifications
In the ordinary course of business, Seattle enters into contractual arrangements under which Seattle provides indemnifications to certain vendors and customers against claims of intellectual property infringement made by third parties arising from the use by such vendors and customers of Seattles software products and services and certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Note 16: Commitments
Lease Commitments
Seattle leases certain real and personal property under non-cancelable operating leases. Certain leases require Seattle to pay property taxes, insurance and routine maintenance and include renewal options and escalation clauses. Rent expense was $34 million in fiscal 2016, $52 million in fiscal 2015 and $42 million in fiscal 2014.
As of October 31, 2016, future minimum lease commitments were as follows:
Fiscal year
|
In millions
|
||
2017
|
$
|
38
|
|
2018
|
|
34
|
|
2019
|
|
30
|
|
2020
|
|
25
|
|
2021
|
|
23
|
|
Thereafter
|
|
39
|
|
Less: Sublease rental income
|
|
(3
|
)
|
Total
|
$
|
186
|
|
Unconditional Purchase Obligations
At October 31, 2016, Seattle had unconditional purchase obligations of approximately $8 million. These unconditional purchase obligations include agreements to purchase goods or services that are enforceable and legally binding on Seattle and that specify all significant terms, including fixed or minimum quantities to be purchased, fixed, minimum or variable price provisions and the approximate timing of the transaction. These unconditional purchase obligations are related principally to software maintenance and support services. Unconditional purchase obligations exclude agreements that are cancelable without penalty.
As of October 31, 2016, future unconditional purchase obligations were as follows:
Fiscal year
|
In millions
|
||
2017
|
$
|
2
|
|
2018
|
|
2
|
|
2019
|
|
1
|
|
2020
|
|
1
|
|
2021
|
|
1
|
|
Thereafter
|
|
1
|
|
Total
|
$
|
8
|
|
Note 17: Geographic Information
Major Customers
No single customer represented 10% or more of Seattles total net revenue in any fiscal year presented.
Geographic Information
Net revenue by country is based upon the sales location that predominately represents the customer location. For each of the fiscal years 2016, 2015 and 2014, other than the U.S., no country represented more than 10% of Seattles net revenue.
F-149
Net revenue by country in which Seattle operates was as follows:
|
For the fiscal years ended October 31
|
||||||||
|
2016
|
2015
|
2014
|
||||||
|
In millions
|
||||||||
U.S.
|
$
|
1,580
|
|
$
|
1,797
|
|
$
|
1,989
|
|
Other countries
|
|
1,615
|
|
|
1,825
|
|
|
1,944
|
|
Total net revenue
|
$
|
3,195
|
|
$
|
3,622
|
|
$
|
3,933
|
|
As of October 31, 2016, 2015 and 2014 only the U.S. represented 10% or more of net assets.
Net property, plant and equipment by country in which Seattle operates was as follows:
|
As of October 31
|
|||||
|
2016
|
2015
|
||||
|
In millions
|
|||||
U.S.
|
$
|
92
|
|
$
|
97
|
|
India
|
|
21
|
|
|
7
|
|
Other countries
|
|
27
|
|
|
30
|
|
Total net property, plant and equipment
|
$
|
140
|
|
$
|
134
|
|
Note 18: Subsequent Events
Seattle evaluated subsequent events for recognition or disclosure through April 14, 2017, the date Combined Financial Statements were available to be issued.
F-150
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Condensed Combined Statements of Operations
(Unaudited)
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Net revenue:
|
|
|
|
|
|
|
License
|
$
|
311
|
|
$
|
385
|
|
Support
|
|
773
|
|
|
828
|
|
Professional services
|
|
174
|
|
|
198
|
|
Software-as-a-service
|
|
148
|
|
|
143
|
|
Total net revenue
|
|
1,406
|
|
|
1,554
|
|
|
|
|
|
|
|
|
Costs and expenses:
|
|
|
|
|
|
|
Cost of license revenue
|
|
24
|
|
|
45
|
|
Cost of support revenue
|
|
124
|
|
|
141
|
|
Cost of professional services revenue
|
|
157
|
|
|
179
|
|
Cost of software-as-a-service revenue
|
|
82
|
|
|
82
|
|
Research and development
|
|
240
|
|
|
320
|
|
Selling, general and administrative
|
|
490
|
|
|
526
|
|
Amortization of intangible assets
|
|
70
|
|
|
79
|
|
Restructuring charges
|
|
83
|
|
|
53
|
|
Acquisition and other related charges
|
|
1
|
|
|
2
|
|
Defined benefit plan remeasurement benefit
|
|
(5
|
)
|
|
—
|
|
Separation costs
|
|
188
|
|
|
18
|
|
Total costs and expenses
|
|
1,454
|
|
|
1,445
|
|
(Loss) earnings from operations
|
|
(48
|
)
|
|
109
|
|
Interest and other, net
|
|
(1
|
)
|
|
(2
|
)
|
(Loss) earnings before taxes
|
|
(49
|
)
|
|
107
|
|
Benefit from taxes
|
|
10
|
|
|
17
|
|
Net (loss) earnings
|
$
|
(39
|
)
|
$
|
124
|
|
The accompanying notes are an integral part of these Condensed Combined Financial Statements.
F-151
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Condensed Combined Statements of Comprehensive (Loss) Income
(Unaudited)
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Net (loss) earnings
|
$
|
(39
|
)
|
$
|
124
|
|
Other comprehensive loss before taxes:
|
|
|
|
|
|
|
Change in net unrealized losses on available-for-sale securities:
|
|
|
|
|
|
|
Net unrealized losses arising during the period
|
|
(2
|
)
|
|
(1
|
)
|
|
|
(2
|
)
|
|
(1
|
)
|
Change in net unrealized losses on cash flow hedges:
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
|
3
|
|
|
(3
|
)
|
Net gains reclassified into earnings
|
|
(4
|
)
|
|
—
|
|
|
|
(1
|
)
|
|
(3
|
)
|
Change in cumulative translation adjustment
|
|
1
|
|
|
—
|
|
Other comprehensive loss before taxes
|
|
(2
|
)
|
|
(4
|
)
|
Provision for taxes
|
|
—
|
|
|
(1
|
)
|
Other comprehensive loss, net of taxes
|
|
(2
|
)
|
|
(5
|
)
|
Comprehensive (loss) income
|
$
|
(41
|
)
|
$
|
119
|
|
The accompanying notes are an integral part of these Condensed Combined Financial Statements.
F-152
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Condensed Combined Balance Sheets
(Unaudited)
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
ASSETS
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
167
|
|
$
|
130
|
|
Accounts receivable
|
|
508
|
|
|
665
|
|
Other current assets
|
|
111
|
|
|
97
|
|
Total current assets
|
|
786
|
|
|
892
|
|
Property, plant and equipment
|
|
147
|
|
|
140
|
|
Goodwill
|
|
8,089
|
|
|
8,089
|
|
Intangible assets
|
|
339
|
|
|
409
|
|
Deferred tax assets
|
|
956
|
|
|
1,024
|
|
Other assets
|
|
143
|
|
|
93
|
|
Total assets
|
$
|
10,460
|
|
$
|
10,647
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Capital lease obligations, short-term
|
$
|
16
|
|
$
|
15
|
|
Accounts payable
|
|
75
|
|
|
65
|
|
Employee compensation and benefits
|
|
175
|
|
|
273
|
|
Taxes on earnings
|
|
142
|
|
|
204
|
|
Deferred revenue
|
|
746
|
|
|
765
|
|
Accrued restructuring
|
|
42
|
|
|
45
|
|
Other accrued liabilities
|
|
112
|
|
|
142
|
|
Total current liabilities
|
|
1,308
|
|
|
1,509
|
|
Capital lease obligations, long-term
|
|
23
|
|
|
21
|
|
Other liabilities
|
|
568
|
|
|
526
|
|
Commitments and contingencies
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
Parent company investment
|
|
8,608
|
|
|
8,636
|
|
Accumulated other comprehensive loss
|
|
(47
|
)
|
|
(45
|
)
|
Total equity
|
|
8,561
|
|
|
8,591
|
|
Total liabilities and equity
|
$
|
10,460
|
|
$
|
10,647
|
|
The accompanying notes are an integral part of these Condensed Combined Financial Statements.
F-153
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Condensed Combined Statements of Cash Flows
(Unaudited)
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Cash flows from operating activities:
|
|
|
|
|
|
|
Net (loss) earnings
|
$
|
(39
|
)
|
$
|
124
|
|
Adjustments to reconcile net (loss) earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
100
|
|
|
116
|
|
Stock-based compensation expense
|
|
32
|
|
|
33
|
|
Provision for doubtful accounts
|
|
(1
|
)
|
|
3
|
|
Restructuring charges
|
|
83
|
|
|
53
|
|
Deferred taxes on earnings
|
|
68
|
|
|
(108
|
)
|
Excess tax benefit from stock-based compensation
|
|
(11
|
)
|
|
—
|
|
Other, net
|
|
(1
|
)
|
|
(81
|
)
|
Changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
Accounts receivable
|
|
157
|
|
|
202
|
|
Accounts payable
|
|
10
|
|
|
3
|
|
Taxes on earnings
|
|
(2
|
)
|
|
(2
|
)
|
Restructuring
|
|
(69
|
)
|
|
(27
|
)
|
Other assets and liabilities
|
|
(151
|
)
|
|
(63
|
)
|
Net cash provided by operating activities
|
|
176
|
|
|
253
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Investment in property, plant and equipment
|
|
(16
|
)
|
|
(16
|
)
|
Proceeds from sale of property, plant and equipment
|
|
—
|
|
|
1
|
|
Purchases of available-for-sale securities and other investments
|
|
(1
|
)
|
|
—
|
|
Payments made in connection with business acquisitions, net of cash acquired
|
|
—
|
|
|
(12
|
)
|
Proceeds from business divestitures, net
|
|
—
|
|
|
249
|
|
Net cash (used in) provided by investing activities
|
|
(17
|
)
|
|
222
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Principal payments on capital lease obligations
|
|
(6
|
)
|
|
(5
|
)
|
Net transfers to Parent
|
|
(127
|
)
|
|
(450
|
)
|
Excess tax benefit from stock-based compensation
|
|
11
|
|
|
—
|
|
Net cash used in financing activities
|
|
(122
|
)
|
|
(455
|
)
|
|
|
|
|
|
|
|
Increase in cash and cash equivalents
|
|
37
|
|
|
20
|
|
Cash and cash equivalents at beginning of period
|
|
130
|
|
|
150
|
|
Cash and cash equivalents at end of period
|
$
|
167
|
|
$
|
170
|
|
|
|
|
|
|
|
|
Supplemental schedule of non-cash investing and financing activities:
|
|
|
|
|
|
|
Property, plant and equipment acquired through capital leases
|
$
|
10
|
|
$
|
7
|
|
The accompanying notes are an integral part of these Condensed Combined Financial Statements.
F-154
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Condensed Combined Statements of Equity
(Unaudited)
|
Parent
Company Investment |
Accumulated
Other Comprehensive Loss |
Total
Equity |
||||||
|
In millions
|
||||||||
Balance at October 31, 2016
|
$
|
8,636
|
|
$
|
(45
|
)
|
$
|
8,591
|
|
Net loss
|
|
(39
|
)
|
|
|
|
|
(39
|
)
|
Other comprehensive loss
|
|
|
|
|
(2
|
)
|
|
(2
|
)
|
Comprehensive loss
|
|
|
|
|
|
|
|
(41
|
)
|
Net transfers from Parent
|
|
11
|
|
|
|
|
|
11
|
|
Balance at April 30, 2017
|
$
|
8,608
|
|
$
|
(47
|
)
|
$
|
8,561
|
|
|
Parent
Company Investment |
Accumulated
Other Comprehensive Loss |
Total
Equity |
||||||
|
In millions
|
||||||||
Balance at October 31, 2015
|
$
|
8,797
|
|
$
|
(51
|
)
|
$
|
8,746
|
|
Net earnings
|
|
124
|
|
|
|
|
|
124
|
|
Other comprehensive loss
|
|
|
|
|
(5
|
)
|
|
(5
|
)
|
Comprehensive income
|
|
|
|
|
|
|
|
119
|
|
Net transfers to Parent
|
|
(484
|
)
|
|
|
|
|
(484
|
)
|
Balance at April 30, 2016
|
$
|
8,437
|
|
$
|
(56
|
)
|
$
|
8,381
|
|
The accompanying notes are an integral part of these Condensed Combined Financial Statements.
F-155
Seattle SpinCo, Inc.
The Software Segment of Hewlett Packard Enterprise Company
Notes to Condensed Combined Financial Statements
(Unaudited)
Note 1: Overview and Summary of Significant Accounting Policies
Background
The Software Segment (Seattle SpinCo, Inc. or Seattle) of Hewlett Packard Enterprise Company (HPE) provides big data platform analytics, security and information governance, application testing and delivery management, and IT operations management solutions for businesses and other enterprises of all sizes. Seattles offerings include licenses, support, professional services and software-as-a-service (SaaS). Seattle consists of one reportable segment, the development and sale of software solutions.
HPE was spun off by Hewlett-Packard Company in a November 1, 2015 transaction in which HP Inc., formerly known as Hewlett-Packard Company, separated into two independent publicly traded companies. Accordingly, the term Parent refers to the Hewlett-Packard Company for periods prior to November 1, 2015 and to HPE from November 1, 2015 onward.
On September 7, 2016, HPE announced plans for a spin-off and merger of Seattle with Micro Focus International plc (Micro Focus) (the Transactions), which will create a pure-play enterprise software company. Upon the completion of the Transactions, which are currently anticipated to close on September 1, 2017, shareholders of HPE will own shares of both HPE and 50.1% of the new combined company. The Transactions are subject to certain customary closing conditions.
Basis of Presentation
These Condensed Combined Financial Statements of Seattle were derived from the Condensed Consolidated Financial Statements and accounting records of Parent as if Seattle were operated on a standalone basis during the periods presented and were prepared in accordance with U.S. generally accepted accounting principles (GAAP). The Condensed Combined Balance Sheet as of October 31, 2016 included herein was derived from Seattles audited financial statements as of that date, but does not include all disclosures including notes required by U.S. GAAP. As such, Seattles Condensed Combined Financial Statements should be read in conjunction with Seattles audited Combined Financial Statements and accompanying notes for the fiscal year ended October 31, 2016. There have been no changes to Seattles significant accounting policies described in Seattles audited Combined Financial Statements for the fiscal year ended October 31, 2016 that have had a material impact on its Condensed Combined Financial Statements and related notes.
The Condensed Combined Statements of Operations and Comprehensive (Loss) Income of Seattle reflect allocations of general corporate expenses from Parent including, but not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. Management of Seattle and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Seattle. These allocations may not, however, reflect the expenses Seattle would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if Seattle had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
The Condensed Combined Balance Sheets of Seattle include Parent assets and liabilities that are specifically identifiable or otherwise attributable to Seattle, including subsidiaries and affiliates in which Parent has a controlling financial interest or is the primary beneficiary. Parents cash has not been assigned to Seattle for any of the periods presented because those cash balances are not directly attributable to Seattle. Seattle reflects transfers of cash to and from Parents cash management system as a component of Parent company investment in the Condensed Combined Balance Sheets. Parents long-term debt has not been attributed to Seattle for any of the periods presented because Parents borrowings are not the legal obligation of Seattle.
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Parent maintains various benefit and stock-based compensation plans. Seattles employees participate in those programs and a portion of the cost of those plans is included in Seattles Condensed Combined Financial Statements. However, Seattles Condensed Combined Balance Sheets do not include any net benefit plan obligations as no Parent benefit plan included only active, retired and other former Seattle employees. Seattles Condensed Combined Balance Sheets also do not include any equity related to stock-based compensation plans. See Note 3, Retirement and Post-Retirement Benefit Plans, and Note 4, Stock-Based Compensation, for a further discussion.
In the opinion of management, the accompanying unaudited Condensed Combined Financial Statements of Seattle contain all adjustments, including normal recurring adjustments, necessary to present fairly Seattles financial position as of April 30, 2017 and its results of operations and cash flows for the six months ended April 30, 2017 and 2016. Seattles results of operations and cash flows for the six months ended April 30, 2017 are not necessarily indicative of the results to be expected for the full fiscal year.
Principles of Combination
The Condensed Combined Financial Statements include Seattles net assets and results of operations as described above. All intercompany transactions and accounts within the combined businesses of Seattle have been eliminated.
Intercompany transactions between Seattle and Parent other than leases with Parents wholly-owned leasing subsidiary (see below) are considered to be effectively settled in the Condensed Combined Financial Statements at the time the transaction is recorded. The total net effect of the settlement of these intercompany transactions is reflected in the Condensed Combined Statements of Cash Flows within financing activities and in the Condensed Combined Balance Sheets within Parent company investment.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in Seattles Condensed Combined Financial Statements and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. These estimates form the basis for making judgments that affect the carrying amounts of assets and liabilities as of the date of the financial statements and reported amounts of revenue and expenses during the reporting period. Making estimates and judgments about future events is inherently unpredictable and is subject to significant uncertainties, some of which are beyond Seattles control. Should any of these estimates and assumptions change or prove to have been incorrect, it could have a material impact on Seattles results of operations, financial position and cash flows.
An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably possible could materially impact the financial statements. Management believes the following critical accounting policies reflect the significant estimates and assumptions used in the preparation of Seattles Condensed Combined Financial Statements:
• | revenue recognition; |
• | restructuring; |
• | taxes on earnings; |
• | business combinations; |
• | goodwill; |
• | intangible assets and long-lived assets; and |
• | loss contingencies. |
Leases with Parents Wholly-owned Leasing Subsidiary
Seattle enters into leasing arrangements with Parents wholly-owned leasing subsidiary, HPE Financial Services, which are cash settled on a recurring basis in accordance with the contractual terms of the leasing arrangements. These leasing arrangements are accounted for as capital leases or operating leases based on the contractual terms
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of the leasing arrangements. Capital lease obligations are presented on the face of the Condensed Combined Balance Sheets at the outstanding principal amount, which approximates fair value, and principal payments on these obligations are reflected on a separate line within financing activities in the Condensed Combined Statements of Cash Flows.
Recently Adopted Accounting Pronouncements
In November 2015, the Financial Accounting Standards Board (FASB) amended the existing accounting standards for income taxes. The amendments require companies to report their deferred tax assets and liabilities each as a single non-current item on their classified balance sheets. Seattle elected to early adopt the amendments and applied them retrospectively to all periods presented in Seattles Condensed Combined Financial Statements, as permitted by the standard.
In September 2015, the FASB amended existing accounting standards to simplify the accounting for measurement period adjustments to provisional amounts recognized in a business combination. The amendments require all such adjustments to be recognized in the period they are determined. Adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item, either on the face of the income statement or within the footnotes. Seattle elected to early adopt the amendments in the first quarter of fiscal 2016, as permitted by the standard. The adoption of the amendments did not have a material impact on Seattles Condensed Combined Financial Statements.
In April 2015, the FASB amended the existing accounting standards for intangible assets. The amendments provide explicit guidance to customers in determining the accounting for fees paid in a cloud computing arrangement, wherein the arrangements that do not convey a software license to the customer are accounted for as service contracts. The amendments also eliminate the practice of accounting for software licenses as executory contracts which may result in more software assets being capitalized. Seattle adopted the amendments in the first quarter of fiscal 2017. The adoption of the amendments did not have a material impact on Seattles Condensed Combined Financial Statements.
Recently Enacted Accounting Pronouncements
In March 2017, the FASB amended the existing accounting standard for retirement benefits. The amendments require the presentation of the service cost component of net periodic benefit cost in the same income statement line items as other employee compensation costs, unless eligible for capitalization. The other components of net periodic benefit costs will be presented separately from service cost as non-operating costs. Seattle is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Consolidated Financial Statements.
In January 2017, the FASB amended the existing accounting standards for intangible assets. The amendments simplify how an entity is required to test goodwill for impairment by eliminating the second step of the goodwill impairment test, which measures a goodwill impairment loss by comparing the implied fair value of a reporting units goodwill with the carrying amount of that goodwill. The amendments will be applied on a prospective basis. Seattle is required to adopt the guidance in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In October 2016, the FASB amended the existing accounting standards for income taxes. The amendments require the recognition of the income tax consequences for intra-entity transfers of assets other than inventory when the transfer occurs. Under current U.S. GAAP, current and deferred income taxes for intra-entity asset transfers are not recognized until the asset has been sold to an outside party. The amendments will be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Seattle is required to adopt the guidance in the first quarter of fiscal 2019. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In August 2016, the FASB amended the existing accounting standards for the statement of cash flows. The amendments provide guidance on eight classification issues related to the statement of cash flows. Seattle is required to adopt the guidance in the first quarter of fiscal 2019. The amendments should be applied retrospectively to all periods presented. For issues that are impracticable to apply retrospectively, the amendments
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may be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In June 2016, the FASB amended the existing accounting standards for the measurement of credit losses. The amendments require an entity to estimate its lifetime expected credit loss for most financial instruments, including trade and lease receivables, and record an allowance for the portion of the amortized cost the entity does not expect to collect. The estimate of expected credit losses should consider historical information, current information, and reasonable and supportable forecasts, including estimates of prepayments. Seattle is required to adopt the guidance in the first quarter of fiscal 2021. Early adoption is permitted beginning in fiscal 2020. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In March 2016, the FASB amended the existing accounting standards for employee share-based payment arrangements. The amendments require all excess tax benefits and tax deficiencies associated with share-based payments to be recognized as income tax expense or income tax benefit, rather than as additional paid-in capital. The amendments also increase the amount an employer can withhold in order to cover personal income taxes on awards, allows companies to recognize forfeitures of awards as they occur, and requires companies to present excess tax benefits from stock-based compensation as an operating activity in the statement of cash flows rather than as a financing activity. Seattle is required to adopt the guidance in the first quarter of fiscal 2018. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In February 2016, the FASB amended the existing accounting standards for leases. The amendments require lessees to record, at lease inception, a lease liability for the obligation to make lease payments and a right-of-use (ROU) asset for the right to use the underlying asset for the lease term on their balance sheets. Lessees may elect to not recognize lease liabilities and ROU assets for most leases with terms of 12 months or less. The lease liability is measured at the present value of the lease payments over the lease term. The ROU asset will be based on the liability, adjusted for lease prepayments, lease incentives received and the lessees initial direct costs. For finance leases, lease expense will be the sum of interest on the lease obligation and amortization of the ROU asset, resulting in a front-loaded expense pattern. For operating leases, lease expense will generally be recognized on a straight-line basis over the lease term. The amended lessor accounting model is similar to the current model, updated to align with certain changes to the lessee model and the new revenue standard. The current sale-leaseback guidance, including guidance applicable to real estate, is also replaced with a new model for both lessees and lessors. Seattle is required to adopt the guidance in the first quarter of fiscal 2020 using a modified retrospective approach. Early adoption is permitted. Seattle is currently evaluating the timing and the impact of these amendments on its Condensed Combined Financial Statements.
In May 2014, the FASB amended the existing accounting standards for revenue recognition. The amendments are based on the principle that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued an accounting standard update for a one-year deferral of the effective date, with an option of applying the standard on the original effective date, which for Seattle is the first quarter of fiscal 2018. In accordance with this deferral, Seattle is required to adopt these amendments in the first quarter of fiscal 2019. The amendments may be applied retrospectively to each prior period presented or retrospectively with the cumulative effect recognized as of the date of initial application. Seattle plans to adopt the new revenue standard in the first quarter of fiscal 2019, beginning on November 1, 2018, using the modified retrospective method and is currently evaluating the impact on its Condensed Combined Financial Statements.
Note 2: Restructuring
Summary of Restructuring Plans
Restructuring charges of $83 million and $53 million were recorded by Seattle during the six months ended April 30, 2017 and 2016, respectively, based on restructuring activities impacting Seattles employees and infrastructure as well as an allocation of restructuring charges related to Parents corporate and shared functional employees and infrastructure. Allocated restructuring charges related to Parents corporate and shared functional employees
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and infrastructure were $5 million and $4 million during the six months ended April 30, 2017 and 2016, respectively. Restructuring activities related to Seattles employees and infrastructure (Direct Restructuring), summarized by plan were as presented in the table below:
|
Fiscal 2015 Plan
|
Fiscal 2012 Plan
|
|
|||||||||
|
Employee
Severance |
Infrastructure
and other |
Employee
Severance and EER |
Total
|
||||||||
|
In millions
|
|||||||||||
Liability as of October 31, 2016
|
$
|
43
|
|
$
|
9
|
|
$
|
3
|
|
$
|
55
|
|
Charges
|
|
74
|
|
|
4
|
|
|
—
|
|
|
78
|
|
Cash payments
|
|
(62
|
)
|
|
(6
|
)
|
|
(1
|
)
|
|
(69
|
)
|
Non-cash items
|
|
(9
|
)
|
|
(7
|
)
|
|
—
|
|
|
(16
|
)
|
Liability as of April 30, 2017
|
$
|
46
|
|
$
|
—
|
|
$
|
2
|
|
$
|
48
|
|
Total costs incurred to date as of April 30, 2017
|
$
|
149
|
|
$
|
24
|
|
$
|
193
|
|
$
|
366
|
|
Total costs expected to be incurred as of April 30, 2017
|
$
|
172
|
|
$
|
24
|
|
$
|
193
|
|
$
|
389
|
|
The current restructuring liability reported in Accrued restructuring in the Condensed Combined Balance Sheets at April 30, 2017 and October 31, 2016 was $42 million and $45 million, respectively. The long-term restructuring liability reported in Other liabilities in the Condensed Combined Balance Sheets at April 30, 2017 and October 31, 2016 was $6 million and $10 million, respectively.
Fiscal 2015 Restructuring Plan
On September 14, 2015, Parents Board of Directors approved a restructuring plan (the 2015 Plan) which will be implemented through fiscal 2018. As part of the 2015 Plan, Seattle expects up to approximately 2,900 employees to exit Seattle by the end of 2018. The changes to the workforce will vary by country, based on local legal requirements and consultations with employee works councils and other employee representatives, as appropriate. Seattle estimates that it will incur aggregate pretax charges in connection with the 2015 plan of approximately $196 million through fiscal 2018, of which approximately $172 million relates to workforce reductions and approximately $24 million primarily relates to real estate consolidation.
Fiscal 2012 Restructuring Plan
On May 23, 2012, Parent adopted a multi-year restructuring plan (the 2012 Plan) designed to simplify business processes, accelerate innovation and deliver better results for customers, employees and stockholders. As of April 30, 2017 Seattle had eliminated approximately 2,500 positions in connection with the 2012 Plan, with a portion of those employees exiting Seattle as part of voluntary enhanced early retirement (EER) programs in the U.S. and in certain other countries. The 2012 Plan is substantially complete, with no further positions being eliminated. Seattle recognized $193 million in total aggregate charges in connection with the 2012 Plan, all related to workforce reductions, including the EER programs.
Note 3: Retirement and Post-Retirement Benefit Plans
Defined Benefit Plans
Certain eligible employees, retirees and other former employees of Seattle participate in certain U.S. and international defined benefit pension plans offered by Parent. These plans whose participants included both Seattle employees and other employees of Parent are accounted for as multiemployer benefit plans and as such, the related net benefit plan obligations of these Shared plans are not included in the Condensed Combined Balance Sheets. The related benefit plan expense has been allocated to Seattle based on Seattles labor costs and allocations of corporate and other shared functional personnel.
Pension Benefit Expense
Seattles total net pension benefit expense recognized in the Condensed Combined Statements of Operations was $2 million and $3 million for the six months ended April 30, 2017 and 2016, respectively. The amount for the six month period ended April 30, 2017 includes a pre-tax benefit of $5 million resulting from the remeasurement of certain Parent pension plans which were separated during the period, which has been recorded within Defined benefit plan remeasurement benefit in the Condensed Combined Statement of Operations.
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Note 4: Stock-Based Compensation
Certain of Seattles employees participate in stock-based compensation plans sponsored by Parent. Parents stock-based compensation plans include incentive compensation plans and an employee stock purchase plan (ESPP). All awards granted under the plans are based on Parents common shares and, as such, are not reflected in Seattles Condensed Combined Statements of Equity. Stock-based compensation expense includes expense attributable to Seattle based on the awards and terms previously granted under Parents incentive compensation plan to Seattles employees and an allocation of Parents corporate and shared functional employee expenses. Accordingly, the amounts presented are not necessarily indicative of future awards and do not necessarily reflect the results that Seattle would have experienced as an independent company for the periods presented.
Stock-Based Compensation Expense and Related Income Tax Benefits
Stock-based compensation expense and the resulting tax benefits recognized by Seattle were as follows:
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Cost of revenue
|
$
|
5
|
|
$
|
4
|
|
Research and development
|
|
8
|
|
|
8
|
|
Selling, general and administrative
|
|
15
|
|
|
21
|
|
Restructuring charges
|
|
1
|
|
|
—
|
|
Separation costs
|
|
3
|
|
|
—
|
|
Stock-based compensation expense
|
|
32
|
|
|
33
|
|
Income tax benefit
|
|
(6
|
)
|
|
(6
|
)
|
Stock-based compensation expense, net of tax
|
$
|
26
|
|
$
|
27
|
|
Stock-based compensation expense includes an allocation of Parents corporate and shared functional employee expenses of $7 million and $8 million for the six months ended April 30, 2017 and 2016, respectively.
Restricted Stock Awards
A summary of restricted stock award activity for Seattle employees is as follows:
|
Six months ended
April 30, 2017 |
|||||
|
Shares
|
Weighted-
Average Grant Date Fair Value Per Share |
||||
|
In thousands
|
|
||||
Outstanding at beginning of period
|
|
6,408
|
|
$
|
15
|
|
Granted
|
|
1,432
|
|
$
|
25
|
|
Additional shares granted due to conversion(1)
|
|
1,417
|
|
$
|
18
|
|
Vested
|
|
(2,321
|
)
|
$
|
15
|
|
Forfeited
|
|
(467
|
)
|
$
|
17
|
|
Employee transition(2)
|
|
(1,067
|
)
|
$
|
18
|
|
Outstanding at end of period
|
|
5,402
|
|
$
|
18
|
|
(1) | Additional shares granted as a result of modification adjustments made upon the April 1, 2017 separation and merger of Parent’s Enterprise Services business with Computer Sciences Corporation, in order to preserve the intrinsic value of the awards prior to the close of that transaction. |
(2) | Employee transition amounts consist of restricted stock award activity for employees transitioning between Seattle and Parent. |
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As of April 30, 2017, total unrecognized pre-tax stock-based compensation expense related to non-vested restricted stock awards held by Seattle employees was $50 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.3 years.
Stock Options
Parent utilizes the Black-Scholes-Merton option valuation model to estimate the fair value of stock options subject to service-based vesting conditions. Parent estimates the fair value of stock options subject to performance-contingent vesting conditions using a combination of a Monte Carlo simulation model and a lattice model, as these awards contain market conditions. The weighted-average fair value per share and the assumptions used to measure fair value were as follows:
|
Six months
ended April 30, 2017 |
||
Weighted-average fair value(1)
|
$
|
6
|
|
Expected volatility(2)
|
|
25.7
|
%
|
Risk-free interest rate(3)
|
|
2.0
|
%
|
Expected dividend yield(4)
|
|
1.0
|
%
|
Expected term in years(5)
|
|
6.1
|
|
(1) | The weighted-average fair value per share was based on stock options granted during the period. |
(2) | The expected volatility was estimated using average historical volatility of selected peer companies. |
(3) | The risk-free interest rate was estimated based on the yield on U.S. Treasury zero-coupon issues. |
(4) | The expected dividend yield represents a constant dividend yield applied for the duration of the expected term of the option. |
(5) | For options granted subject to service-based vesting, the expected term was estimated using the simplified method detailed in SEC Staff Accounting Bulletin No. 110. For performance-contingent stock options, the expected term represents an output from the lattice model. |
A summary of stock option activity for Seattle employees is as follows:
|
Six months ended April 30, 2017
|
|||||||||||
|
Shares
|
Weighted-
Average Exercise Price |
Weighted-
Average Remaining Contractual Term |
Aggregate
Intrinsic Value |
||||||||
|
In thousands
|
|
In years
|
In millions
|
||||||||
Outstanding at beginning of period
|
|
4,561
|
|
$
|
15
|
|
|
|
|
|
|
|
Granted
|
|
21
|
|
$
|
25
|
|
|
|
|
|
|
|
Additional shares granted due to conversion(1)
|
|
537
|
|
$
|
10
|
|
|
|
|
|
|
|
Exercised
|
|
(863
|
)
|
$
|
14
|
|
|
|
|
|
|
|
Forfeited/cancelled/expired
|
|
(239
|
)
|
$
|
13
|
|
|
|
|
|
|
|
Employee transition(2)
|
|
(1,949
|
)
|
$
|
17
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
2,068
|
|
$
|
10
|
|
|
4.6
|
|
$
|
18
|
|
Vested and expected to vest at end of period
|
|
2,025
|
|
$
|
10
|
|
|
4.6
|
|
$
|
17
|
|
Exercisable at end of period
|
|
1,114
|
|
$
|
9
|
|
|
2.8
|
|
$
|
11
|
|
(1) | Additional shares granted as a result of exercise price modification adjustments made upon the April 1, 2017 separation and merger of Parent’s Enterprise Services business with Computer Sciences Corporation, in order to preserve the intrinsic value of the awards prior to the close of that transaction. |
(2) | Employee transition amounts consist of option activity for employees transitioning between Seattle and Parent. |
The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value that Seattle employee option holders would have realized had all Seattle employee option holders exercised their options on April 30, 2017. The aggregate intrinsic value is the difference between Parents closing stock price on April 30, 2017 and the exercise price, multiplied by the number of in-the-money options. The total intrinsic value of options exercised by Seattle employees during the six months ended April 30, 2017 was $8 million.
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As of April 30, 2017, total unrecognized pre-tax stock-based compensation expense related to stock options held by Seattle employees was $2 million, which is expected to be recognized over the remaining weighted-average vesting period of 1.4 years.
Note 5: Taxes on Earnings
Seattles operating results are included in Parents various consolidated U.S. federal and state income tax returns, as well as non-U.S. tax filings. For purposes of Seattles Condensed Combined Financial Statements, provision for taxes and deferred tax balances have been recorded as if Seattle filed tax returns on a standalone basis separate from Parent using the separate return method. The separate return method applies the accounting guidance for income taxes to the standalone financial statements as if Seattle was a separate taxpayer and a standalone enterprise for the periods presented.
Benefit from Taxes
Seattles effective tax rate was 20.4% and (15.9)% for the six months ended April 30, 2017 and 2016, respectively. Seattles effective tax rate generally differs from the U.S. federal statutory rate of 35% due to lower tax rates associated with Seattles earnings in certain non-U.S. jurisdictions. Seattle has not provided U.S. taxes for all foreign earnings because Seattle plans to reinvest certain earnings indefinitely outside the U.S. Additionally, Seattles effective tax rate may vary from period to period as a result of specific transactions and the impact of uncertain tax positions.
For the six months ended April 30, 2017, Seattle recorded $59 million of net income tax benefits related to items unique to that period. These amounts included $74 million of income tax benefits related to restructuring and separation costs and $18 million of income tax benefits related to other items, the effects of which were partially offset by $33 million of income tax charges related to uncertain tax positions.
For the six months ended April 30, 2016, Seattle recorded $65 million of net income tax benefits related to items unique to that period. These amounts included $20 million of income tax benefits related to uncertain tax positions, $14 million of income tax benefits related to restructuring and separation costs and $31 million of income tax benefits related to other items.
Uncertain Tax Positions
Seattle is subject to income tax in the U.S. and approximately 70 other countries and is subject to routine corporate income tax audits in many of these jurisdictions. In addition, Parent is subject to numerous ongoing audits by federal, state and foreign tax authorities. Seattle believes it has provided adequate reserves for all tax deficiencies or reductions in tax benefits that could result from federal, state and foreign tax audits. Seattle regularly assesses the likely outcomes of these audits in order to determine the appropriateness of Seattles tax provision. Seattle adjusts its uncertain tax positions to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other information and events pertaining to a particular audit. However, income tax audits are inherently unpredictable and there can be no assurance that Seattle will accurately predict the outcome of these audits. The amounts ultimately paid on resolution of an audit could be materially different from the amounts previously included in the Benefit from taxes and therefore the resolution of one or more of these uncertainties in any particular period could have a material impact on net earnings or cash flows.
As of April 30, 2017 and October 31, 2016, the amount of unrecognized tax benefits was $519 million and $479 million, respectively, of which up to $246 million and $204 million would affect Seattles effective tax rate if realized.
Seattle recognizes interest income from favorable settlements and interest expense and penalties accrued on unrecognized tax benefits in its Benefit from taxes in the Condensed Combined Statements of Operations. As of April 30, 2017, Seattle had accrued $149 million for interest and penalties.
Parent engages in continuous discussion and negotiation with taxing authorities regarding tax matters in various jurisdictions. Parent does not expect complete resolution of any U.S. Internal Revenue Service audit cycle within the next 12 months. However, it is reasonably possible that certain federal, foreign and state tax issues may be concluded in the next 12 months, including issues involving transfer pricing and other matters. Accordingly, Seattle believes it is reasonably possible that its existing unrecognized tax benefits may be reduced by an amount up to $250 million within the next 12 months.
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With respect to major foreign and state tax jurisdictions, Parent is no longer subject to tax authority examinations for years prior to 2005. Seattle is subject to a foreign tax audit concerning an intercompany transaction for fiscal 2009. The relevant taxing authority has proposed an assessment of approximately $743 million. Parent is contesting this proposed assessment on behalf of Seattle.
Deferred Income Taxes
In the first quarter of fiscal 2016, Seattle adopted the amendment to the existing accounting standards for income taxes issued by the FASB in November 2015, and elected to apply it on a retrospective basis. As a result, all of Seattles deferred tax assets and liabilities are classified as non-current as of April 30, 2017 and October 31, 2016. See Note 1, Overview and Basis of Presentation, for more details.
Deferred tax assets and liabilities included in the Condensed Combined Balance Sheets were as follows:
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Deferred tax assets
|
$
|
956
|
|
$
|
1,024
|
|
Deferred tax liabilities
|
|
(2
|
)
|
|
(2
|
)
|
Deferred tax assets net of deferred tax liabilities
|
$
|
954
|
|
$
|
1,022
|
|
Note 6: Balance Sheet Details
Balance sheet details were as follows:
Accounts Receivable
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Accounts receivable:
|
|
|
|
|
|
|
Billed
|
$
|
462
|
|
$
|
631
|
|
Unbilled
|
|
50
|
|
|
41
|
|
Accounts receivable, gross
|
|
512
|
|
|
672
|
|
Allowance for doubtful accounts
|
|
(4
|
)
|
|
(7
|
)
|
|
$
|
508
|
|
$
|
665
|
|
Seattle has third-party revolving short-term financing arrangements intended to facilitate the working capital requirements of certain customers. The recourse obligations associated with these short-term financing arrangements as of April 30, 2017 and October 31, 2016 were not material. The amount of trade receivables sold but not collected under these short-term financing arrangements was $1 million and $2 million at April 30, 2017 and October 31, 2016, respectively.
The allowance for doubtful accounts related to accounts receivable and changes therein were as follows:
|
Six months
ended April 30, 2017 |
||
|
In millions
|
||
Balance at beginning of period
|
$
|
7
|
|
Reversals to provision for doubtful accounts, net
|
|
(1
|
)
|
Deductions, net of recoveries
|
|
(2
|
)
|
Balance at end of period
|
$
|
4
|
|
F-164
Other Current Assets
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Prepaid expenses
|
$
|
36
|
|
$
|
27
|
|
Prepaid income taxes
|
|
30
|
|
|
10
|
|
Accounts receivable - other
|
|
22
|
|
|
3
|
|
Value-added taxes receivable
|
|
5
|
|
|
22
|
|
Inventory
|
|
5
|
|
|
20
|
|
Other
|
|
13
|
|
|
15
|
|
|
$
|
111
|
|
$
|
97
|
|
Property, Plant and Equipment
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Buildings and leasehold improvements
|
$
|
62
|
|
$
|
64
|
|
Equipment and other
|
|
326
|
|
|
357
|
|
|
|
388
|
|
|
421
|
|
Accumulated depreciation
|
|
(241
|
)
|
|
(281
|
)
|
|
$
|
147
|
|
$
|
140
|
|
The gross property, plant and equipment and accumulated depreciation presented in the above table include property under capital leases and the related accumulated amortization, respectively. Property under capital leases is comprised primarily of equipment. Capital lease assets included in Property, plant and equipment in the Condensed Combined Balance Sheets were $72 million and $60 million as of April 30, 2017 and October 31, 2016, respectively. Accumulated amortization on the property under capital leases was $34 million and $26 million as of April 30, 2017 and October 31, 2016, respectively.
Depreciation expense for the six months ended April 30, 2017 and 2016 was $30 million and $31 million, respectively. The change in gross property, plant and equipment during the six months ended April 30, 2017 was due primarily to retirements totaling $75 million partially offset by purchases, acquisitions through capital leases, transfers from Parent and other items totaling $42 million. The change in accumulated depreciation during the six months ended April 30, 2017 was due primarily to $70 million of reductions related to disposals and other items.
Other Assets
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Deposits and prepaid assets
|
$
|
55
|
|
$
|
49
|
|
Income tax receivables and prepaid taxes
|
|
48
|
|
|
23
|
|
Value-added taxes receivable
|
|
26
|
|
|
9
|
|
Other
|
|
14
|
|
|
12
|
|
|
$
|
143
|
|
$
|
93
|
|
F-165
Other Accrued Liabilities
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Accrued taxes—other
|
$
|
37
|
|
$
|
64
|
|
Other
|
|
75
|
|
|
78
|
|
|
$
|
112
|
|
$
|
142
|
|
Other Liabilities
|
As of
|
|||||
|
April 30,
2017 |
October 31,
2016 |
||||
|
In millions
|
|||||
Tax liability
|
$
|
339
|
|
$
|
310
|
|
Deferred revenue—long-term
|
|
165
|
|
|
154
|
|
Deferred tax liability
|
|
2
|
|
|
2
|
|
Other
|
|
62
|
|
|
60
|
|
|
$
|
568
|
|
$
|
526
|
|
Note 7: Acquisitions and Divestitures
Acquisitions
In February 2016, Seattle acquired Trilead, a provider of backup solutions targeted for virtualized environments, for a purchase price of $12 million. In connection with this acquisition, Seattle recorded $10 million of goodwill (which is not deductible for tax purposes), $4 million of amortizable intangible assets, and assumed $2 million of net liabilities. Pro forma results of operations have not been presented because they are not material to Seattles combined results of operations.
Divestitures
In March 2016, Seattle completed the sale of its TippingPoint business to Trend Micro International for approximately $300 million. TippingPoint is a provider of next-generation intrusion prevention systems and related network security solutions. Cash proceeds from the sale of Seattles TippingPoint business included a $25 million deposit received in fiscal 2015, and $254 million, offset by $5 million of transaction costs, received in fiscal 2016. The remaining amount of approximately $21 million was related to inventory and tooling assets retained by Seattle in connection with a Transition Services Agreement (TSA) with Trend Micro International under which Seattle produced products for the divested business until the termination of the TSA in Seattles fiscal quarter ending April 30, 2017. Upon the termination of the TSA, Trend Micro International became obligated to purchase any remaining TippingPoint related inventory and tooling. As of April 30, 2017, substantially all remaining TippingPoint related inventory and tooling had been shipped to Trend Micro International with the related receivable recorded as a component of Accounts receivable – other within Other current assets in the Condensed Combined Balance Sheets.
The $82 million gain related to the divestiture of TippingPoint during the six months ended April 30, 2016 was included in Selling, general and administrative expense in the Condensed Combined Statement of Operations and in Other, net in Net cash provided by operating activities in the Condensed Combined Statement of Cash Flows.
F-166
Note 8: Intangible Assets
Intangible assets consist of:
|
As of April 30, 2017
|
|||||||||||
|
Gross
|
Accumulated
Amortization |
Accumulated
Impairment Loss |
Net
|
||||||||
|
In millions
|
|||||||||||
Customer contracts, customer lists and distribution agreements
|
$
|
1,221
|
|
$
|
(299
|
)
|
$
|
(822
|
)
|
$
|
100
|
|
Developed and core technology and patents
|
|
3,150
|
|
|
(773
|
)
|
|
(2,144
|
)
|
|
233
|
|
Trade name and trade marks
|
|
127
|
|
|
(12
|
)
|
|
(109
|
)
|
|
6
|
|
Total intangible assets
|
$
|
4,498
|
|
$
|
(1,084
|
)
|
$
|
(3,075
|
)
|
$
|
339
|
|
|
As of October 31, 2016
|
|||||||||||
|
Gross
|
Accumulated
Amortization |
Accumulated
Impairment Loss |
Net
|
||||||||
|
In millions
|
|||||||||||
Customer contracts, customer lists and distribution agreements
|
$
|
1,221
|
|
$
|
(278
|
)
|
$
|
(822
|
)
|
$
|
121
|
|
Developed and core technology and patents
|
|
3,153
|
|
|
(728
|
)
|
|
(2,144
|
)
|
|
281
|
|
Trade name and trade marks
|
|
127
|
|
|
(11
|
)
|
|
(109
|
)
|
|
7
|
|
Total intangible assets
|
$
|
4,501
|
|
$
|
(1,017
|
)
|
$
|
(3,075
|
)
|
$
|
409
|
|
During the six months ended April 30, 2017, $3 million of intangible assets became fully amortized and were eliminated from gross intangible assets and accumulated amortization.
As of April 30, 2017, estimated future amortization expense related to finite-lived intangible assets was as follows:
Fiscal year
|
In millions
|
||
2017 (six months)
|
$
|
64
|
|
2018
|
|
109
|
|
2019
|
|
85
|
|
2020
|
|
77
|
|
2021
|
|
4
|
|
Total
|
$
|
339
|
|
Note 9: Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date.
Fair Value Hierarchy
Seattle uses valuation techniques that are based upon observable and unobservable inputs. Observable inputs are developed using market data such as publicly available information and reflect the assumptions market participants would use, while unobservable inputs are developed using the best information available about the assumptions market participants would use. Assets and liabilities are classified in the fair value hierarchy based on the lowest level input that is significant to the fair value measurement:
Level 1—Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2—Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.
Level 3—Unobservable inputs for the asset or liability.
F-167
The fair value hierarchy gives the highest priority to observable inputs and lowest priority to unobservable inputs.
The following table presents Seattles assets and liabilities that are measured at fair value on a recurring basis:
|
As of April 30, 2017
|
As of October 31, 2016
|
||||||||||||||||||||||
|
Fair Value Measured Using
|
|
Fair Value Measured Using
|
|
||||||||||||||||||||
|
Level 1
|
Level 2
|
Level 3
|
Total
|
Level 1
|
Level 2
|
Level 3
|
Total
|
||||||||||||||||
|
In millions
|
|||||||||||||||||||||||
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Equivalents and Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
$
|
11
|
|
$
|
—
|
|
$
|
11
|
|
Money market funds
|
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Foreign bonds
|
|
1
|
|
|
32
|
|
|
—
|
|
|
33
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
27
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Total assets
|
$
|
78
|
|
$
|
45
|
|
$
|
—
|
|
$
|
123
|
|
$
|
95
|
|
$
|
41
|
|
$
|
—
|
|
$
|
136
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange contracts
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
Total liabilities
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
During the six months ended April 30, 2017, there were no transfers between levels within the fair value hierarchy.
Valuation Techniques
Cash Equivalents and Investments: Seattle holds time deposits, money market funds and debt securities primarily consisting of foreign government bonds. Seattle values cash equivalents using quoted market prices, alternative pricing sources, including net asset value, or models utilizing market observable inputs. The fair value of debt investments was based on quoted market prices or model-driven valuations using inputs primarily derived from or corroborated by observable market data. Investments are included in the Condensed Combined Balance Sheets as components of Other current assets and Other assets.
Derivative Instruments: Seattle uses forward contracts and total return swaps to hedge certain foreign currency exposures. Seattle uses industry standard valuation models to measure fair value. Where applicable, these models project future cash flows and discount the future amounts to present value using market-based observable inputs, including interest rate curves, Parent and counterparty credit risk, foreign exchange rates, and forward and spot prices for currencies and interest rates. See Note 10, Financial Instruments, for a further discussion of Seattles use of derivative instruments.
Other Fair Value Disclosures
Other Financial Instruments: For the balance of Seattles financial instruments, primarily accounts receivable, accounts payable and financial liabilities included in Other accrued liabilities, the carrying amounts approximate fair value due to their short maturities. If measured at fair value in the Condensed Combined Balance Sheets, these other financial instruments would be classified in Level 2 or Level 3 of the fair value hierarchy.
Non-Financial Assets: Seattles non-financial assets, such as intangible assets, goodwill and property, plant and equipment, are recorded at fair value in the period an impairment charge is recognized. If measured at fair value in the Condensed Combined Balance Sheets, these would generally be classified in Level 3 of the fair value hierarchy.
F-168
Note 10: Financial Instruments
Cash Equivalents and Available-for-Sale Investments
Cash equivalents and available-for-sale investments were as follows:
|
As of April 30, 2017
|
As of October 31, 2016
|
||||||||||||||||||||||
|
Cost
|
Gross
Unrealized Gain |
Gross
Unrealized Loss |
Fair
Value |
Cost
|
Gross
Unrealized Gain |
Gross
Unrealized Loss |
Fair
Value |
||||||||||||||||
|
In millions
|
|||||||||||||||||||||||
Cash Equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Money market funds
|
$
|
77
|
|
$
|
—
|
|
$
|
—
|
|
$
|
77
|
|
$
|
95
|
|
$
|
—
|
|
$
|
—
|
|
$
|
95
|
|
Total cash equivalents
|
|
77
|
|
|
—
|
|
|
—
|
|
|
77
|
|
|
95
|
|
|
—
|
|
|
—
|
|
|
95
|
|
Available-for-Sale Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Time deposits
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
11
|
|
|
—
|
|
|
—
|
|
|
11
|
|
Foreign bonds
|
|
28
|
|
|
5
|
|
|
—
|
|
|
33
|
|
|
20
|
|
|
7
|
|
|
—
|
|
|
27
|
|
Total debt securities
|
|
39
|
|
|
5
|
|
|
—
|
|
|
44
|
|
|
31
|
|
|
7
|
|
|
—
|
|
|
38
|
|
Total available-for-sale investments
|
|
39
|
|
|
5
|
|
|
—
|
|
|
44
|
|
|
31
|
|
|
7
|
|
|
—
|
|
|
38
|
|
Total cash equivalents and available-for-sale investments
|
$
|
116
|
|
$
|
5
|
|
$
|
—
|
|
$
|
121
|
|
$
|
126
|
|
$
|
7
|
|
$
|
—
|
|
$
|
133
|
|
All highly liquid investments with original maturities of three months or less at the date of acquisition are considered cash equivalents. As of April 30, 2017 and October 31, 2016, the carrying amount of cash equivalents approximated fair value due to the short period of time to maturity. Time deposits were primarily issued by institutions outside the U.S. as of April 30, 2017 and October 31, 2016. The estimated fair value of the available-for-sale investments may not be representative of values that will be realized in the future.
Contractual maturities of investments in available-for-sale debt securities were as follows:
|
As of April 30, 2017
|
|||||
|
Amortized
Cost |
Fair
Value |
||||
|
In millions
|
|||||
Due in more than five years
|
$
|
39
|
|
$
|
44
|
|
Derivative Instruments
Seattle is a global company exposed to foreign currency exchange rate fluctuations and interest rate changes in the normal course of its business. As part of its risk management strategy, Seattle uses derivative instruments, primarily forward contracts and total return swaps, to hedge certain foreign currency exposures. Seattles objective is to offset gains and losses resulting from these exposures with losses and gains on the derivative contracts used to hedge them, thereby reducing volatility of earnings or protecting the fair value of assets and liabilities. Seattle does not have any leveraged derivatives and does not use derivative contracts for speculative purposes. Seattle may designate its derivative contracts as cash flow hedges. Additionally, for derivatives not designated as hedging instruments, Seattle categorizes those economic hedges as other derivatives. Derivative instruments directly attributable to Seattle are recognized at fair value in the Condensed Combined Balance Sheets. The change in fair value of the derivative instruments is recognized in the Condensed Combined Statements of Operations or Condensed Combined Statements of Comprehensive (Loss) Income dependent upon the type of hedge as further discussed below. Seattle classifies cash flows from its derivative programs with the activities that correspond to the underlying hedged items in the Condensed Combined Statements of Cash Flows.
As a result of its use of derivative instruments, Seattle is exposed to the risk that its counterparties will fail to meet their contractual obligations. To mitigate counterparty credit risk, Seattle has a policy of only entering into derivative contracts with carefully selected major financial institutions based on their credit ratings and other factors, and Seattle maintains dollar risk limits that correspond to each financial institutions credit rating and other factors. Seattles established policies and procedures for mitigating credit risk include reviewing and
F-169
establishing limits for credit exposure and periodically reassessing the creditworthiness of its counterparties. Seattle participates in Parents master netting agreements, which further mitigates credit exposure to counterparties by permitting Seattle to net amounts due from Seattle to counterparty against amounts due to Seattle from the same counterparty under certain conditions.
To further mitigate credit exposure to counterparties, Seattle participates in Parents collateral security agreements, which allow Seattle to hold collateral from, or require Seattle to post collateral to, counterparties when aggregate derivative fair values exceed contractually established thresholds which are generally based on the credit ratings of Parent and its counterparties. If Parents credit rating falls below a specified credit rating, the counterparty has the right to request full collateralization of the derivatives net liability position. Conversely, if the counterpartys credit rating falls below a specified credit rating, the Parent has the right to request full collateralization of the derivatives net asset position. Collateral is generally posted within two business days.
Under Seattles derivative contracts, the counterparty can terminate all outstanding trades following a covered change of control event affecting Seattle that results in the surviving entity being rated below a specified credit rating. This credit contingent provision did not affect Seattles financial position or cash flows as of April 30, 2017 and October 31, 2016.
Cash Flow Hedges
Seattle uses forward contracts designated as cash flow hedges to protect against the foreign currency exchange rate risks inherent in its forecasted net revenue and, to a lesser extent, cost of revenue, operating expenses and intercompany loans denominated in currencies other than the U.S. dollar. Seattles foreign currency cash flow hedges mature generally within twelve months; however, forward contracts associated with intercompany loans extend for the duration of the loan term, which typically range from two to five years.
For derivative instruments that are designated and qualify as cash flow hedges, Seattle initially records changes in fair value for the effective portion of the derivative instrument in Accumulated other comprehensive loss in the Condensed Combined Balance Sheets and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized in the Condensed Combined Statement of Operations. Seattle reports the effective portion of its cash flow hedges in the same financial statement line item as changes in the fair value of the hedged item.
Other Derivatives
Other derivatives not designated as hedging instruments consist primarily of forward contracts used to hedge foreign currency-denominated balance sheet exposures. Seattle also uses total return swaps based on equity or fixed income indices to hedge its executive deferred compensation plan liability.
For derivative instruments not designated as hedging instruments, Seattle recognizes changes in fair value of the derivative instrument, as well as the offsetting change in the fair value of the hedged item, in Interest and other, net, in the Condensed Combined Statements of Operations in the period of change.
Hedge Effectiveness
For forward contracts designated as cash flow hedges, Seattle measures hedge effectiveness by comparing the cumulative change in fair value of the hedge contract with the cumulative change in fair value of the hedged item, both of which are based on forward rates. Seattle recognizes any ineffective portion of the hedge in the Condensed Combined Statements of Operations in the same period in which ineffectiveness occurs. Amounts excluded from the assessment of effectiveness are recognized in the Condensed Combined Statements of Operations in the period they arise.
F-170
Fair Value of Derivative Instruments in the Condensed Combined Balance Sheets
The gross notional and fair value of derivative instruments in the Condensed Combined Balance Sheets was as follows:
|
As of April 30, 2017
|
||||||||
|
|
Fair Value
|
|||||||
|
Outstanding
Gross Notional |
Other
Current Assets |
Other
Accrued Liabilities |
||||||
|
In millions
|
||||||||
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
66
|
|
$
|
2
|
|
$
|
—
|
|
Total derivatives designated as hedging instruments
|
|
66
|
|
|
2
|
|
|
—
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
|
4
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
4
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
$
|
70
|
|
$
|
2
|
|
$
|
—
|
|
|
As of October 31, 2016
|
||||||||
|
|
Fair Value
|
|||||||
|
Outstanding
Gross Notional |
Other
Current Assets |
Other
Accrued Liabilities |
||||||
|
In millions
|
||||||||
Derivatives designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
155
|
|
$
|
3
|
|
$
|
1
|
|
Total derivatives designated as hedging instruments
|
|
155
|
|
|
3
|
|
|
1
|
|
Derivatives not designated as hedging instruments
|
|
|
|
|
|
|
|
|
|
Other derivatives
|
|
11
|
|
|
—
|
|
|
—
|
|
Total derivatives not designated as hedging instruments
|
|
11
|
|
|
—
|
|
|
—
|
|
Total derivatives
|
$
|
166
|
|
$
|
3
|
|
$
|
1
|
|
Offsetting of Derivative Instruments
Seattle recognizes all derivative instruments on a gross basis in the Condensed Combined Balance Sheets. Seattle participates in Parents master netting arrangements and collateral security arrangements. Seattle does not offset the fair value of its derivative instruments against the fair value of cash collateral posted under Parents collateral security agreements. As of April 30, 2017 and October 31, 2016, information related to the potential effect of Seattles use of Parents master netting agreements and collateral security agreements was as follows:
|
As of April 30, 2017
|
|||||||||||||||||
|
In the Condensed Combined Balance Sheets
|
|
||||||||||||||||
|
(i)
|
(ii)
|
(iii) = (i)−(ii)
|
(iv)
|
(v)
|
(vi) =
(iii)−(iv)−(v) |
||||||||||||
|
Gross
Amount Recognized |
Gross
Amount Offset |
Net Amount
Presented |
Gross Amounts Not Offset
|
|
|||||||||||||
|
Derivatives
|
Financial
Collateral |
Net Amount
|
|||||||||||||||
|
In millions
|
|||||||||||||||||
Derivative assets
|
$
|
2
|
|
$
|
—
|
|
$
|
2
|
|
$
|
—
|
|
$
|
—
|
|
$
|
2
|
|
Derivative liabilities
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
F-171
|
As of October 31, 2016
|
|||||||||||||||||
|
In the Condensed Combined Balance Sheets
|
|
||||||||||||||||
|
(i)
|
(ii)
|
(iii) = (i)−(ii)
|
(iv)
|
(v)
|
(vi) =
(iii)−(iv)−(v) |
||||||||||||
|
Gross
Amount Recognized |
Gross
Amount Offset |
Net Amount
Presented |
Gross Amounts Not Offset
|
|
|||||||||||||
|
Derivatives
|
Financial
Collateral |
Net Amount
|
|||||||||||||||
|
In millions
|
|||||||||||||||||
Derivative assets
|
$
|
3
|
|
$
|
—
|
|
$
|
3
|
|
$
|
—
|
|
$
|
—
|
|
$
|
3
|
|
Derivative liabilities
|
$
|
1
|
|
$
|
—
|
|
$
|
1
|
|
$
|
—
|
|
$
|
—
|
|
$
|
1
|
|
Effect of Derivative Instruments on the Condensed Combined Statements of Operations
The pre-tax effect of derivative instruments in cash flow hedging relationships for the six months ended April 30, 2017 and 2016 was as follows:
|
Gains (Losses) Recognized
in Other Comprehensive Loss on Derivatives (Effective Portion) |
Gains Reclassified from Accumulated Other
Comprehensive Loss into Earnings (Effective Portion) |
|||||||||||
|
Six months ended
April 30 |
|
Six months ended
April 30 |
||||||||||
|
2017
|
2016
|
Location
|
2017
|
2016
|
||||||||
|
In millions
|
|
In millions
|
||||||||||
Cash flow hedges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts
|
$
|
2
|
|
$
|
(5
|
)
|
Net revenue
|
$
|
4
|
|
$
|
—
|
|
Foreign currency contracts
|
|
1
|
|
|
2
|
|
Other operating expenses
|
|
—
|
|
|
—
|
|
Total currency hedges
|
$
|
3
|
|
$
|
(3
|
)
|
|
$
|
4
|
|
$
|
—
|
|
As of April 30, 2017 and 2016, no portion of the hedging instruments gains or losses were excluded from the assessment of effectiveness for cash flow hedges. During the six months ended April 30, 2017 and 2016, there was no hedge ineffectiveness for cash flow hedges.
As of April 30, 2017, Seattle expects to reclassify an estimated net Accumulated other comprehensive gain of approximately $1 million, net of taxes, to earnings in the next twelve months along with the earnings effects of the related forecasted transactions associated with cash flow hedges.
Derivative instruments not designated as hedging instruments had an immaterial effect in the Condensed Combined Statements of Operations for the six months ended April 30, 2017 and 2016.
Note 11: Related Party Transactions and Parent Company Investment
Intercompany Revenue and Purchases
During the six months ended April 30, 2017 and 2016, Seattle sold software to other businesses of Parent in the amount of $100 million and $122 million.
During the six months ended April 30, 2017 and 2016, Seattle purchased equipment and services from other businesses of Parent in the amount of $1 million and $2 million, respectively. These intercompany purchases exclude leases with Parents wholly-owned leasing subsidiary, which are discussed in Note 1, Overview and Summary of Significant Accounting Policies.
Allocation of Corporate Expenses
The Condensed Combined Statements of Operations and Comprehensive Income include an allocation of general corporate expenses from Parent for certain management and support functions which are provided on a centralized basis within Parent. These management and support functions include, but are not limited to, executive management, finance, legal, information technology, employee benefits administration, treasury, risk management, procurement and other shared services. These allocations were made on a direct usage basis when identifiable, with the remainder allocated on the basis of revenue, expenses, headcount or other relevant measures. These allocations were $151 million and $175 million for the six months ended April 30, 2017 and 2016, respectively.
F-172
Management of Seattle and Parent consider these allocations to be a reasonable reflection of the utilization of services by, or the benefits provided to, Seattle. These allocations may not, however, reflect the expense Seattle would have incurred as a standalone company for the periods presented. Actual costs that may have been incurred if Seattle had been a standalone company would depend on a number of factors, including the chosen organizational structure, what functions were outsourced or performed by employees and strategic decisions made in areas such as information technology and infrastructure.
Parent Company Investment
Parent company investment on the Condensed Combined Balance Sheets and Statements of Equity represents Parents historical investment in Seattle, the net effect of transactions with and allocations to Parent, and Seattles accumulated earnings.
Net Transfers from (to) Parent
Net transfers from (to) Parent are included within Parent company investment. The components of the Net transfers to Parent on the Condensed Combined Statements of Equity for the six months ended April 30, 2017 and 2016 were as follows:
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Intercompany revenue
|
$
|
(100
|
)
|
$
|
(122
|
)
|
Intercompany purchases
|
|
1
|
|
|
2
|
|
Cash pooling and general financing activities
|
|
55
|
|
|
(373
|
)
|
Corporate allocations
|
|
151
|
|
|
175
|
|
Income taxes
|
|
(96
|
)
|
|
71
|
|
Cash transfers to Parent for business combinations and divestitures
|
|
—
|
|
|
(237
|
)
|
Total net transfers from (to) Parent per Condensed Combined Statements of Equity
|
$
|
11
|
|
$
|
(484
|
)
|
A reconciliation of Net transfers from (to) Parent in the Condensed Combined Statements of Equity to the corresponding amount presented on the Condensed Combined Statements of Cash Flows for the six months ended April 30, 2017 and 2016 was as follows:
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Net transfers from (to) Parent per Condensed Combined Statements of Equity
|
$
|
11
|
|
$
|
(484
|
)
|
Income taxes paid by Parent
|
|
(16
|
)
|
|
(36
|
)
|
Restructuring
|
|
(5
|
)
|
|
(4
|
)
|
Stock-based compensation
|
|
(32
|
)
|
|
(33
|
)
|
Other
|
|
(85
|
)
|
|
107
|
|
Total net transfers to Parent per Condensed Combined Statements of Cash Flows
|
$
|
(127
|
)
|
$
|
(450
|
)
|
F-173
Note 12: Other Comprehensive Loss
Taxes Related to Other Comprehensive Loss
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Taxes on change in net unrealized losses on available-for-sale securities:
|
|
|
|
|
|
|
Tax benefit on net unrealized losses arising during the period
|
$
|
—
|
|
$
|
—
|
|
|
|
—
|
|
|
—
|
|
Taxes on change in net unrealized losses on cash flow hedges:
|
|
|
|
|
|
|
Tax provision on net unrealized gains (losses) arising during the period
|
|
—
|
|
|
(1
|
)
|
Tax provision on net gains reclassified into earnings
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
(1
|
)
|
Taxes on change in cumulative translation adjustment
|
|
—
|
|
|
—
|
|
Tax provision on other comprehensive loss
|
$
|
—
|
|
$
|
(1
|
)
|
Changes and Reclassifications Related to Other Comprehensive Loss, Net of Taxes
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Change in net unrealized losses on available-for-sale securities:
|
|
|
|
|
|
|
Net unrealized losses arising during the period
|
$
|
(2
|
)
|
$
|
(1
|
)
|
|
|
(2
|
)
|
|
(1
|
)
|
Change in net unrealized losses on cash flow hedges:
|
|
|
|
|
|
|
Net unrealized gains (losses) arising during the period
|
|
3
|
|
|
(4
|
)
|
Net gains reclassified into earnings(1)
|
|
(4
|
)
|
|
—
|
|
|
|
(1
|
)
|
|
(4
|
)
|
Change in cumulative translation adjustment
|
|
1
|
|
|
—
|
|
Other comprehensive loss, net of taxes
|
$
|
(2
|
)
|
$
|
(5
|
)
|
(1) | Reclassification of pre-tax net gains on cash flow hedges into the Condensed Combined Statements of Operations was as follows: |
|
Six months ended
April 30 |
|||||
|
2017
|
2016
|
||||
|
In millions
|
|||||
Net revenue
|
$
|
(4
|
)
|
$
|
—
|
|
F-174
The components of Accumulated other comprehensive loss, net of taxes as of April 30, 2017 and changes during the six months ended April 30, 2017 were as follows:
|
Net unrealized
gains (losses) on available-for- sale securities |
Net unrealized
gains on cash flow hedges |
Cumulative
translation adjustment |
Accumulated
other comprehensive loss |
||||||||
|
In millions
|
|||||||||||
Balance at beginning of period
|
$
|
7
|
|
$
|
2
|
|
$
|
(54
|
)
|
$
|
(45
|
)
|
Other comprehensive (loss) income before reclassifications
|
|
(2
|
)
|
|
3
|
|
|
1
|
|
|
2
|
|
Reclassifications of gains into earnings
|
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
Balance at end of period
|
$
|
5
|
|
$
|
1
|
|
$
|
(53
|
)
|
$
|
(47
|
)
|
Note 13: Litigation and Contingencies
Seattle is involved in various lawsuits, claims, investigations and proceedings including those consisting of IP, commercial, employment, employee benefits and environmental matters, which arise in the ordinary course of business. The Separation and Distribution Agreement between Seattle SpinCo, Inc. and Hewlett Packard Enterprise Company includes provisions that allocate liability and financial responsibility for litigation involving the parties, as well as provide for cross-indemnification of the parties against liabilities to one party arising out of liabilities allocated to the other party. In addition, as part of the Separation and Distribution Agreement, HPE and Seattle have agreed to cooperate with each other in managing litigation that relates to both parties businesses. The Separation and Distribution Agreement also contains provisions that allocate liability and financial responsibility for such litigation relating to both parties businesses. Seattle records a liability when it believes that it is both probable that a liability has been incurred and the amount of loss can be reasonably estimated. Significant judgment is required to determine both the probability of having incurred a liability and the estimated amount of the liability. Seattle reviews these matters at least quarterly and adjusts these liabilities to reflect the impact of negotiations, settlements, rulings, advice of legal counsel and other updated information and events pertaining to a particular matter. Litigation is inherently unpredictable. However, Seattle believes it has valid defenses with respect to legal matters pending against it. Nevertheless, cash flows or results of operations could be materially affected in any particular period by the resolution of one or more of these contingencies. Seattle believes it has recorded adequate provisions for any such matters and, as of April 30, 2017, it was not reasonably possible that a material loss had been incurred in connection with such matters in excess of the amounts recognized in its financial statements.
Litigation, Proceedings and Investigations
Forsyth, et al. vs. HP Inc. and Hewlett Packard Enterprise Company: This purported class and collective action was filed on August 18, 2016 and an amended (and operative) complaint was filed on December 19, 2016 in the United States District Court for the Northern District of California, against HP Inc. and Hewlett Packard Enterprise Company alleging defendants violated the Federal Age Discrimination in Employment Act (ADEA), the California Fair Employment and Housing Act, California public policy and the California Business and Professions Code by terminating older workers and replacing them with younger workers. Plaintiffs seek to certify a nationwide collective action under the ADEA comprised of all individuals aged 40 and older at the time their employment was terminated by an HP entity pursuant to a work force reduction (WFR) plan on or after December 9, 2014 for individuals terminated in deferral states and on or after April 8, 2015 in nondeferral states. Plaintiffs also seek to certify a Rule 23 class under California law comprised of all persons 40 years of age or older employed by defendants in the state of California and terminated pursuant to a WFR plan on or after August 18, 2012.
Delaney and Haragos v. Hewlett-Packard Company and HP Enterprise Services, LLC: This purported California class action was filed on April 22, 2016 and a second (and operative) amended complaint was filed on September 2, 2016 in California Superior Court (San Diego County) against Hewlett-Packard Company, HP Inc., and Hewlett Packard Enterprise Services, LLC, alleging defendants violated the California Fair Employment and Housing Act and the California Unfair Competition Code by disproportionately laying off employees who were 40 or older and replacing them with younger workers. Plaintiff Haragos seeks to represent a Federal Rule of
F-175
Civil Procedure Rule 23 state-law class comprised of all California employees who were terminated by defendants pursuant to a WFR plan between April 22, 2012 and the present. Plaintiff Delaneys claims were voluntarily dismissed effective November 28, 2016. On January 27, 2017, the court granted defendants motion to compel plaintiff Haragos to arbitration. Pursuant to the terms of Mr. Haragos WFR release, the parties engaged in mediation on March 1, 2017 and reached a confidential settlement of Haragos individual claims. On March 28, 2017, the court dismissed Haragos class claims without prejudice.
Wall v. Hewlett-Packard Enterprise Company and HP Inc.: This certified California class action and Private Attorney General Act action was filed against Hewlett-Packard Company on January17, 2012 and the fifth (and operative) amended complaint was filed against HP Inc. and Hewlett Packard Enterprise Company on June 28, 2016. The complaint alleges that the defendants paid earned incentive compensation late and failed to timely pay final wages. On August 9, 2016, the court ordered the class certified without prejudice to a future motion to amend or modify the class certification order or to decertify. Trial is set to begin on January 22, 2018.
Realtime Data LLC: Realtime Data LLC (Realtime) filed three patent infringement actions in the Eastern District of Texas against HPE. The first was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services and Oracle (Oracle matter) and accuses HPs Proliant servers running Oracles Solaris, HPEs StoreOnce, and HPEs Vertica. Oracle has agreed to indemnify HPE for all claims against HPE related to Oracles Solaris, including databases running Solaris with the ZFS file system on HP ProLiant servers. Following a March 23, 2017 mediation, Oracle and Realtime reached a settlement. It is unclear whether their agreement has been finalized. No stipulated judgment or joint motion to dismiss has been filed to date, although the parties notified the Court that an agreement has been reached in principle. The second lawsuit was filed on May 8, 2015 against Hewlett-Packard Company, HP Enterprise Services, and SAP America Inc., Sybase Inc. (SAP matter) and accuses HPs Converged Systems running SAP Hana. SAP agreed to indemnify HPE and HPES for the SAP related products. On June 6, 2016, SAP reached a settlement agreement with Realtime, which led to the dismissal of all claims relating to HPE products indemnified by SAP. The third lawsuit was filed on February 26, 2016 (amended on August 15, 2016) against Hewlett Packard Enterprise Company, HP Enterprise Services, and Silver Peak Systems, Inc. (Silver Peak), and accuses HPEs StoreOnce, 3Par StoreServe, Connected MX, Connected Backup, and LiveVault. On November 17, 2016, the Magistrate Judge granted HPE and Realtimes joint motion to sever and consolidate the Oracle and Silver Peak matters. There are seven patents asserted in the remaining lawsuits. The patents generally relate to data compression techniques used to conserve storage space. HPE and the joint defense group have filed several inter partes review petitions with the Patent Trial and Appeal Board on all seven asserted patents. On February 3, 2017, the Magistrate Judge granted HPEs Motion to Stay Pending Inter Partes Review.
Environmental
Seattles operations are or may in the future become subject to various federal, state, local and foreign laws and regulations concerning environmental protection, including laws addressing the discharge of pollutants into the air and water, the management and disposal of hazardous substances and wastes, the cleanup of contaminated sites and the energy consumption of operations. Seattle could incur substantial costs and it could face other sanctions, if it were to violate or become liable under environmental laws. Seattles potential exposure includes fines and civil or criminal sanctions, third-party property damage or personal injury claims and cleanup costs. The amount and timing of costs to comply with environmental laws are difficult to predict.
In particular, Seattle may become a party to, or otherwise involved in, proceedings brought by U.S. or state environmental agencies under the Comprehensive Environmental Response, Compensation and Liability Act known as Superfund, or other federal, state or foreign laws and regulations addressing the cleanup of contaminated sites, and may become a party to, or otherwise involved in, proceedings brought by private parties for contribution towards cleanup costs. Seattle is also contractually obligated to make financial contributions to address actions related to certain environmental liabilities, both ongoing and arising in the future, pursuant to the Separation and Distribution Agreement with Hewlett Packard Enterprise Company.
Note 14: Indemnifications
In the ordinary course of business, Seattle enters into contractual arrangements under which Seattle provides indemnifications to certain vendors and customers against claims of intellectual property infringement made by third parties arising from the use by such vendors and customers of Seattles software products and services and
F-176
certain other matters. Some indemnifications may not be subject to maximum loss clauses. Historically, payments made related to these indemnifications have been immaterial.
Note 15: Subsequent Events
Seattle evaluated subsequent events for recognition or disclosure through July 17, 2017, the date Condensed Combined Financial Statements were available to be issued.
On June 21, 2017, Seattle borrowed $2.6 billion in the form of a 7-year term loan (Term Loan) due June 21, 2024 under its senior secured credit facility. The Term Loan bears interest at a rate per annum of LIBOR plus 2.75% (subject to a LIBOR floor of 0.00%). Proceeds from the Term Loan will primarily be used to fund a $2.5 billion payment to HPE prior to the closing of the Transactions and to pay expenses associated with the borrowing.
F-177
PART II: INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Micro Focus Articles provide that, subject to the Companies Act 2006 of the United Kingdom and the U.K. Listing Rules, every director and officer and former director and former officer of Micro Focus and of each of the associated companies of Micro Focus (meaning any company that is a parent, subsidiary or sister company of Micro Focus) shall be indemnified by Micro Focus out of its own funds against:
(i) | subject to certain exceptions, any liability incurred by or attaching to him/her in connection with any negligence, default, breach of duty or breach of trust by him/her in relation to Micro Focus or any associated company of Micro Focus; and |
(ii) | any other liability incurred by or attaching to him/her in the actual or purported execution and/or discharge of his/her duties and/or the exercise or purported exercise of his/her powers and/or otherwise in relation to or in connection with his/her duties, powers or office. |
Generally, under the Companies Act 2006, a company may not indemnify its directors against liability covering: liability to the company in cases where the company sues the director (i.e., only liability to third parties can be the subject of an indemnity), liability for fines for criminal conduct or fines imposed by a regulator, or other liabilities, such as legal costs, in criminal cases where the director is convicted, or in civil cases brought by the company where the final judgment goes against the director.
Micro Focus has entered into a deed of indemnity with each of its directors and officers. Except as prohibited by applicable law, these deeds of indemnity may require Micro Focus, among other things, to indemnify its directors and officers for certain expenses, including attorneys fees, judgments, fines and settlement amounts incurred by such directors and officers in any action or proceeding arising out of their service as a director or officer of Micro Focus, or one of its subsidiaries, or arising out of the services provided to another company or enterprise at Micro Focus request.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling Micro Focus pursuant to the foregoing provisions, Micro Focus has been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Item 21. Exhibits and Financial Statement Schedules
(a) | The Exhibit Index is incorporated herein by reference. |
See the Exhibit Index attached to this registration statement, which is incorporated herein by reference.
(b) | Financial Statements Schedule has been omitted as the information has been otherwise supplied in the financial statements or notes to the financial statements. |
Schedules not listed above have been omitted because the information required to be set forth therein is not applicable or is shown in the financial statements or the notes thereto.
Item 22. Undertakings.
The undersigned Registrant hereby undertakes:
1. | To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: |
(i) | to include any prospectus required by section 10(a)(3) of the Securities Act; |
(ii) | to reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the |
II-1
Commission pursuant to Rule 424(b) if, in aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the Calculation of Registration Fee table in the effective registration statement; and
(iii) | to include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. |
2. | That, for the purpose of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
3. | To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. |
4. | To file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A. of Form 20-F at the start of any delayed offering or throughout a continuous offering. |
5. | That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: |
(i) | Each prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to be part of the registration statement as of the date the filed prospectus was deemed part of and included in the registration statement; and |
(ii) | Each prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as part of a registration statement in reliance on Rule 430B relating to an offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of providing the information required by section 10(a) of the Securities Act of 1933 shall be deemed to be part of and included in the registration statement as of the earlier of the date such form of prospectus is first used after effectiveness or the date of the first contract of sale of securities in the offering described in the prospectus. As provided in Rule 430B, for liability purposes of the issuer and any person that is at that date an underwriter, such date shall be deemed to be a new effective date of the registration statement relating to the securities in the registration statement to which that prospectus relates, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such effective date, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such effective date. |
The undersigned Registrant hereby undertakes (i) to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means and (ii) to arrange or provide for a facility in the U.S. for purpose of responding to such requests. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will,
II-2
unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
1. | For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b) (1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. |
2. | For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. |
II-3
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Newbury, United Kingdom, on August 3, 2017.
|
MICRO FOCUS INTERNATIONAL PLC
|
||
|
|
|
|
|
By:
|
/s/ Mike Phillips
|
|
|
|
Name:
|
Mike Phillips
|
|
|
Title:
|
Chief Financial Officer
|
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Kevin Loosemore and Mike Phillips, and each of them singly, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all (i) amendments (including post-effective amendments) and additions to this registration statement and (ii) any and all additional registration statements pursuant to Rule 462(b) of the Securities Act of 1933, as amended, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto each said attorney-in-fact and agents full power and authority to do and perform each and every act in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or either of them or their or his or her substitute or substitutes may lawfully do or cause to be done by virtue hereof.
Signatures
|
Title
|
Date
|
|
|
|
/s/ Kevin Loosemore
|
Executive Chairman of the Board
(Principal Executive Officer) |
August 3, 2017
|
Kevin Loosemore
|
|
|
|
|
|
/s/ Mike Phillips
|
Chief Financial Officer and Executive Director
(Principal Financial Officer and Principal Accounting Officer) |
August 3, 2017
|
Mike Phillips
|
|
|
|
|
|
/s/ Stephen Murdoch
|
Chief Executive Officer of Micro Focus and Executive Director
|
August 3, 2017
|
Stephen Murdoch
|
|
|
|
|
|
/s/ Nils Brauckmann
|
Chief Executive Officer of SUSE and Executive Director
|
August 3, 2017
|
Nils Brauckmann
|
|
|
|
|
|
/s/ Karen Slatford
|
Senior Independent Non-Executive Director
|
August 3, 2017
|
Karen Slatford
|
|
|
|
|
|
/s/ Richard Atkins
|
Independent Non-Executive Director
|
August 3, 2017
|
Richard Atkins
|
|
|
|
|
|
/s/ Amanda Brown
|
Independent Non-Executive Director
|
August 3, 2017
|
Amanda Brown
|
|
|
|
|
|
/s/ Silke Scheiber
|
(Independent Non-Executive Director)
|
August 3, 2017
|
Silke Scheiber
|
|
|
|
|
|
/s/ Darren Roos
|
(Independent Non-Executive Director)
|
August 3, 2017
|
Darren Roos
|
|
|
II-4
SIGNATURE OF AUTHORIZED REPRESENTATIVE OF THE REGISTRANT
Pursuant to the requirements of the Securities Act, the Registrant has duly caused this registration statement to be signed on its behalf by the following persons in the capacities indicated on August 3, 2017.
Signatures
|
Title
|
Date
|
|
|
|
/s/ Giselle Manon
|
Authorized Representative in the United States
|
August 3, 2017
|
Giselle Manon
|
|
|
II-5
EXHIBIT INDEX
Exhibit No.
|
Description
|
2.1†
|
Agreement and Plan of Merger dated September 7, 2016 entered into among Micro Focus International plc, Hewlett Packard Enterprise Company, Seattle MergerSub, Inc., Seattle Holdings Inc. and Seattle SpinCo, Inc. (incorporated by reference to Exhibit 2.1 of Hewlett Packard Enterprise Company’s Current Report on Form 8-K filed on September 7, 2016)
|
|
|
2.2†
|
Separation and Distribution Agreement dated September 7, 2016 entered into between Hewlett Packard Enterprise Company and Seattle SpinCo, Inc. (incorporated by reference to Exhibit 2.2 of Hewlett Packard Enterprise Company’s Current Report on Form 8-K filed on September 7, 2016)
|
|
|
2.3†
|
Employee Matters Agreement dated September 7, 2016 entered into among Micro Focus International plc, Hewlett Packard Enterprise Company and Seattle SpinCo, Inc. (incorporated by reference to Exhibit 2.3 of Hewlett Packard Enterprise Company’s Current Report on Form 8-K filed on September 7, 2016)
|
|
|
2.4†
|
Form of Intellectual Property Matters Agreement to be entered into among Hewlett Packard Enterprise Company, Hewlett Packard Enterprise Development LP and Seattle SpinCo, Inc.
|
|
|
2.5†
|
Form of Real Estate Matters Agreement to be entered into between Hewlett Packard Enterprise Company and Seattle SpinCo, Inc.
|
|
|
2.6†
|
Form of Tax Matters Agreement to be entered into among Micro Focus International plc, Hewlett Packard Enterprise Company and Seattle SpinCo, Inc.
|
|
|
2.7†
|
Form of Transition Services Agreement to be entered into between Hewlett Packard Enterprise Company and Seattle SpinCo, Inc.
|
|
|
3.1
|
Articles of Association of Micro Focus International plc
|
|
|
4.1
|
Specimen certificate representing ordinary shares of Micro Focus International plc
|
|
|
4.2
|
Form of Deposit Agreement by and among Micro Focus International plc and Deutsche Bank Trust Company Americas, as Depositary
|
|
|
4.3
|
Form of American Depositary Receipt (included in Exhibit 4.2)
|
|
|
5.1
|
Opinion of Travers Smith LLP regarding ordinary shares to be issued by Micro Focus International plc
|
|
|
8.1
|
Form of Opinion of Skadden, Arps, Slate, Meagher & Flom LLP regarding certain tax matters
|
|
|
10.1
|
Form of Credit Agreement, among Seattle SpinCo, Inc., the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent.
|
|
|
10.2
|
Form of Credit Agreement, among Micro Focus International plc, Micro Focus Group Limited, MA FinanceCo., LLC, the Lenders party thereto and JPMorgan Chase Bank, N.A., as Administrative Agent and Collateral Agent.
|
|
|
16.1
|
Form of letter from PricewaterhouseCoopers LLP
|
|
|
21.1
|
Subsidiaries of Micro Focus International plc
|
II-6
Exhibit No.
|
Description
|
23.1
|
Consent of PricewaterhouseCoopers LLP relating to Micro Focus International plc
|
|
|
23.2
|
Consent of Ernst & Young LLP relating to Seattle SpinCo, Inc.
|
|
|
23.3
|
Consent of Grant Thornton LLP relating to The Attachmate Group
|
|
|
23.4
|
Consent of Travers Smith LLP (included in Exhibit 5.1)
|
|
|
23.5
|
Form of Consent of Skadden, Arps, Slate, Meagher & Flom LLP (included in Exhibit 8.1)
|
|
|
24.1
|
Power of Attorney for Micro Focus International plc (included on signature page)
|
† | Exhibits and schedules have been omitted pursuant to Item 601(b)(2) of Regulation S-K and will be supplementally provided to the Securities and Exchange Commission upon request. |
II-7
|
HEWLETT PACKARD ENTERPRISE COMPANY
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
|
|
|
HEWLETT PACKARD ENTERPRISE DEVELOPMENT LP
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
|
|
|
SEATTLE SPINCO, INC.
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
HEWLETT PACKARD ENTERPRISE COMPANY,
|
|
|
a Delaware corporation
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
|
|
|
SEATTLE SPINCO, INC.,
|
|
|
a Delaware corporation
|
|
|
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
SECTION 1. DEFINITION OF TERMS
|
2
|
SECTION 2. ALLOCATION OF PRE-DISTRIBUTION PERIOD TAX LIABILITIES
|
13
|
Section 2.01 General Rule
|
13
|
Section 2.02 Attribution of Taxes
|
13
|
SECTION 3. PREPARATION AND FILING OF TAX RETURNS.
|
14
|
Section 3.01 General
|
14
|
Section 3.02 Responsibility for Preparation and Filing and Payment of Taxes Shown Due
|
14
|
Section 3.03 Tax Reporting Practices
|
15
|
Section 3.04 Consolidated or Combined Tax Returns
|
16
|
Section 3.05 Right to Review Tax Returns
|
16
|
Section 3.06 Refunds, Carrybacks and Amended Tax Returns
|
17
|
Section 3.07 Apportionment of Tax Attributes
|
19
|
SECTION 4. TAX PAYMENTS
|
19
|
Section 4.01 Payment of Taxes.
|
19
|
Section 4.02 Indemnification Payments
|
20
|
SECTION 5. TAX BENEFITS AND HOUSTON TAX ATTRIBUTES
|
21
|
Section 5.01 Tax Benefits
|
21
|
Section 5.02 VAT Credits
|
22
|
Section 5.03 Pension Deductions
|
22
|
SECTION 6. EMPLOYEE BENEFITS MATTERS
|
22
|
Section 6.01 Houston and Seattle Income Tax Deductions in Respect of Certain Equity Awards and Compensation
|
22
|
Section 6.02 Withholding and Reporting
|
22
|
SECTION 7. TAX-FREE STATUS
|
22
|
Section 7.01 Restrictions on Seattle
|
22
|
Section 7.02 Liability for Distribution Tax-Related Losses
|
24
|
Section 7.03 Procedures Regarding Ruling Requests.
|
24
|
SECTION 8. COOPERATION AND RELIANCE
|
25
|
Section 8.01 Assistance and Cooperation
|
25
|
Section 8.02 Income Tax Return Information
|
26
|
Section 8.03 Non-Performance
|
26
|
Section 8.04 Costs
|
26
|
SECTION 9. TAX RECORDS
|
26
|
Section 9.01 Retention of Tax Records
|
26
|
Section 9.02 Access to Tax Records
|
27
|
SECTION 10. TAX CONTESTS
|
27
|
Section 10.01 Notice
|
27
|
Section 10.02 Control of Tax Contests
|
27
|
SECTION 11. EFFECTIVE DATE; TERMINATION OF PRIOR INTERCOMPANY TAX ALLOCATION AGREEMENTS
|
29
|
SECTION 12. SURVIVAL OF OBLIGATIONS
|
30
|
SECTION 13. TREATMENT OF PAYMENTS; TAX GROSS UP
|
30
|
Section 13.01 Treatment of Tax Indemnity and Tax Benefit Payments
|
30
|
Section 13.02 Tax Gross Up
|
30
|
Section 13.03 Interest Under This Agreement
|
30
|
SECTION 14. DISAGREEMENTS
|
31
|
Section 14.01 Discussion
|
31
|
Section 14.02 Escalation
|
31
|
Section 14.03 Referral to Tax Advisor for Computational Disputes
|
31
|
Section 14.04 Injunctive Relief
|
31
|
SECTION 15. EXPENSES
|
32
|
SECTION 16. GENERAL PROVISIONS
|
32
|
Section 16.01 Notices
|
32
|
Section 16.02 Binding Effect
|
33
|
Section 16.03 Waiver
|
33
|
Section 16.04 Severability
|
33
|
Section 16.05 Authority
|
34
|
Section 16.06 Further Action
|
34
|
Section 16.07 Integration
|
34
|
Section 16.08 Rules of Construction
|
34
|
Section 16.09 No Double Recovery
|
35
|
Section 16.10 Counterparts
|
35
|
Section 16.11 Governing Law
|
35
|
Section 16.12 Jurisdiction
|
35
|
Section 16.13 Amendment
|
35
|
Section 16.14 Houston or Seattle Affiliates
|
35
|
Section 16.15 Successors
|
35
|
Section 16.16 Injunctions
|
36
|
(a)
|
all Taxes based upon, measured by, or calculated with respect to (i) net income or profits (including, any capital gains, minimum tax or any Tax on items of tax preference, but not including sales, use, real, or personal property, gross or net receipts, value added, excise, leasing, transfer or similar Taxes), or (ii) multiple bases (including, corporate franchise, doing business and occupation Taxes) if one or more bases upon which such Tax is determined is described in clause (a)(i) above; and
|
(b)
|
any related interest and any penalties, additions to such Tax or additional amounts imposed with respect thereto by any Tax Authority.
|
if to Houston or, prior to the Distribution, Seattle, to:
|
||||
|
|
|
|
|
|
|
Hewlett Packard Enterprise Company
|
||
|
|
3000 Hanover Street
|
||
|
|
Palo Alto, California 94304
|
||
|
|
Attention:
|
General Counsel
|
|
|
|
Facsimile:
|
(650) 857-2012
|
|
|
|
|
||
|
|
with a copy (which shall not constitute notice) to:
|
||
|
|
|
|
|
|
|
Wachtell, Lipton, Rosen & Katz
|
||
|
|
51 West 52nd Street
|
||
|
|
New York, New York 10019
|
||
|
|
Attention:
|
Andrew R. Brownstein
|
|
|
|
|
Benjamin M. Roth
|
|
|
|
Facsimile:
|
(212) 403-2000
|
|
|
|
Email:
|
ARBrownstein@wlrk.com & BMRoth@wlrk.com
|
|
|
|
|
||
|
|
and a copy (which shall not constitute notice) to:
|
||
|
|
|
|
|
|
|
Skadden, Arps, Slate, Meagher & Flom LLP
|
||
|
|
525 University Avenue
|
||
|
|
Palo Alto, California 94301
|
||
|
|
Attention:
|
Nathan W. Giesselman
|
|
|
|
Facsimile:
|
(650) 798.6572
|
|
|
|
|
|
if to Miami or, following the Distribution, Seattle, to:
|
|||
|
|
|
|
|
Micro Focus International plc
|
||
|
The Lawn, 22-30 Old Bath Road
|
||
|
Berkshire, RG14 1QN
|
||
|
United Kingdom
|
||
|
Attention:
|
General Counsel
|
|
|
Facsimile:
|
+44 1635 33966
|
|
|
Email:
|
jane.smithard@microfocus.com
|
|
|
|
|
|
|
with a copy (which shall not constitute notice) to:
|
||
|
|
|
|
|
Kirkland & Ellis LLP
|
||
|
601 Lexington Avenue
|
||
|
New York, New York 10022
|
||
|
Attention: David Fox, William B. Sorabella & David B. Feirstein
|
||
|
Facsimile No.:
|
(212) 446-6460
|
|
|
Email:
|
david.fox@kirkland.com, william.sorabella@kirkland.com & david.feirstein@kirkland.com
|
HEWLETT PACKARD ENTERPRISE COMPANY, a Delaware corporation
|
||
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
|
|
|
SEATTLE SPINCO, INC., a Delaware corporation
|
||
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
|
|
|
MICRO FOCUS INTERNATIONAL PLC, a company organized under the laws of England and Wales
|
||
|
|
|
By:
|
|
|
|
Name:
|
|
|
Title:
|
|
1
|
Note to Draft: Section 3.6 should be included only if any of the services provided under the TSA will involve joint development activities.
|
|
HEWLETT PACKARD ENTERPRISE COMPANY
|
|
|
|
|
|
By:
|
|
|
Name:
|
Rishi Varma
|
|
Title:
|
SVP, Deputy General Counsel
|
|
|
|
|
SEATTLE SPINCO, INC.
|
|
|
|
|
|
By:
|
|
|
Name:
|
[●]
|
|
Title:
|
[●]
|
1
|
Exclusion of other regulations
|
7
|
2
|
Interpretation
|
7
|
3
|
Limited Liability
|
10
|
4
|
Consolidation, subdivision and cancellation
|
10
|
5
|
Purchase of own shares
|
10
|
6
|
Reduction of capital
|
11
|
7
|
Rights attaching to shares on issue
|
11
|
8
|
Commissions on issue of shares
|
11
|
9
|
Renunciation of allotment
|
11
|
10
|
Trust etc. interests not recognised
|
12
|
11
|
Issue of share certificates
|
12
|
12
|
Form of share certificate
|
12
|
13
|
Joint holders
|
12
|
14
|
Replacement of share certificates
|
12
|
15
|
Power to make calls
|
13
|
16
|
Liability for calls
|
13
|
17
|
Interest on overdue amounts
|
13
|
18
|
Other sums due on shares
|
13
|
19
|
Power to differentiate between holders
|
14
|
20
|
Payment of calls in advance
|
14
|
21
|
Notice on failure to pay a call
|
14
|
22
|
Forfeiture for non-compliance
|
14
|
23
|
Disposal of forfeited shares
|
14
|
24
|
Holder to remain liable despite forfeiture
|
15
|
25
|
Lien on partly-paid shares
|
15
|
26
|
Sale of shares subject to lien
|
15
|
27
|
Proceeds of sale of shares subject to lien
|
15
|
28
|
Evidence of forfeiture
|
15
|
29
|
Manner of variation of rights
|
16
|
30
|
Matters not constituting variation of rights
|
16
|
31
|
Form of transfer
|
17
|
32
|
Balance certificate
|
17
|
33
|
Right to refuse registration
|
17
|
34
|
No fee on registration
|
18
|
35
|
Branch Register
|
18
|
36
|
Further provisions on shares in uncertificated form
|
18
|
37
|
Persons entitled on death
|
18
|
38
|
Election by persons entitled by transmission
|
18
|
39
|
Rights of persons entitled by transmission
|
19
|
40
|
Untraced Shareholders
|
19
|
41
|
Annual General Meetings
|
20
|
42
|
Convening of General Meetings
|
20
|
43
|
Notice
|
20
|
44
|
Contents of notice of General Meetings
|
20
|
45
|
Attendance and speaking at General Meetings
|
21
|
46
|
Chairman
|
22
|
47
|
Quorum
|
22
|
48
|
Lack of quorum
|
22
|
49
|
Adjournment
|
22
|
50
|
Notice of adjourned meeting
|
22
|
51
|
Amendments to resolutions
|
23
|
52
|
Demand for poll
|
23
|
53
|
Procedure on a poll
|
23
|
54
|
Voting on a poll
|
24
|
55
|
Timing of poll
|
24
|
56
|
Votes attaching to shares
|
24
|
57
|
Votes of joint holders
|
24
|
58
|
Restriction on voting in particular circumstances
|
24
|
59
|
Voting by guardian
|
26
|
60
|
Validity and result of vote
|
27
|
61
|
Appointment of proxies
|
27
|
62
|
Multiple Proxies
|
27
|
63
|
Form of proxy
|
27
|
64
|
Deposit of form of proxy
|
28
|
65
|
Rights of proxy
|
29
|
66
|
Termination of proxy’s authority
|
29
|
67
|
Corporations acting by representatives
|
30
|
68
|
Number of Directors
|
30
|
69
|
Share qualification
|
30
|
70
|
Directors’ fees
|
30
|
71
|
Other remuneration of Directors
|
31
|
72
|
Directors’ expenses
|
31
|
73
|
Directors’ pensions and other benefits
|
31
|
74
|
Appointment of executive Directors
|
31
|
75
|
Powers of executive Directors
|
31
|
76
|
Retirement at Annual General Meetings
|
32
|
77
|
Re-election of retiring Director
|
32
|
78
|
Election of two or more Directors
|
32
|
79
|
Nomination of Director for election
|
32
|
80
|
Election or appointment of additional Director
|
33
|
81
|
Vacation of office
|
33
|
82
|
Removal of Director
|
34
|
83
|
Convening of meetings of Directors
|
34
|
84
|
Quorum
|
34
|
85
|
Chairman
|
34
|
86
|
Casting vote
|
35
|
87
|
Number of Directors below minimum
|
35
|
88
|
Directors’ written resolutions
|
35
|
89
|
Validity of proceedings
|
35
|
90
|
Authorisation of Directors’ interests
|
36
|
91
|
Permitted Interests
|
36
|
92
|
Restrictions on quorum and voting
|
38
|
93
|
Confidential information
|
39
|
94
|
Directors’ interests - general
|
40
|
95
|
Appointment and constitution of committees
|
41
|
96
|
Proceedings of committee meetings
|
41
|
97
|
General powers
|
41
|
98
|
Local boards
|
41
|
99
|
Appointment of attorney
|
42
|
100
|
President
|
42
|
101
|
Signature on cheques etc.
|
42
|
102
|
Borrowing powers
|
42
|
103
|
Alternate Directors
|
46
|
104
|
Secretary
|
47
|
105
|
The Seal
|
47
|
106
|
Provision for Employees
|
48
|
107
|
Authentication of documents
|
48
|
108
|
Establishment of reserves
|
48
|
109
|
Business bought as from past date
|
48
|
110
|
Final dividends
|
49
|
111
|
Fixed and interim dividends
|
49
|
112
|
Distribution in specie
|
49
|
113
|
No dividend except out of profits
|
49
|
114
|
Ranking of shares for dividend
|
49
|
115
|
Manner of payment of dividends
|
50
|
116
|
Joint holders
|
50
|
117
|
Record date for dividends
|
50
|
118
|
No interest on dividends
|
51
|
119
|
Retention of dividends
|
51
|
120
|
Unclaimed dividend
|
51
|
121
|
Waiver of dividend
|
51
|
122
|
Capitalisation of profits and reserves
|
52
|
123
|
Scrip Dividends
|
54
|
124
|
Accounting records
|
55
|
125
|
Copies of accounts for members
|
56
|
126
|
Validity of Auditor’s acts
|
56
|
127
|
Auditor’s right to attend General Meetings
|
56
|
128
|
Service of notices
|
56
|
129
|
Joint holders
|
57
|
130
|
Deceased and bankrupt members
|
58
|
131
|
Suspension of postal services
|
58
|
132
|
Signature or authentication of documents sent by electronic means
|
58
|
133
|
Statutory provisions as to notices
|
59
|
134
|
Directors’ power to petition
|
59
|
135
|
Destruction of Documents
|
59
|
136
|
Indemnity
|
60
|
137
|
Insurance
|
60
|
138
|
Defence expenditure
|
61
|
139
|
Rights and Restrictions Attached to the B Shares
|
62
|
140
|
Deferred Shares
|
64
|
1 |
Exclusion of other regulations
|
2 |
Interpretation
|
“these Articles”
|
These Articles of Association as from time to time altered.
|
“Company”
|
Micro Focus International PLC, with registered number 5134647.
|
the “CREST Regulations”
|
The Uncertificated Securities Regulations 2001.
|
“Directors”
|
The Directors of the Company from time to time.
|
“in writing”
|
Written or produced by any substitute for writing (including anything in electronic form) or partly one and partly another.
|
the “London Stock Exchange”
|
London Stock Exchange plc.
|
“month”
|
Calendar month.
|
“Office”
|
The registered office of the Company for the time being.
|
“Operator”
|
CRESTCo Limited or such other person as may for the time being be approved by H.M. Treasury as Operator under the CREST Regulations.
|
“Operator-instruction”
|
A properly authenticated dematerialised instruction attributable to the Operator.
|
“paid”
|
Paid or credited as paid.
|
“participating security”
|
A security title to units of which is permitted by the Operator to be transferred by means of a relevant system.
|
“Procedural Resolution”
|
A resolution at a shareholders’ meeting which in the opinion of the chairman is of a procedural nature (such as a resolution on the choice of a chairman of the meeting or a resolution to adjourn the meeting).
|
“Register”
|
The register of members of the Company.
|
“relevant system”
|
A computer-based system, and procedures, which enable title to units of a security to be evidenced and transferred without a written instrument pursuant to the CREST Regulations.
|
“Seal”
|
The Common Seal of the Company.
|
“Securities Seal”
|
An official seal kept by the Company for sealing securities issued by the Company, or for sealing documents creating or evidencing securities so issued, as permitted by the Companies Acts.
|
the “Statutes”
|
The Companies Acts, the CREST Regulations and every other enactment, statutory instrument or other subordinate legislation for the time being in force concerning companies and affecting the Company.
|
“Substantive Resolution”
|
Any resolution at a shareholders’ meeting, other than a Procedural Resolution.
|
“Transfer Office”
|
The place where the Register is situate for the time being.
|
the “UK Listing Authority”
|
The Financial Services Authority in its capacity as competent authority for official listing under Part VI of the Financial Services and Markets Act 2000.
|
the “United Kingdom”
|
The United Kingdom of Great Britain and Northern Ireland.
|
“year”
|
Calendar year.
|
3 |
Limited Liability
|
4 |
Consolidation, subdivision and cancellation
|
4.1 |
Subject to the provisions of the Statutes, the Company may by Ordinary Resolution:
|
(a) |
Consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
|
(b) |
cancel any shares which, at the date of the passing of the resolution, have not been taken, or agreed to be taken, by any person and diminish the amount of its capital by the amount of the shares so cancelled;
|
(c) |
subdivide its shares, or any of them, into shares of a smaller amount than its existing shares, and so that the resolution whereby any share is subdivided may determine that, as between the holders of the shares resulting from such subdivision, one or more of the shares may, as compared with the others, have any such preferred, deferred or other special rights, or be subject to any such restrictions, as the Company has power to attach to new shares.
|
4.2 |
Whenever as a result of a consolidation or subdivision of shares any members would become entitled to fractions of a share, the Directors may, on behalf of those members, sell the shares representing the fractions for the best price reasonably obtainable to any person (including, subject to the provisions of the Statutes, the Company) and distribute the net proceeds of sale in due proportion among those members, and the Directors may authorise some person to transfer the shares to, or in accordance with the directions of, the purchaser. The transferee shall not be bound to see to the application of the purchase money nor shall his title to the shares be affected by any irregularity in or invalidity of the proceedings in reference to the sale. So far as the Statutes allow, the Directors may treat shares of a member in certificated form and in uncertificated form as separate holdings in giving effect to subdivisions and/or consolidations and may cause any shares arising on consolidation or subdivision and representing fractional entitlements to be entered in the Register as shares in certificated form where this is desirable to facilitate the sale thereof.
|
5 |
Purchase of own shares
|
5.1 |
Subject to the provisions of the Statutes, the Company may purchase, or may enter into a contract under which it will or may purchase, any of its own shares of any class (including any redeemable shares) but so that if there shall be in issue any shares which are admitted to the official list maintained by the UK Listing Authority and which are convertible into equity share capital of the Company of the class proposed to be purchased, then the Company shall not purchase, or enter into a contract under which it will or may purchase, such equity securities unless either:
|
(a) |
the terms of issue of such convertible securities include provisions permitting the Company to purchase its own equity shares or providing for adjustment to the conversion terms upon such a purchase; or
|
(b) |
the purchase, or the contract, has first been approved by a Special Resolution passed at a separate meeting of the holders of such convertible securities.
|
5.2 |
The Company may not exercise any right in respect of treasury shares held by it, including any right to attend or vote at meetings, to participate in any offer by the Company to shareholders or to receive any distribution (including in a winding-up), but without prejudice to its right to sell the treasury shares, to transfer the shares for the purposes of or pursuant to an employees’ share scheme, to receive an allotment of shares as fully paid bonus shares in respect of the treasury shares or to receive any amount payable on redemption of any redeemable treasury shares.
|
6 |
Reduction of capital
|
7 |
Rights attaching to shares on issue
|
8 |
Commissions on issue of shares
|
9 |
Renunciation of allotment
|
(a) |
recognise a renunciation thereof by the allottee in favour of some other person and accord to any allottee of a share a right to effect such renunciation; and/or
|
(b) |
allow the rights represented thereby to be one or more participating securities, in each case upon and subject to such terms and conditions as the Directors may think fit to impose.
|
10 |
Trust etc. interests not recognised
|
11 |
Issue of share certificates
|
12 |
Form of share certificate
|
13 |
Joint holders
|
14 |
Replacement of share certificates
|
14.1 |
Any two or more certificates representing shares of any one class held by any member may at his request be cancelled and a single new certificate for such shares issued in lieu without charge.
|
14.2 |
If any member shall surrender for cancellation a share certificate representing shares held by him and request the Company to issue in lieu two or more share certificates representing such shares in such proportions as he may specify, the Directors may, if they think fit, comply with such request.
|
14.3 |
If a share certificate shall be damaged or defaced or alleged to have been lost, stolen or destroyed, a new certificate representing the same shares may be issued to the holder upon request subject to delivery up of the old certificate or (if alleged to have been lost, stolen or destroyed) compliance with such conditions as to evidence and indemnity and the payment of any exceptional out-of-pocket expenses of the Company in connection with the request as the Directors may think fit.
|
14.4 |
In the case of shares held jointly by several persons any such request may be made by any one of the joint holders.
|
15 |
Power to make calls
|
16 |
Liability for calls
|
17 |
Interest on overdue amounts
|
18 |
Other sums due on shares
|
19 |
Power to differentiate between holders
|
20 |
Payment of calls in advance
|
21 |
Notice on failure to pay a call
|
21.1 |
If a member fails to pay in full any call or instalment of a call on or before the due date for payment thereof, the Directors may at any time thereafter serve a notice in writing on him requiring payment of so much of the call or instalment as is unpaid together with any interest which may have accrued thereon and any expenses incurred by the Company by reason of such non-payment.
|
21.2 |
The notice shall name a further day (not being less than seven days from the date of service of the notice) on or before which and the place where the payment required by the notice is to be made, and shall state that in the event of non-payment in accordance therewith the shares on which the call has been made will be liable to be forfeited.
|
22 |
Forfeiture for non-compliance
|
23 |
Disposal of forfeited shares
|
24 |
Holder to remain liable despite forfeiture
|
25 |
Lien on partly-paid shares
|
26 |
Sale of shares subject to lien
|
27 |
Proceeds of sale of shares subject to lien
|
28 |
Evidence of forfeiture
|
29 |
Manner of variation of rights
|
29.1 |
Whenever the share capital of the Company is divided into different classes of shares, the special rights attached to any class may, subject to the provisions of the Statutes, be varied or abrogated either with the consent in writing of the holders of three-quarters in nominal value of the issued shares of the class or with the sanction of a Special Resolution passed at a separate meeting of the holders of the shares of the class (but not otherwise) and may be so varied or abrogated either whilst the Company is a going concern or during or in contemplation of a winding-up.
|
29.2 |
To every such separate meeting all the provisions of these Articles relating to General Meetings and to the proceedings thereat shall mutatis mutandis apply, except that the necessary quorum shall be two persons at least holding or representing by proxy at least one-third in nominal value of the issued shares of the class (but so that at any adjourned meeting any holder of shares of the class present in person or by proxy shall in accordance with Article 45 be a quorum) and that any holder of shares of the class present in person or by proxy in accordance with Article 45 may demand a poll and that every such holder shall on a poll have one vote for every share of the class held by him.
|
29.3 |
The foregoing provisions of this Article shall apply to the variation or abrogation of the special rights attached to some only of the shares of any class as if each group of shares of the class differently treated formed a separate class the special rights whereof are to be varied.
|
30 |
Matters not constituting variation of rights
|
31 |
Form of transfer
|
31.1 |
All transfers of shares which are in certificated form may be effected by transfer in writing in any usual or common form or in any other form acceptable to the Directors and may be under hand only. The instrument of transfer shall be signed by or on behalf of the transferor and (except in the case of fully-paid shares) by or on behalf of the transferee. The transferor shall remain the holder of the shares concerned until the name of the transferee is entered in the Register in respect thereof. All instruments of transfer which are registered may be retained by the Company.
|
31.2 |
All transfers of shares which are in uncertificated form shall, unless the CREST Regulations otherwise provide, be effected by means of a relevant system.
|
32 |
Balance certificate
|
33 |
Right to refuse registration
|
33.1 |
The Directors may decline to recognise any instrument of transfer relating to shares in certificated form unless it is in respect of only one class of share, it is lodged (duly stamped if required) at the Transfer Office accompanied by the relevant share certificate(s) and when lodged it is accompanied by such other evidence as the Directors may reasonably require to show the right of the transferor to make the transfer (or, if the instrument of transfer is executed by some other person on his behalf, the authority of that person) so to do. In the case of a transfer of shares in certificated form by a recognised clearing house or a nominee of a recognised clearing house or of a recognised investment exchange the lodgement of share certificates will only be necessary if and to the extent that certificates have been issued in respect of the shares in question.
|
33.2 |
The Directors may, in the case of shares in certificated form, in their absolute discretion refuse to register any transfer of shares (not being fully-paid shares) provided that, where any such shares are admitted to the official list maintained by the UK Listing Authority, such discretion may not be exercised in such a way as to prevent dealings in the shares of that class from taking place on an open and proper basis.
|
33.3 |
The Directors may also refuse to register an allotment or transfer of shares (whether fully-paid or not) in favour of more than four persons jointly.
|
33.4 |
If the Directors refuse to register an allotment or transfer of shares they shall as soon as practicable and in any event within two months after the date on which:
|
(a) |
the letter of allotment or instrument of transfer was lodged with the Company (in the case of shares held in certificated form); or
|
(b) |
the Operator-instruction was received by the Company (in the case of shares held in uncertificated form),
|
34 |
No fee on registration
|
35 |
Branch Register
|
36 |
Further provisions on shares in uncertificated form
|
36.1 |
Subject to the Statutes and the rules (as defined in the CREST Regulations), and apart from any class of wholly dematerialised security, the Directors may determine that any class of shares may be held in uncertificated form and that title to such shares may be transferred by means of a relevant system or that shares of any class should cease to be held and transferred as aforesaid.
|
36.2 |
The provisions of these Articles shall not apply to shares of any class which are in uncertificated form to the extent that such Articles are inconsistent with:
|
(a) |
the holding of shares of that class in uncertificated form;
|
(b) |
the transfer of title to shares of that class by means of a relevant system; or
|
(c) |
any provision of the CREST Regulations.
|
37 |
Persons entitled on death
|
38 |
Election by persons entitled by transmission
|
39 |
Rights of persons entitled by transmission
|
40 |
Untraced Shareholders
|
40.1 |
The Company shall be entitled to sell at the best price reasonably obtainable at the time of sale the shares of a member or the shares to which a person is entitled by virtue of transmission on death or bankruptcy or otherwise by operation of law if and provided that:
|
(a) |
during the period of 6 years prior to the date of the publication of the advertisements referred to in paragraph 40.1(b) below (or, if published on different dates, the first thereof) at least three dividends in respect of the shares have become payable and no dividend in respect of those shares has been claimed; and
|
(b) |
the Company shall on expiry of such period of 6 years have inserted advertisements in both a national newspaper and in a newspaper circulating in the area in which the last known postal address of the member or the postal address at which service of notices may be effected under these Articles is located giving notice of its intention to sell the said shares; and
|
(c) |
during the period of three months following the publication of such advertisements the Company shall have received no communication from such member or person.
|
40.2 |
To give effect to any such sale the Company may appoint any person to transfer, as transferor, the said shares and such transfer shall be as effective as if it had been carried out by the registered holder of or person entitled by transmission to such shares and the title of the transferee shall not be affected by any irregularity or invalidity in the proceedings relating thereto. The net proceeds of sale shall belong to the Company which shall be obliged to account to the former member or other person previously entitled as aforesaid for an amount equal to such proceeds and shall enter the name of such former member or other person in the books of the Company as a creditor for such amount which shall be a permanent debt of the Company. No trust shall be created in respect of the debt, no interest shall be payable in respect of the same and the Company shall not be required to account for any money earned on the net proceeds, which may be employed in the business of the Company or invested in such investments (other than shares of the Company or its holding company if any) as the Directors may from time to time think fit.
|
41 |
Annual General Meetings
|
42 |
Convening of General Meetings
|
43 |
Notice
|
43.1 |
In accordance with the Statutes, an Annual General Meeting shall be called by notice of at least 21 days and any other General Meeting shall be called by notice of at least 14 days.
|
43.2 |
The period of notice of any General Meeting (including an Annual General Meeting) shall in either case be exclusive of the day on which it is served or deemed to be served and of the day on which the meeting is to be held.
|
43.3 |
Notice shall be given to all members other than such as are not under the provisions of these Articles entitled to receive such notices from the Company. The Company may determine that only those persons entered on the Register at the close of business on a day determined by the Company, such day being no more than 21 days before the day that notice of the meeting is sent, shall be entitled to receive such a notice.
|
44 |
Contents of notice of General Meetings
|
44.1 |
Every notice calling a General Meeting shall specify the place, date and time of the meeting.
|
44.2 |
There shall appear with reasonable prominence in every such notice a statement:
|
(a) |
that a member is entitled to appoint another person as his proxy to exercise all or any of his rights to attend and to speak and vote;
|
(b) |
that a proxy need not be a member of the Company;
|
(c) |
giving the address of the website on which the information required by Section 311A of the Companies Act 2006 is published;
|
(d) |
that the right to vote at the meeting is determined by reference to the register of members, and of the time when such right will be determined;
|
(e) |
of the procedures with which members must comply in order to be able to attend and vote at the meeting, including the date by which they must comply;
|
(f) |
giving details of any forms to be used to appoint a proxy;
|
(g) |
where the Company offers for member to vote in advance or by electronic means, the procedure for doing so, including the date by which such procedures must be complied with and details of any forms to be used; and
|
(h) |
a statement of the right of members to ask questions in accordance with Section 319A of the Companies Act 2006.
|
44.3 |
The notice shall specify the general nature of the business to be transacted at the meeting; and if any resolution is to be proposed as a Special Resolution, the notice shall contain a statement to that effect.
|
44.4 |
In the case of an Annual General Meeting, the notice shall also specify the meeting as such.
|
44.5 |
For the purposes of determining which persons are entitled to attend or vote at a General Meeting and how many votes such persons may cast, the Company may specify in the notice of the General Meeting a time, not more than 48 hours before the time fixed for the General Meeting, not taking account of days which are not working days, by which a person must be entered on the Register in order to have the right to attend or vote at the General Meeting.
|
45 |
Attendance and speaking at General Meetings
|
45.1 |
A person is able to exercise the right to speak at a General Meeting when that person is in a position to communicate to all those attending the meeting, during the meeting, any information or opinions which that person has on the business of the meeting.
|
45.2 |
A person is able to exercise the right to vote at a General Meeting when:
|
(a) |
that person is able to vote, during the meeting, on resolutions put to the vote at the meeting; and
|
(b) |
that person’s vote can be taken into account in determining whether or not such resolutions are passed at the same time as the votes of all the other persons attending the meeting.
|
45.3 |
The Directors may make whatever arrangements they consider appropriate to enable those attending a General Meeting to exercise their rights to speak or vote at it. Such arrangements may include but are not limited to convening a meeting by electronic means.
|
45.4 |
In determining attendance at a General Meeting, it is immaterial whether any two or more members attending it are in the same place as each other.
|
45.5 |
Two or more persons who are not in the same place as each other attend a General Meeting if their circumstances are such that if they have (or were to have) rights to speak and vote at that meeting, they are (or would be) able to exercise them.
|
46 |
Chairman
|
47 |
Quorum
|
48 |
Lack of quorum
|
49 |
Adjournment
|
50 |
Notice of adjourned meeting
|
51 |
Amendments to resolutions
|
52 |
Demand for poll
|
52.1 |
At any General Meeting any Substantive Resolution put to the vote shall be decided on a poll, and any Procedural Resolution put to the vote shall be decided on a show of hands unless a poll is (before the resolution is put to the vote on a show of hands, or on the declaration of the result of the show of hands) demanded by:
|
(a) |
the chairman of the meeting; or
|
(b) |
not less than five members present in person or by proxy in accordance with Article 45 and entitled to vote; or
|
(c) |
a member or members present in person or by proxy in accordance with Article 45 and representing not less than one-tenth of the total voting rights of all the members having the right to vote at the meeting; or
|
(d) |
a member or members present in person or by proxy in accordance with Article 45 and holding shares in the Company conferring a right to vote at the meeting being shares on which an aggregate sum has been paid up equal to not less than one-tenth of the total sum paid up on all the shares conferring that right.
|
52.2 |
A demand for a poll may, before the poll is taken, be withdrawn but only with the consent of the chairman. A demand so withdrawn shall not be taken to have invalidated the result of a show of hands declared before the demand was made.
|
53 |
Procedure on a poll
|
54 |
Voting on a poll
|
55 |
Timing of poll
|
56 |
Votes attaching to shares
|
57 |
Votes of joint holders
|
58 |
Restriction on voting in particular circumstances
|
58.1 |
No member shall, unless the Directors otherwise determine, be entitled in respect of any share held by him to vote either personally or by proxy at a shareholders’ meeting or to exercise any other right conferred by membership in relation to shareholders’ meetings if any call or other sum presently payable by him to the Company in respect of that share remains unpaid.
|
58.2 |
If any member, or any other person appearing to be interested in shares (within the meaning of Part 22 of the Companies Act 2006) held by such member, has been duly served with a notice under Section 793 of the Companies Act 2006 and is in default for a period of 14 days in supplying to the Company the information thereby required, then (unless the Directors otherwise determine) in respect of:
|
(a) |
the shares comprising the shareholding account in the Register which comprises or includes the shares in relation to which the default occurred (all or the relevant number as appropriate of such shares being the “default shares”, which expression shall include any further shares which are issued in respect of such shares); and
|
(b) |
any other shares held by the member,
|
58.3 |
Where the default shares represent 0.25 per cent or more of the issued shares of the class in question, the Directors may in their absolute discretion by notice in writing (a “direction notice”) to such member direct that:
|
(a) |
any dividend or part thereof or other money which would otherwise be payable in respect of the default shares shall be retained by the Company without any liability to pay interest thereon when such dividend or other money is finally paid to the member and the member shall not be entitled to elect to receive shares in lieu of dividend; and/or
|
(b) |
no transfer of any of the shares held by such member shall be registered unless the transfer is an approved transfer or:
|
(i) |
the member is not himself in default as regards supplying the information required; and
|
(ii) |
the transfer is of part only of the member’s holding and, when presented for registration, is accompanied by a certificate by the member in a form satisfactory to the Directors to the effect that after due and careful enquiry the member is satisfied that none of the shares the subject of the transfer are default shares,
|
58.4 |
The Company shall send to each other person appearing to be interested in the shares the subject of any direction notice a copy of the notice, but the failure or omission by the Company to do so shall not invalidate such notice.
|
58.5 |
Save as herein provided any direction notice shall have effect in accordance with its terms for so long as the default in respect of which the direction notice was issued continues and shall cease to have effect thereafter upon the Directors so determining (such determination to be made within a period of one week of the default being duly remedied, with notice in writing thereof being given to the member forthwith).
|
58.6 |
Any direction notice shall cease to have effect in relation to any shares which are transferred by such member by means of an approved transfer or in accordance with paragraph 58.3(b) above.
|
58.7 |
For the purposes of this Article:
|
(a) |
a person shall be treated as appearing to be interested in any shares if the member holding such shares has been served with a notice under the said Section 793 and either (i) the member has named such person as being so interested or (ii) (after taking into account the response of the member to the said notice and any other relevant information) the Company knows or has reasonable cause to believe that the person in question is or may be interested in the shares; and
|
(b) |
a transfer of shares is an “approved transfer” if:
|
(i) |
it is a transfer of shares to an offeror by way or in pursuance of acceptance of a takeover offer (as defined in Section 974 of the Companies Act 2006); or
|
(ii) |
the Directors are satisfied that the transfer is made pursuant to a bona fide sale of the whole of the beneficial ownership of the shares to a party unconnected with the member or with any person appearing to be interested in such shares including any such sale made through a recognised investment exchange or through a stock exchange outside the United Kingdom on which the Company’s shares are normally traded. For the purposes of this sub-paragraph any associate (as that term is defined in Section 435 of the Insolvency Act 1986) shall be included amongst the persons who are connected with the member or any person appearing to be interested in such shares.
|
58.8 |
The provisions of this Article are in addition and without prejudice to the provisions of the Companies Acts.
|
59 |
Voting by guardian
|
60 |
Validity and result of vote
|
60.1 |
No objection shall be raised as to the qualification of any voter or the admissibility of any vote except at the meeting or adjourned meeting at which the vote is tendered. Every vote not disallowed at such meeting shall be valid for all purposes. Any such objection shall be referred to the chairman of the meeting, whose decision shall be final and conclusive.
|
60.2 |
On a vote on a resolution at a meeting on a show of hands, a declaration by the chairman that the resolution:
|
(a) |
has or has not been passed; or
|
(b) |
has been passed with a particular majority,
|
61 |
Appointment of proxies
|
61.1 |
A member is entitled to appoint a proxy or (subject to Article 62) proxies to exercise all or any of his rights to attend and to speak and vote at a meeting of the Company.
|
61.2 |
A proxy need not be a member of the Company.
|
61.3 |
The Company is not obliged to verify that a proxy or representative of a member has acted in accordance with the terms of his appointment and any failure by the proxy or representative to so act in accordance with the terms of his appointment shall not affect the validity of any proceedings at a meeting of the Company.
|
62 |
Multiple Proxies
|
63 |
Form of proxy
|
(a) |
in the case of an individual must either be signed by the appointor or his attorney or authenticated in accordance with Article 132; and
|
(b) |
in the case of a corporation must be either given under its common seal or be signed on its behalf by an attorney or a duly authorised officer of the corporation or authenticated in accordance with Article 132.
|
64 |
Deposit of form of proxy
|
64.1 |
The appointment of a proxy (together with any supporting documentation required under Article 63) must be received at the address or one of the addresses (if any) as may be specified for that purpose in, or by way of note to, or in any document accompanying, the notice convening the meeting (or, if no address is so specified, at the Transfer Office):
|
(a) |
in the case of a meeting or adjourned meeting, not less than 48 hours before the commencement of the meeting or adjourned meeting to which it relates;
|
(b) |
in the case of the poll taken following the conclusion of a meeting or adjourned meeting, but not more than 48 hours after the poll was demanded, not less than 48 hours before the commencement of the meeting or adjourned meeting at which the poll was demanded; and
|
(c) |
in the case of a poll taken more than 48 hours after it was demanded, not less than 24 hours before the time appointed for the taking of the poll,
|
64.2 |
The Directors in calculating the periods mentioned in Article 64.1, shall not take account of any part of any day that is not a working day.
|
64.3 |
Without limiting the foregoing, in relation to any shares in uncertificated form the Directors may permit a proxy to be appointed by electronic means or by means of a website in the form of an Uncertificated Proxy Instruction (that is, a properly authenticated dematerialised instruction, and/or other instruction or notification, sent by means of a relevant system to such participant in that system acting on behalf of the Company as the Directors may prescribe, in such form and subject to such terms and conditions as may from time to time be prescribed by the Directors (subject always to the facilities and requirements of the relevant system)); and may permit any supplement to, or amendment or revocation of, any such Uncertificated Proxy Instruction to be made by a further Uncertificated Proxy Instruction. The Directors may in addition prescribe the method of determining the time at which any such instruction or notification is to be treated as received by the Company. The Directors may treat any such instruction or notification purporting or expressed to be sent on behalf of a holder of a share as sufficient evidence of the authority of the person sending the instruction to send it on behalf of that holder.
|
64.4 |
The appointment of a proxy shall, unless the contrary is stated thereon, be as valid for any adjournment of a meeting as it is for the meeting to which it relates. An appointment relating to more than one meeting (including any adjournment of any such meeting) having once been delivered in accordance with this Article 64 for the purposes of any such meeting does not need to be delivered again for the purposes of any subsequent meeting to which it relates.
|
65 |
Rights of proxy
|
65.1 |
A proxy shall have the right to exercise all or any of the rights of his appointor, or (where more than one proxy is appointed) all or any of the rights attached to the shares in respect of which he is appointed the proxy to attend, and to speak and vote, at the meeting of the Company.
|
65.2 |
Unless his appointment provides otherwise, a proxy may vote or abstain at his discretion on any resolution put to the vote at a shareholders’ meeting.
|
65.3 |
Every proxy present who has been duly appointed by a member entitled to vote on a show of hands on a resolution has one vote except where:
|
(a) |
that proxy has been duly appointed by more than one member entitled to vote on the resolution; and
|
(b) |
the proxy has been instructed:
|
(i) |
by one or more of those members to vote for the resolution and by one or more of those members to vote against the resolution; or
|
(ii) |
by one or more of those members to vote in the same way on the resolution (whether for or against) and one of more of those members has permitted the proxy discretion as to how to vote,
|
65.4 |
Every proxy present who has been duly appointed by a member entitled to vote on a poll on a resolution has one vote for every share held by the relevant member.
|
66 |
Termination of proxy’s authority
|
66.1 |
Neither the death or insanity of a member who has appointed a proxy, nor the revocation or termination by a member of the appointment of a proxy (or of the authority under which the appointment was made), shall invalidate the proxy or the exercise of any of the rights of the proxy thereunder, unless notice of such death, insanity, revocation or termination shall have been received by the Company in accordance with Article 66.2.
|
66.2 |
Any such notice of death, insanity, revocation or termination must be received at the address or one of the addresses (if any) specified for receipt of proxies in, or by way of note to, or in any document accompanying, the notice convening the meeting to which the appointment of the proxy relates (or if no address is so specified, at the Transfer Office):
|
(a) |
in the case of a meeting or adjourned meeting, not less than one hour before the commencement of the meeting or adjourned meeting to which the proxy appointment relates;
|
(b) |
in the case of a poll taken following the conclusion of a meeting or adjourned meeting, but not more than 48 hours after it was demanded, not less than one hour before the commencement of the meeting or adjourned meeting at which the poll was demanded; or
|
(c) |
in the case of a poll taken more than 48 hours after it was demanded, not less than one hour before the time appointed for the taking of the poll.
|
67 |
Corporations acting by representatives
|
68 |
Number of Directors
|
69 |
Share qualification
|
70 |
Directors’ fees
|
71 |
Other remuneration of Directors
|
72 |
Directors’ expenses
|
73 |
Directors’ pensions and other benefits
|
74 |
Appointment of executive Directors
|
74.1 |
The Directors may from time to time appoint one or more of their body to be the holder of any executive office (including, where considered appropriate, the office of Chairman or Deputy Chairman) on such terms and for such period as they may (subject to the provisions of the Statutes) determine and, without prejudice to the terms of any contract entered into in any particular case, may at any time revoke or vary the terms of any such appointment.
|
74.2 |
The appointment of any Director to the office of Chairman or Deputy Chairman or Managing or Joint Managing or Deputy or Assistant Managing Director shall automatically determine if he ceases to be a Director but without prejudice to any claim for damages for breach of any contract of service between him and the Company.
|
74.3 |
The appointment of any Director to any other executive office shall not automatically determine if he ceases from any cause to be a Director, unless the contract or resolution under which he holds office shall expressly state otherwise, in which event such determination shall be without prejudice to any claim for damages for breach of any contract of service between him and the Company.
|
75 |
Powers of executive Directors
|
76 |
Retirement at Annual General Meetings
|
76.1 |
Subject to Article 76.2, each Director shall retire at each Annual General Meeting held following the year in which he was elected or last re-elected but, unless he falls within Article 76.3 below, he shall be eligible for re-election.
|
76.2 |
Each Director (other than the Chairman and any director holding an executive office) shall retire at each Annual General Meeting following the ninth anniversary of the date on which he was elected by the Company.
|
76.3 |
A Director shall also retire at any Annual General Meeting if he has agreed to do so (whether in accordance with the terms of his appointment or otherwise) and, unless the Directors have agreed otherwise, he shall not be eligible for re-election.
|
77 |
Re-election of retiring Director
|
(a) |
where at such meeting a resolution for the re-election of such Director is put to the meeting and lost, or it is expressly resolved not to fill the office being vacated;
|
(b) |
where such Director is ineligible for re-election or has given notice in writing to the Company that he is unwilling to be re-elected; or
|
(c) |
where a resolution to elect such Director is void by reason of contravention of the next following Article.
|
78 |
Election of two or more Directors
|
79 |
Nomination of Director for election
|
80 |
Election or appointment of additional Director
|
81 |
Vacation of office
|
(a) |
if he shall become prohibited by law from acting as a Director;
|
(b) |
if he shall resign by writing under his hand left at the Office or if he shall in writing offer to resign and the Directors shall resolve to accept such offer;
|
(c) |
if he shall have a bankruptcy order made against him or shall compound with his creditors generally or shall apply to the court for an interim order under Section 253 of the Insolvency Act 1986 in connection with a voluntary arrangement under that Act;
|
(d) |
if in England or elsewhere an order shall be made by any court claiming jurisdiction in that behalf on the ground (however formulated) of mental disorder for his detention or for the appointment of a guardian or for the appointment of a receiver or other person (by whatever name called) to exercise powers with respect to his property or affairs;
|
(e) |
if he shall be absent from meetings of the Directors for six months without leave and the Directors shall resolve that his office be vacated;
|
(f) |
if a notice in writing is served upon him, signed by not less than three-quarters of the Directors for the time being (which, for the avoidance of doubt, may be signed in counterpart), to the effect that his office as Director shall on receipt (or deemed receipt) of such notice ipso facto be vacated, but so that if he holds an appointment to an executive office which thereby automatically determines such removal shall be deemed an act of the Company and shall have effect without prejudice to any claim for damages for breach of any contract of service between him and the Company; or
|
(g) |
in the case of a director other than the Chairman and any director holding an executive office, if the Directors shall resolve to require him to resign in accordance with paragraph (b) above and within 30 days of being given notice of such resolution, he shall fail to do so.
|
82 |
Removal of Director
|
83 |
Convening of meetings of Directors
|
83.1 |
Subject to the provisions of these Articles the Directors may meet together for the despatch of business, adjourn and otherwise regulate their proceedings as they think fit. At any time any Director may, and the Secretary at the request of a Director shall, call a meeting of the Directors. Any Director may waive notice of any meeting and any such waiver may be retroactive. Notice of a meeting of the Directors shall be deemed to be properly sent to a Director if it is given to him personally or by word of mouth or sent by instrument to him, at his last known address or such other address (if any) as may, for the time being, be notified to him or on his behalf to the Company for that purpose, or sent using electronic communication to such address (if any) for the time being notified by him or on his behalf to the Company for that purpose. A Director absent or intending to be absent from the United Kingdom may request the board that notices of board meetings shall, during his absence, be sent by instrument to him at such address (if any) for the time being notified by him or on his behalf to the Company for that purpose, or sent using electronic communication to such address (if any) for the time being notified by him or on his behalf to the Company for that purpose, but such notices need not be sent any earlier than notices sent to Directors not so absent. It shall be necessary to send notice of a board meeting to any Director who is for the time being absent from the United Kingdom.
|
83.2 |
The Directors shall be deemed to meet together if, being in separate locations, they are nonetheless linked by conference telephone or other communication equipment which allows those participating to hear and speak to each other, and a quorum in that event shall be two Directors so linked. Such a meeting shall be deemed to take place where the largest group of Directors participating is assembled or, if there is no such group, where the chairman of the meeting then is.
|
84 |
Quorum
|
85 |
Chairman
|
85.1 |
The Directors may elect from their number a Chairman and a Deputy Chairman (or two or more Deputy Chairmen) and determine the period for which each is to hold office. If no Chairman or Deputy Chairman shall have been appointed or if at any meeting of the Directors no Chairman or Deputy Chairman shall be present within five minutes after the time appointed for holding the meeting, the Directors present may choose one of their number to be chairman of the meeting.
|
85.2 |
If at any time there is more than one Deputy Chairman the right in the absence of the Chairman to preside at a meeting of the Directors or of the Company shall be determined as between the Deputy Chairmen present (if more than one) by seniority in length of appointment or otherwise as resolved by the Directors.
|
86 |
Casting vote
|
87 |
Number of Directors below minimum
|
88 |
Directors’ written resolutions
|
88.1 |
A Directors’ written resolution is adopted when all the Directors entitled to vote on such resolution have:
|
(a) |
signed one or more copies of it; or
|
(b) |
otherwise indicated their agreement to it in writing.
|
88.2 |
A Directors’ written resolution is not adopted if the number of Directors who have signed it is less than the quorum for Directors’ meetings.
|
88.3 |
Once a Directors’ written resolution has been adopted, it must be treated as if it had been a resolution passed at a Directors’ meeting in accordance with the Articles.
|
89 |
Validity of proceedings
|
90 |
Authorisation of Directors’ interests
|
90.1 |
For the purposes of Section 175 of the Companies Act 2006, the Directors shall have the power to authorise any matter which would or might otherwise constitute or give rise to a breach of the duty of a Director under that Section to avoid a situation in which he has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company.
|
90.2 |
Authorisation of a matter under this Article shall be effective only if:
|
(a) |
the matter in question shall have been proposed in writing for consideration at a meeting of the Directors, in accordance with the Board’s normal procedures or in such other manner as the Directors may determine;
|
(b) |
any requirement as to the quorum at the meeting of the Directors at which the matter is considered is met without counting the Director in question and any other interested Director (together the “Interested Directors”); and
|
(c) |
the matter was agreed to without the Interested Directors voting or would have been agreed to if the votes of the Interested Directors had not been counted.
|
90.3 |
Any authorisation of a matter under this Article may:
|
(a) |
extend to any actual or potential conflict of interest which may arise out of the matter so authorised;
|
(b) |
be subject to such conditions or limitations as the Directors may determine, whether at the time such authorisation is given or subsequently;
|
|
(c) |
be terminated by the Directors at any time,
|
90.4 |
A Director shall not, save as otherwise agreed by him, be accountable to the Company for any benefit which he (or a person connected with him) derives from any matter authorised by the Directors under this Article and any contract, transaction or arrangement relating thereto shall not be liable to be avoided on the grounds of any such benefit.
|
90.5 |
This Article does not apply to a conflict of interest arising in relation to a transaction or arrangement with the Company.
|
91 |
Permitted Interests
|
91.1 |
Subject to compliance with Article 91.2, a Director, notwithstanding his office, may have an interest of the following kind:
|
(a) |
where a Director (or a person connected with him) is a director or other officer of, or employed by, or otherwise interested (including by the holding of shares) in any Relevant Company;
|
(b) |
where a Director (or a person connected with his) is a party to, or otherwise interested in, any contract, transaction or arrangement with a Relevant Company, or in which the Company is otherwise interested;
|
(c) |
where the Director (or a person connected with him) acts (or any firm of which he is a partner, employee or member acts) act in a professional capacity for any Relevant Company (other than as Auditor) whether or not he or it is remunerated therefor;
|
(d) |
where a Director is or becomes a director of any other company in which the Company does not have an interest if that cannot reasonably be regarded as likely to give rise to a conflict of interest at the time of his appointment as director of that other Company;
|
(e) |
an interest which cannot reasonably be regarded as likely to give rise to a conflict of interest;
|
(f) |
an interest, or a transaction or arrangement giving rise to an interest, of which the Director is not aware; or
|
(g) |
any other interest authorised by Ordinary Resolution.
|
91.2 |
Subject to Section 182 of the Companies Act 2006, the Director shall declare the nature and extent of any interest permitted under Article 91.1, and not falling within Article 91.3, at a meeting of the Directors or in such other manner as the Directors may determine.
|
91.3 |
No declaration of an interest shall be required by a Director in relation to an interest:
|
(a) |
falling within paragraph (e) or (f) of Article 91.1;
|
(b) |
if, or to the extent that, the other Directors are already aware of such interest (and for this purpose the other Directors are treated as aware of anything of which they ought reasonably to be aware); or
|
(c) |
if, or to the extent that, it concerns the terms of his service contract (as defined in Section 227 of the Companies Act 2006) that have been or are to be considered by a meeting of the Directors, or by a committee of Directors appointed for the purpose under these Articles.
|
91.4 |
A Director shall not, save as otherwise agreed by him, be accountable to the Company for any benefit which he (or a person connected with him) derives from any such contract, transaction or arrangement or from any such office or employment or from any interest in any Relevant Company or for such remuneration, each as referred to in Article 91.1, and no such contract, transaction or arrangement shall be liable to be avoided on the grounds of any such interest or benefit.
|
91.5 |
For the purposes of this Article, “Relevant Company” shall mean:
|
(a) |
the Company;
|
(b) |
a subsidiary undertaking of the Company;
|
(c) |
any holding company of the Company or a subsidiary undertaking of any such holding company;
|
(d) |
any body corporate promoted by the Company; or
|
(e) |
any body corporate in which the Company is otherwise interested.
|
92 |
Restrictions on quorum and voting
|
92.1 |
Save as provided in this Article, and whether or not the interest is one which is authorised pursuant to Article 90 or permitted under Article 91, a Director shall not be entitled to vote on any resolution in respect of any contract, transaction or arrangement, or any other proposal, in which he (or a person connected with him) is interested. Any vote of a Director in respect of a matter where he is not entitled to vote shall be disregarded.
|
92.2 |
A Director shall not be counted in the quorum at a meeting of the Directors in relation to any resolution on which he is not entitled to vote.
|
92.3 |
Subject to the provisions of the Statutes, a Director shall (in the absence of some other interest than is set out below) be entitled to vote, and be counted in the quorum, in respect of any resolution concerning any contacts, transaction or arrangements, or any other proposal:
|
(a) |
in which he has an interest of which he is not aware;
|
(b) |
in which he has an interest which cannot reasonably be regarded as likely to give rise to a conflict of interest;
|
(c) |
in which he has an interest only by virtue of interests in shares, debentures or other securities of the Company, or by reason of any other interest in or through the Company;
|
(d) |
which involves the giving of any security, guarantee or indemnity to the Director or any other person in respect of (i) money lent or obligations incurred by him or by any other person at the request of or for the benefit of the Company or any of its subsidiary undertakings or (ii) a debt or other obligation of the Company or any of its subsidiary undertakings for which he himself has assumed responsibility in whole or in part under a guarantee or indemnity or by the giving of security;
|
(e) |
concerning an offer of shares or debentures or other securities of or by the Company or any of its subsidiary undertakings (i) in which offer he is or may be entitled to participate as a holder of securities or (ii) in the underwriting or sub-underwriting of which he is to participate;
|
(f) |
concerning any other body corporate in which he is interested, directly or indirectly and whether as an officer, shareholder, creditor, employee or otherwise, provided that he (together with persons connected with him) is not the holder of, or beneficially interested in, one per cent or more of the issued equity share capital of any class of such body corporate or of the voting rights available to members of the relevant body corporate;
|
(g) |
relating to an arrangement for the benefit of the employees or former employees of the Company or any of its subsidiary undertakings which does not award him any privilege or benefit not generally awarded to the employees or former employees to whom such arrangement relates;
|
(h) |
concerning the purchase or maintenance by the Company of insurance for any liability for the benefit of Directors or for the benefit of persons who include Directors;
|
(i) |
concerning the giving of indemnities in favour of Directors;
|
(j) |
concerning the funding of expenditure by any Director or Directors on (i) defending criminal, civil or regulatory proceedings or action against him or them, (ii) in connection with an application to the court for relief, or (iii) defending him or them in any regulatory investigations;
|
(k) |
concerning the doing of anything to enable any Director or Directors to avoid incurring expenditure as described in paragraph (j); and
|
(l) |
in respect of which his interest, or the interest of Directors generally, has been authorised by Ordinary Resolution.
|
92.4 |
Where proposals are under consideration concerning the appointment (including fixing or varying the terms of appointment) of two or more Directors to offices or employments with the Company or any body corporate in which the Company is interested, the proposals may be divided and considered in relation to each Director separately. In such case each of the Directors concerned (if not debarred from voting under paragraph (f) of Article 92.3) above) shall be entitled to vote, and be counted in the quorum, in respect of each resolution except that concerning his own appointment or the fixing or variation of the terms thereof.
|
92.5 |
If a question arises at any time as to whether any interest of a Director prevents him from voting, or being counted in the quorum, under this Article, and such question is not resolved by his voluntarily agreeing to abstain from voting, such question shall be referred to the chairman of the meeting and his ruling in relation to any Director other than himself shall be final and conclusive except in a case where the nature or extent of the interest of such Director has not been fairly disclosed. If any such question shall arise in respect of the chairman of the meeting, the question shall be decided by resolution of the Directors and the resolution shall be conclusive except in a case where the nature or extent of the interest of the chairman of the meeting (so far as it is known to him) has not been fairly disclosed to the Directors.
|
93 |
Confidential information
|
93.1 |
Subject to Article 93.2, if a Director, otherwise than by virtue of his position as Director, receives information in respect of which he owes a duty of confidentiality to a person other than the Company, he shall not be required:
|
(a) |
to disclose such information to the Company or to the Directors, or to any Director, officer or employee of the Company; or
|
(b) |
otherwise use or apply such confidential information for the purpose of or in connection with the performance of his duties as a Director.
|
93.2 |
Where such duty of confidentiality arises out of a situation in which the Director has, or can have, a direct or indirect interest that conflicts, or possibly may conflict, with the interests of the Company, Article 93.1 shall apply only if the conflict arises out of a matter which has been authorised under Article 90 above or falls within Article 91 above.
|
93.3 |
This Article is without prejudice to any equitable principle or rule of law which may excuse or release the Director from disclosing information, in circumstances where disclosure may otherwise be required under this Article.
|
94 |
Directors’ interests - general
|
94.1 |
For the purposes of Articles 90 to 94 inclusive:
|
(a) |
an interest of a person who is connected with a Director shall be treated as an interest of the Director; and
|
(b) |
Section 252 of the Companies Act 2006 shall determine whether a person is connected with a Director.
|
94.2 |
Where a Director has an interest which can reasonably be regarded as likely to give rise to a conflict of interest, the Director may, and shall if so requested by the Directors take such additional steps as may be necessary or desirable for the purpose of managing such conflict of interest, including compliance with any procedures laid down from time to time by the Directors for the purpose of managing conflicts of interest generally and/or any specific procedures approved by the Directors for the purpose of or in connection with the situation or matter in question, including without limitation:
|
(a) |
absenting himself from any meetings of the Directors at which the relevant situation or matter falls to be considered; and
|
(b) |
not reviewing documents or information made available to the Directors generally in relation to such situation or matter and/or arranging for such documents or information to be reviewed by a professional adviser to ascertain the extent to which it might be appropriate for him to have access to such documents or information.
|
94.3 |
The Company may by Ordinary Resolution ratify any contract, transaction or arrangement, or other proposal, not properly authorised by reason of a contravention of any provisions of Articles 90 to 94 inclusive.
|
95 |
Appointment and constitution of committees
|
96 |
Proceedings of committee meetings
|
97 |
General powers
|
98 |
Local boards
|
99 |
Appointment of attorney
|
100 |
President
|
101 |
Signature on cheques etc.
|
102 |
Borrowing powers
|
102.1 |
Subject as hereinafter provided and to the provisions of the Statutes, the Directors may exercise all the powers of the Company to borrow money and to mortgage or charge its undertaking, property and uncalled capital or any part or parts thereof and to issue debentures and other securities, whether outright or as collateral security for any debt, liability or obligation of the Company or of any third party.
|
102.2 |
The Directors shall restrict the borrowings of the Company and exercise all voting and other rights, powers of control or rights of influence exercisable by the Company in relation to its subsidiary undertakings (if any) so as to secure (so far, as regards subsidiary undertakings, as by such exercise they can secure) that the aggregate amount for the time being remaining outstanding of all moneys borrowed by the Group and for the time being owing to persons outside the Group less the aggregate amount of Current Asset Investments shall not at any time without the previous sanction of an Ordinary Resolution of the Company exceed an amount equal to $10,000,000,000.
|
102.3 |
For the purpose of this Article:
|
(a) |
the “Group” means the Company and its subsidiary undertakings for the time being;
|
(b) |
the “relevant balance sheet” means at any time the latest audited consolidated balance sheet dealing with the state of affairs of the Company and (with or without exceptions) its subsidiary undertakings provided that if in any case such balance sheet has been prepared on a basis not being in substance a historical cost basis then all such adjustments shall be made therein as in the opinion of the Auditors (such opinion to be conclusive and binding on all concerned) are appropriate to bring such balance sheet into line with the accounting bases and principles which were applied in relation to the last audited consolidated balance sheet of the Company which was prepared on an historical cost basis and “the relevant balance sheet” shall then be the balance sheet as so adjusted;
|
(c) |
“moneys borrowed” shall be deemed to include (to the extent that the same would not otherwise fall to be taken into account):
|
(i) |
the amount of all debentures allotted or issued (whether or not for cash) by any member of the Group which are not for the time being beneficially owned by a company within the Group;
|
(ii) |
the outstanding amount of acceptances (not being acceptances of trade bills in respect of the purchase or sale of goods in the ordinary course of trading) by any member of the Group or by any bank or accepting house under any acceptance credit opened on behalf of and in favour of any member of the Group;
|
(iii) |
the nominal amount of any allotted or issued and paid up share capital (other than equity share capital) of any subsidiary undertaking which is a body corporate of the Company not for the time being beneficially owned by other members of the Group;
|
(iv) |
the amount of any other allotted or issued and paid up share capital and of any other debentures or other borrowed moneys (not being shares or debentures which or borrowed moneys the indebtedness in respect of which is for the time being beneficially owned within the Group) the redemption or repayment whereof is guaranteed (or is the subject of an indemnity granted) by any member of the Group or which any member of the Group may be required to purchase;
|
(v) |
the minority proportion of moneys borrowed and owing to a partly-owned subsidiary undertaking by another member of the Group;
|
(vi) |
the aggregate amount owing by any member of the Group under finance leases (as determined in accordance with any then current Financial Reporting Standard or otherwise in accordance with United Kingdom generally accepted accounting principles but excluding leaseholds of immovable property);
|
(vii) |
the principal amount of any book debts of any member of the Group which have been sold or agreed to be sold, to the extent that any member of the Group is for the time being liable to indemnify or reimburse the purchaser in respect of any non-payment in respect of such book debts;
|
(viii) |
any part of the purchase price of any movable or immovable assets acquired by any member of the Group, the payment of which is deferred beyond the date of completion of the conveyance, assignment or transfer of the legal estate to such assets or, if no such conveyance, assignment or transfer is to take place within six months after the date on which the contract for such purchase is entered into or (if later) becomes unconditional, beyond that date;
|
(i) |
moneys borrowed by any member of the Group for the purpose of repaying, redeeming or purchasing (with or without premium) in whole or in part any other borrowed moneys falling to be taken into account and intended to be applied for such purpose within six months after the borrowing thereof pending the application for such purpose or, if earlier, the end of such period;
|
(ii) |
any amounts borrowed by any member of the Group from bankers or others for the purpose of financing any contract up to an amount not exceeding that part of the price receivable under such contract which is guaranteed or insured by the Export Credits Guarantee Department or other like institution carrying on a similar business;
|
(iii) |
the minority proportion of moneys borrowed by a partly-owned subsidiary undertaking and not owing to another member of the Group;
|
(i) |
no amount shall be taken into account more than once in the same calculation but subject thereto (i) to (iii) above shall be read cumulatively; and
|
(ii) |
in determining the amount of any debentures or other moneys borrowed or of any share capital for the purpose of this Article 103.3.3 there shall be taken into account the nominal or principal amount thereof (or, in the case of partly-paid debentures or shares, the amount for the time being paid up thereon) together with any fixed or minimum premium payable on final redemption or repayment Provided that if moneys are borrowed or shares are issued on terms that they may be repayable or redeemable (or that any member of the Group may be required to purchase them) earlier than their final maturity date (whether by exercise of an option on the part of the issuer or the creditor (or a trustee for the creditor) or the shareholder, by reason of a default or for any other reason) at a premium or discount to their nominal or principal amount then there shall be taken into account the amount (or the greater or greatest of two or more alternative amounts) which would, if those circumstances occurred, be payable on such repayment or, redemption or purchase at the date as at which the calculation is being made;
|
(d) |
in relation to a partly-owned subsidiary undertaking the “minority proportion” is a proportion equal to the proportion of its issued equity share capital which is not attributable to the Company;
|
102.4 |
“Current Asset Investments” means the aggregate of:
|
(a) |
cash in hand of the Group;
|
(b) |
sums standing to the credit of any current or other account of any member of the Group with banks in the United Kingdom or elsewhere to the extent that remittance of the same to the United Kingdom is not prohibited by any law, regulation, treaty or official directive or, where remittance of the same to the United Kingdom is so prohibited, to the extent that the same may be set off against or act as security for any moneys borrowed by such member;
|
(c) |
the amount of such assets as would be included in “Current Assets - Investments” in a consolidated balance sheet of the Group prepared as at the date of the relevant calculation in accordance with the principles used in the preparation of the relevant balance sheet;
|
(a) |
in the case of a partly-owned subsidiary undertaking, a proportion thereof equal to the minority proportion; and
|
(b) |
an amount equal to any amount excluded from Article (c) by virtue of sub-paragraph (i).
|
102.5 |
For the purposes of the foregoing paragraphs borrowed moneys expressed in or calculated by reference to a currency other than sterling shall be converted into sterling at the relevant rate of exchange used for the purposes of the relevant balance sheet save that moneys borrowed (or first brought into account for the purposes of this Article) since the date of such balance sheet shall be converted at the rate of exchange or approximate rate of exchange (determined on such basis as the Auditors may determine or approve) ruling on the date on which such moneys are borrowed (or first taken into account as aforesaid): provided that in the case of any bank overdraft or other borrowing of a fluctuating amount (together herein described as an “Overdraft Account”) the following further provisions shall apply:
|
(a) |
if the amount outstanding on an Overdraft Account on a date as at which a calculation is being made for the purpose of the foregoing limit is not more than the amount outstanding on such Overdraft Account at the date of the relevant balance sheet, the whole of such amount shall be converted at the rate of exchange used for the purpose of such balance sheet;
|
(b) |
if the amount outstanding on an Overdraft Account on a date as at which the calculation is being made for such purpose exceeds the amount which was outstanding on the same Overdraft Account at the date of the relevant balance sheet (or if the latter amount is nil), an amount equal to the excess shall be converted at the rate of exchange or approximate rate of exchange (determined on such basis as the Auditors may determine or approve) on the last business day preceding the date as on which the calculation is being made for such purpose and the balance shall be converted at the rate of exchange used for the purpose of the said balance sheet.
|
102.6 |
No person dealing with the Company or any of its subsidiary undertakings shall be concerned to see or enquire whether the said limit is observed and no debt incurred or security given in excess of such limit shall be invalid or ineffectual unless the lender or the recipient of the security had, at the time when the debt was incurred or security given, express notice that the said limit had been or would thereby be exceeded.
|
103 |
Alternate Directors
|
103.1 |
Any Director may at any time by writing under his hand and deposited at the Office, or delivered at a meeting of the Directors, appoint any person (including another Director) to be his alternate Director and may in like manner at any time terminate such appointment. Such appointment, unless previously approved by the Directors or unless the appointee is another Director, shall have effect only upon and subject to being so approved.
|
103.2 |
The appointment of an alternate Director shall determine on the happening of any event which if he were a Director would cause him to vacate such office or if his appointor ceases to be a Director, otherwise than by retirement at a General Meeting at which he is re-elected.
|
103.3 |
An alternate Director shall (except when absent from the United Kingdom) be entitled to receive notices of meetings of the Directors and shall be entitled to attend and vote as a Director at any such meeting at which the Director appointing him is not personally present and generally at such meeting to perform all functions of his appointor as a Director and for the purposes of the proceedings at such meeting the provisions of these Articles shall apply as if he (instead of his appointor) were a Director. If he shall be himself a Director or shall attend any such meeting as an alternate for more than one Director or shall act, his voting rights shall be cumulative but he shall not be counted more than once for the purposes of the quorum. If his appointor is for the time being temporarily unable to act through ill health or disability his signature to any resolution in writing of the Directors shall be as effective as the signature of his appointor. To such extent as the Directors may from time to time determine in relation to any committees of the Directors the foregoing provisions of this paragraph shall also apply mutatis mutandis to any meeting of any such committee of which his appointor is a member. An alternate Director shall not (save as aforesaid) have power to act as a Director, nor shall he be deemed to be a Director for the purposes of these Articles, nor shall he be deemed to be the agent of his appointor.
|
103.4 |
An alternate Director shall be entitled to contract and be interested in and benefit from contracts or arrangements or transactions and to be repaid expenses and to be indemnified to the same extent mutatis mutandis as if he were a Director but he shall not be entitled to receive from the Company in respect of his appointment as alternate Director any remuneration except only such part (if any) of the remuneration otherwise payable to his appointor as such appointor may by notice in writing to the Company from time to time direct.
|
104 |
Secretary
|
105 |
The Seal
|
105.1 |
The Directors shall provide for the safe custody of the Seal and any Securities Seal and neither shall be used without the authority of the Directors or of a committee authorised by the Directors in that behalf. The Securities Seal shall be used only for sealing securities issued by the Company and documents creating or evidencing securities so issued.
|
105.2 |
Every instrument to which the Seal or the Securities Seal shall be affixed (other than a certificate for or evidencing shares, debentures or other securities (including options) issued by the Company) shall be signed autographically by one Director and the Secretary or by two Directors.
|
105.3 |
The Company may exercise the powers conferred by the Statutes with regard to having an official seal for use abroad and such powers shall be vested in the Directors.
|
105.4 |
Any instrument signed by:
|
(a) |
one Director and the Secretary; or
|
(b) |
by two Directors; or
|
(c) |
by a Director in the presence of a witness who attests the signature,
|
106 |
Provision for Employees
|
107 |
Authentication of documents
|
108 |
Establishment of reserves
|
109 |
Business bought as from past date
|
110 |
Final dividends
|
111 |
Fixed and interim dividends
|
112 |
Distribution in specie
|
113 |
No dividend except out of profits
|
114 |
Ranking of shares for dividend
|
115 |
Manner of payment of dividends
|
115.1 |
Any dividend or other moneys payable on or in respect of a share shall be paid to the member or to such other person as the member (or, in the case of joint holders of a share, all of them) may in writing direct. Such dividend or other moneys may be paid (i) by cheque sent by post to the payee or, where there is more than one payee, to any one of them, or (ii) by inter-bank transfer to such account as the payee or payees shall in writing direct, or (iii) (if so authorised by the holder of shares in uncertificated form) using the facilities of a relevant system (subject to the facilities and requirements of the relevant system), or (iv) by such other method of payment as the member (or, in the case of joint holders of a share, all of them) may agree to. Every such cheque shall be sent at the risk of the person or persons entitled to the money represented thereby, and payment of a cheque by the banker upon whom it is drawn, and any transfer or payment within (ii), (iii) or (iv) above, shall be a good discharge to the Company.
|
115.2 |
Subject to the provisions of these Articles and to the rights attaching to any shares, any dividend or other moneys payable on or in respect of a share may be paid in such currency as the Directors may determine, using such exchange rate for currency conversions as the Directors may select.
|
115.3 |
The Company may cease to send any cheque, warrant or order by post for any dividend on any shares which is normally paid in that manner if in respect of at least two consecutive dividends payable on those shares the cheque, warrant or order has been returned undelivered or remains uncashed but, subject to the provisions of these Articles, shall recommence sending cheques, warrants or orders in respect of the dividends payable on those shares if the holder or person entitled by transmission claims the arrears of dividend and does not instruct the Company to pay future dividends in some other way.
|
116 |
Joint holders
|
117 |
Record date for dividends
|
118 |
No interest on dividends
|
119 |
Retention of dividends
|
119.1 |
The Directors may retain any dividend or other moneys payable on or in respect of a share on which the Company has a lien and may apply the same in or towards satisfaction of the moneys payable to the Company in respect of that share.
|
119.2 |
The Directors may retain the dividends payable upon shares in respect of which any person is entitled to become a member under the provisions as to the transmission of shares contained in these Articles, until such person shall become a member in respect of such shares or which any person is under those provisions entitled to transfer until such person shall transfer the same.
|
120 |
Unclaimed dividend
|
121 |
Waiver of dividend
|
122 |
Capitalisation of profits and reserves
|
122.1 |
The Directors may, if they are so authorised by a Special Resolution, capitalise any part of any amount for the time being standing to the credit of any reserve (including the share premium account, capital redemption reserve, merger reserve and retained earnings) in each case, whether or not the same is available for distribution, and appropriate the amount to be capitalised to the members or any class of members (on the Register at such time and on such date as may be specified in, or determined as provided in, the resolution of the general meeting granting authority for such capitalisation (or, in the absence of any such specification or determination, as the Directors may determine)) who would have been entitled thereto if distributed by way of dividend (which may exclude the Company in respect of any treasury shares) and in the same proportions (or, in connection with the arrangements and proposed transactions described in the circular to holders of shares in the capital of the Company dated 9 May 2017 (the “Circular”), in such proportions as the Directors determine to give effect to the arrangements and proposed transactions set out in that Circular) and the Directors shall apply such sum on their behalf either:
|
122.2 |
The Directors shall have power after the passing of any such resolution to do all acts and things which they may consider necessary or expedient to give effect thereto, with full power to the Directors:
|
122A. |
Capitalisation of profits and reserves in connection with employee share plans
|
122A.1 |
This Article applies where:
|
(a) |
a person is granted pursuant to an employees’ share plan a right to subscribe for shares in the capital of the Company in cash (or for nil consideration) at a subscription price which is less than the nominal value of the relevant shares;
|
(b) |
as a result of a share consolidation or other variation of capital, the nominal value of shares in the capital of the Company is increased such that the subscription price (if any) at which any person is entitled to subscribe for shares in the capital of the Company pursuant to an employee share plan is less than the nominal value of the relevant shares; or
|
(c) |
pursuant to an employees’ share plan, the terms on which any person is entitled to subscribe for shares in the capital of the Company are adjusted as a result of a capitalisation issue, rights issue or other variation of capital so that the subscription price is less than the nominal value of the relevant shares.
|
122A.2 |
In any such case the Board:
|
(a) |
may transfer to a reserve account a sum equal to the deficiency between the subscription price if any and the nominal value of the shares (the “Cash Deficiency”) from the profits or reserves of the Company specified in Article 122A.5; and
|
(b) |
subject to Article 122A.4, shall not apply that reserve account for any purpose other than paying up the Cash Deficiency on the allotment of those shares.
|
122A.3 |
Whenever the Company is required to allot shares pursuant to such a right to subscribe, the Board may, subject to the provisions of the Act:
|
(a) |
appropriate to capital out of the reserve account an amount equal to the Cash Deficiency applicable to those shares;
|
(b) |
apply that amount in paying up the deficiency on the nominal value of those shares; and
|
(c) |
allot those shares credited as fully paid to the person entitled to them.
|
122A.4 |
If any person previously entitled to subscribe for shares as described in Article 122A.1 ceases to be so entitled, the restrictions on the reserve account shall cease to apply in relation to such part of the account as is equal to the amount of the Cash Deficiency applicable to those shares.
|
122A.5 |
The profits or reserves of the Company to which Articles 122A.1 to 122A.4 (inclusive) apply shall be:
|
(a)
|
any profits of the Company, including, without limitation any profits arising from appreciation in capital assets (whether realised by sale of ascertained by valuation); and
|
(b) |
any amounts for the time being standing to any reserve or reserves, to the capital redemption reserve, to the share premium account, to the share based payment reserve, or to any other special account.
|
123 |
Scrip Dividends
|
123.1 |
Subject as hereinafter provided, the Directors may offer to shareholders the right to receive, in lieu of dividend (or part thereof), an allotment of new shares credited as fully paid.
|
123.2 |
The Directors shall not make such an offer unless so authorised by an Ordinary Resolution passed at any General Meeting, which authority may extend to dividends declared or paid prior to the fifth Annual General Meeting of the Company occurring thereafter, but no further, provided that this Article shall, without the need for any further Ordinary Resolution, authorise the Directors to offer rights of election in respect of any dividend declared or proposed after the date of the adoption of these Articles and at or prior to the Annual General Meeting in the year 2015.
|
123.3 |
The Directors may either offer such rights of election in respect of the next dividend (or part thereof) proposed to be paid; or may offer such rights of election in respect of that dividend and all subsequent dividends, until such time as the election is revoked; or may allow shareholders to make an election in either form.
|
123.4 |
The basis of allotment on each occasion shall be determined by the Directors so that, as nearly as may be considered convenient, the value of the shares to be allotted in lieu of any amount of dividend shall equal such amount. For such purpose the value of an share shall be the average of the middle market quotations of an share on the London Stock Exchange, as derived from the Daily Official List, on each of the first five business days on which the shares are quoted “ex” the relevant dividend.
|
123.5 |
If the Directors determine to offer such right of election on any occasion they shall give notice in writing to the shareholders of such right and shall issue forms of election and shall specify the procedures to be followed in order to exercise such right provided that they need not give such notice to a shareholder who has previously made, and has not revoked, an earlier election to receive shares in lieu of all future dividends, but instead shall send him a reminder that he has made such an election, indicating how that election may be revoked in time for the next dividend proposed to be paid.
|
123.6 |
On each occasion the dividend (or that part of the dividend in respect of which a right of election has been accorded) shall not be payable on shares in respect whereof the share election has been duly exercised and has not been revoked (the “elected shares”), and in lieu thereof additional shares (but not any fraction of a share) shall be allotted to the holders of the elected shares on the basis of allotment determined as aforesaid. For such purpose the Directors shall capitalise, out of such of the sums standing to the credit of reserves (including any share premium account or capital redemption reserve) or profit and loss account as the Directors may determine, a sum equal to the aggregate nominal amount of the additional shares to be allotted on that occasion on such basis and shall apply the same in paying up in full the appropriate number of shares for allotment and distribution to and amongst the holders of the elected shares on such basis.
|
123.7 |
The additional shares so allotted on any occasion shall rank pari passu in all respects with the fully-paid shares in issue on the record date for the relevant dividend save only as regards participation in the relevant dividend.
|
123.8 |
Article 122 shall apply (mutatis mutandis) to any capitalisation made pursuant to this Article.
|
123.9 |
No fraction of an share shall be allotted. The Directors may make such provision as they think fit for any fractional entitlements including, without limitation, provision whereby, in whole or in part, the benefit thereof accrues to the Company and/or fractional entitlements are accrued and/or retained and in either case accumulated on behalf of any shareholder.
|
123.10 |
The Directors may on any occasion determine that rights of election shall not be made available to any shareholders with registered addresses in any territory where in the absence of a registration statement or other special formalities the circulation of an offer of rights of election would or might be unlawful, and in such event the provisions aforesaid shall be read and construed subject to such determination.
|
123.11 |
In relation to any particular proposed dividend the Directors may in their absolute discretion decide (i) that shareholders shall not be entitled to make any election in respect thereof and that any election previously made shall not extend to such dividend or (ii) at any time prior to the allotment of the shares which would otherwise be allotted in lieu thereof, that all elections to take shares in lieu of such dividend shall be treated as not applying to that dividend, and if so the dividend shall be paid in cash as if no elections had been made in respect of it.
|
124 |
Accounting records
|
125 |
Copies of accounts for members
|
125.1 |
Subject as provided in Article 125.2, a copy of the Company’s annual accounts and reports, which are to be laid before a General Meeting of the Company (including every document required by law to be comprised therein or attached or annexed thereto), shall not less than 21 days before the date of the meeting be sent to every member of, and every holder of debentures of, the Company and to every other person who is entitled to receive notices of General Meetings from the Company under the provisions of the Statutes or of these Articles.
|
125.2 |
Article 125.1 shall not require a copy of these documents to be sent to any member to whom a summary financial statement is sent in accordance with the Statutes nor to more than one of joint holders nor to any person of whose postal address the Company is not aware, but any member or holder of debentures to whom a copy of these documents has not been sent shall be entitled to receive a copy free of charge on application at the Office.
|
126 |
Validity of Auditor’s acts
|
127 |
Auditor’s right to attend General Meetings
|
128 |
Service of notices
|
128.1 |
The Company may, subject to and in accordance with the Companies Acts and these Articles, send or supply all types of notices, documents or information to members by electronic means and/or including by making such notices, documents or information available on a website.
|
128.2 |
The Company Communications Provisions have effect for the purposes of any provision of the Companies Acts or these Articles that authorises or requires notices, documents or information to be sent or supplied by or to the Company.
|
128.3 |
Any notice, document or information (including a share certificate) which is sent or supplied by the Company in hard copy form, or in electronic form but to be delivered other than by electronic means, and which is sent by pre-paid post and properly addressed shall be deemed to have been received by the intended recipient at the expiration of 24 hours (or, where first-class mail is not employed, 48 hours) after the time it was posted, and in proving such receipt it shall be sufficient to show that such notice, document or information was properly addressed, pre-paid and posted.
|
128.4 |
Any notice, document or information which is sent or supplied by the Company by electronic means shall be deemed to have been received by the intended recipient 24 hours after it was transmitted, and in proving such receipt it shall be sufficient to show that such notice, document or information was properly addressed.
|
128.5 |
Any notice, document or information which is sent or supplied by the Company by means of a website shall be deemed to have been received when the material was first made available on the website or, if later, when the recipient received (or is deemed to have received) notice of the fact that the material was available on the website.
|
128.6 |
The accidental failure to send, or the non-receipt by any person entitled to, any notice of or other document or information relating to any meeting or other proceeding shall not invalidate the relevant meeting or other proceeding.
|
128.7 |
The provisions of this Article shall have effect in place of the Company Communications Provisions relating to deemed delivery of notices, documents or information.
|
129 |
Joint holders
|
129.1 |
Anything which needs to be agreed or specified by the joint holders of a share shall for all purposes be taken to be agreed or specified by all the joint holders where it has been agreed or specified by the joint holder whose name stands first in the Register in respect of the share.
|
129.2 |
Any notice, document or information which is authorised or required to be sent or supplied to joint holders of a share may be sent or supplied to the joint holder whose name stands first in the Register in respect of the share, to the exclusion of the other joint holders. For such purpose, a joint holder having no registered address in the United Kingdom and not having supplied an address within the United Kingdom for the service of notices may, subject to the Statutes, be disregarded.
|
129.3 |
The provisions of this Article shall have effect in place of the Company Communications Provisions regarding joint holders of shares.
|
130 |
Deceased and bankrupt members
|
130.1 |
A person who claims to be entitled to a share in consequence of the death or bankruptcy of a member or otherwise by operation of law, shall supply to the Company such evidence as the Directors may reasonably require to show his title to the share; and an address at which notices may be sent or supplied to such person, whereupon he shall be entitled to have sent or supplied to him at such address any notice, document, or information to which the said member would have been entitled. Any notice, document or information so sent or supplied shall for all purposes be deemed to be duly sent or supplied to all persons interested (whether jointly with or as claiming through or under him) in the share.
|
130.2 |
Save as provided by Article 130.1 any notice, document or information sent or supplied to the address of any member in pursuance of these Articles shall, notwithstanding that such member be then dead or bankrupt or in liquidation, and whether or not the Company has notice of his death or bankruptcy or liquidation, be deemed to have been duly sent or supplied in respect of any share registered in the name of such member as sole or first-named joint holder.
|
130.3 |
The provisions of this Article shall have effect in place of the Company Communications Provisions regarding the death or bankruptcy of a holder of shares in the Company.
|
131 |
Suspension of postal services
|
132 |
Signature or authentication of documents sent by electronic means
|
133 |
Statutory provisions as to notices
|
134 |
Directors’ power to petition
|
135 |
Destruction of Documents
|
(a) |
the provisions aforesaid shall apply only to the destruction of a document in good faith and without notice of any claim (regardless of the parties thereto) to which the document might be relevant;
|
(b) |
nothing herein contained shall be construed as imposing upon the Company any liability in respect of the destruction of any such document earlier than as aforesaid or in any other circumstances which would not attach to the Company in the absence of this Article;
|
(c) |
any document referred to above may, subject to the Statutes, be destroyed before the end of the relevant period so long as a copy of such document (whether made electronically, by microfilm, by digital imaging or by any other means) has been made and is retained until the end of the relevant period; and
|
(d) |
references herein to the destruction of any document include references to the disposal thereof in any manner.
|
136 |
Indemnity
|
136.1 |
Subject to the provisions of, and so far as may be permitted by and consistent with, the Statutes and rules made by the UK Listing Authority, every Director and officer and former Director and former officer of the Company and of each of the Associated Companies of the Company shall be indemnified by the Company out of its own funds against:
|
(a) |
any liability incurred by or attaching to him in connection with any negligence, default, breach of duty or breach of trust by him in relation to the Company or any Associated Company of the Company other than:
|
(i) |
any liability to the Company or any Associated Company; and
|
(ii) |
any liability of the kind referred to in Section 234(3) of the Companies Act 2006; and
|
(b) |
any other liability incurred by or attaching to him in the actual or purported execution and/or discharge of his duties and/or the exercise or purported exercise of his powers and/or otherwise in relation to or in connection with his duties, powers or office.
|
136.2 |
Subject to the Companies Acts and rules made by the UK Listing Authority, the Company may indemnify a Director or former Director of the Company or of any Associated Company of the Company if it is the trustee of an occupational pension scheme (within the meaning of Section 235(6) of the Companies Act 2006).
|
136.3 |
Where a Director or officer is indemnified against any liability in accordance with Article 136.1, such indemnity shall extend to all costs, charges, losses, expenses and liabilities incurred by him in relation thereto.
|
136.4 |
In this Article, “Associated Company” shall have the meaning given thereto by Section 256 of the Companies Act 2006.
|
137 |
Insurance
|
137.1 |
Without prejudice to Article 136 above, the Directors shall have power to purchase and maintain insurance for or for the benefit of:
|
(a) |
any person who is or was at any time a Director or officer of any Relevant Company (as defined in Article 137.2 below); or
|
(b) |
any person who is or was at any time a trustee of any pension fund or employees’ share scheme in which employees of any Relevant Company are interested,
|
137.2 |
For the purpose of Article 137.1 above, “Relevant Company” shall mean:
|
(a) |
the Company;
|
(b) |
any holding company of the Company;
|
(c) |
any other body, whether or not incorporated, in which the Company or such holding company or any of the predecessors of the Company or of such holding company has or had any interest whether direct or indirect or which is in any way allied to or associated with the Company; or
|
(d) |
any subsidiary undertaking of the Company or of such other body.
|
138 |
Defence expenditure
|
138.1 |
Subject to the provisions of and so far as may be permitted by the Statutes and rules made by the UK Listing Authority, the Company:
|
(a) |
may provide a Director or former Director or officer of the Company or any Associated Company of the Company with funds to meet expenditure incurred or to be incurred by him in:
|
(i) |
defending any criminal or civil proceedings in connection with any negligence, default, breach of duty or breach of trust by him in relation to the Company or an Associated Company of the Company; or
|
(ii) |
in connection with any application for relief under the provisions mentioned in Section 205(5) of the Companies Act 2006; and
|
(b) |
may do anything to enable any such Director or officer to avoid incurring such expenditure.
|
138.2 |
The terms set out in Section 205(2) of the Companies Act 2006 shall apply to any provision of funds or other things done under Article 138.1.
|
138.3 |
Subject to the provisions of and so far as may be permitted by the Statutes and rules made by the UK Listing Authority, the Company:
|
(a) |
may provide a Director or former Director or officer of the Company or any Associated Company of the Company with funds to meet expenditure incurred or to be incurred by him in defending himself in an investigation by a regulatory authority or against action proposed to be taken by a regulatory authority in connection with any alleged negligence, default, breach of duty or breach of trust by him in relation to the Company or any Associated Company of the Company; and
|
(b) |
may do anything to enable any such Director or officer to avoid incurring such expenditure.
|
138.4 |
In this Article “Associated Company” shall have the meaning given thereto by Section 256 of the Companies Act 2006.
|
139 |
Rights and Restrictions Attached to the B Shares
|
139.1 |
General
|
139.2 |
Income
|
139.3 |
Capital
|
(a) |
Except as provided in Article 139.5 below, on a return of capital on winding-up (excluding any intra-group reorganisation on a solvent basis) but not otherwise, the holders of the B Shares shall be entitled, in priority to any payment to the holders of every other class of share in the capital of the Company, to an amount equal to the nominal value of a B Share per B Share held by them, rounded down in respect of the holder’s aggregate holding to the nearest penny.
|
(b) |
On a winding up, the holders of the B Shares shall not be entitled to any further right of participation in the profits or assets of the Company in excess of that specified in Article 139.3(a) above. In the event that there is a winding-up to which Article 139.3(a) applies and the amounts available for payment are insufficient to pay the amounts due on all the B Shares in full, the holders of the B Shares shall be entitled to their pro rata proportion of the amounts to which they would otherwise be entitled.
|
(c) |
The holders of the B Shares shall not be entitled to any further right of participation in the profits or assets of the Company in their capacity as holders of B Shares, save as provided in Article 139.3(a) or 139.6.
|
139.4 |
Attendance and voting at general meetings
|
(a) |
The holders of the B Shares shall not be entitled, in their capacity as holders of such B Shares, to receive notice of any general meeting of the Company nor to attend, speak or vote at any such general meeting unless the business of the meeting includes the consideration of a resolution for the winding-up of the Company (excluding any intra group reorganisation on a solvent basis), in which case the holders of the B Shares shall have the right to attend the general meeting and shall be entitled to speak and vote only on any such resolution.
|
(b) |
If the holders of the B Shares are entitled to vote at a general meeting of the Company in their capacity as holders of such B Shares, then, subject to any other provisions of these Articles, each holder thereof shall be entitled to vote at such general meeting whether on a show of hands or on a poll as provided in the Companies Acts. For this purpose, where a proxy is given discretion as to how to vote on a show of hands, this shall be treated as an instruction by the relevant holder of B Shares to vote in the way in which the proxy elects to exercise that discretion.
|
139.5 |
Class rights
|
(a) |
The Company may from time to time create, allot and issue further shares, whether ranking pari passu with or in priority or subsequent to the B Shares. The creation, allotment or issue of any such further shares (whether or not ranking in any respect in priority to the B Shares) shall be treated as being in accordance with the rights attaching to the B Shares and shall not involve a variation of such rights for any purpose or require the consent or sanction of the holders of the B Shares.
|
(b) |
A reduction by the Company of the capital paid up or credited as paid up on the B Shares and the cancellation of such shares shall be treated as being in accordance with the rights attaching to the B Shares and shall not involve a variation of such rights for any purpose or require the consent or sanction of the holders of the B Shares.
|
(c) |
Without prejudice to the generality of the foregoing, the Company is authorised to reduce (or purchase shares in) its capital of any class or classes and such reduction (or purchase) shall not involve a variation of any rights attaching to the B Shares for any purpose or require the consent or sanction of the holders of the B Shares.
|
(d) |
If at any time a currency other than sterling is accepted as legal tender in the United Kingdom in place of or in addition to sterling, the Directors shall be entitled, without the consent of holders of ordinary shares, B Shares or Deferred Shares (as defined in Article 140 below), to make such arrangements and adjustments in respect of the method of calculation and payment of any of the entitlements of holders of B Shares under these Articles as the Directors consider necessary, fair and reasonable in the circumstances to give effect to the rights attaching to the B Shares. Any such arrangements and adjustments shall not involve a variation of any rights attaching to the B Shares for any purpose.
|
139.6 |
Redemption of B Shares
|
(a) |
The B Shares shall be redeemed (without the Company having to give any notice to holders of B shares) at such time as the Directors may in their absolute discretion determine (the “Redemption Time”).
|
(b) |
On redemption of a B Share at the Redemption Time, the Company shall be liable to pay to a holder of B Shares an amount equal to the nominal value of a B Share (the “Redemption Amount”) for each B Share registered on the Company’s relevant register at the Redemption Time, rounded down in respect of the holder’s aggregate holding to the nearest penny. The Company’s liability to pay to such holder the Redemption Amount for each such B Share shall be discharged by the Company by a payment to such holder within 25 days of the Redemption Time of the Redemption Amount for each such B Share by cheque or by the crediting of CREST accounts.
|
(c) |
In the absence of bad faith or wilful default, neither the Company nor any of its Directors, officers or employees shall have any liability to any person for any loss or damage arising as a result of the determination of the Redemption Time in accordance with Article 139.6(a) above.
|
(d) |
All B Shares redeemed shall be cancelled and Micro Focus shall not be entitled to re-issue them.
|
139.7 |
Transfer and Certificates
|
139.8 |
Deletion of Article 139 when no B Shares in existence
|
140 |
Deferred Shares
|
140.1 |
General
|
140.2 |
Income
|
140.3 |
Capital
|
(a) |
firstly, paying to the holders of the B Shares, the amounts they are entitled to receive on a winding up in accordance with their terms; and
|
(b) |
secondly, paying to the holders of the ordinary shares the nominal capital paid up or credited as paid up on the ordinary shares held by them respectively, together with the sum of £100,000,000,000 on each ordinary share.
|
140.4 |
Attendance and voting at general meetings
|
140.5 |
Class rights
|
(a) |
The Company may from time to time create, allot and issue further shares, whether ranking pari passu with or in priority to the Deferred Shares, and on such creation, allotment or issue any such further shares (whether or not ranking in any respect in priority to the Deferred Shares) shall be treated as being in accordance with the rights attaching to the Deferred Shares and shall not involve a variation of such rights for any purpose or require the consent or sanction of the holders of the Deferred Shares.
|
(b) |
The reduction by the Company of the capital paid up on the Deferred Shares, or any other shares, or reduction of share premium account shall be in accordance with the rights attaching to the Deferred Shares and shall not involve a variation of such rights for any purpose and the Company shall be authorised at any time to reduce its capital (in accordance with the Companies Acts) or share premium account without obtaining the consent or sanction of the holders of the Deferred Shares.
|
(c) |
Without prejudice to the foregoing, the Company is authorised to reduce (or purchase or redeem shares in) its capital of any class or classes and such reduction (or purchase or redemption) shall not involve a variation of any rights attaching to the Deferred Shares for any purpose or require the consent of the holders of the Deferred Shares.
|
140.6 |
Form
|
140.7 |
Transfer and purchase
|
(a) |
appoint any person to execute on behalf of any holder of Deferred Shares a transfer of all of the Deferred Shares or any part thereof (and/or an agreement to transfer the same) to the Company or to such person as the Directors may determine (whether or not an officer of the Company), in any case for not more than the aggregate amount of one penny for all the Deferred Shares then being transferred which shall be donated to a suitable charity; and
|
(b) |
cancel all or any of the Deferred Shares purchased or acquired by Micro Focus in accordance with the Companies Acts.
|
140.8 |
Deletion of Article 140 when no Deferred Shares in existence
|
(i) |
all fees, taxes, duties (including stamp duty and stamp duty reserve tax), charges, costs and expenses which are payable by the Company shall be paid or be procured to be paid by the Company (and any such amounts which are paid by the Depositary shall be reimbursed to the Depositary by the Company upon demand therefor); and
|
(ii) |
such payment shall be subject to all necessary exchange control and other consents and approvals having been obtained. The Company undertakes to use its reasonable endeavours to obtain all necessary approvals that are required to be obtained by it in this connection.
|
MICRO FOCUS INTERNATIONAL PLC
|
|||
By:
|
|||
Name:
|
|||
Title:
|
|||
By:
|
|||
Name:
|
|||
Title:
|
|||
DEUTSCHE BANK TRUST COMPANY AMERICAS
|
|||
By:
|
|||
Name:
|
|||
Title:
|
|||
By:
|
|||
Name:
|
|||
Title:
|
Number
|
CUSIP
|
American Depositary Shares (Each
American Depositary Share
representing one Fully Paid Ordinary
Share)
|
|
(vi) |
for the operation and maintenance costs in administering the ADSs an annual fee not in excess of U.S. $ 5.00 per 100 ADSs (or portion thereof), such fee to be assessed against Holders of record as of the date or dates set by the Depositary as it sees fit and collected at the sole discretion of the Depositary by billing such Holders for such fee or by deducting such fee from one or more cash dividends or other cash distributions.
|
Dated:
|
DEUTSCHE BANK TRUST
|
||
COMPANY AMERICAS, as Depositary
|
|||
By:
|
|||
Vice President
|
Dated:
|
Name:
|
|
By: | ||
Title: | ||
NOTICE: The signature of the Holder to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatsoever.
|
||
If the endorsement be executed by an attorney, executor, administrator, trustee or guardian, the person executing the endorsement must give his/her full title in such capacity and proper evidence of authority to act in such capacity, if not on file with the Depositary, must be forwarded with this Receipt.
|
||
SIGNATURE GUARANTEED
|
||
____________________________
|
(a) |
by giving this opinion, we do not assume any obligation to notify you of future changes in law which may affect the opinions expressed in this opinion, or otherwise to update this opinion in any respect;
|
(b) |
to the extent that the laws of any other jurisdiction may be relevant, our opinion is subject to the effect of such laws. We express no views in this opinion on the validity of the matters set out in any opinion given in relation to such laws; and
|
(c) |
we have not been responsible for verifying whether statements of fact (including foreign law), opinion or intention in any documents referred to in this opinion or in any related documents are accurate, complete or reasonable.
|
(a) |
the Resolutions being duly and validly passed and remaining in full force and effect and not having been rescinded or amended;
|
(b) |
the Micro Focus Board validly resolving to allot the Shares at a duly convened and quorate meeting of the Micro Focus Board (or a duly authorised committee thereof) and such board resolutions being in full force and effect and not having been rescinded or amended; and
|
(c) |
the completion of the Merger taking place and entry of the name of the Depositary in the Company’s register of members in respect of the Shares;
|
·
|
the request for private letter ruling submitted by Houston to the Internal Revenue Service (the “Service”) on May 12, 2017 (including all exhibits or attachments thereto), as supplemented and amended;
|
·
|
the registration statement of Miami on Form F−4 filed with the Securities and Exchange Commission (the “SEC”) (including all amendments and exhibits thereto and the proxy statement/prospectus) (the “Registration Statement”);
|
·
|
the transaction agreements (including all schedules, exhibits or other attachments thereto) pursuant to which the Transactions have been and will be effected (collectively, with the documents referred to in the preceding bullets and with the Officers’ Certificates, the “Transaction Documents”); and
|
·
|
such other documents as we have deemed necessary or appropriate as a basis for the opinion set forth below.
|
1.
|
Houston should not recognize income, gain or loss on the Distribution (except for taxable income or gain possibly arising as a result of certain internal restructuring transactions undertaken prior to or in anticipation of the Distribution or with respect to any “excess loss account” or “intercompany transaction” required to be taken into account by Houston under Treasury Regulations relating to consolidated federal income tax returns).
|
2.
|
U.S. Holders of HPE Shares should not recognize income, gain or loss on the receipt of Seattle Shares in the Distribution.
|
3.
|
A U.S. Holder’s aggregate tax basis in its HPE Shares and Seattle Shares immediately after the Distribution should be the same as the aggregate tax basis of the HPE Shares held by such U.S. Holder immediately before the Distribution, allocated between such HPE Shares and Seattle Shares in proportion to their relative fair market values.
|
4.
|
A U.S. Holder’s holding period in the Seattle Shares received in the Distribution should include the holding period of the HPE Shares with respect to which such Seattle Shares were received.
|
|
Very truly yours, |
Page
|
|||
ARTICLE I Definitions
|
2
|
||
Section 1.01
|
Defined Terms
|
2
|
|
Section 1.02
|
Classification of Loans and Borrowings
|
74
|
|
Section 1.03
|
Terms Generally
|
74
|
|
Section 1.04
|
Accounting Terms; IFRS
|
75
|
|
Section 1.05
|
Pro Forma Calculations
|
75
|
|
Section 1.06
|
Currency Translation
|
77
|
|
Section 1.07
|
Rounding
|
78
|
|
Section 1.08
|
Timing of Payment or Performance
|
78
|
|
Section 1.09
|
Applicability to Parent and its Restricted Subsidiaries prior to the Seattle Acquisition
|
78
|
|
Section 1.10
|
Certifications
|
78
|
|
Section 1.11
|
Compliance with Article VI
|
78
|
|
ARTICLE II The Credits
|
78
|
||
Section 2.01
|
Commitments
|
78
|
|
Section 2.02
|
Loans and Borrowings
|
79
|
|
Section 2.03
|
[Reserved]
|
79
|
|
Section 2.04
|
[Reserved]
|
79
|
|
Section 2.05
|
[Reserved]
|
79
|
|
Section 2.06
|
Funding of Borrowings
|
79
|
|
Section 2.07
|
Interest Elections
|
80
|
|
Section 2.08
|
Termination and Reduction of Commitments
|
81
|
|
Section 2.09
|
Repayment of Loans; Evidence of Debt
|
82
|
|
Section 2.10
|
Amortization of Term Loans
|
82
|
|
Section 2.11
|
Prepayment of Loans
|
83
|
|
Section 2.12
|
Fees
|
89
|
|
Section 2.13
|
Interest
|
89
|
|
Section 2.14
|
Alternate Rate of Interest
|
90
|
|
Section 2.15
|
Increased Costs
|
90
|
|
Section 2.16
|
Break Funding Payments
|
92
|
|
Section 2.17
|
Taxes
|
92
|
|
Section 2.18
|
Payments Generally; Pro Rata Treatment; Sharing of Setoffs
|
96
|
|
Section 2.19
|
Mitigation Obligations; Replacement of Lender
|
98
|
|
Section 2.20
|
Incremental Loans
|
99
|
|
Section 2.21
|
Refinancing Amendments
|
102
|
|
Section 2.22
|
Defaulting Lenders
|
102
|
|
Section 2.23
|
[Reserved]
|
104
|
|
Section 2.24
|
Extensions of Term Loans and Revolving Commitments
|
104
|
|
Section 2.25
|
Term Loan Exchange Notes
|
106
|
|
ARTICLE III Representations and Warranties
|
109
|
||
Section 3.01
|
Organization; Powers
|
110
|
Section 3.02
|
Authorization; Enforceability
|
110
|
|
Section 3.03
|
Governmental Approvals; No Conflicts
|
110
|
|
Section 3.04
|
Financial Condition; No Material Adverse Change
|
111
|
|
Section 3.05
|
Properties
|
111
|
|
Section 3.06
|
Litigation and Environmental Matters
|
111
|
|
Section 3.07
|
Compliance with Laws
|
112
|
|
Section 3.08
|
Investment Company Status.
|
112
|
|
Section 3.09
|
Taxes
|
112
|
|
Section 3.10
|
ERISA
|
112
|
|
Section 3.11
|
Disclosure
|
112
|
|
Section 3.12
|
Labor Matters
|
113
|
|
Section 3.13
|
Subsidiaries
|
113
|
|
Section 3.14
|
[Reserved]
|
113
|
|
Section 3.15
|
Federal Reserve Regulations
|
113
|
|
Section 3.16
|
[Reserved]
|
113
|
|
Section 3.17
|
Use of Proceeds
|
113
|
|
Section 3.18
|
Security Documents
|
113
|
|
Section 3.19
|
OFAC; FCPA; Patriot Act
|
114
|
|
ARTICLE IV Conditions
|
115
|
||
Section 4.01
|
Effective Date
|
115
|
|
ARTICLE V Affirmative Covenants
|
115
|
||
Section 5.01
|
Financial Statements and Other Information
|
115
|
|
Section 5.02
|
Notices of Material Events
|
119
|
|
Section 5.03
|
Semi-Annual Lender Call
|
119
|
|
Section 5.04
|
Existence; Conduct of Business
|
119
|
|
Section 5.05
|
Payment of Taxes
|
120
|
|
Section 5.06
|
Maintenance of Properties
|
120
|
|
Section 5.07
|
Insurance
|
120
|
|
Section 5.08
|
Books and Records; Inspection and Audit Rights
|
121
|
|
Section 5.09
|
Compliance with Laws
|
121
|
|
Section 5.10
|
Use of Proceeds
|
121
|
|
Section 5.11
|
Execution of Subsidiary Guaranty and Security Documents after the Effective Date.
|
122
|
|
Section 5.12
|
Further Assurances.
|
126
|
|
Section 5.13
|
Designation of Subsidiaries
|
128
|
|
Section 5.14
|
Conduct of Business
|
128
|
|
Section 5.15
|
Maintenance of Ratings
|
128
|
|
Section 5.16
|
Post-Closing Covenants
|
129
|
|
ARTICLE VI Negative Covenants
|
129
|
||
Section 6.01
|
Indebtedness; Certain Equity Securities
|
129
|
|
Section 6.02
|
Liens
|
135
|
|
Section 6.03
|
Fundamental Changes
|
141
|
|
Section 6.04
|
Investments
|
142
|
|
Section 6.05
|
Asset Sales
|
146
|
Section 6.06
|
[Reserved
|
150
|
|
Section 6.07
|
[Reserved]
|
150
|
|
Section 6.08
|
Restricted Payments; Certain Payments of Indebtedness
|
150
|
|
Section 6.09
|
Transactions with Affiliates
|
155
|
|
Section 6.10
|
Restrictive Agreements
|
156
|
|
Section 6.11
|
Amendment of Material Documents
|
157
|
|
Section 6.12
|
[Reserved]
|
157
|
|
Section 6.13
|
Changes in Fiscal Year
|
157
|
|
ARTICLE VII Events of Default
|
157
|
||
Section 7.01
|
Events of Default
|
157
|
|
Section 7.02
|
Exclusion of Immaterial Subsidiaries
|
161
|
|
Section 7.03
|
[Reserved]
|
161
|
|
Section 7.04
|
Application of Proceeds.
|
161
|
|
ARTICLE VIII The Administrative Agent
|
162
|
||
Section 8.01
|
Appointment of Agents
|
162
|
|
Section 8.02
|
Rights of Lender
|
168
|
|
Section 8.03
|
Exculpatory Provisions
|
163
|
|
Section 8.04
|
Reliance by Administrative Agent and Collateral Agent
|
164
|
|
Section 8.05
|
Delegation of Duties
|
165
|
|
Section 8.06
|
Resignation of Agents; Successor, Administrative Agent and Collateral Agent
|
165
|
|
Section 8.07
|
Non-Reliance on Agents and Other Lenders
|
166
|
|
Section 8.08
|
No Other Duties
|
166
|
|
Section 8.09
|
Collateral and Guaranty Matters
|
167
|
|
Section 8.10
|
Secured Swap Agents and Secured Cash Management Agents
|
168
|
|
Section 8.11
|
Withholding Tax
|
168
|
|
Section 8.12
|
Administrative Agent and Collateral Agent May File Proofs of Claim
|
169
|
|
ARTICLE IX Miscellaneous
|
170
|
||
Section 9.01
|
Notices
|
170
|
|
Section 9.02
|
Waivers; Amendments.
|
170
|
|
Section 9.03
|
Expenses; Indemnity; Damage Waiver
|
175
|
|
Section 9.04
|
Successors and Assigns
|
178
|
|
Section 9.05
|
Survival
|
183
|
|
Section 9.06
|
Counterparts; Integration
|
184
|
|
Section 9.07
|
Severability
|
184
|
|
Section 9.08
|
Right of Setoff
|
184
|
|
Section 9.09
|
Governing Law; Jurisdiction; Consent to Service of Process
|
185
|
|
Section 9.10
|
WAIVER OF JURY TRIAL
|
185
|
|
Section 9.11
|
Headings
|
186
|
|
Section 9.12
|
Confidentiality
|
186
|
|
Section 9.13
|
Interest Rate Limitation
|
187
|
|
Section 9.14
|
USA Patriot Act
|
188
|
|
Section 9.15
|
Direct Website Communication
|
188
|
Section 9.16
|
Intercreditor Agreement Governs
|
189
|
|
Section 9.17
|
Judgment Currency
|
190
|
|
Section 9.18
|
No Advisory or Fiduciary Responsibility
|
190
|
|
Section 9.19
|
[Reserved]
|
190
|
|
Section 9.20
|
Acknowledgment and Consent to Bail-In of EEA Financial Institutions
|
191
|
SCHEDULES:
|
|
Schedule 1.01(a)
|
Adjustments to Consolidated EBITDA
|
Schedule 1.01(b)
|
UK Security Documents
|
Schedule 1.01(c)
|
Loan Parties
|
Schedule 1.02
|
Excluded Subsidiaries
|
Schedule 2.01
|
Commitments
|
Schedule 3.06
|
Disclosed Matters
|
Schedule 3.13
|
Subsidiaries
|
Schedule 5.11(c)
|
U.S. Security Documents
|
Schedule 5.16
|
Post-Closing Covenants
|
Schedule 6.01(a)
|
Existing Indebtedness
|
Schedule 6.02
|
Existing Liens
|
Schedule 6.03
|
Permitted Jurisdictions
|
Schedule 6.04(c)
|
Existing Investments
|
Schedule 6.05
|
Asset Dispositions
|
Schedule 6.09
|
Transactions with Affiliates
|
Schedule 9.01
|
Addresses for Notices
|
EXHIBITS:
|
|
Exhibit A
|
Form of Borrowing Request
|
Exhibit B
|
Form of Interest Election Request
|
Exhibit C
|
[Reserved]
|
Exhibit D-1
|
Form of UK Collateral Agreement
|
Exhibit D-2
|
Form of US Collateral Agreement
|
Exhibit E-1
|
Form of Parent Companies Guaranty
|
Exhibit E-2
|
Form of Subsidiary Guaranty
|
Exhibit F
|
Form of Term Note
|
Exhibit G
|
Form of Assignment and Assumption Agreement
|
Exhibit H
|
[Reserved]
|
Exhibit I
|
Form of Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filings
|
Exhibit J
|
Form of Compliance Certificate
|
Exhibit K-1
|
Form of Pari Passu Intercreditor Agreement
|
Exhibit K-2
|
[Terms of] Second Lien Intercreditor Agreement
|
Exhibit L-1
|
Form of Tax Compliance Certificate (For Non-U.S. Lenders that Are Not Partnerships for U.S. Federal Income Tax Purposes)
|
Exhibit L-2
|
Form of Tax Compliance Certificate (For Non-U.S. Participants that Are Not Partnerships for U.S. Federal Income Tax Purposes)
|
Exhibit L-3
|
Form of Tax Compliance Certificate (For Non-U.S. Participants that Are Partnerships for U.S. Federal Income Tax Purposes)
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Exhibit L-4
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Form of Tax Compliance Certificate (For Non-U.S. Lenders that Are Partnerships for U.S. Federal Income Tax Purposes)
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1 |
NTD: To be the date that is one Business Day prior to the Acquisition Closing Date.
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Adjusted Eurocurrency |
Eurocurrency Rate
|
Rate =
|
1.00 – Eurocurrency Reserve Percentage
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First Lien Leverage Ratio:
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Initial Term Loan
ABR Spread
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Initial Term Loan
Eurocurrency Spread
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Category 1
Greater than 3.00 to 1.00
|
1.75%
|
2.75%
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Category 2
Less than or equal to 3.00 to 1.00
|
1.50%
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2.50%
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2
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To reference the date of effectiveness of Amendment No. 3 (to match the Miami Credit Agreement).
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(a)
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provision for taxes based on income or profits or capital, including, without limitation, federal, state, provincial, local, foreign, unitary, excise, property, franchise and similar taxes and foreign withholding and similar taxes (including any penalties and interest) of such Person paid or accrued during such period to the extent the same were deducted (and not added back) in computing Consolidated Net Income; plus
|
(b) |
Consolidated Interest Expense of such Person for such period (including (x) net losses on Swap Obligations or other derivative instruments entered into for the purpose of hedging interest rate risk and (y) costs of surety bonds in connection with financing activities), to the extent the same were deducted (and not added back) in calculating such Consolidated Net Income; plus
|
(c) |
Consolidated Depreciation and Amortization Expense of such Person for such period to the extent the same were deducted (and not added back) in computing Consolidated Net Income; plus
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(d) |
(x) Transaction Costs and (y) any fees, costs, expenses or charges (other than Consolidated Depreciation and Amortization Expense) related to any actual, proposed or contemplated issuance or registration (actual or proposed) of Equity Interests, any one time expense relating to enhanced accounting functions or other transaction costs or any Investment, acquisition, disposition, recapitalization, Restricted Payment or the incurrence or registration (actual or proposed) of Indebtedness (including a refinancing thereof) (in each case, whether or not consummated or successful), including (i) such fees, expenses or charges related to any Loans, the offering of Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes or any Permitted Refinancing and this Agreement and any Securitization Fees and such fees, expenses or charges related to any Loans, the offering of Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes or any Permitted Refinancing, in each case, as defined in the Miami Credit Agreement, and (ii) any amendment, waiver or other modification of Loans, Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes and Loans, Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes, in each case, as defined in the Miami Credit Agreement. Receivables Facilities, Securitization Facilities, or any Permitted Refinancing, any Loan Document, any Miami Loan Document, any Securitization Fees, any other Indebtedness or any Equity Interests, in each case, whether or not consummated, deducted (and not added back) in computing Consolidated Net Income; plus
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(e) |
the amount of any restructuring charge, reserve, integration cost or other business optimization expense or cost (including charges directly related to implementation of cost-savings initiatives), that is deducted (and not added back) in such period in computing Consolidated Net Income including, without limitation, those related to severance, retention, signing bonuses, relocation, recruiting and other employee related costs, future lease commitments and costs related to the opening and closure and/or consolidation of facilities; plus
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(f) |
any non-cash charges, write-downs, expenses, losses or items reducing Consolidated Net Income for such period including any share based compensation charge and any impairment charges or the impact of purchase accounting, or other items classified by the Parent as special items; plus
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(g) |
[Reserved];
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(h) |
(i) the amount of cost savings, operating expense reductions, other operating improvements and initiatives and synergies projected by the Borrower in good faith to be reasonably anticipated to be realizable or a plan for realization shall have been established within eighteen (18) months of the date thereof (which will be added to Consolidated EBITDA as so projected until fully realized and calculated on a pro forma basis as though such cost savings, operating expense reductions, other operating improvements and initiatives and synergies had been realized on the first day of such period), net of the amount of actual benefits realized during such period from such actions; provided that, to the extent any such operational changes are not associated with the Transactions or a Specified Transaction, all steps have been taken for realizing such cost savings and such cost savings are reasonably identifiable and factually supportable (in the good faith determination of the Borrower); and (ii) each of the adjustments of the nature set forth (x) in the model delivered to the Agent on March 30, 2017 or in the confidential information memorandum of the Borrower dated April 2017, or (y) on Schedule 1.01(a); plus
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(i) |
the amount of loss on sale of Securitization Assets and related assets to the Securitization Subsidiary in connection with a Qualified Securitization Financing; plus
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(j) |
any costs or expense incurred by the Parent or any Restricted Subsidiary pursuant to any management equity plan or stock option plan or any other management or employee benefit plan or agreement or any stock subscription or shareholder agreement, to the extent that such costs or expenses are funded with cash proceeds contributed to the capital of the Parent or net cash proceeds of an issuance of Qualified Equity Interests of the Parent (in each case, except to the extent comprising any Cure Amount); plus
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(k) |
cash receipts (or any netting arrangements resulting in reduced cash expenditures) not representing Consolidated EBITDA or Consolidated Net Income in any period to the extent non-cash gains relating to such income were deducted in the calculation of Consolidated EBITDA pursuant to clause (2) below for any previous period and not added back; plus
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(l) |
any loss attributable to non-controlling interests included in the consolidated financial statements due to the application of IFRS 10 “Consolidated Financial Statements” and related pronouncements; plus
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(m) |
realized foreign exchange losses resulting from the impact of foreign currency changes on the valuation of assets or liabilities on the statement of financial position of the Parent and its Restricted Subsidiaries; plus
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(n) |
net realized losses from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements; plus
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(o) |
the amount of any minority interest expense consisting of Subsidiary income attributable to minority equity interests of third parties in any non-wholly owned Subsidiary deducted in calculating Consolidated Net Income (and not added back in such period to Consolidated Net Income); plus
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(p) |
costs related to the implementation of operational and reporting systems and technology initiatives.
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(2) |
decreased (without duplication) by: (a) non-cash gains increasing Consolidated Net Income of such Person for such period, excluding any non-cash gains to the extent they represent the reversal of an accrual or reserve for a potential cash item that reduced Consolidated EBITDA in any prior period and any non-cash gains with respect to cash actually received in a prior period so long as such cash did not increase Consolidated EBITDA in such prior period; plus (b) realized foreign exchange income or gains resulting from the impact of foreign currency changes on the valuation of assets or liabilities on the statement of financial position of the Parent and its Restricted Subsidiaries; plus (c) any net realized income or gains from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements; plus (d) any net profit attributable to non-controlling interests included in the consolidated financial statements due to the application of IFRS 10 “Consolidated Financial Statements” and related pronouncements; plus (e) all cash payments made during such period to the extent made on account of non-cash reserves and other non-cash charges added back to Consolidated Net Income pursuant to clause (f) above in a previous period (it being understood that this clause (2)(e) shall not be utilized in reversing any non-cash reserve or charge added to Consolidated Net Income); plus (f) the amount of any minority interest income consisting of Subsidiary loss attributable to minority equity interests of third parties in any non-wholly owned Subsidiary added to Consolidated Net Income (and not deducted in such period from Consolidated Net Income); plus
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(3) |
increased or decreased (without duplication) by, as applicable, any adjustments resulting for the application of IAS 37 “Provisions, contingent liabilities and contingent assets” or any comparable regulation.
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(1) |
consolidated interest expense or finance costs of such Person and its Restricted Subsidiaries for such period, to the extent such expense was deducted (and not added back) in computing Consolidated Net Income (including (a) amortization of original issue discount or premium resulting from the issuance of Indebtedness at less than par, (b) all commissions, discounts and other fees and charges owed with respect to letters of credit or bankers acceptances or any similar facilities or financing and hedging agreements, (c) non-cash interest payments (but excluding any non-cash interest expense attributable to the movement in the mark to market valuation of any Swap Obligations or other derivative instruments pursuant to IFRS), (d) the interest component of Capital Lease Obligations, (e) net payments, if any, pursuant to interest rate Swap Obligations with respect to Indebtedness, (f) fees and expenses paid to the Agents, (g) other bank and financing fees, and (h) costs of surety bonds in connection with financing activities); plus
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(2) |
consolidated capitalized interest expense or finance costs of such Person and its Restricted Subsidiaries for such period, whether paid or accrued; plus
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(3) |
all cash dividends or other distributions paid (excluding items eliminated in consolidation) on any series of preferred stock of any Subsidiary of such Person during such period; plus
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(4) |
all cash dividends or other distributions paid (excluding items eliminated in consolidation) on any series of Disqualified Equity Interests during this period.
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(a) |
any profit (loss) for such period of any Person if such Person is not a Restricted Subsidiary, except that any equity in the profit of any such Person for such period will be included in such Consolidated Net Income up to the aggregate amount of cash or Cash Equivalents actually distributed or that (as reasonably determined by a Responsible Officer of the Borrower) could have been distributed by such Person during such period to the Parent or any Restricted Subsidiary as a dividend or other distribution or as a return on investment;
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(b) |
any profit (or loss) for such period realized upon the sale or other disposition of any asset or disposed operations of the Borrower or any Restricted Subsidiaries (including pursuant to any Sale Leaseback which is not sold or otherwise disposed of in the ordinary course of business);
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(c) |
any extraordinary, exceptional, unusual or nonrecurring gain, loss, charge or expense, or any charges, expenses or reserves in respect of any restructuring, redundancy or severance expense;
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(d) |
the cumulative effect of a change in accounting principles;
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(e) |
any (i) non-cash compensation charge or expense arising from any grant of stock, stock options or other equity based awards and any non-cash deemed finance charges in respect of any pension liabilities or other provisions or on the re-valuation of any benefit plan obligation and (ii) income (loss) attributable to deferred compensation plans or trusts shall be excluded;
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(f) |
all deferred financing costs written off or amortized and premiums paid or other expenses incurred directly in connection with any early extinguishment of Indebtedness and any net gain (loss) from any write-off or forgiveness of Indebtedness;
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(g) |
any unrealized gains or losses in respect of Swap Obligations or any ineffectiveness recognized in earnings related to qualifying hedge transactions or the fair value of changes therein recognized in earnings for derivatives that do not qualify as hedge transactions, in each case, in respect of Swap Obligations;
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(h) |
any unrealized foreign currency transaction gains or losses in respect of obligations of any Person denominated in a currency other than the functional currency of such Person and any unrealized foreign exchange gains or losses relating to translation of assets and liabilities denominated in foreign currencies;
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(i) |
any unrealized foreign currency translation or transaction gains or losses in respect of Indebtedness or other obligations of the Parent or any Restricted Subsidiary owing to the Parent or any Restricted Subsidiary;
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(j) |
any purchase accounting effects including, but not limited to, adjustments to inventory, property and equipment, software and other intangible assets and deferred revenue in component amounts required or permitted by IFRS and related authoritative pronouncements (including the effects of such adjustments pushed down to the Parent and the Restricted Subsidiaries), as a result of the Transactions or any consummated acquisition, or the amortization or write-off of any amounts thereof (including any write-off of in process research and development);
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(k) |
any goodwill or other asset impairment charge or write-off or write-down;
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(l) |
any after-tax effect of income (loss) from the early retirement, extinguishment or cancellation of Indebtedness or Swap Obligations or other derivative instruments shall be excluded;
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(m) |
accruals and reserves that are established within twelve months after the Acquisition Closing Date that are so required to be established as a result of the Transactions in accordance with IFRS, shall be excluded;
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(n) |
any net unrealized gains and losses resulting from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements shall be excluded;
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(o) |
proceeds from any business interruption insurance to the extent not already included in Consolidated Net Income;
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(p) |
the amount of any expense to the extent a corresponding amount is received in cash by the Parent and the Restricted Subsidiaries from a Person other than the Parent or any Restricted Subsidiaries, provided such payment has not been included in determining Consolidated Net Income (it being understood that if the amounts received in cash under any such agreement in any period exceed the amount of expense in respect of such period, such excess amounts received may be carried forward and applied against expense in future periods);
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(q) |
gains and losses on the sale, exchange or other disposition of assets outside the ordinary course of business or abandonment of assets and from discontinued operations;
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(r) |
cash and non-cash charges, paid or accrued, and gains resulting from the application of IFRS 3 “Business Combinations” (including with respect to earn-outs incurred by the Parent or any of its Restricted Subsidiaries); and
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(s) |
rental payments under Synthetic Leases.
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(i) |
an amount equal to the amount of all non-cash gains and credits included in arriving at such Consolidated Net Income and cash charges of the type referred to in clauses (c), (f), (r) and (s) of Consolidated Net Income, and the expenses and charges of the type referred to in the last paragraph of Consolidated Net Income to the extent not reimbursed during such period, in each case, to the extent not included in arriving at such Consolidated Net Income,
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(ii) |
without duplication of amounts deducted pursuant to clause (xi) below in prior years, the amount of Capital Expenditures, Capitalized Software Expenditures, acquisitions of intellectual property, capitalized intellectual property development, for retention, recruiting, relocation, severance or signing bonuses and expenses made in cash during such period, except to the extent that such Capital Expenditures, Capitalized Software Expenditures, acquisitions or costs or expenses were financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans),
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(iii) |
the aggregate amount of all principal payments of Indebtedness of the Parent and the Restricted Subsidiaries during such period but excluding (x) all prepayments of Term Loans or Miami Term Loans (other than, in each case, prepayments pursuant to Section 2.11(c) or Section 2.11(c) of the Miami Credit Agreement, but solely to the extent that the Disposition in question increased Consolidated Net Income, and not in excess of such increase), (y) all prepayments of Revolving Loans made during such period and (z) any other revolving credit facility to the extent there is not an equivalent permanent reduction in commitments thereunder, and except to the extent financed with the proceeds of other Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans),
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(iv) |
an amount equal to the aggregate net gain on Dispositions by the Parent and the Restricted Subsidiaries during such period (other than Dispositions in the ordinary course of business) to the extent included in arriving at such Consolidated Net Income,
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(v) |
increases in Consolidated Working Capital for such period,
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(vi) |
payments by the Parent and the Restricted Subsidiaries during such period in cash in respect of (x) non-current liabilities of the Parent and the Restricted Subsidiaries other than Indebtedness, to the extent not already deducted from Consolidated Net Income or (y) non-cash charges incurred in a prior period,
|
(vii) |
without duplication of amounts deducted pursuant to clause (xi) below in prior fiscal years, the aggregate amount of cash consideration paid by the Parent and the Restricted Subsidiaries (on a consolidated basis) in connection with Investments (including acquisitions and earnout payments) pursuant to Section 6.04 that are not made in the Parent or a wholly owned Restricted Subsidiary made during such period (to the extent permitted to be made hereunder), except to the extent financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or intercompany loans),
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(viii) |
the aggregate amount of Restricted Payments paid to any Person other than the Parent or any Restricted Subsidiary during such period pursuant to Section 6.08 (other than pursuant to Section 6.08(a)(xx) (except by reference to clause (a) of the definition of “Available Amount”)), except to the extent financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans),
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(ix) |
the aggregate amount of expenditures, fees, costs, charges and expenses actually made by the Parent and the Restricted Subsidiaries in cash during such period (including expenditures for the payment of financing fees) to the extent that such expenditures are not deducted in calculating Consolidated Net Income,
|
(x) |
the aggregate amount of any premium, make-whole or penalty payments actually paid in cash by the Parent and the Restricted Subsidiaries during such period that are made in connection with any prepayment of Indebtedness to the extent that such payments are not deducted in calculating Consolidated Net Income,
|
(xi) |
without duplication of amounts deducted from Excess Cash Flow in prior periods, at the option of the Borrower, the aggregate consideration required to be paid in cash by the Parent or any of the Restricted Subsidiaries pursuant to binding contracts (or binding commitments) (the “Contract Consideration”) entered into prior to or during such period or, at the option of the Borrower, after the applicable period and prior to the applicable ECF Due Date (including acquisitions and other Investments), Capital Expenditures, Capitalized Software Expenditures or acquisitions of intellectual property to be consummated or made during the period of four consecutive fiscal quarters of the Parent following the end of such period, provided that to the extent the aggregate amount utilized to finance such acquisitions, Capital Expenditures, Capitalized Software Expenditures or acquisitions of intellectual property during such period of four consecutive fiscal quarters is less than the Contract Consideration, the amount of such shortfall shall be added to the calculation of Excess Cash Flow at the end of such period of four consecutive fiscal quarters,
|
(xii) |
the amount of taxes (including penalties and interest) paid in cash or tax reserves set aside or payable in each case in such period to the extent they exceed the amount of tax expense deducted in determining Consolidated Net Income for such period, and
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(xiii) |
the aggregate amount paid by the Parent and the Restricted Subsidiaries during such period in respect of the Transaction Costs to the extent that such payments are not deducted in calculating Consolidated Net Income.
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3 |
To include requirement to deliver Parent Companies Guaranty within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security.
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4 |
To include requirement to deliver Pari Passu Intercreditor Agreement within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security.
|
5
|
To include a requirement that Subsidiaries of Seattle Borrower that are required to provide a guarantee deliver Subsidiary Guaranty immediately following the consummation of the Distribution.
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6
|
To include requirement to deliver UK Collateral Agreement within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security.
|
7
|
To include a requirement that Seattle Borrower and Subsidiaries of Seattle Borrower that are required to provide a guarantee deliver US Collateral Agreement immediately following the consummation of the Distribution.
|
8 |
To include requirement to (x) deliver Seattle Guarantors and security immediately following the Distribution, (y) deliver Miami Guarantors and security within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security and (z) execute the Pari Passu Intercreditor Agreement.
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Exhibit 10.2
CREDIT AGREEMENT
dated as of [__], 201[_],
among
MICRO FOCUS INTERNATIONAL PLC,
as Parent
MICRO FOCUS GROUP LIMITED,
as Holdco,
MA FINANCECO., LLC,
as Borrower,
The Lenders Party Hereto,
and
JPMORGAN CHASE BANK, N.A.
as Administrative Agent and Collateral Agent
_____________________________
JPMORGAN CHASE BANK, N.A.,
BARCLAYS BANK PLC,
HSBC SECURITIES (USA) INC.,
THE ROYAL BANK OF SCOTLAND PLC,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Joint Lead Arrangers and Joint Lead Bookrunners,
HSBC SECURITIES (USA) INC.,
BARCLAYS BANK PLC,
THE ROYAL BANK OF SCOTLAND PLC,
as Co-Syndication Agents
and
JPMORGAN CHASE BANK, N.A.,
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED,
as Co-Documentation Agents
Table of Contents
Page | ||
Article I Definitions | 2 | |
Section 1.01 | Defined Terms | 2 |
Section 1.02 | Classification of Loans and Borrowings | 79 |
Section 1.03 | Terms Generally | 80 |
Section 1.04 | Accounting Terms; IFRS | 80 |
Section 1.05 | Pro Forma Calculations | 81 |
Section 1.06 | Currency Translation | 82 |
Section 1.07 | Rounding | 83 |
Section 1.08 | Timing of Payment or Performance | 83 |
Section 1.09 | Letter of Credit Amounts | 83 |
Section 1.10 | Certifications | 84 |
Section 1.11 | Compliance with Article VI | 84 |
Section 1.12 | Reversion Provision | 84 |
Article II The Credits | 85 | |
Section 2.01 | Commitments | 85 |
Section 2.02 | Loans and Borrowings | 86 |
Section 2.03 | Requests for Borrowings | 87 |
Section 2.04 | Swingline Loans | 88 |
Section 2.05 | Letters of Credit | 91 |
Section 2.06 | Funding of Borrowings | 99 |
Section 2.07 | Interest Elections | 100 |
Section 2.08 | Termination and Reduction of Commitments | 101 |
Section 2.09 | Repayment of Loans; Evidence of Debt | 102 |
Section 2.10 | Amortization of Term Loans | 103 |
Section 2.11 | Prepayment of Loans | 104 |
Section 2.12 | Fees | 110 |
Section 2.13 | Interest | 111 |
Section 2.14 | Alternate Rate of Interest | 112 |
Section 2.15 | Increased Costs | 113 |
Section 2.16 | Break Funding Payments | 114 |
Section 2.17 | Taxes | 114 |
Section 2.18 | Payments Generally; Pro Rata Treatment; Sharing of Setoffs | 117 |
Section 2.19 | Mitigation Obligations; Replacement of Lender | 119 |
Section 2.20 | Incremental Loans | 120 |
Section 2.21 | Refinancing Amendments | 123 |
Section 2.22 | Defaulting Lenders | 124 |
Section 2.23 | Cash Collateral | 126 |
Section 2.24 | Extensions of Term Loans and Revolving Commitments | 128 |
Section 2.25 | Term Loan Exchange Notes | 131 |
i |
Article III Representations and Warranties | 133 | |
Section 3.01 | Organization; Powers | 133 |
Section 3.02 | Authorization; Enforceability | 134 |
Section 3.03 | Governmental Approvals; No Conflicts | 134 |
Section 3.04 | Financial Condition; No Material Adverse Change | 134 |
Section 3.05 | Properties | 135 |
Section 3.06 | Litigation and Environmental Matters | 135 |
Section 3.07 | Compliance with Laws | 136 |
Section 3.08 | Investment Company Status. | 136 |
Section 3.09 | Taxes | 136 |
Section 3.10 | ERISA | 136 |
Section 3.11 | Disclosure | 136 |
Section 3.12 | Labor Matters | 137 |
Section 3.13 | Subsidiaries | 137 |
Section 3.14 | Solvency | 137 |
Section 3.15 | Federal Reserve Regulations | 137 |
Section 3.16 | [Reserved] | 137 |
Section 3.17 | Use of Proceeds | 137 |
Section 3.18 | Security Documents | 137 |
Section 3.19 | OFAC; FCPA; Patriot Act | 138 |
Article IV Conditions | 139 | |
Section 4.01 | Effective Date | 139 |
Section 4.02 | Each Credit Event | 139 |
Article V Affirmative Covenants | 140 | |
Section 5.01 | Financial Statements and Other Information | 140 |
Section 5.02 | Notices of Material Events | 143 |
Section 5.03 | Semi-Annual Lender Call | 144 |
Section 5.04 | Existence; Conduct of Business | 144 |
Section 5.05 | Payment of Taxes | 144 |
Section 5.06 | Maintenance of Properties | 145 |
Section 5.07 | Insurance | 145 |
Section 5.08 | Books and Records; Inspection and Audit Rights | 145 |
Section 5.09 | Compliance with Laws | 146 |
Section 5.10 | Use of Proceeds | 146 |
Section 5.11 | Execution of Subsidiary Guaranty and Security Documents after the Effective Date. | 146 |
Section 5.12 | Further Assurances. | 150 |
Section 5.13 | Designation of Subsidiaries | 151 |
Section 5.14 | Conduct of Business | 152 |
Section 5.15 | Maintenance of Ratings | 152 |
Section 5.16 | Post-Closing Covenants | 152 |
Article VI Negative Covenants | 152 | |
Section 6.01 | Indebtedness; Certain Equity Securities | 152 |
Section 6.02 | Liens | 158 |
Section 6.03 | Fundamental Changes | 163 |
Section 6.04 | Investments | 164 |
ii |
Section 6.05 | Asset Sales | 169 |
Section 6.06 | [Reserved | 172 |
Section 6.07 | [Reserved] | 172 |
Section 6.08 | Restricted Payments; Certain Payments of Indebtedness | 172 |
Section 6.09 | Transactions with Affiliates | 176 |
Section 6.10 | Restrictive Agreements | 177 |
Section 6.11 | Amendment of Material Documents | 178 |
Section 6.12 | First Lien Leverage Ratio | 178 |
Section 6.13 | Changes in Fiscal Year | 179 |
Article VII Events of Default | 179 | |
Section 7.01 | Events of Default | 179 |
Section 7.02 | Exclusion of Immaterial Subsidiaries | 183 |
Section 7.03 | Right to Cure | 183 |
Section 7.04 | Application of Proceeds. | 184 |
Article VIII The Administrative Agent | 186 | |
Section 8.01 | Appointment of Agents | 186 |
Section 8.02 | Rights of Lender | 187 |
Section 8.03 | Exculpatory Provisions | 187 |
Section 8.04 | Reliance by Administrative Agent and Collateral Agent | 188 |
Section 8.05 | Delegation of Duties | 188 |
Section 8.06 | Resignation of Agents; Successor, Administrative Agent, Collateral Agent and Issuing Bank | 189 |
Section 8.07 | Non-Reliance on Agents and Other Lenders | 190 |
Section 8.08 | No Other Duties | 190 |
Section 8.09 | Collateral and Guaranty Matters | 191 |
Section 8.10 | Secured Swap Agents and Secured Cash Management Agents | 192 |
Section 8.11 | Withholding Tax | 192 |
Section 8.12 | Administrative Agent and Collateral Agent May File Proofs of Claim | 193 |
Article IX Miscellaneous | 194 | |
Section 9.01 | Notices | 194 |
Section 9.02 | Waivers; Amendments. | 194 |
Section 9.03 | Expenses; Indemnity; Damage Waiver | 199 |
Section 9.04 | Successors and Assigns | 201 |
Section 9.05 | Survival | 205 |
Section 9.06 | Counterparts; Integration | 205 |
Section 9.07 | Severability | 206 |
Section 9.08 | Right of Setoff | 206 |
Section 9.09 | Governing Law; Jurisdiction; Consent to Service of Process | 206 |
Section 9.10 | WAIVER OF JURY TRIAL | 207 |
Section 9.11 | Headings | 208 |
Section 9.12 | Confidentiality | 208 |
Section 9.13 | Interest Rate Limitation | 209 |
Section 9.14 | USA Patriot Act | 209 |
iii |
Section 9.15 | Direct Website Communication | 210 |
Section 9.16 | Intercreditor Agreement Governs | 211 |
Section 9.17 | Judgment Currency | 211 |
Section 9.18 | No Advisory or Fiduciary Responsibility | 212 |
Section 9.19 | [Reserved] | 212 |
Section 9.20 | Acknowledgment and Consent to Bail-In of EEA Financial Institutions | 213 |
iv |
SCHEDULES:
Schedule 1.01 | Effective Date Loans and Commitments |
Schedule 1.01(a) | Adjustments to Consolidated EBITDA |
Schedule 1.01(b) | UK Security Documents |
Schedule 1.01(c) | Loan Parties |
Schedule 1.02 | Excluded Subsidiaries |
Schedule 1.03 | Existing Letters of Credit |
Schedule 2.01 | Commitments |
Schedule 3.06 | Disclosed Matters |
Schedule 3.13 | Subsidiaries |
Schedule 5.11(c) | U.S. Security Documents |
Schedule 5.16 | Post-Closing Covenants |
Schedule 6.01(a) | Existing Indebtedness |
Schedule 6.02 | Existing Liens |
Schedule 6.04(c) | Existing Investments |
Schedule 6.05 | Asset Dispositions |
Schedule 6.09 | Transactions with Affiliates |
Schedule 9.01 | Addresses for Notices |
EXHIBITS:
Exhibit A | Form of Borrowing Request |
Exhibit B | Form of Interest Election Request |
Exhibit C | Form of Solvency Certificate |
Exhibit D | [Reserved] |
Exhibit E | [Reserved] |
Exhibit F-1 | Form of Tranche B-2 Term Note |
Exhibit F-2 | Form of Tranche B-3 Term Note |
Exhibit F-3 | Form of Euro Tranche Term Note |
Exhibit F-4 | Form of Revolving Note |
Exhibit G | Form of Assignment and Assumption Agreement |
Exhibit H | Form of Swingline Loan Notice |
Exhibit I | Form of Mortgage, Security Agreement, Assignment of Rents and Leases and Fixture Filings |
Exhibit J | Form of Compliance Certificate |
Exhibit K-1 | Form of Pari Passu Intercreditor Agreement |
Exhibit K-2 | [Terms of] Second Lien Intercreditor Agreement |
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CREDIT AGREEMENT dated as of [__], 201[_]1 (this “Agreement”), among MICRO FOCUS INTERNATIONAL PLC, a company organized under the laws of England and Wales (the “Parent”), MICRO FOCUS GROUP LIMITED, a company organized under the laws of England and Wales (“Holdco”), MA FINANCECO., LLC, a Delaware limited liability company (the “Borrower”), the LENDERS party hereto and JPMORGAN CHASE BANK, N.A. (“JPMCB”), as Administrative Agent and Collateral Agent.
WHEREAS, capitalized terms used in these recitals shall have the respective meanings set forth for such terms in Article I;
WHEREAS, reference is hereby made to the Credit Agreement, dated as of November 20, 2014 (as amended, restated, supplemented or otherwise modified from time to time prior to the date hereof, the “Existing Credit Agreement”), by and among the Parent, Holdco, the Borrower, the lenders from time to time party thereto (the “Existing Lenders”) and JPMCB, as administrative agent, collateral agent and swingline lender (the “Existing Agent”);
WHEREAS, the Parent, pursuant to an Agreement and Plan of Merger, dated as of September 7, 2016 (together with all exhibits, annexes and schedules thereto, as amended, restated, supplemented or otherwise modified from time to time, the “Merger Agreement”), by and among the Parent, Seattle Holdings, Inc., a newly formed Delaware corporation and wholly-owned, direct or indirect subsidiary of the Parent (“Seattle Holdings”), Seattle MergerSub, Inc., a newly formed Delaware corporation and wholly-owned, direct or indirect subsidiary of Seattle Holdings (“Merger Sub”), Hewlett Packard Enterprise Company, a Delaware corporation (“Houston”), and Seattle SpinCo, Inc., a Delaware corporation (the “Company”), intends to acquire indirectly through Seattle Holdings (the “Seattle Acquisition”) 100% of the outstanding Equity Interests of the Company and its subsidiaries;
WHEREAS, to effect the Seattle Acquisition, the parties to the Merger Agreement will consummate the transactions contemplated by the Merger Agreement and pursuant to the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”), with the Company continuing as the surviving entity, and all shares of the Company will be converted into American Depositary Shares representing ordinary shares of the Parent in accordance with the terms of the Merger Agreement;
WHEREAS, prior to the consummation of the Seattle Acquisition and Merger, the Borrower has requested the Lenders and the Issuing Banks to extend credit to the Borrower in the form of (a) Tranche B-2 Term Loans denominated in Dollars in an aggregate principal amount not in excess of the amount set forth on Schedule 1.01, (b) Tranche B-3 Term Loans denominated in Dollars in an aggregate principal amount not in excess of the amount set forth on Schedule 1.01, (c) Euro Tranche Term Loans denominated in Euros in an aggregate principal amount not in excess of the amount set forth on Schedule 1.01 and (d) Revolving Loans, Letters of Credit and Swingline Loans, in an aggregate principal amount not in excess of the Dollar Equivalent of $500,000,000, in each case the proceeds of which shall be utilized as set forth below and in Section 5.10; and
1 | NTD: To be the date that is one Business Day prior to the Acquisition Closing Date. |
WHEREAS, proceeds received by the Borrower, together with cash on hand, will be used (a) to fund a loan by the Borrower to Holdco (the “Borrower Intercompany Loan”), a portion of which may be used by Holdco, directly or indirectly, to make payment in connection with the “Return of Value” (as defined in Schedule 7.1(b) to the Merger Agreement) not in excess of the Dollar Equivalent of $500,000,000 (the “Return of Value Payment”) prior to the consummation of the Merger, (b) to finance certain Transaction Costs and (c) to provide cash to the Parent and its Restricted Subsidiaries for working capital and general corporate purposes.
NOW THEREFORE, in consideration of the premises, provisions, covenants and mutual agreements contained herein and other good and valuable consideration, the sufficiency and receipt of which are hereby acknowledged, the Lenders and Issuing Banks are willing to extend such credit to the Borrower on the terms and express conditions set forth herein, and accordingly the parties hereto agree as follows.
Article I
Definitions
Section 1.01 Defined Terms. As used in this Agreement, the following terms have the meanings specified below:
“ABR” when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are bearing interest at a rate determined by reference to the Alternate Base Rate.
“Accounting Change” has the meaning assigned to such term in Section 1.04.
“Acquisition” means any acquisition by the Parent or any Restricted Subsidiary, whether by purchase, merger, consolidation, contribution or otherwise, of (w) at least a majority of the assets or property and/or liabilities (or any other substantial part for which financial statements or other financial information is available), or a business line, product line, unit or division of, any other Person, (x) Equity Interests of any other Person such that such other Person becomes a Restricted Subsidiary and (y) additional Equity Interests of any Restricted Subsidiary not then held by the Parent or any Restricted Subsidiary.
“Acquisition Closing Date” means the date of the consummation of the Merger.
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“Additional Debt” means subordinated or senior debt (including, as applicable, Registered Equivalent Notes), which may be unsecured, have the same lien priority as the Obligations or be secured by a Lien ranking junior to the Lien securing the Obligations, in each case issued or incurred by the Parent or any of its Restricted Subsidiaries after the Effective Date that (i) has a final maturity date that is on or after the Latest Maturity Date with respect to the Initial Term Loans and has a Weighted Average Life to Maturity equal to or longer than the remaining Weighted Average Life to Maturity of the Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans); provided that this clause (i) shall not restrict the issuance or incurrence by the Parent or any of its Restricted Subsidiaries after the Effective Date of up to $1,700,000,000 aggregate principal amount of Additional Debt, Additional Term Notes, Unrestricted Additional Term Notes, Incremental Term Loans, Seattle Additional Debt, Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes and Seattle Incremental Term Loans having (x) a final maturity date that is prior to the Latest Maturity Date with respect to the Initial Term Loans so long as such final maturity date is at least five years from the date of such issuance or incurrence and (y) a Weighted Average Life to Maturity shorter than the remaining Weighted Average Life to Maturity of the Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans) so long as such debt does not require annual amortization or similar regularly scheduled prepayments in excess of 10% of the original amount of such debt at issuance or incurrence in any year and (ii) to the extent subordinated in right of payment to the Initial Term Loans, does not require any scheduled payment of principal (including pursuant to a sinking fund obligation) or mandatory redemption or redemption at the option of the holders thereof (except for customary redemptions in respect of asset sales, changes in control or similar events and AHYDO Catch-Up Payments) prior to the date that is 91 days after the Latest Maturity Date in respect of the Initial Term Loans in effect as of the time such Additional Debt is incurred and (iii) if a Loan Party is a borrower or a guarantor with respect to such Indebtedness the obligation in respect thereof shall not be secured by Liens on the assets of such Loan Party other than assets constituting Collateral.
“Additional Lender” has the meaning assigned to such term in Section 2.20(d).
“Additional Mortgaged Property” has the meaning set forth in Section 5.11(f).
“Additional Refinancing Lender” has the meaning assigned to such term in Section 2.21.
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“Additional Term Notes” means first priority senior secured notes and/or junior Lien secured notes and/or unsecured notes, in each case issued pursuant to an indenture, note purchase agreement or other agreement and in lieu of the incurrence of a portion of the Incremental Term Facility; provided that (a) such Additional Term Notes rank pari passu or junior in right of payment and (if secured) of security with the Initial Term Loans hereunder, (b) the Additional Term Notes have a final maturity date that is on or after the then existing Latest Maturity Date with respect to the Initial Term Loans and have a Weighted Average Life to Maturity equal to or longer than the remaining Weighted Average Life to Maturity of the then existing Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans); provided that this clause (b) shall not restrict the issuance or incurrence by the Parent or any of its Restricted Subsidiaries after the Effective Date of up to $1,700,000,000 aggregate principal amount of Additional Debt, Additional Term Notes, Unrestricted Additional Term Notes, Incremental Term Loans, Seattle Additional Debt, Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes and Seattle Incremental Term Loans having (x) a final maturity date that is prior to the Latest Maturity Date with respect to the Initial Term Loans so long as such final maturity date is at least five years from the date of such issuance or incurrence and (y) a Weighted Average Life to Maturity shorter than the remaining Weighted Average Life to Maturity of the Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans) so long as such debt does not require annual amortization or similar regularly scheduled prepayments in excess of 10% of the original amount of such debt at issuance or incurrence in any year, (c) the covenants and events of default and other terms of which (other than maturity, fees, discounts, interest rate, redemption terms and redemption premiums, which shall be determined in good faith by the Borrower) shall be on market terms at the time of issuance (as determined in good faith by the Borrower) of the Additional Term Notes; provided that the Additional Term Notes shall not have the benefit of any financial maintenance covenant unless (x) the Initial Term Loans have the benefit of such financial maintenance covenant on the same terms or (y) the Initial Term Loans have in the future been provided with the benefit of a financial maintenance covenant, in which case such Additional Term Notes issued after such future date may be provided with the benefit of the same financial maintenance covenant on the same or less favorable terms, (d) the obligations in respect thereof shall not be secured by Liens on the assets of the Parent and its Restricted Subsidiaries, other than assets constituting Collateral, (e) no Restricted Subsidiary is a borrower or a guarantor with respect to such Indebtedness unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently guaranteed or borrowed, as applicable, the Obligations, (f) (x) if such Additional Term Notes are secured on a paripassu basis with the Obligations, the Senior Representative for such Additional Term Notes shall enter into the Pari Passu Intercreditor Agreement or other customary intercreditor agreement and (y) if such Additional Term Notes are secured on a junior basis to the Obligations, the Senior Representative for such Additional Term Notes shall enter into a Second Lien Intercreditor Agreement or other customary intercreditor agreement, in each case with the Administrative Agent’s and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may be secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations) and (g) immediately after giving effect to the incurrence of such Additional Term Notes (or, at the option of the Borrower, (i) in the case of any commitment in respect of Additional Term Notes established and not issued or purchased at such time, at the time of issuance and purchase of such Additional Term Notes and not at the time of the commitment and/or (ii) at the time of consummation of any acquisition or investment contemplated pursuant to an agreement in connection therewith) (assuming, solely for purposes of this definition at the time of incurrence and not for any other provision hereunder, that (I) all Additional Term Notes and all Incremental Facilities, in each case established on or prior to such time are secured on a first Lien basis, whether or not so secured and (II) the proceeds of such Additional Term Notes are not included as unrestricted cash and Cash Equivalents in clause (i) of the definition of “First Lien Leverage Ratio”; provided that, to the extent the proceeds of such Additional Term Notes are to be used to prepay Indebtedness, the use of such proceeds for the prepayment of such Indebtedness may be given pro forma effect), on a Pro Forma Basis after giving effect to any acquisition or investment consummated or contemplated pursuant to an agreement in connection herewith, the First Lien Leverage Ratio shall not be greater than 3.50:1.00 as of the Applicable Date of Determination (but without giving effect to any Unrestricted Incremental First Lien Indebtedness, Unrestricted Additional Term Notes, Unrestricted Additional Debt, Seattle Unrestricted Incremental First Lien Indebtedness, Seattle Unrestricted Additional Term Notes or Seattle Unrestricted Additional Debt established and/or incurred at such time, it being understood and agreed that amounts incurred concurrently with the incurrence of Unrestricted Incremental First Lien Indebtedness or Unrestricted Additional Term Notes shall be permitted to exceed 3.50:1.00).
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“Adjusted Eurocurrency Rate” means for any Interest Period with respect to a Eurocurrency Borrowing, a rate per annum determined by the Administrative Agent pursuant to the following formula:
Adjusted Eurocurrency Rate = |
Eurocurrency Rate 1.00 – Eurocurrency Reserve Percentage |
“Administrative Agent” means JPMorgan Chase Bank, N.A., in its capacity as administrative agent for the Lenders hereunder, and its successors in such capacity as provided in Article VIII.
“Administrative Agent’s Office” means the Administrative Agent’s address and, as appropriate, account as set forth on Schedule 9.01, or such other address or account as the Administrative Agent may from time to time notify the Borrower and the Lenders.
“Administrative Questionnaire” means an administrative questionnaire in a form supplied by the Administrative Agent.
“Affiliate” means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. Notwithstanding the foregoing, in relation to The Royal Bank of Scotland plc, the term “Affiliate” shall not include (i) the UK government or any member or instrumentality thereof, including Her Majesty’s Treasury of the United Kingdom and UK Financial Investments Limited (or any directors, officers, employees or entities thereof) or (ii) any persons or entities controlled by or under common control with the UK government or any member or instrumentality thereof (including Her Majesty’s Treasury of the United Kingdom and UK Financial Investments Limited) and which are not part of The Royal Bank of Scotland Group plc and its subsidiaries or subsidiary undertakings.
“Agent” means any of the Administrative Agent, the Collateral Agent, the Co-Syndication Agents or the Co-Documentation Agents.
“Agreement” has the meaning assigned to such term in the preamble to this Agreement.
“Agreement Currency” has the meaning assigned to such term in Section 9.17.
“AHYDO Catch-Up Payment” means any payment with respect to any obligations of Parent, the Borrower or any Restricted Subsidiary, including subordinated debt obligations, in each case to avoid the application of Code Section 163(e)(5) thereto.
“ALTA” means the American Land Title Association.
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“Alternate Base Rate” means, for any day, a rate per annum equal to the greatest of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus ½ of 1%. If the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms of the definition thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the preceding sentence until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Effective Rate respectively.
“Alternative Currency” means (a) with respect to Letters of Credit, Euros, Sterling and any other currency that may be agreed with the relevant Issuing Bank for issuing Letters of Credit in Alternative Currencies, (b) with respect to any Revolving Loans, Euros, Sterling and any other currency other than Dollars that may be agreed with all of the Revolving Lenders and the Administrative Agent and (c) with respect to any Incremental Term Loans and Incremental Revolving Commitments (and Incremental Revolving Loans made pursuant thereto), any currency that may be agreed among the Borrower and all of the applicable Lenders providing such Incremental Term Loans and/or Incremental Revolving Commitments.
“Amendment No. 3” means that certain Consent, Waiver and Amendment No. 3 to Credit Agreement, dated as of April 28, 2017, by and among Parent, Holdco, the Borrower, the other Loan Parties party thereto, the Administrative Agent, the Issuing Bank, the Swingline Lender and the Lenders party thereto.
“Anti-Corruption Laws” means The United States Foreign Corrupt Practices Act of 1977, the Bribery Act 2010 of the United Kingdom and any similar laws, rules or regulations issued, administered or enforced by any Governmental Authority having jurisdiction over Parent or any of its Subsidiaries.
“Applicable Acquisition Consummation Deadline” has the meaning assigned to such term in Section 2.11(k).
“Applicable Date of Determination” means the last day of the most recently ended fiscal quarter for which financial statements are available pursuant to Section 5.01(a) or (b), as applicable, or, if such date occurs prior to the date on which financial statements are available pursuant to Section 5.01(a) or (b), as applicable, the last day of the most recently ended fiscal quarter for which financial statements were delivered under Section 9 of Amendment No. 3.
“Applicable Margin” means for any day a percentage per annum equal to (I) with respect to:
(a) any Tranche B-2 Term Loan that is a Eurocurrency Loan or an ABR Loan, the applicable rate per annum set forth below under the caption “Tranche B-2 Term Loan Eurocurrency Spread” or “Tranche B-2 Term Loan ABR Spread” as the case may be, based upon the First Lien Leverage Ratio as of most recent determination date;
(b) any Tranche B-3 Term Loan that is a Eurocurrency Loan or an ABR Loan, the applicable rate per annum set forth below under the caption “Tranche B-3 Term Loan Eurocurrency Spread” or “Tranche B-3 Term Loan ABR Spread” as the case may be, based upon the First Lien Leverage Ratio as of most recent determination date;
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(c) any Euro Tranche Term Loan, the applicable rate per annum set forth below under the caption “Euro Tranche Term Loan Eurocurrency Spread”, based upon the First Lien Leverage Ratio as of most recent determination date;
(d) any Revolving Loan that is a Eurocurrency Loan or an ABR Loan, the applicable rate per annum set forth below under the caption “Revolving Loan Eurocurrency Spread” or “Revolving Loan ABR Spread” as the case may be, based upon the First Lien Leverage Ratio as of most recent determination date; and
(e) any Swingline Loan, the Applicable Margin then applicable to a Revolving Loan that is an ABR Loan pursuant to clause (b) above; and
(II) with respect to Incremental Facilities, Other Term Loans, Other Revolving Loans, Other Revolving Commitments, Extended Term Loans, Extended Revolving Loans, Extended Revolving Commitments or Replacement Term Loans, the rate per annum specified in the amendment establishing such Incremental Facilities, Other Term Loans, Other Revolving Loans, Other Revolving Commitments, Extended Term Loans, Extended Revolving Loans, Extended Revolving Commitments or Replacement Term Loans.
First Lien Leverage Ratio: |
Tranche B-2 Term Loan ABR Spread | Tranche B-2 Term Loan Eurocurrency Spread | Tranche B-3 Term Loan ABR Spread | Tranche B-3 Term Loan Eurocurrency Spread | Euro Tranche Term Loan Eurocurrency Spread | Revolving Loan ABR Spread |
Revolving Loan Eurocurrency Spread |
Category 1 Greater than 3.00 to 1.00 |
1.50% | 2.50% | 1.75% | 2.75% | 3.00% | 2.50% | 3.50% |
Category 2 Less than or equal to 3.00 to 1.00 |
1.25% | 2.25% | 1.50% | 2.50% | 2.75% | 2.25% | 3.25% |
Until a Compliance Certificate for the fiscal quarter ending April 30, 2018 is delivered, the Applicable Margin for the Initial Term Loans shall be set at the margin in the row styled “Category 1.” For purposes of the foregoing, (a) the First Lien Leverage Ratio shall be determined on a Pro Forma Basis as of the end of each fiscal quarter of the Parent following delivery of financial statements and related the Compliance Certificate for such fiscal quarter and (b) each change in the Applicable Margin resulting from a change in the First Lien Leverage Ratio shall be effective during the period commencing on and including the Business Day following the date of delivery to the Administrative Agent pursuant to Section 5.01(a) or 5.01(b) of the consolidated financial statements and related Compliance Certificate indicating such change and ending on the date immediately preceding the effective date of the next such change. Notwithstanding the foregoing, the Applicable Margin, at the option of the Required Lenders (in the case of the Initial Term Loans) or the Required Revolving Lenders (in the case of the Revolving Loans), commencing upon written notice to the Borrower, shall be based on the rates per annum set forth in Category 1 if the Borrower fails to deliver the consolidated financial statements required to be delivered pursuant to Section 5.01(a) or 5.01(b) or any Compliance Certificate required to be delivered pursuant hereto, in each case within the time periods specified herein for such delivery, until the delivery thereof.
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In the event that a Compliance Certificate is shown to be inaccurate at any time and such inaccuracy, if corrected, would have led to a higher Applicable Margin for any period (an “Applicable Period”) than the Applicable Margin applied for such Applicable Period, then (i) the Borrower shall, upon obtaining knowledge promptly deliver to the Administrative Agent a correct Compliance Certificate for such Applicable Period, (ii) the Applicable Margin shall be determined by reference to the corrected Compliance Certificate for such Applicable Period, and (iii) the Borrower shall pay to the Administrative Agent no later than five (5) Business Days after written demand any additional interest owing as a result of such increased Applicable Margin for such Applicable Period, which payment shall be promptly applied by the Administrative Agent in accordance with the terms hereof. Notwithstanding anything to the contrary in this Agreement, any additional interest hereunder shall not be due and payable until written demand is made for such payment pursuant to this paragraph and accordingly, any nonpayment of such interest as a result of any such inaccuracy shall not constitute a Default or Event of Default (whether retroactively or otherwise), and no such amounts shall be deemed overdue (and no amounts shall accrue interest at the Default Rate), at any time prior to the date that is five (5) Business Days following such written demand. This paragraph shall not limit the rights of the Administrative Agent and the Lenders hereunder.
“Applicable Percentage” means at any time with respect to any Revolving Lender with a Revolving Commitment of any Class, the percentage of the aggregate Revolving Commitments of such Class outstanding at such time represented by such Lender’s Revolving Commitment with respect to such Class at such time. If the Revolving Commitments of such Class have terminated or expired, the Applicable Percentage shall be determined based upon the Revolving Commitments of such Class most recently in effect, giving effect to any assignments of such Class of Revolving Loans, LC Exposures and Swingline Exposures that occur after such termination or expiration.
“Applicable Time” means, with respect to any payments in any Alternative Currency, the local time in the place of settlement for such Alternative Currency as may be determined by the applicable Issuing Bank to be necessary for timely settlement on the relevant date in accordance with normal banking procedures in the place of payment.
“Applicable Discount” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Applicable Discount Notice” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Approved Fund” has the meaning assigned to such term in Section 9.04(b).
“Asset Sale Prepayment Trigger” has the meaning assigned to such term in Section 2.11(c).
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“Assignment and Assumption” means an assignment and assumption entered into by a Lender and an assignee (with the consent of any party whose consent is required by Section 9.04), and accepted by the Administrative Agent pursuant to the terms hereof, substantially in the form of Exhibit G or any other form or changes thereto approved by the Administrative Agent and the Borrower. “Auction” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Auction Amount” has the meaning assigned to such term in the definition “Dutch Auction.”
“Auction Expiration Time” has the meaning assigned to such term in the definition “Dutch Auction.”
“Auction Notice” has the meaning assigned to such term in the definition “Dutch Auction.”
“Auction Party” or “Auction Parties” has the meaning assigned to such term in the definition of “Dutch Auction” or as specified in Section 2.11(i), as the context may require.
“Auto-Renewal Letter of Credit” has the meaning specified in Section 2.05(c).
“Available Amount” means, on any date of determination (the “Reference Date”), an amount determined on a cumulative basis equal to the sum of (without duplication):
(a) $100,000,000; plus
(b) an amount (which shall not be less than zero) equal to 50% of Consolidated Net Income for the period (taken as one accounting period) from the first day of the fiscal quarter of the Borrower during which the Closing Date occurred to and including the last day of the most recently ended fiscal quarter of the Borrower prior to the Reference Date for which consolidated financial statements of the Borrower have been delivered; plus
(c) the cumulative amount of (A) any capital contributions made in cash by any Person other than a Restricted Subsidiary to the Parent after the Closing Date (other than any Cure Amount) and (B) any Net Proceeds of any issuance of Qualified Equity Interests of the Parent (other than any Cure Amount) to any Person other than a Restricted Subsidiary after the Closing Date; plus
(d) 100% of the aggregate net cash proceeds (other than any Cure Amount) and the fair market value (as determined in good faith by the Borrower) of marketable securities or other property contributed to the Qualified Equity Interests of the Parent after the Closing Date by any Person other than a Restricted Subsidiary; plus
(e) to the extent not otherwise included in clause (b) above, (i) the aggregate amount received by the Parent or any Restricted Subsidiary after the Closing Date from cash (or Cash Equivalents) dividends and distributions made by any Unrestricted Subsidiary or any Joint Venture, and returns of principal, cash repayments and similar payments made by any Unrestricted Subsidiary or Joint Venture in respect of Investments made by the Parent or any Restricted Subsidiary to any Unrestricted Subsidiary or Joint Venture pursuant to Section 6.04(z), and (ii) the Net Proceeds in connection with the sale, transfer or other disposition of assets or the Equity Interests of any Unrestricted Subsidiary or Joint Venture of the Parent to any Person other than the Parent or a Restricted Subsidiary after the Closing Date, in each case, to the extent not already reflected as a Return with respect to such Investment credited to any basket amount under Section 6.04; plus
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(f) in the event that the Parent redesignates any Unrestricted Subsidiary as a Restricted Subsidiary after the Closing Date (which, for purposes hereof, shall be deemed to also include (A) the merger, consolidation, liquidation or similar amalgamation of any Unrestricted Subsidiary into the Parent or any Restricted Subsidiary, so long as the Parent or such Restricted Subsidiary is the surviving Person, and (B) the transfer of all or substantially all of the assets of an Unrestricted Subsidiary to the Parent or any Restricted Subsidiary), the fair market value (as determined in good faith by the Parent) of the Investment in such Unrestricted Subsidiary at the time of such redesignation; plus
(g) the aggregate amount of Retained Declined Proceeds and Retained Asset Sale Proceeds retained by the Parent or any of its Restricted Subsidiaries; plus
(h) the fair market value of all Qualified Equity Interests of the Parent issued upon conversion or exchange of Indebtedness or Disqualified Equity Interests of the Parent or any of its Restricted Subsidiaries after the Closing Date; plus
(i) to the extent not otherwise included, the aggregate amount of cash Returns (or proceeds of sales) to the Parent or any Restricted Subsidiary in respect of Investments made pursuant to Section 6.04(z) or (dd); minus
(j) the aggregate amount of (i) Restricted Payments made using the Available Amount pursuant to Section 6.08(a)(xx), (ii) Investments made using the Available Amount pursuant to Section 6.04(z) and (iii) prepayments, redemptions, acquisitions, retirements, cancellations, terminations and repurchases of Indebtedness made using the Available Amount pursuant to Section 6.08(b)(vi)(B), in each case during the period from and including the Business Day immediately following the Closing Date through and including the Reference Date (without taking account of the intended usage of the Available Amount on such Reference Date).
“Bail-in Action” means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
“Bail-in Legislation” means, with respect to the any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-in Legislation Schedule.
“Bankruptcy Code” means Title 11 of the United States Code entitled “Bankruptcy”, as now and hereafter in effect, or any successor statute.
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“Beneficial Owner” means, in the case of a Lender that is classified as a partnership for U.S. federal income tax purposes, the direct or indirect partner or owner of such Lender that is treated, for U.S. federal income tax purposes, as the beneficial owner of a payment by any Loan Party under any Loan Document.
“Board” means the Board of Governors of the Federal Reserve System of the United States of America.
“Borrower” has the meaning assigned to such term in the preamble to this Agreement.
“Borrower Intercompany Loan” has the meaning assigned to such term in the recitals to this Agreement.
“Borrower Materials” has the meaning assigned to such term in Section 5.01.
“Borrowing” means (a) Loans of the same Class, Type and currency made, converted or continued on the same date and, in the case of Eurocurrency Loans, as to which a single Interest Period is in effect or (b) a Swingline Loan.
“Borrowing Request” means a request by the Borrower for a Borrowing in accordance with Section 2.03 substantially in the form of Exhibit A hereto or such other form as may be approved by the Administrative Agent and the Borrower, including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent, appropriately completed and signed by a Responsible Officer of the Borrower.
“Business Day” means (a) for all purposes other than as covered by clauses (b), (c) and (d) below, any day that is not a Saturday, Sunday or other day on which commercial banks in New York City or London are authorized or required by law to remain closed, (b) if such day relates to any fundings, disbursements, settlements or payments in connection with a Loan or Letter of Credit denominated in Dollars, any day described in clause (a) that is also a day for trading by and between banks in Dollar deposits in the London interbank currency markets and not a legal holiday in the principal financial markets or a day in which banking institutions are required to be closed in the home country of any relevant Alternative Currency (other than Sterling and Euros), (c) if such day relates to any fundings, disbursements, settlements or payments in connection with a Loan or Letter of Credit denominated in Euros, any day described in clauses (a) and (b) that is also a day on which the Trans-European Automated Real Time Gross Settlement Express Transfer (TARGET) payment system is open for the settlement of payment in Euros, and (d) if such day relates to any fundings, disbursements, settlements or payments in connection with a Loan or Letter of Credit denominated in a currency other than Dollars or Euros, means any such day on which banks are open for foreign exchange business in the principal financial center of the country of such currency.
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“Capital Expenditures” means, for any period, the additions to property, plant and equipment of the Parent and its Restricted Subsidiaries that are (or should be) set forth in a consolidated statement of cash flows of the Parent and its Restricted Subsidiaries for such period prepared in accordance with IFRS, but excluding in each case any such expenditure (i) made to restore, replace, rebuild, develop, maintain, improve or upgrade property, to the extent such expenditure is made with, or subsequently reimbursed out of, insurance proceeds, indemnity payments, condemnation or similar awards (or payments in lieu thereof) or damage recovery proceeds or other settlements relating to any damage, loss, destruction or condemnation of such property, (ii) constituting reinvestment of the Net Proceeds of any event described in clause (a) or (b) of the definition of the term “Prepayment Event,” (iii) made by the Parent or any Restricted Subsidiary as payment of the consideration for any Acquisition (including any property, plant and equipment obtained as a part thereof), (iv) made by the Parent or any Restricted Subsidiary to effect leasehold improvements to any property leased by the Parent or such Restricted Subsidiary as lessee, to the extent that such expenses have been reimbursed by the landlord, (v) actually paid for by a third party (excluding the Parent or any Restricted Subsidiary) and for which none of the Parent or any Restricted Subsidiary has provided or is required to provide or incur, directly or indirectly, any consideration or monetary obligation to such third party or any other Person (whether before, during or after such period), (vi) constituting Capitalized Software Expenditures or research and development expenditures that are treated as additions to property, plant and equipment or other capital expenditures in accordance with IFRS, (vii) made with the Net Proceeds from any issuance of Qualified Equity Interests of the Parent, and (viii) the purchase price of equipment that is purchased simultaneously with the trade in or sale of existing equipment.
“Capital Lease Obligations” of any Person means, subject to Section 1.04, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital or finance leases on a statement of financial position of such Person under IFRS and the amount of such obligations shall be the capitalized amount thereof determined in accordance with IFRS.
“Capitalized Software Expenditures”means, for any period, the aggregate of all expenditures (whether paid in cash or accrued as liabilities) by a Person and its Restricted Subsidiaries during such period in respect of purchased software or internally developed software and software enhancements that, in conformity with IFRS, are or are required to be reflected as capitalized costs on the consolidated statement of financial position of a Person and its Restricted Subsidiaries.
“Captive Insurance Subsidiaries” means, collectively or individually as of any date of determination, those regulated Subsidiaries of the Parent primarily engaged in the business of providing insurance and insurance related services to the Parent, its other Subsidiaries and certain other Persons.
“Cash Collateralize” means to deposit, or designate funds previously deposited, in a deposit account subject to control of the Administrative Agent or Collateral Agent, solely for the benefit of the Issuing Bank or Lenders, as collateral for Letters of Credit or obligations of Lenders to fund participations in respect of Letters of Credit, cash or deposit account balances in an aggregate amount equal to 100% (or, in the case where the obligation to Cash Collateralize arises from a voluntary termination of Revolving Commitments, 103%) of the maximum amount available to be drawn under such Letters of Credit or, if the Issuing Bank shall agree in its sole discretion, other credit support, in each case pursuant to documentation in form and substance reasonably satisfactory to the Issuing Bank. “Cash Collateral” shall have a meaning correlative to the foregoing.
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“Cash Equivalents” means:
(a) (i) Dollars, Euro, Sterling, or any national currency of any member state of the European Union; or (ii) any other foreign currency held by the Parent or any of its Restricted Subsidiaries in the ordinary course of business;
(b) securities issued or directly and fully Guaranteed or insured by the United States or Canada or any entity comprising the United Kingdom governments, a member state of the European Union or, in each case, any agency or instrumentality of thereof (provided that the full faith and credit of such country or such member state is pledged in support thereof), having maturities of not more than two years from the date of acquisition;
(c) certificates of deposit, time deposits, eurodollar time deposits, overnight bank deposits or bankers’ acceptances having maturities of not more than one year from the date of acquisition thereof issued by (x) any Lender or affiliate thereof or (y) by any bank or trust company (i) whose commercial paper is rated at least “A-2” or the equivalent thereof by S&P or at least “P-2” or the equivalent thereof by Moody’s (or if at the time neither is issuing comparable ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization) or (ii) (in the event that the bank or trust company does not have commercial paper which is rated) having combined capital and surplus in excess of $100 million;
(d) repurchase obligations for underlying securities of the types described in clauses (b) and (c) entered into with any Person referenced in clause (c) above;
(e) securities with maturities of one year or less from the date of acquisition backed by standby letters of credit issued by any Person referenced in clause (c);
(f) commercial paper rated at the time of acquisition thereof at least “A-2” or the equivalent thereof by S&P or “P-2” or the equivalent thereof by Moody’s or carrying an equivalent rating by a Nationally Recognized Statistical Rating Organization, if both of the two named rating agencies cease publishing ratings of investments or, if no rating is available in respect of the commercial paper, the issuer of which has an equivalent rating in respect of its long-term debt, and in any case maturing within one year after the date of acquisition thereof;
(g) readily marketable direct obligations issued by any state, commonwealth or territory of the United States of America, any province or territory of Canada, any entity comprising the United Kingdom, any member of the European Union, any other foreign government or any political subdivision or taxing authority thereof, in each case, having one of the two highest rating categories obtainable from either Moody’s or S&P (or, if at the time, neither is issuing comparable ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization) with maturities of not more than two years from the date of acquisition;
(h) Indebtedness or preferred stock issued by Persons with a rating of “BBB-” or higher from S&P or “Baa3” or higher from Moody’s (or, if at the time, neither is issuing comparable ratings, then a comparable rating of another Nationally Recognized Statistical Rating Organization) with maturities of 12 months or less from the date of acquisition;
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(i) bills of exchange issued in the United States, Canada, any entity comprising the United Kingdom, a member state of the European Union or Japan eligible for rediscount at the relevant central bank and accepted by a bank (or any dematerialized equivalent);
(j) interests in any investment company, money market or enhanced high yield fund which invests at least 90% of its assets in instruments of the type specified in clauses (a) through (i) above;
(k) instruments and investments of the type and maturity described in clause (a) through (j) denominated in any foreign currency or of foreign obligors, which investments or obligors are, in the reasonable judgment of the Borrower, comparable in investment quality to those referred to above;
(l) the marketable securities portfolio owned by the Parent and its Subsidiaries on the Effective Date; and
(m) solely with respect to any Restricted Subsidiary that is a Foreign Subsidiary, investments of comparable tenor and credit quality to those described in the foregoing clauses (b) through (l) customarily utilized in countries in which such Foreign Subsidiary operates for short term cash management purposes.
Notwithstanding the foregoing, Cash Equivalents shall include amounts denominated in currencies other than set forth in clause (a) above; provided that such amounts are converted into currencies listed in clause (a) within ten Business Days following the receipt of such amounts.
“Cash Management Agreement” means any agreement to provide Cash Management Services.
“Cash Management Obligations” means, as to any Person, any and all obligations of such Person, whether absolute or contingent and however and whenever created, arising, evidenced or acquired (including all renewals, extensions and modifications thereof and substitutions therefor), under any Cash Management Agreement.
“Cash Management Services” means any one or more of the following types of services or facilities, including without limitation (a) Automated Clearing House (ACH) transactions, (b) cash management services, including controlled disbursement services, treasury, depository, overdraft, credit or debit card, stored value card, electronic funds transfer services, and (c) foreign exchange facilities or other cash management arrangements in the ordinary course of business. For the avoidance of doubt, Cash Management Services do not include Swap Agreements.
“CFC” means a “controlled foreign corporation” within the meaning of Section 957 of the Code.
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“CFC Holding Company” means any Domestic Subsidiary that owns no material assets other than cash and cash equivalents and equity interests in and/or debt of one or more (a) Foreign Subsidiaries that are CFCs or (b) other Domestic Subsidiaries that own no material assets other than cash and cash equivalents and equity interests in and/or debt of one or more Foreign Subsidiaries that are CFCs.
“Change in Control” means the occurrence of any of the following events after the Effective Date: (a) any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act), but excluding any employee benefit plan of such Person and any Person acting in its capacity as trustee, agent or other fiduciary or administrator of any employee benefit plan of such person, shall become the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the Exchange Act), directly or indirectly, of more than 50% of the outstanding voting securities having ordinary voting power for the election of directors of the Parent; or (b) the Parent shall cease to own, directly or indirectly through wholly owned Subsidiaries, of record and beneficially, 100% of each class of outstanding Equity Interests of the Borrower.
“Change in Law” means (a) the adoption of any law, rule, treaty or regulation after the Closing Date (or, solely with respect to the Lenders with respect to the Tranche B-3 Term Loans and Euro Tranche Term Loans, the Escrow Funding Date), (b) any change in any law, rule, treaty or regulation or in the interpretation or application thereof by any Governmental Authority after the Closing Date (or, solely with respect to the Lenders with respect to the Tranche B-3 Term Loans and Euro Tranche Term Loans, the Escrow Funding Date) or (c) compliance by any Lender or the Issuing Bank (or, for purposes of Section 2.15(b), by any lending office of such Lender or by such Lender’s or the Issuing Bank’s holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the Closing Date (or, solely with respect to the Lenders with respect to the Tranche B-3 Term Loans and Euro Tranche Term Loans, the Escrow Funding Date); provided that notwithstanding anything herein to the contrary, (x) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (y) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a “Change in Law” regardless of the date enacted, adopted or issued.
“Charges” has the meaning assigned to such term in Section 9.13.
“Class,” when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, are Revolving Loans, Tranche B-2 Term Loans, Tranche B-3 Term Loans, Euro Tranche Term Loans, Incremental Term Loans, Incremental Revolving Loans, Other Term Loans, Other Revolving Loans, Extended Term Loans, Extended Revolving Loans, Replacement Term Loans or Swingline Loans; when used in reference to any Commitment, refers to whether such Commitment is a Tranche B-2 Term Commitment, Tranche B-3 Term Commitment, Euro Tranche Term Commitment, Revolving Commitment, Incremental Term Commitment, Incremental Revolving Commitment, Extended Revolving Commitments, Other Term Commitment and Other Revolving Commitment; and when used in reference to any Lender, refers to whether such Lender has a Loan or Commitment with respect to a particular Class. Incremental Term Loans, Extended Term Loans, Other Term Loans and Replacement Term Loans (together with the respective Commitments in respect thereof) shall, at the election of the Borrower, be construed to be in different Classes. Incremental Revolving Loans, Extended Revolving Loans and Other Revolving Loans (together with the respective Commitments in respect thereof) shall, at the election of the Borrower, be construed to be in different Classes.
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“CLO” has the meaning assigned to such term in Section 9.04(b).
“Closing Date” means the date on which the conditions precedent set forth in Section 8 of Amendment No. 3 shall have been satisfied or waived.
“Co-Documentation Agents” means JPMorgan Chase Bank, N.A. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or any successor co-documentation agents.
“Co-Syndication Agents” means HSBC Securities (USA) Inc., Barclays Bank plc and The Royal Bank of Scotland plc or any successor co-syndication agents.
“Code” means the Internal Revenue Code of 1986, as amended.
“Collateral” means any and all “Collateral” or “Secured Assets” (or any other term of similar meaning), as defined in any applicable Security Document, and any and all property of whatever kind or nature subject to or purported to be subject to a Lien under any Security Document, but shall in all events exclude all Excluded Property.
“Collateral Agent” means JPMorgan Chase Bank, N.A., in its capacity as collateral agent (including, if applicable, in the case of any UK Security Documents, as trustee of the Liens constituted thereby) for the Secured Parties, and its successors in such capacity as provided in Article VIII.
“Commitment” means (a) with respect to any Person, such Person’s Tranche B-2 Term Commitment, Tranche B-3 Term Commitment, Euro Tranche Term Commitment, Revolving Commitment, Incremental Term Commitment, Incremental Revolving Commitment, Other Term Commitment, Extended Revolving Commitment or Other Revolving Commitment or any combination thereof (as the context requires) and (b) with respect to the Swingline Lender, its Swingline Commitment.
“Commodity Exchange Act” means the Commodity Exchange Act (7 U.S.C. § 1 et seq.), as amended from time to time, and any successor statute.
“Communications” has the meaning assigned to such term in Section 9.15.
“Company” has the meaning assigned to such term in the preamble to this Agreement.
“Compliance Certificate” means a certificate substantially in the form of Exhibit J annexed hereto.
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“Consolidated Depreciation and Amortization Expense” means, with respect to any Person for any period, the total amount of depreciation and amortization expense, including amortization or write-off of (i) intangible assets and non-cash organization costs, (ii) deferred financing fees or costs and (iii) Capitalized Software Expenditures or costs, capitalized expenditures, customer acquisition costs and incentive payments, conversion costs and contract acquisition costs, the amortization of original issue discount resulting from the issuance of Indebtedness at less than par and amortization of favorable or unfavorable lease assets or liabilities, of such Person and its Restricted Subsidiaries for such period on a consolidated basis and otherwise determined in accordance with IFRS and any write down of assets or asset value carried on the statement of financial position.
“Consolidated EBITDA” for any period means the Consolidated Net Income for such period:
(1) | increased (without duplication) by: |
(a) | provision for taxes based on income or profits or capital, including, without limitation, federal, state, provincial, local, foreign, unitary, excise, property, franchise and similar taxes and foreign withholding and similar taxes (including any penalties and interest) of such Person paid or accrued during such period to the extent the same were deducted (and not added back) in computing Consolidated Net Income; plus |
(b) | Consolidated Interest Expense of such Person for such period (including (x) net losses on Swap Obligations or other derivative instruments entered into for the purpose of hedging interest rate risk and (y) costs of surety bonds in connection with financing activities), to the extent the same were deducted (and not added back) in calculating such Consolidated Net Income; plus |
(c) | Consolidated Depreciation and Amortization Expense of such Person for such period to the extent the same were deducted (and not added back) in computing Consolidated Net Income; plus |
(d) | (x) Transaction Costs and (y) any fees, costs, expenses or charges (other than Consolidated Depreciation and Amortization Expense) related to any actual, proposed or contemplated issuance or registration (actual or proposed) of Equity Interests, any one time expense relating to enhanced accounting functions or other transaction costs or any Investment, acquisition, disposition, recapitalization, Restricted Payment or the incurrence or registration (actual or proposed) of Indebtedness (including a refinancing thereof) (in each case, whether or not consummated or successful), including (i) such fees, expenses or charges related to any Loans, the offering of Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes or any Permitted Refinancing and this Agreement and any Securitization Fees and such fees, expenses or charges related to any Loans, the offering of Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes or any Permitted Refinancing, in each case, as defined in the Seattle Credit Agreement, and (ii) any amendment, waiver or other modification of Loans, Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes and Loans, Additional Debt, Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes, in each case, as defined in the Seattle Credit Agreement. Receivables Facilities, Securitization Facilities, or any Permitted Refinancing, any Loan Document, any Seattle Loan Document, any Securitization Fees, any other Indebtedness or any Equity Interests, in each case, whether or not consummated, deducted (and not added back) in computing Consolidated Net Income; plus |
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(e) | the amount of any restructuring charge, reserve, integration cost or other business optimization expense or cost (including charges directly related to implementation of cost-savings initiatives), that is deducted (and not added back) in such period in computing Consolidated Net Income including, without limitation, those related to severance, retention, signing bonuses, relocation, recruiting and other employee related costs, future lease commitments and costs related to the opening and closure and/or consolidation of facilities; plus |
(f) | any non-cash charges, write-downs, expenses, losses or items reducing Consolidated Net Income for such period including any share based compensation charge and any impairment charges or the impact of purchase accounting, or other items classified by the Parent as special items; plus |
(g) | [Reserved]; |
(h) | (i) the amount of cost savings, operating expense reductions, other operating improvements and initiatives and synergies projected by the Borrower in good faith to be reasonably anticipated to be realizable or a plan for realization shall have been established within eighteen (18) months of the date thereof (which will be added to Consolidated EBITDA as so projected until fully realized and calculated on a pro forma basis as though such cost savings, operating expense reductions, other operating improvements and initiatives and synergies had been realized on the first day of such period), net of the amount of actual benefits realized during such period from such actions; provided that, to the extent any such operational changes are not associated with the Transactions or a Specified Transaction, all steps have been taken for realizing such cost savings and such cost savings are reasonably identifiable and factually supportable (in the good faith determination of the Borrower); and (ii) each of the adjustments of the nature set forth (x) in the model delivered to the Agent on March 30, 2017 or in the confidential information memorandum of the Borrower dated April 2017, or (y) on Schedule 1.01(a);plus |
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(i) | the amount of loss on sale of Securitization Assets and related assets to the Securitization Subsidiary in connection with a Qualified Securitization Financing; plus |
(j) | any costs or expense incurred by the Parent or any Restricted Subsidiary pursuant to any management equity plan or stock option plan or any other management or employee benefit plan or agreement or any stock subscription or shareholder agreement, to the extent that such costs or expenses are funded with cash proceeds contributed to the capital of the Parent or net cash proceeds of an issuance of Qualified Equity Interests of the Parent (in each case, except to the extent comprising any Cure Amount); plus |
(k) | cash receipts (or any netting arrangements resulting in reduced cash expenditures) not representing Consolidated EBITDA or Consolidated Net Income in any period to the extent non-cash gains relating to such income were deducted in the calculation of Consolidated EBITDA pursuant to clause (2) below for any previous period and not added back; plus |
(l) | any loss attributable to non-controlling interests included in the consolidated financial statements due to the application of IFRS 10 “Consolidated Financial Statements” and related pronouncements; plus |
(m) | realized foreign exchange losses resulting from the impact of foreign currency changes on the valuation of assets or liabilities on the statement of financial position of the Parent and its Restricted Subsidiaries; plus |
(n) | net realized losses from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements; plus |
(o) | the amount of any minority interest expense consisting of Subsidiary income attributable to minority equity interests of third parties in any non-wholly owned Subsidiary deducted in calculating Consolidated Net Income (and not added back in such period to Consolidated Net Income); plus |
(p) | costs related to the implementation of operational and reporting systems and technology initiatives. |
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(2) | decreased (without duplication) by: (a) non-cash gains increasing Consolidated Net Income of such Person for such period, excluding any non-cash gains to the extent they represent the reversal of an accrual or reserve for a potential cash item that reduced Consolidated EBITDA in any prior period and any non-cash gains with respect to cash actually received in a prior period so long as such cash did not increase Consolidated EBITDA in such prior period; plus (b) realized foreign exchange income or gains resulting from the impact of foreign currency changes on the valuation of assets or liabilities on the statement of financial position of the Parent and its Restricted Subsidiaries; plus (c) any net realized income or gains from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements; plus (d) any net profit attributable to non-controlling interests included in the consolidated financial statements due to the application of IFRS 10 “Consolidated Financial Statements” and related pronouncements; plus (e) all cash payments made during such period to the extent made on account of non-cash reserves and other non-cash charges added back to Consolidated Net Income pursuant to clause (f) above in a previous period (it being understood that this clause (2)(e) shall not be utilized in reversing any non-cash reserve or charge added to Consolidated Net Income); plus (f) the amount of any minority interest income consisting of Subsidiary loss attributable to minority equity interests of third parties in any non-wholly owned Subsidiary added to Consolidated Net Income (and not deducted in such period from Consolidated Net Income); plus |
(3) | increased or decreased (without duplication) by, as applicable, any adjustments resulting for the application of IAS 37 “Provisions, contingent liabilities and contingent assets” or any comparable regulation. |
For purposes of determining compliance with any financial test or ratio hereunder (including any incurrence test), (x) Consolidated EBITDA of any Person, property, business or asset acquired by the Parent or any Restricted Subsidiary during such period and of any Unrestricted Subsidiary that is converted into a Restricted Subsidiary shall be included in determining Consolidated EBITDA of the Parent and its Restricted Subsidiaries for any period, (y) Consolidated EBITDA of any Restricted Subsidiary or any operating entity for which historical financial statements are available that is Disposed of during such period or any Restricted Subsidiary that is converted into a Unrestricted Subsidiary during such period shall be excluded in determining Consolidated EBITDA of the Parent and its Restricted Subsidiaries for any period, and (z) Consolidated EBITDA shall be calculated on a Pro Forma Basis. Unless otherwise provided herein, Consolidated EBITDA shall be calculated with respect to the Parent and its Restricted Subsidiaries.
“Consolidated Interest Expense” means, with respect to any Person for any period, without duplication, the sum of:
(1) | consolidated interest expense or finance costs of such Person and its Restricted Subsidiaries for such period, to the extent such expense was deducted (and not added back) in computing Consolidated Net Income (including (a) amortization of original issue discount or premium resulting from the issuance of Indebtedness at less than par, (b) all commissions, discounts and other fees and charges owed with respect to letters of credit or bankers acceptances or any similar facilities or financing and hedging agreements, (c) non-cash interest payments (but excluding any non-cash interest expense attributable to the movement in the mark to market valuation of any Swap Obligations or other derivative instruments pursuant to IFRS), (d) the interest component of Capital Lease Obligations, (e) net payments, if any, pursuant to interest rate Swap Obligations with respect to Indebtedness, (f) fees and expenses paid to the Agents, (g) other bank and financing fees, and (h) costs of surety bonds in connection with financing activities); plus |
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(2) | consolidated capitalized interest expense or finance costs of such Person and its Restricted Subsidiaries for such period, whether paid or accrued; plus |
(3) | all cash dividends or other distributions paid (excluding items eliminated in consolidation) on any series of preferred stock of any Subsidiary of such Person during such period; plus |
(4) | all cash dividends or other distributions paid (excluding items eliminated in consolidation) on any series of Disqualified Equity Interests during this period. |
For purposes of this definition, interest on a Capital Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by such Person to be the rate of interest implicit in such Capital Lease Obligation in accordance with IFRS.
“Consolidated Net Income” means, for any period, the net income (loss) of the Parent and its Restricted Subsidiaries determined on a consolidated basis on the basis of IFRS; provided, however, that there will not be included in such Consolidated Net Income (other than in respect of clause (o) which will be added to Consolidated Net Income):
(a) | any profit (loss) for such period of any Person if such Person is not a Restricted Subsidiary, except that any equity in the profit of any such Person for such period will be included in such Consolidated Net Income up to the aggregate amount of cash or Cash Equivalents actually distributed or that (as reasonably determined by a Responsible Officer of the Borrower) could have been distributed by such Person during such period to the Parent or any Restricted Subsidiary as a dividend or other distribution or as a return on investment; |
(b) | any profit (or loss) for such period realized upon the sale or other disposition of any asset or disposed operations of the Borrower or any Restricted Subsidiaries (including pursuant to any Sale Leaseback which is not sold or otherwise disposed of in the ordinary course of business); |
(c) | any extraordinary, exceptional, unusual or nonrecurring gain, loss, charge or expense, or any charges, expenses or reserves in respect of any restructuring, redundancy or severance expense; |
(d) | the cumulative effect of a change in accounting principles; |
(e) | any (i) non-cash compensation charge or expense arising from any grant of stock, stock options or other equity based awards and any non-cash deemed finance charges in respect of any pension liabilities or other provisions or on the re-valuation of any benefit plan obligation and (ii) income (loss) attributable to deferred compensation plans or trusts shall be excluded; |
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(f) | all deferred financing costs written off or amortized and premiums paid or other expenses incurred directly in connection with any early extinguishment of Indebtedness and any net gain (loss) from any write-off or forgiveness of Indebtedness; |
(g) | any unrealized gains or losses in respect of Swap Obligations or any ineffectiveness recognized in earnings related to qualifying hedge transactions or the fair value of changes therein recognized in earnings for derivatives that do not qualify as hedge transactions, in each case, in respect of Swap Obligations; |
(h) | any unrealized foreign currency transaction gains or losses in respect of obligations of any Person denominated in a currency other than the functional currency of such Person and any unrealized foreign exchange gains or losses relating to translation of assets and liabilities denominated in foreign currencies; |
(i) | any unrealized foreign currency translation or transaction gains or losses in respect of Indebtedness or other obligations of the Parent or any Restricted Subsidiary owing to the Parent or any Restricted Subsidiary; |
(j) | any purchase accounting effects including, but not limited to, adjustments to inventory, property and equipment, software and other intangible assets and deferred revenue in component amounts required or permitted by IFRS and related authoritative pronouncements (including the effects of such adjustments pushed down to the Parent and the Restricted Subsidiaries), as a result of the Transactions or any consummated acquisition, or the amortization or write-off of any amounts thereof (including any write-off of in process research and development); |
(k) | any goodwill or other asset impairment charge or write-off or write-down; |
(l) | any after-tax effect of income (loss) from the early retirement, extinguishment or cancellation of Indebtedness or Swap Obligations or other derivative instruments shall be excluded; |
(m) | accruals and reserves that are established within twelve months after the Acquisition Closing Date that are so required to be established as a result of the Transactions in accordance with IFRS, shall be excluded; |
(n) | any net unrealized gains and losses resulting from Swap Obligations or embedded derivatives that require similar accounting treatment and the application of IFRS 9 “Financial Instruments” and related pronouncements shall be excluded; |
(o) | proceeds from any business interruption insurance to the extent not already included in Consolidated Net Income; |
(p) | the amount of any expense to the extent a corresponding amount is received in cash by the Parent and the Restricted Subsidiaries from a Person other than the Parent or any Restricted Subsidiaries, provided such payment has not been included in determining Consolidated Net Income (it being understood that if the amounts received in cash under any such agreement in any period exceed the amount of expense in respect of such period, such excess amounts received may be carried forward and applied against expense in future periods); |
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(q) | gains and losses on the sale, exchange or other disposition of assets outside the ordinary course of business or abandonment of assets and from discontinued operations; |
(r) | cash and non-cash charges, paid or accrued, and gains resulting from the application of IFRS 3 “Business Combinations” (including with respect to earn-outs incurred by the Parent or any of its Restricted Subsidiaries); and |
(s) | rental payments under Synthetic Leases. |
In addition, notwithstanding anything to the contrary in the foregoing, Consolidated Net Income shall exclude (i) any expenses and charges that are reimbursed by indemnification or other reimbursement provisions, or so long as the Borrower has made a determination that there exists reasonable evidence that such amount will in fact be indemnified or reimbursed (and such amount is in fact reimbursed within 365 days of the date of such charge or payment (with a deduction for any amount so added back to the extent not so reimbursed within such 365 days)), in connection with any investment or any sale, conveyance, transfer or other disposition of assets permitted hereunder (ii) to the extent covered by insurance and actually reimbursed, or, so long as the Borrower has made a determination that there exists reasonable evidence that such amount will in fact be reimbursed by the insurer and such amount is in fact reimbursed within 365 days of the date of such evidence (with a deduction for any amount so added back to the extent not so reimbursed within 365 days), expenses with respect to liability or casualty events or business interruption, (iii) any expenses and charges to the extent paid for, or so long as the Borrower has made a determination that there exists reasonable evidence that such amount will in fact be reimbursed by (and such amount is in fact reimbursed within 365 days of the date of such payment (with a deduction for any amount so added back to the extent not so reimbursed within 365 days)), any third party other than such Person or any of its Restricted Subsidiaries.
“Consolidated Total Assets” means, as of any date of determination, the amount that would, in conformity with IFRS, be set forth opposite the caption “total assets” (or any like caption) on the most recent consolidated statement of financial position of the Parent and the Restricted Subsidiaries at such date or, for the period prior to the time any such statements are so delivered, the pro forma financial statements of the Parent giving effect to the Transactions.
“Consolidated Working Capital” shall mean, at any date, the excess (which may be a negative number) of (a) the sum of all amounts (other than cash and Cash Equivalents) that would, in conformity with IFRS, be set forth opposite the caption “total current assets” (or any like caption) on a consolidated balance sheet of the Parent and the Restricted Subsidiaries at such date excluding the current portion of income tax receivables, deferred financing fees and assets held for sale over (b) the sum of all amounts that would, in conformity with IFRS, be set forth opposite the caption “total current liabilities” (or any like caption) on a consolidated statement of financial position of the Parent and the Restricted Subsidiaries on such date, including deferred revenue but excluding, without duplication, (i) the current portion of any long term debt and all revolving loans, (ii) all Indebtedness consisting of Loans and LC Exposure and Capital Lease Obligations to the extent otherwise included therein, (iii) the current portion of interest payable and (iv) the current portion of income tax liabilities; provided that Consolidated Working Capital shall be calculated without giving effect to (w) purchase accounting, (x) any assets or liabilities acquired, assumed, sold or transferred in any Acquisition or Disposition pursuant to Section 6.05(k) or Section 6.05(bb), (y) as a result of the reclassification of items from current to non-current and vice versa or (z) changes to Consolidated Working Capital resulting from non-cash charges and credits to consolidated current assets and consolidated current liabilities (including, without limitation, derivatives and tax receivables and liabilities).
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“Contract Consideration” shall have the meaning provided in the definition of “Excess Cash Flow.”
“Control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms “Controlling” and “Controlled” have meanings correlative thereto.
“Credit Agreement Refinanced Debt” has the meaning assigned to such term in the definition of “Credit Agreement Refinancing Indebtedness.”
“Credit Agreement Refinancing Indebtedness” means (a) Permitted First Priority Replacement Debt, (b) Permitted Second Priority Replacement Debt, (c) Permitted Unsecured Replacement Debt, and/or (d) Other Term Loans or Other Revolving Commitments (including the corresponding Other Revolving Loans incurred pursuant to such Other Revolving Commitments) obtained pursuant to a Refinancing Amendment, in each case, issued, incurred or obtained (including by means of the extension or renewal of existing Indebtedness) in exchange for, or to extend, renew, replace, restructure or refinance, in whole or in part, any or all Classes of then existing Term Loans, Revolving Loans or Revolving Commitments (in each case including any successive Credit Agreement Refinancing Indebtedness) (the “Credit Agreement Refinanced Debt”); provided that (v) such Credit Agreement Refinancing Indebtedness (including, if such Credit Agreement Refinancing Indebtedness includes any Other Revolving Commitments, such Other Revolving Commitments) is in an original aggregate principal amount not greater than the aggregate principal amount of the Credit Agreement Refinanced Debt (including, in the case of Credit Agreement Refinanced Debt consisting, in whole or in part, of Revolving Commitments or Other Revolving Commitments, the amount thereof) plus any Term Loans and/or Revolving Commitments plus other Indebtedness that could otherwise be (A) incurred hereunder (subject to a dollar-for-dollar usage of any basket (other than any basket that provides for Credit Agreement Refinancing Indebtedness) set forth in Section 6.01) and (B) if such Indebtedness is secured, subject to a dollar-for-dollar usage of any basket (other than any basket that provides for Liens on Credit Agreement Refinancing Indebtedness) set forth in Section 6.02, plus premiums and accrued and unpaid interest, fees and expenses in respect thereof plus other reasonable costs, fees and expenses (including upfront fees and original issue discount) incurred in connection with such Credit Agreement Refinancing Indebtedness, (w) such Credit Agreement Refinancing Indebtedness does not mature prior to the maturity date of and, except in the case of Other Revolving Commitments, has a Weighted Average Life to Maturity equal to or longer than the Weighted Average Life to Maturity at such time of the corresponding Class of Credit Agreement Refinanced Debt (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Credit Agreement Refinanced Debt), (x) no Restricted Subsidiary is a borrower or a guarantor with respect to such Indebtedness unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently guaranteed or borrowed, as applicable, the Obligations, (y) such Credit Agreement Refinanced Debt shall be repaid, defeased or satisfied and discharged, and all accrued and unpaid interest, fees then due and premiums (if any) in connection therewith shall be paid substantially contemporaneously with the incurrence of the Credit Agreement Refinancing Indebtedness; and (z) if such Credit Agreement Refinancing Indebtedness is Permitted First Priority Replacement Debt, Permitted Second Priority Replacement Debt and/or Permitted Unsecured Replacement Debt, the covenants and events of default and other terms of which (other than maturity, fees, discounts, interest rate, redemption terms and redemption premiums, which shall be determined in good faith by the Borrower) shall be on market terms at the time of issuance (as determined in good faith by the Borrower) of such Credit Agreement Refinancing Indebtedness; provided that such Indebtedness (other than Indebtedness consisting of revolving commitments and revolving loans) shall not have the benefit of any financial maintenance covenant unless (x) the Term Loans have the benefit of such financial maintenance covenant on the same terms or (y) the Term Loans have in the future been provided with the benefit of a financial maintenance covenant, in which case such Indebtedness issued after such future date may be provided with the benefit of the same financial maintenance covenant on the same terms. For the avoidance of doubt, (I) Credit Agreement Refinancing Indebtedness consisting of Other Term Loans or Other Revolving Commitments (including the corresponding Other Revolving Loans incurred pursuant to such Other Revolving Commitments) shall be subject to the requirements set forth in Section 2.21, and (II) to the extent that such Credit Agreement Refinanced Debt consists, in whole or in part, of (A) Revolving Commitments or Other Revolving Commitments, such Revolving Commitments or Other Revolving Commitments or (B) Revolving Loans, Other Revolving Loans or Swingline Loans, the corresponding Revolving Commitments or Other Revolving Commitments, in each case, shall be terminated, and all accrued fees in connection therewith shall be paid substantially contemporaneously with the incurrence of the Credit Agreement Refinancing Indebtedness.
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“Credit Event” has the meaning assigned to such term in Section 4.02.
“Cure Amount” has the meaning assigned to such term in Section 7.03.
“Cure Right” has the meaning assigned to such term in Section 7.03.
“Debtor Relief Laws” means the Bankruptcy Code, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect and affecting the rights of creditors generally.
“Declined Proceeds” has the meaning assigned to such term in Section 2.11(g).
“Default” means any event or condition specified in Article VII that after notice, lapse of applicable grace periods or both would, unless cured or waived hereunder, constitute an Event of Default; provided that any Default that results solely from the taking of an action that would have been permitted but for the continuation of a previous Default will be deemed to be cured if such previous Default is cured prior to becoming an Event of Default.
“Defaulting Lender” means, subject to Section 2.22(b), any Lender that (a) has failed to (i) fund all or any portion of its Loans within two Business Days of the date such Loans were required to be funded hereunder, or (ii) pay to the Administrative Agent, any Issuing Bank, the Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within two Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent or any Issuing Bank in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect, (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct parent company that has, (i) become the subject of a proceeding under the Bankruptcy Code, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the Federal Deposit Insurance Corporation or any other state or federal regulatory authority acting in such a capacity or (iii) become the subject of a Bail-in Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority or instrumentality) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination made in good faith by the Administrative Agent that a Lender is a Defaulting Lender under clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 2.22(b)) upon delivery of written notice of such determination to the Borrower, each Issuing Bank and each Lender.
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“Defaulting Seattle Lender” means a Seattle Lender that is a “Defaulting Lender” as defined in the Seattle Credit Agreement.
“Designated Non-Cash Consideration” means the fair market value (as determined in good faith by the Borrower) of non-cash consideration received by the Parent or one of its Restricted Subsidiaries in connection with a Disposition that is so designated as Designated Non-Cash Consideration pursuant to an officer’s certificate, setting forth the basis of such valuation, less the amount of cash or Cash Equivalents received in connection with a subsequent payment, redemption, retirement, sale or other disposition of such Designated Non-Cash Consideration. A particular item of Designated Non-Cash Consideration will no longer be considered to be outstanding when and to the extent it has been paid, redeemed or otherwise retired or sold or otherwise disposed of in compliance with Section 6.05.
“Direct Competitor” means any Person who is a competitor of the Parent and its Subsidiaries (including the Company and its subsidiaries) or any Affiliate of such competitor (other than, unless a Disqualified Lender or an Excluded Affiliate, bona fide fixed income investors or debt funds that are (i) engaged in making, purchasing, holding or otherwise investing in commercial loans, bonds and similar extensions of credit in the ordinary course of business) and (ii) managed, sponsored or advised by any person that is controlling, controlled by or under common control with such competitor or Affiliate thereof, as applicable, but only to the extent that no personnel involved with the investment in such competitor or Affiliate thereof, as applicable, (x) makes (or has the right to make or participate with others in making) investment decisions on behalf of such debt fund, investment vehicle, regulated bank entity or unregulated lending entity or (y) has access to any information (other than information that is publicly available) relating to the Parent and its Subsidiaries (including the Company and its subsidiaries) and/or any entity that forms a part of any of their respective businesses (including any of their respective subsidiaries).
“Disclosed Matters” means the actions, suits and proceedings and the environmental matters disclosed on Schedule 3.06.
“Disclosure and Transparency Rules” means the latest edition of the “Disclosure and Transparency Rules” issued made by the FCA under Part VI of the FSMA.
“Discount Range” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Disposition” or “Dispose” means the sale, transfer, license, lease (as lessor) or other disposition (including any Sale Leaseback transaction) of any property by any Person, including any sale, assignment, transfer or other disposal, with or without recourse, of any Equity Interests owned by such Person, or any notes or trade or accounts receivable or any rights and claims associated therewith; provided that “Disposition” and “Dispose” shall be deemed not to include any issuance or sale by such Person of its Equity Interests or other securities to another Person.
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“Disqualified Equity Interests” means Equity Interests that by their terms (or by the terms of any security into which they are convertible or for which they are exchangeable) (a) require the payment of any cash dividends (other than dividends payable solely in shares of Qualified Equity Interests), (b) mature or are mandatorily redeemable or subject to mandatory repurchase or redemption or repurchase at the option of the holders thereof, in whole or in part and whether upon the occurrence of any event, pursuant to a sinking fund obligation, on a fixed date or otherwise, prior to the date that is 91 days after the then Latest Maturity Date at such time of then outstanding Loans (other than (i) upon payment in full of the Obligations (other than contingent indemnification obligations for which no claim has been made), reduction of the LC Exposure to zero and termination of the Commitments or (ii) upon a “change in control,” asset sale or similar event) or (c) are convertible or exchangeable, automatically or at the option of any holder thereof, into any Indebtedness other than Indebtedness otherwise permitted under Section 6.01; provided that if such Equity Interests are issued pursuant to a plan for the benefit of employees of the Parent or the Restricted Subsidiaries or by any such plan to such employees, such Equity Interests shall not constitute Disqualified Equity Interests solely because it may be required to be repurchased by the Parent or if its Restricted Subsidiaries in order to satisfy applicable statutory or regulatory obligations or as a result of such employee’s termination, death or disability.
“Disqualified Lender” means (x) any Person identified in writing to the Administrative Agent on or prior to September 7, 2016 and/or (y) any Excluded Affiliate.
“Dollar Equivalent” means, on any date of determination, (a) with respect to any amount in Dollars, such amount, and (b) with respect to any amount in Euros or any other Alternative Currency, the equivalent in Dollars of such amount, determined by the Administrative Agent pursuant to Section 1.06 using the Exchange Rate with respect to Euros or such Alternative Currency at the time in effect under the provisions of such Section (except as otherwise expressly provided herein).
“Dollars” or “$” refers to the lawful money of the United States of America.
“Domestic Restricted Subsidiary” means any Domestic Subsidiary that is a Restricted Subsidiary.
“Domestic Subsidiary” means any Subsidiary of the Parent that is incorporated or organized under the laws of the United States of America, any state thereof or the District of Columbia (it being understood that a Foreign Subsidiary with a dual charter (one of which is governed by the laws of the United States of America, any state thereof or the District of Columbia) shall not be deemed a “Domestic Subsidiary” for purposes hereof).
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“Dutch Auction” means an auction (an “Auction”) conducted by the Parent or one or more of its Subsidiaries (in such capacity, as applicable, the “Auction Party”) in their sole discretion in order to purchase Revolving Loans and Revolving Commitments of Defaulting Lenders or Term Loans in accordance with the following procedures:
(A) Notice Procedures. In connection with an Auction, the Auction Party will provide notification to the auction manager (for distribution to the Lenders of the relevant Class of Loans and Commitments that are the subject of the Auction (the “Eligible Auction Lenders”) and the Administrative Agent) of the Class and principal amount of Loans and Commitments that will be the subject of the Auction (an “Auction Notice”). Each Auction Notice shall contain (i) the Class of Loans and Commitments that will be the subject of the Auction, (ii) the total cash value of the bid (the “Auction Amount”), in a minimum amount of $1,000,000 with minimum increments of $500,000, (iii) the discount to par, which shall be a range (the “Discount Range”) of percentages of the par principal amount of the Term Loans (i.e., a 5% to 10% Discount Range would represent $50,000 to $100,000 per $1,000,000 principal amount of Loans and Commitments, with a 10% discount being deemed a “higher” discount than 5% for purposes of an Auction) at issue that represents the discounts applied to calculate the range of purchase prices that could be paid in the Auction; provided that the Discount Range may, at the option of the Auction Party, be a single percentage, (iv) the date on which the Auction will conclude, on which date Return Bids will be due at the time provided in the Auction Notice (such time, the “Auction Expiration Time”), as such date and time may be extended upon notice by the Auction Party to the auction manager before any prior Auction Expiration Time, and (v) the identity of the auction manager, and shall indicate if such auction manager is an Affiliate of the Parent. Each offer to purchase Loans or Commitments in an Auction shall be offered on a pro rata basis to all the Eligible Auction Lenders.
(B) Reply Procedures. In connection with any Auction, each Eligible Auction Lender may, in its sole discretion, participate in such Auction and, if it elects to do so (any such participating Eligible Auction Lender, a “Participating Lender”), shall provide, prior to the Auction Expiration Time, the auction manager with a notice of participation (the “Return Bid”) which shall be in a form and substance prepared by the Borrower and shall specify (i) a discount to par that must be expressed as a percentage of par principal amount of Loans or Commitments of the relevant Class expressed in percentages (the “Reply Discount”), which must be within the Discount Range, and (ii) a principal amount of Loans or Commitments of the relevant Class, which must be in increments of $500,000, that such Eligible Auction Lender is willing to offer for sale at its Reply Discount (the “Reply Amount”). An Eligible Auction Lender may avoid the minimum increment amount condition solely when submitting a Reply Amount equal to such Eligible Auction Lender’s entire remaining amount of such Loans or Commitments. Eligible Auction Lenders may only submit one Return Bid per Auction but each Return Bid may contain up to three bids, only one of which can result in a Qualifying Bid (as defined below). In addition to the Return Bid, each Participating Lender must execute and deliver, to be irrevocable during the pendency of the Auction and held in escrow by the auction manager, an assignment agreement pursuant to which such Participating Lender shall make the representations and agreements substantially consistent with the terms of Section 2.11(i)(C). Any Eligible Auction Lender that fails to submit a Return Bid at or prior to the Auction Expiration Time shall be deemed to have declined to participate in the Auction.
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(C) Acceptance Procedures. Based on the Reply Discounts and Reply Amounts received by the Auction Manager, the auction manager, with the consent of the Auction Party, will, within 10 Business Days of the Auction Notice (or such other time agreed by the Borrower), determine the applicable discount (the “Applicable Discount”) for the Auction, which will be the highest Reply Discount at which the Auction Party can complete the Auction at the Auction Amount; provided that, in the event that the Reply Amounts are insufficient to allow the Auction Party to complete a purchase of the entire Auction Amount, the Auction Party shall either, at its election, (i) withdraw the Auction or (ii) complete the Auction as set forth below. Unless withdrawn, the Auction Party shall notify the Participating Lenders of the Applicable Discount no later than one Business Day after it is determined (the “Applicable Discount Notice”). The Auction Party shall, within three Business Days of the Applicable Discount Notice, purchase Loans or Commitments from each Participating Lender with a Reply Discount that is equal to or higher than the Applicable Discount (“Qualifying Bids”) at a discount to par equal to the Reply Discount of such Participating Lender, with the applicable Loans or Commitments of the Participating Lender(s) with the highest Reply Discount being purchased first and then in descending order from such highest Reply Discount to and including the applicable Loans or Commitments of the Participating Lenders with a Reply Discount equal to the Applicable Discount (the “Applicable Order of Purchase”); provided that if the aggregate proceeds required to purchase all Loans or Commitments of the relevant Class subject to Qualifying Bids would exceed the Auction Amount for such Auction, the Auction Party shall purchase such Loans or Commitments of the Participating Lenders in the Applicable Order of Purchase, but with the Loans or Commitments of Participating Lenders with Reply Discounts equal to the Applicable Discount being purchased pro rata until the Auction Amount has been so expended on such purchases. If a Participating Lender has submitted a Return Bid containing multiple bids at different Reply Discounts, only the bid with the highest Reply Discount that is equal to or more than the Applicable Discount will be deemed the Qualifying Bid of such Participating Lender. In no event shall any purchase of Loans or Commitments in an Auction be made at a Reply Discount lower than the Applicable Discount for such Auction.
(D) Additional Procedures. Once initiated by an Auction Notice, the Auction Party may withdraw or modify an Auction only prior to the delivery of the Applicable Discount Notice (and if any Auction is withdrawn or modified, notice thereof shall be delivered to the Administrative Agent and the Eligible Auction Lenders no later than the first Business Day after such withdrawal). Furthermore, in connection with any Auction, upon submission by a Participating Lender of the relevant Class of a Qualifying Bid, such Lender will be obligated to sell the entirety or its allocable portion of the Reply Amount, as the case may be, at the Applicable Discount.
(E) Any failure by such Loan Party or such Subsidiary to make any prepayment to a Lender, pursuant to this definition shall not constitute a Default or Event of Default under Section 7.01 or otherwise.
“ECF Due Date” has the meaning assigned to such term in Section 2.11(d).
“ECF Prepayment Trigger” has the meaning assigned to such term in Section 2.11(d).
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“EEA Financial Institution” means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
“EEA Member Country” means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
“EEA Resolution Authority” means any public administrative authority or any person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
“Effective Date” means the date on which the conditions precedent set forth in Section 9 of Amendment No. 3 shall have been satisfied or waived.
“Effective Date Guarantors” shall have the meaning assigned to such term in the definition of “Specified Representations.”
“Electing Guarantors” any Excluded Subsidiary that, at the option and in the sole discretion of the Borrower, has been designated a Subsidiary Loan Party.
“Eligible Assignee” means (i) any Lender, any Affiliate of any Lender and any Approved Fund of any Lender, and (ii) (A) any commercial bank organized under the laws of the United States or any state thereof (B) any savings and loan association or savings bank organized under the laws of the United States or any state thereof and (C) any commercial bank organized under the laws of any other country or a political subdivision thereof; provided that (1) such bank is acting through a branch or agency located in the United States or (2) such bank is organized under the laws of a country that is a member of the Organization for Economic Cooperation and Development or a political subdivision of such country; and (D) any other entity (other than a natural person) that is an “accredited investor” (as defined in Regulation D under the Securities Act) that extends credit or buys loans as one of its businesses including insurance companies, investment or mutual funds, lease financing companies; and (iii) the Parent and any Subsidiary subject to Section 9.04 or Section 2.11(i) (so long as the Loans and Commitments obtained by the Parent or such Restricted Subsidiary are immediately cancelled); provided that, in any event, Eligible Assignees shall not include (w) any natural person, (x) any Direct Competitor, Disqualified Lender or Excluded Affiliate unless, in each case, consented to in writing by the Borrower (such consent shall be required regardless of whether a Default or Event of Default shall be continuing) or (y) any Defaulting Lender or any Affiliate thereof.
“Eligible Auction Lenders” has the meaning assigned to such term in the definition of “Dutch Auction.”
“EMU Legislation” means the legislative measures of the European Council for the introduction of, changeover to or operation of a single or unified European currency.
“Environmental Laws” means all applicable treaties, laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by or with any Governmental Authority, relating in any way to the protection of the environment, the preservation or reclamation of natural resources, the generation, management, Release or threatened Release of, or exposure to, any Hazardous Material or to workplace health and safety matters.
“Environmental Liability” means any liability, contingent or otherwise (including any liability for damages, costs of medical monitoring, costs of environmental remediation or restoration, administrative oversight costs, consultants’ fees, fines, penalties or indemnities), of Holdco or any Restricted Subsidiary directly or indirectly resulting from or based upon (a) any actual or alleged violation of any Environmental Law or permit, license or approval issued thereunder, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the Release or threatened Release of any Hazardous Materials or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing.
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“Equity Investors” means, collectively, (a) the officers, directors, and other members of senior management of the Parent or any of its Restricted Subsidiaries, who at any date beneficially own or have the right to acquire, directly or indirectly, Equity Interests of the Parent and (b) any existing equity holder of the Company rolled over or invested in the Parent on the Acquisition Closing Date.
“Equity Interests” means shares of capital stock or other share capital, partnership interests, membership interests in a limited liability or exempted company, beneficial interests in a trust or other equity ownership interests in a Person, and any option, warrant or other right entitling the holder thereof to purchase or otherwise acquire any such equity interest.
“ERISA” means the Employee Retirement Income Security Act of 1974, as amended from time to time.
“ERISA Affiliate” means any trade or business (whether or not incorporated) that, together with the Parent, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code.
“ERISA Event” means (a) any “reportable event,” as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived), (b) with respect to any Plan, a failure to satisfy the minimum funding standard under Section 412 of the Code or Section 302 of ERISA, whether or not waived, (c) the filing pursuant to Section 412(c) of the Code or Section 302(c) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan, (d) the incurrence by the Parent or any of its ERISA Affiliates of any liability under Title IV of ERISA with respect to the termination of any Plan, (e) the receipt by the Parent or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan, (f) the incurrence by the Parent or any of its ERISA Affiliates of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan or (g) the receipt by the Parent or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Parent or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA.
“Escrow Borrower” means the “Borrower” as defined in the Escrow Term Loan Agreement.
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“Escrow Funding Date” means the date of the initial funding of the term loans under the Escrow Term Loan Agreement.
“Escrow Term Loan Agreement” means the Credit Agreement, dated as of June 21, 2017, by and among Miami Escrow Borrower LLC, the lenders party thereto and JPMorgan Chase Bank, N.A., as administrative agent and escrow agent, pursuant to which the Tranche B-3 Term Loans and the Euro Tranche Term Loans were originally borrowed.
“Escrowed Proceeds” means the proceeds from the offering of any debt securities or other Indebtedness paid into an escrow account with an independent escrow agent on the date of the applicable offering or incurrence pursuant to escrow arrangements that permit the release of amounts on deposit in such escrow account upon satisfaction of certain conditions or the occurrence of certain events. The term “Escrowed Proceeds” shall include any interest earned on the amounts held in escrow.
“EU Bail-in Legislation Schedule” means the EU Bail-in Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.
“EURIBO Rate” means, with respect to any Eurocurrency Borrowing denominated in Euro for any Interest Period, the rate per annum equal to the Banking Federation of the European Union EURIBO Rate (“BFEA EURIBOR”), as published by Reuters on page EURIBOR01 of the Reuters screen (or another commercially available source providing quotations of BFEA EURIBOR as designated by the Administrative Agent from time to time) at approximately 10:00 a.m., London time, two Business Days prior to the commencement of such Interest Period, for deposits in Euro (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period; provided that if such rate is not available at such time for any reason, then the “EURIBO Rate” for such Interest Period shall be the rate per annum reasonably determined by the Administrative Agent to be the rate at which deposits in Euro for delivery on the first day of such Interest Period in same day funds and with a term equivalent to such Interest Period would be offered by the Administrative Agent in the European interbank market at their request at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period; provided, further, that if the EURIBO Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.
“Euro”, “EUR” and “€” mean the lawful currency of the Participating Member States introduced in accordance with the EMU Legislation.
“Euro Tranche Term Commitment” means, with respect to each Term Lender with a Euro Tranche Commitment, the commitment of such Term Lender to convert its Euro-denominated term loans under the Escrow Credit Agreement for an equal aggregate principal amount of Euro Tranche Term Loans hereunder on the Effective Date, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Term Lender pursuant to Section 9.04.
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“Euro Tranche Term Loan” means the term loans converted into and deemed issued under and outstanding pursuant to this Agreement on the Effective Date, pursuant to Section 2.01(a)(i) pursuant to the Euro Tranche Term Commitment.
“Eurocurrency,” when used in reference to any Loan or Borrowing, refers to whether such Loan, or the Loans comprising such Borrowing, is bearing interest at a rate determined by reference to the Adjusted Eurocurrency Rate.
“Eurocurrency Borrowing” means a Loan that bears interest at a rate based on the Adjusted Eurocurrency Rate.
“Eurocurrency Rate” means with respect to any Eurocurrency Borrowing for any Interest Period the rate per annum determined by the Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the commencement of such Interest Period (or, with respect to any Eurocurrency Borrowing in Sterling, on the first day of such Interest Period) by reference to the interest settlement rates for deposits in Dollars or the applicable Alternative Currency as published by Reuters on page LIBOR01 of the Reuters screen (or another commercially available source providing quotations of such rate as designated by the Administrative Agent from time to time) (as set forth by (a) the ICE Benchmark Administration Limited, (b) any successor service or entity that has been authorized by the U.K. Financial Conduct Authority to administer the London Interbank Offered Rate or (c) any service selected by the Administrative Agent that has been nominated by such an entity as an authorized information vendor for the purpose of displaying such rates) for a period equal to such Interest Period; provided that for any Eurocurrency Borrowing for any Interest Period in Euros, the rate the Administrative Agent shall reference shall be the EURIBO Rate; provided, further, that, to the extent that an interest rate is not ascertainable pursuant to the foregoing provisions of this definition, the “Eurocurrency Rate” shall be the interest rate per annum determined by the Administrative Agent (including by reference to any applicable published market data) to be the average of the rates per annum at which deposits in Dollars or applicable Alternative Currencies are offered for such relevant Interest Period to major banks in the London interbank market in London, England by the Administrative Agent at approximately 11:00 a.m. (London time) on the date that is two Business Days prior to the beginning of such Interest Period; provided, further, that if the Eurocurrency Rate shall be less than zero, such rate shall be deemed zero for purposes of this Agreement.
“Eurocurrency Reserve Percentage” means, for any day during any Interest Period, the reserve percentage (expressed as a decimal, carried out to five decimal places) in effect on such day, whether or not applicable to any Lender, under regulations issued from time to time by the Board for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as “Eurocurrency liabilities”). The Eurocurrency Rate for each outstanding Eurocurrency Borrowing shall be adjusted automatically as of the effective date of any change in the Eurocurrency Reserve Percentage.
“Event of Default” has the meaning assigned to such term in Section 7.01.
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“Excess Cash Flow” means, for any period, an amount (to the extent positive) equal to the excess of
(a) the sum, without duplication, of
(i) Consolidated Net Income for such period,
(ii) an amount equal to the amount of all non-cash charges to the extent deducted in arriving at such Consolidated Net Income, and
(iii) decreases in Consolidated Working Capital for such period;
over (b) the sum, without duplication, of
(i) | an amount equal to the amount of all non-cash gains and credits included in arriving at such Consolidated Net Income and cash charges of the type referred to in clauses (c), (f), (r) and (s) of Consolidated Net Income, and the expenses and charges of the type referred to in the last paragraph of Consolidated Net Income to the extent not reimbursed during such period, in each case, to the extent not included in arriving at such Consolidated Net Income, |
(ii) | without duplication of amounts deducted pursuant to clause (xi) below in prior years, the amount of Capital Expenditures, Capitalized Software Expenditures, acquisitions of intellectual property, capitalized intellectual property development, for retention, recruiting, relocation, severance or signing bonuses and expenses made in cash during such period, except to the extent that such Capital Expenditures, Capitalized Software Expenditures, acquisitions or costs or expenses were financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans), |
(iii) | the aggregate amount of all principal payments of Indebtedness of the Parent and the Restricted Subsidiaries during such period but excluding (x) all prepayments of Term Loans or Seattle Term Loans (other than, in each case, prepayments pursuant to Section 2.11(c) or Section 2.11(c) of the Seattle Credit Agreement, but solely to the extent that the Disposition in question increased Consolidated Net Income, and not in excess of such increase), (y) all prepayments of Revolving Loans made during such period and (z) any other revolving credit facility to the extent there is not an equivalent permanent reduction in commitments thereunder, and except to the extent financed with the proceeds of other Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans), |
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(iv) | an amount equal to the aggregate net gain on Dispositions by the Parent and the Restricted Subsidiaries during such period (other than Dispositions in the ordinary course of business) to the extent included in arriving at such Consolidated Net Income, |
(v) | increases in Consolidated Working Capital for such period, |
(vi) | payments by the Parent and the Restricted Subsidiaries during such period in cash in respect of (x) non-current liabilities of the Parent and the Restricted Subsidiaries other than Indebtedness, to the extent not already deducted from Consolidated Net Income or (y) non-cash charges incurred in a prior period, |
(vii) | without duplication of amounts deducted pursuant to clause (xi) below in prior fiscal years, the aggregate amount of cash consideration paid by the Parent and the Restricted Subsidiaries (on a consolidated basis) in connection with Investments (including acquisitions and earnout payments) pursuant to Section 6.04 that are not made in the Parent or a wholly owned Restricted Subsidiary made during such period (to the extent permitted to be made hereunder), except to the extent financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or intercompany loans), |
(viii) | the aggregate amount of Restricted Payments paid to any Person other than the Parent or any Restricted Subsidiary during such period pursuant to Section 6.08 (other than pursuant to Section 6.08(a)(xx) (except by reference to clause (a) of the definition of “Available Amount”)), except to the extent financed with the proceeds of Indebtedness of the Parent or the Restricted Subsidiaries (other than Revolving Loans or borrowings under any other revolving credit facility or intercompany loans), |
(ix) | the aggregate amount of expenditures, fees, costs, charges and expenses actually made by the Parent and the Restricted Subsidiaries in cash during such period (including expenditures for the payment of financing fees) to the extent that such expenditures are not deducted in calculating Consolidated Net Income, |
(x) | the aggregate amount of any premium, make-whole or penalty payments actually paid in cash by the Parent and the Restricted Subsidiaries during such period that are made in connection with any prepayment of Indebtedness to the extent that such payments are not deducted in calculating Consolidated Net Income, |
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(xi) | without duplication of amounts deducted from Excess Cash Flow in prior periods, at the option of the Borrower, the aggregate consideration required to be paid in cash by the Parent or any of the Restricted Subsidiaries pursuant to binding contracts (or binding commitments) (the “Contract Consideration”) entered into prior to or during such period or, at the option of the Borrower, after the applicable period and prior to the applicable ECF Due Date (including acquisitions and other Investments), Capital Expenditures, Capitalized Software Expenditures or acquisitions of intellectual property to be consummated or made during the period of four consecutive fiscal quarters of the Parent following the end of such period, provided that to the extent the aggregate amount utilized to finance such acquisitions, Capital Expenditures, Capitalized Software Expenditures or acquisitions of intellectual property during such period of four consecutive fiscal quarters is less than the Contract Consideration, the amount of such shortfall shall be added to the calculation of Excess Cash Flow at the end of such period of four consecutive fiscal quarters, |
(xii) | the amount of taxes (including penalties and interest) paid in cash or tax reserves set aside or payable in each case in such period to the extent they exceed the amount of tax expense deducted in determining Consolidated Net Income for such period, and |
(xiii) | the aggregate amount paid by the Parent and the Restricted Subsidiaries during such period in respect of the Transaction Costs to the extent that such payments are not deducted in calculating Consolidated Net Income. |
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exchange Rate” means, on any day, for purposes of determining the Dollar Equivalent of any currency, the rate at which such other currency may be exchanged into Dollars at the time of determination on such day on the applicable Bloomberg screen (or another commercially available source providing quotations of such rate as designated by the Administrative Agent from time to time) for such currency (or to the extent applicable, the rate at which Dollars may be exchanged into such other currency). In the event that such rate does not appear on such applicable Bloomberg screen (or another commercially available source providing quotations of such rate as designated by the Administrative Agent from time to time), the Exchange Rate shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the Borrower (or with respect to calculations to be made by the relevant Issuing Bank, such Issuing Bank and the Borrower), or, in the absence of such an agreement, such Exchange Rate shall instead be the arithmetic average of the spot rates of exchange of the Administrative Agent (or with respect to calculations to be made by the relevant Issuing Bank, such Issuing Bank) in the market where its foreign currency exchange operations in respect of such currency are then being conducted, at or about such time as the Administrative Agent (or with respect to calculations to be made by the relevant Issuing Bank, such Issuing Bank) shall elect after determining that such rates shall be the basis for determining the Exchange Rate, on such date for the purchase of Dollars for delivery two Business Days later, provided that if at the time of any such determination, for any reason, no such spot rate is being quoted, the Administrative Agent may (or with respect to calculations to be made by the relevant Issuing Bank, such Issuing Bank) use any reasonable method it deems appropriate to determine such rate, and such determination shall be conclusive absent manifest error.
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“Excluded Affiliate” means any Affiliates of the Lead Arrangers that are engaged as principals primarily in private equity, mezzanine financing or venture capital or are engaged in the combination of the Company and its subsidiaries with the Parent and its Subsidiaries, including through the provision of advisory services; provided that notwithstanding anything to the contrary herein, for purposes of Section 9.12, “Excluded Affiliates” shall not include a limited number of senior employees who are required, in accordance with industry regulations or the Lead Arrangers’ internal policies and procedures to act in a supervisory capacity and the Lead Arrangers’ internal legal, compliance, risk management, credit or investment committee members.
“Excluded Information” has the meaning assigned to such term in Section 2.11(i).
“Excluded Property” means (i) any lease, lease in respect of a Capital Lease Obligation, license, contract, permit, instrument, security or franchise agreement to which such Loan Party is a party or any property subject to a purchase money security interest, or any property governed by any such lease, lease in respect of a Capital Lease Obligation to which such Loan Party is a party and any of its rights or interest thereunder, to the extent, but only to the extent, that a grant of a security interest therein in favor of the Collateral Agent would, under the terms of such lease, lease in respect of a Capital Lease Obligation, license, contract, permit, instrument, security or franchise agreement or purchase money arrangement, be prohibited by or result in a violation of law, rule or regulation or a breach of the terms or a condition of, or constitute a default or forfeiture under, or create a right of termination in favor of or require a consent (other than the consent of any Loan Party and any such consent which has been obtained (it being understood and agreed that no Loan Party or Restricted Subsidiary shall be required to seek any such consent)) of any other party to, such lease, lease in respect of a Capital Lease Obligation, license, contract, permit, instrument, security or franchise agreement or purchase money arrangement (except in the case of a lease in respect of a Capital Lease Obligation or property subject to a Lien permitted pursuant to Sections 6.02(c) (to the extent Liens are of the type described in clause (e) of Section 6.02), (d) or (e), other than to the extent that any such law, rule, regulation, term, prohibition, restriction or condition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity, and other than receivables and proceeds of any of the foregoing the assignment of which is expressly deemed effective under the UCC or other applicable law notwithstanding such law, rule, regulation, term prohibition or condition); provided that immediately upon the ineffectiveness, lapse or termination of any such law, rule, regulation, term, prohibition, restriction or condition the Collateral shall include, and such Person shall be deemed to have granted a security interest in, all such rights and interests as if such law, rule, regulation, term, prohibition, restriction or condition had never been in effect; (ii) any of the outstanding Equity Interests issued by a Subsidiary that is a CFC or a CFC Holding Company in excess of 65% of the outstanding Equity Interests of any such Subsidiary (and any property of such a CFC or CFC Holding Company); (iii) any Equity Interests or assets of a Person to the extent that, and for so long as such Equity Interests constitute (x) less than 100% of all Equity Interests of such Person, and the Person or Persons holding the remainder of such Equity Interests are not the Parent or Restricted Subsidiaries of the Parent or (y) less than 50% of all Equity Interests of such Person, and the Person or Persons holding the remainder of such Equity Interests are not Loan Parties, (iv) any Equity Interests in and assets of an Unrestricted Subsidiary, an Immaterial Subsidiary, a Captive Insurance Subsidiary or other special purpose entity; (v) (a) any motor vehicles and other assets subject to certificates of title, (b) letter of credit rights to the extent not constituting supporting obligations and with a value of less than $15,000,000 individually (except to the extent a security interest therein can be perfected by the filing of a UCC financing statement or similar filing in the United Kingdom), and (c) commercial tort claims with a claim value of less than $15,000,000 individually (except to the extent a security interest therein can be perfected by the filing of a UCC financing statement or similar filing in the United Kingdom); (vi) any “intent-to-use” trademark applications for which a statement of use or an amendment to allege use has not been filed (but only until such statement or amendment is filed), and solely to the extent, if any, that, and solely during the period, if any, in which, the grant of a security interest therein would impair the validity or enforceability of, or void, any registration that issues from such intent-to-use application under law; (vii) those assets as to which the Borrower determines (in consultation with the Administrative Agent) that the obtaining a security interest in or perfection thereof could result in an adverse tax consequence to the Borrower, the Parent or any Subsidiary of the Parent; (viii) those assets as to which the Borrower determines (in consultation with the Administrative Agent), that the burden or cost of obtaining a security interest in or perfection thereof are excessive in relation to the benefit to the Lenders of the security to be afforded thereby; (ix) any real property leasehold interests (including any requirement to obtain any landlord waivers, estoppels and consents); (x) except, in each case, to the extent a security interest therein can be perfected by the filing of a UCC financing statement or similar filing in the United Kingdom, cash and cash equivalents, deposit and securities accounts (including securities entitlements and related assets credited thereto) (in each case, other than cash and cash equivalents constituting proceeds of other “Collateral” as to which the perfection of the security interests in such proceeds is accomplished solely by the filing of a UCC financing statement or similar filing in the United Kingdom or automatically without any filing or other action) and any other assets requiring perfection through control agreements or perfection by “control” or notice of such security or acknowledgement of such security; (xi) those assets with respect to which the granting of security interests in such assets would be prohibited by any contract permitted under the terms of this Agreement (not entered into in contemplation thereof with respect to assets that are subject to such contract), applicable law or regulation (other than to the extent that any such law, rule, regulation, term, prohibition or condition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408 or 9-409 of the UCC (or any successor provision or provisions) of any relevant jurisdiction or any other applicable law (including the Bankruptcy Code) or principles of equity, and other than receivables and proceeds of any of the foregoing the assignment of which is expressly deemed effective under the UCC or other applicable law notwithstanding such law, rule, regulation, term, prohibition or condition), or would require governmental or third party (other than any Loan Party) consent, approval, license or authorization or create a right of termination in favor of any Person (other than any Loan Party) party to any such contract (after giving effect to the applicable anti-assignment provisions of the UCC or other applicable law other than proceeds and receivables thereof, the assignment of which is expressly deemed effective under the UCC or other applicable law notwithstanding such prohibition); provided that immediately upon the ineffectiveness, lapse or termination of any such law, rule, regulation, term, prohibition, condition or provision the Collateral shall include, and such Person shall be deemed to have granted a security interest in, all such rights and interests as if such law, rule, regulation, term, prohibition, condition or provision had never been in effect; provided that the exclusions referred to in this clause (xi) shall not include any proceeds of any such assets except to the extent such proceeds constitute Excluded Property; (xii) all owned real property not constituting Material Real Property; (xiii) margin stock; and (xiv) any assets of any Person that are located outside of such Person’s jurisdiction of organization or incorporation that require action under the law of any such jurisdiction to create or perfect a security interest in such assets, including any intellectual property, other than, in each case, with respect to the pledge of the Equity Interests of a Loan Party under the laws of the United States or the United Kingdom. Notwithstanding anything to the contrary, “Excluded Property” shall not include any proceeds, substitutions or replacements of any “Excluded Property” referred to in clauses (i) through (xiv) (unless such proceeds, substitutions or replacements would constitute “Excluded Property” referred to in any of clauses (i) through (xiv)).
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“Excluded Subsidiaries” means any Subsidiary of the Parent that is: (a) listed on Schedule 1.02(b) as of the Effective Date and any Restricted Subsidiary of such Subsidiary; (b) (i) a Foreign Subsidiary (other than a UK Subsidiary), (ii) a CFC or a CFC Holding Company or a Domestic Subsidiary or a UK Subsidiary of a CFC or a CFC Holding Company, (iii) a Foreign Subsidiary of a US Loan Party, or (iv) any other Subsidiary with respect to which a guarantee could result in adverse tax consequences to the Borrower, the Parent or any Subsidiary of the Parent (as reasonably determined by the Borrower), (c) a Joint Venture or a Subsidiary that is not otherwise a wholly-owned Restricted Subsidiary (other than with respect to directors’ qualifying or nominee shares); (d) an Immaterial Subsidiary; (e) an Unrestricted Subsidiary; (f) a Captive Insurance Subsidiary or other special purpose entity; (g) not-for-profit Subsidiary; (h) prohibited by applicable Requirement of Law or contractual obligation from guaranteeing or granting Liens to secure any of the Secured Obligations or with respect to which any consent, approval, license or authorization from any Governmental Authority would be required for the provision of any such guaranty (but in the case of such guaranty being prohibited due to a contractual obligation, such contractual obligation shall have been in place at the Effective Date or at the time such Subsidiary became a Restricted Subsidiary and is not created in contemplation of or in connection with such Person becoming a Restricted Subsidiary); provided that each such Subsidiary shall cease to be an Excluded Subsidiary solely pursuant to this clause (h) if such consent, approval, license or authorization has been obtained; (i) with respect to which the Borrower and the Administrative Agent reasonably agree that the cost or other consequences (including adverse tax consequences) of providing a guaranty of the Secured Obligations outweigh the benefits to the Lenders; (j) a Restricted Subsidiary acquired pursuant to an Acquisition financed with secured Indebtedness permitted to be incurred under Section 6.01 and each Restricted Subsidiary that is a Subsidiary thereof to the extent such secured Indebtedness prohibits such Restricted Subsidiary from becoming a Guarantor; provided that each such Restricted Subsidiary shall cease to be an Excluded Subsidiary solely pursuant to this clause (j) if such secured Indebtedness is repaid or becomes unsecured, if such Restricted Subsidiary ceases to Guarantee such secured Indebtedness or such prohibition no longer exists, as applicable; (k) a Securitization Subsidiary; or (l) a Subsidiary that does not have the legal capacity to provide a guarantee of the Secured Obligations (provided that the lack of such legal capacity does not arise from any action or omission of Borrower or any other Loan Party), in each case other than any Electing Guarantor for so long as such entity is an Electing Guarantor.
“Excluded Swap Obligation” means, with respect to any Guarantor, any Swap Obligation if, and to the extent that, all or a portion of the Guaranty of such Guarantor of, or the grant by such Guarantor of a security interest pursuant to the Security Documents to secure, such Swap Obligation (or any Guaranty thereof) is or becomes illegal or unlawful under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Guarantor’s failure for any reason to constitute an “eligible contract participant” as defined in the Commodity Exchange Act at the time the Guaranty of such Guarantor or the grant of such security interest would otherwise have become effective with respect to such related Swap Obligation but for such Guarantor’s failure to constitute an “eligible contract participant” (determined after giving effect to Section 1(d) of the Subsidiary Guaranty) at such time.
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“Excluded Taxes” means, with respect to any Recipient:
(a) Taxes imposed on or measured by such Recipient’s overall net income or profits, and franchise or capital Taxes imposed in lieu of overall net income or profits Taxes, as a result of a present or former connection between the Recipient and the jurisdiction of the Governmental Authority imposing such Tax (other than any such connection arising solely from such Recipient having executed, delivered, enforced, become a party to, performed its obligations, received payments, received or perfected a security interest under, and/or engaged in any other transaction pursuant to, any Loan Document);
(b) any branch profits Taxes imposed under Section 884(a) of the Code, or any similar Tax, imposed by any jurisdiction described in clause (a);
(c) any United States federal withholding Taxes that are imposed on a Recipient pursuant to a law enacted or in effect at the time such Recipient becomes a party to this Agreement (or designates a new lending office) except (i) to the extent that such Recipient (or its assignor, if any) was entitled, immediately prior to the designation of a new lending office (or assignment), to receive additional amounts from any Loan Party with respect to such withholding Tax pursuant to Section 2.17 of this Agreement or (ii) if such Recipient is an assignee pursuant to a request by the Borrower under Section 2.19;
(d) any withholding Taxes attributable to a Recipient’s failure to comply with Section 2.17(e) or Section 2.17(g), as applicable; and
(e) any Taxes imposed under FATCA.
“Existing Letters of Credit” means each letter of credit or bank guaranty or indemnity previously issued or deemed issued for the account of, or guaranteed by, the Parent or any of the Restricted Subsidiaries that is outstanding on the Effective Date and set forth on Schedule 1.03.2
“Extending Lenders” has the meaning set forth in Section 2.24(a)(ii).
“Extended Revolving Commitment” has the meaning set forth in Section 2.24(a)(i).
“Extending Revolving Loan Lender” has the meaning set forth in Section 2.24(a)(i).
“Extended Revolving Loans” has the meaning set forth in Section 2.24(a).
“Extending Term Lender” has the meaning set forth in Section 2.24(a)(ii).
2 | Definition to be modified prior to the Effective Date as may be reasonable agreed by the Administrative Agent and the Borrower to address any Letters of Credit of the Company and its Subsidiaries outstanding immediately prior to the Acquisition Closing Date. |
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“Extended Term Loans” has the meaning set forth in Section 2.24(a)(ii).
“Extension” has the meaning set forth in Section 2.24(a).
“Extension Amendment” means an amendment to this Agreement in form reasonably satisfactory to the Borrower executed by each of (a) the Parent, Holdco and the Borrower and (b) each Extending Revolving Loan Lender and Extending Term Lender, as the case maybe, in connection with any Extension.
“Extension Offer” has the meaning set forth in Section 2.24(a).
“FATCA” means Sections 1471 through 1474 of the Code as of the Closing Date (or, solely with respect to the Lenders with respect to the Tranche B-3 Term Loans and Euro Tranche Term Loans, the Escrow Funding Date) (or any amended or successor version that is substantively comparable), any current or future Treasury regulations or official administrative interpretations thereof any applicable agreements entered into pursuant to Section 1471(b)(1) of the Code, and any applicable intergovernmental agreements (and related official guidance) with respect to the foregoing.
“FCA” means the UK Financial Conduct Authority.
“Federal Funds Effective Rate” means, for any day, the weighted average (rounded upwards, if necessary, to the next 1/100 of 1%) of the rates on overnight federal funds transactions with members of the Federal Reserve System, as published on the next succeeding Business Day by the Federal Reserve Bank of New York; provided that (a) if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate on such transactions on the next preceding Business Day as so published on the next succeeding Business Day, and (b) if no such rate is so published on such next succeeding Business Day, the Federal Funds Rate for such day shall be the average rate (rounded upward, if necessary, to the next 1/100 of 1%) on such day on such transactions as determined by the Administrative Agent.
“Financial Officer” of any Person means the chief financial officer, vice president of finance, principal accounting officer or treasurer of such Person (or, in the case of any Person that is a Foreign Subsidiary, a director of such Person).
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“First Lien Indebtedness” means Total Indebtedness that is not subordinated in right of payment to the Initial Term Loans and the Initial Revolving Loans and is secured by a Lien, except by a Lien that is junior to the Lien securing the Obligations. For the avoidance of doubt, First Lien Indebtedness includes, without limitation, any First Lien Senior Secured Notes, the Initial Term Loans and the Initial Revolving Loans.
“First Lien Leverage Ratio” means the ratio, as of the last day of any fiscal quarter, of (i) First Lien Indebtedness as of such day (net of unrestricted cash and Cash Equivalents of the Parent and its Restricted Subsidiaries as of such day) to (ii) Consolidated EBITDA of the Parent and its Restricted Subsidiaries for the period of four consecutive fiscal quarters ending on such date for which financial statements have been furnished pursuant to Section 9 of Amendment No. 3 or Section 5.01, as applicable.
“First Lien Senior Secured Notes” means Additional Term Notes, Term Loan Exchange Notes, Unrestricted Additional Term Notes or Refinancing Notes, in each case that is not subordinated in right of payment to the Initial Term Loans and the Initial Revolving Loans and is secured by a Lien except by a Lien that is junior to the Lien securing the Obligations.
“Flood Hazard Property” means an Additional Mortgaged Property located in an area designated by the Federal Emergency Management Agency as having special flood or mud slide hazards.
“Foreign Disposition” has the meaning assigned to such term in Section 2.11(f).
“Foreign Plan” means each defined benefit plan (within the meaning of Section 3(35) of ERISA, whether or not subject to ERISA) that is maintained by or for which liability would be incurred by any Loan Party or Restricted Subsidiary on behalf of employees located outside the United States and which is subject to the law of any jurisdiction outside the United States.
“Foreign Prepayment Event” has the meaning assigned to such term in Section 2.11(f).
“Foreign Subsidiary” means any Subsidiary that is organized or incorporated under the laws of a jurisdiction other than the United States of America, any state thereof or the District of Columbia.
“FSMA” means the UK Financial Services and Markets Act 2000.
“GAAP” means, subject to the limitations set forth in Section 1.04, generally accepted accounting principles in the United States of America as in effect from time to time.
“Governing Body” means the board of directors or other body having the power to direct or cause the direction of the management and policies of a Person that is a corporation, company, partnership, trust, limited liability company, association, Joint Venture or other business entity.
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“Governmental Authority” means the government of the United States of America, any other nation or any political subdivision thereof, whether state, county, provincial, local or otherwise, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
“Granting Lender” has the meaning assigned to such term in Section 9.04(e).
“Guarantee” of or by any Person (the “guarantor”) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the “primary obligor”) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation; provided that the term “Guarantee” shall not include (x) endorsements for collection or deposit in the ordinary course of business and (y) standard contractual indemnities or product warranties provided in the ordinary course of business; and providedfurther that the amount of any Guarantee shall be deemed to be the lower of (i) an amount equal to the stated or determinable amount of the primary obligation in respect of which such Guarantee is made and (ii) the maximum amount for which such guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee or, if such Guarantee is not an unconditional guarantee of the entire amount of the primary obligation and such maximum amount is not stated or determinable, the amount of such guaranteeing Person’s maximum reasonably anticipated liability in respect thereof as determined by such Person in good faith. The term “Guaranteed” has a meaning correlative thereto.
“Guaranties” means Parent Companies Guaranty, the Subsidiary Guaranty and any other guaranty of the Secured Obligations in form and substance reasonably acceptable to the Administrative Agent and the Borrower and each, a “Guaranty.”
“Guarantors” means collectively, all US Loan Parties (other than the Borrower with respect to its Secured Obligations) and all UK Loan Parties, and each, a “Guarantor.”
“Hazardous Materials” means all explosive or radioactive substances, materials or wastes and all hazardous or toxic substances, materials, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances, materials or wastes of any nature regulated pursuant to any Environmental Law.
“Historical Financial Statements” means, collectively, the Micro Focus Historical Financial Statements and the Seattle Historical Financial Statements, and each, an “Historical Financial Statement.”
“Holdco” has the meaning assigned to such term in the preamble to this Agreement.
“Houston” has the meaning assigned to such term in the recitals to this Agreement.
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“IFRS” means, subject to the limitations set forth in Section 1.04, the International Financial Reporting Standards as adopted by the European Union, interpreted by the IFRS Interpretations Committee and prepared in accordance with the Companies Act 2006 applicable to companies reporting under IFRS.
“Immaterial Subsidiary” means, at any date of determination, any Restricted Subsidiary of the Parent (other the Borrower and any Subsidiary of the Parent that directly or indirectly owns Equity Interests in the Borrower); provided that (a) for purposes of this Agreement, at no time shall (i) the consolidated total assets of any individual Immaterial Subsidiary or all Immaterial Subsidiaries in the aggregate as of the last day of the then most recent fiscal year of the Parent for which financial statements have been delivered equal or exceed 5.0% individually or 7.5% in the aggregate of the Consolidated Total Assets of the Parent and the Restricted Subsidiaries at such date, determined on a Pro Forma Basis or (ii) the consolidated revenues (other than revenues generated from the sale or license of property between any of the Parent and its Restricted Subsidiaries) of any individual Immaterial Subsidiary or all Immaterial Subsidiaries in the aggregate for the then most recent fiscal year of the Parent for which financial statements have been delivered equal or exceed 5.0% individually or 7.5% in the aggregate of the consolidated revenues (other than revenues generated from the sale or license of property between any of the Parent and its Restricted Subsidiaries) of the Parent and the Restricted Subsidiaries for such period, determined on a Pro Forma Basis and (b) if, as of the date the financial statements for any fiscal year of the Parent are delivered or required to be delivered pursuant to Section 5.01(a), the consolidated assets or revenues of any or all Restricted Subsidiaries so designated by the Borrower as one or more “Immaterial Subsidiaries” shall have, as of the last day of such fiscal year, exceeded the limits set forth in clause (a) above, then within 10 Business Days (or such later date as agreed by the Administrative Agent in its reasonable discretion) after the date such financial statements are so delivered (or so required to be delivered), the Borrower shall redesignate one or more Immaterial Subsidiaries, such that, as a result thereof, the consolidated assets and revenues of any individual Restricted Subsidiary or all Restricted Subsidiaries in the aggregate, as applicable, that are still designated as “Immaterial Subsidiaries” do not exceed such limits. Upon any such Restricted Subsidiary ceasing to be an Immaterial Subsidiary pursuant to the preceding sentence, such Restricted Subsidiary, to the extent not otherwise qualifying as an Excluded Subsidiary, shall comply with Section 5.11, to the extent applicable.
“Incremental Commitment” means, collectively, the Incremental Revolving Commitment and the Incremental Term Commitment.
“Incremental Facility” has the meaning assigned to such term in Section 2.20(a).
“Incremental Facility Amendment” has the meaning assigned to such term in Section 2.20(d).
“Incremental Loans” means, collectively, the Incremental Revolving Loans and the Incremental Term Loans.
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“Incremental Revolving Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make an Incremental Revolving Loan under any Incremental Facility Amendment with respect thereto, expressed as an amount representing the maximum principal amount of the Incremental Revolving Loans to be made by such Lender under such Incremental Facility Amendment, as such commitment may be (a) reduced pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 or as otherwise set forth herein.
“Incremental Revolving Facility” has the meaning assigned to such term in Section 2.20(a).
“Incremental Revolving Lender” has the meaning assigned to such term in Section 2.20(e).
“Incremental Revolving Loan” means a Loan made under an Incremental Revolving Facility.
“Incremental Term Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make an Incremental Term Loan under any Incremental Facility Amendment with respect thereto, expressed as an amount representing the maximum principal amount of the Incremental Term Loans to be made by such Lender under such Incremental Facility Amendment, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 or as otherwise set forth herein.
“Incremental Term Facility” has the meaning assigned to such term in Section 2.20(d).
“Incremental Term Loan” means a Loan made under an Incremental Term Facility.
“Incurrence Incremental First Lien Indebtedness” has the meaning assigned to such term in Section 2.20(a).
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“Indebtedness” of any Person means, without duplication, (a) all obligations of such Person for borrowed money, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (d) all obligations of such Person in respect of the deferred purchase price of property or services, (e) all obligations of the type described in clauses (a), (b), (c), (d), (f), (g), (h), (i), (j) or (k) of this definition of “Indebtedness” of others secured by (or for which the holder of such Indebtedness has an existing unconditional right to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed by such Person, (f) all Guarantees by such Person of obligations of the type described in clauses (a), (b), (c), (d), (e), (g), (h), (i), (j) or (k) of this definition of “Indebtedness” of others, (g) the principal component of Capital Lease Obligations of such Person, (h) all reimbursement obligations of such Person as an account party in respect of letters of credit and letters of guaranty (except to the extent such letters of credit, or letters of guaranty relate to trade payables and such outstanding amounts are satisfied within 30 days of incurrence), (i) all reimbursement obligations, of such Person in respect of bankers’ acceptances (except to the extent such bankers’ acceptances relate to trade payables and such outstanding amounts are satisfied within 30 days of incurrence), (j) all obligations of such Person, contingent or otherwise, to purchase, redeem, retire or otherwise acquire for value any Disqualified Equity Interests of such Person to the extent that such purchase, redemption, retirement or other acquisition is required to occur on or prior to the Latest Maturity Date in effect at the time of issuance of such Equity Interests (other than as a result of a Change in Control, asset sale or similar event), and (k) to the extent not otherwise included in this definition, net obligations of such Person under Swap Obligations (the amount of any such obligations to be equal at any time to the net payments under such agreement or arrangement giving rise to such obligation that would be payable by such Person at the termination of such agreement or arrangement; provided, however, that (A) intercompany Indebtedness and (B) obligations constituting non-recourse Indebtedness shall only constitute “Indebtedness” for purposes of Section 6.01 and not for any other purpose hereunder). The Indebtedness of any Person shall include the Indebtedness of any partnership in which such Person is a general partner to the extent such Person is liable therefor as a result of such Person’s ownership interest in such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. Notwithstanding the foregoing, in no event shall the following constitute Indebtedness: (v) amounts owed to dissenting stockholders in connection with, or as a result of, their exercise of appraisal rights and the settlement of any claims or actions (whether actual, contingent or potential) with respect thereto (including any accrued interest), with respect to the Transactions, (w) trade accounts payable, deferred revenues, liabilities associated with customer prepayments and deposits and any such obligations incurred under ERISA, and other accrued obligations (including transfer pricing), in each case incurred in the ordinary course of business, (x) operating leases, (y) customary obligations under employment agreements and deferred compensation and (z) deferred revenue and deferred tax liabilities. Notwithstanding the foregoing, the term “Indebtedness” shall not include contingent post-closing purchase price adjustments, non-compete or consulting obligations or earn-outs to which the seller in an Acquisition or Investment may become entitled. The amount of Indebtedness of any Person for purposes of clause (e) above shall (unless such Indebtedness has been assumed by such Person) be deemed to be equal to the lesser of (i) the aggregate unpaid amount of such Indebtedness and (ii) the fair market value of the property encumbered thereby as determined by such Person in good faith.
“Indemnified Taxes” means (a) all Taxes other than Excluded Taxes and (b) Other Taxes.
“Indemnitee” has the meaning assigned to such term in Section 9.03(b).
“Indemnified Liabilities” has the meaning assigned to such term in Section 9.03(b).
“Information” has the meaning assigned to such term in Section 9.12.
“Initial Revolving Borrowing” means one or more borrowings of Revolving Loans or issuances or deemed issuances of Letters of Credit on the Effective Date.
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“Initial Revolving Commitments” means the Revolving Commitments of the Revolving Lenders as of the Effective Date. The initial aggregate principal of the Lender’s Revolving Commitments on the Effective Date is $500,000,000.
“Initial Revolving Loan” means a Revolving Loan made by a Lender to Borrower in respect of an Initial Revolving Commitment pursuant to Section 2.01(b).
“Initial Seattle Term Loans” has the meaning specified in the Seattle Credit Agreement.
“Initial Term Commitments” means, collectively, the Tranche B-2 Term Commitment, the Tranche B-3 Term Commitment and the Euro Tranche Term Commitment.
“Initial Term Loans” means the term loans made, rolled over and continued and/or converted and deemed issued and outstanding on the Effective Date pursuant to Section 2.01(a) pursuant to the Tranche B-2 Term Commitments, the Tranche B-3 Term Commitments and the Euro Tranche Term Commitments.
“Intellectual Property” has the meaning assigned to such term in the US Collateral Agreement and/or the UK Collateral Agreement, as applicable.
“Intercompany License Agreement” means any cost sharing agreement, commission or royalty agreement, license or sub-license agreement, distribution agreement, services agreement, intellectual property rights transfer agreement or any related agreements, in each case where all the parties to such agreement are one or more of the Parent or a Restricted Subsidiary.
“Interest Election Request” means a request by the Borrower to convert or continue a Revolving Loan Borrowing or Term Loan Borrowing in accordance with Section 2.07.
“Interest Payment Date” means (a) with respect to any ABR Loan (including a Swingline Loan), the last day of each April, July, October and January and (b) with respect to any Eurocurrency Loan, the last day of the Interest Period applicable to the Borrowing of which such Loan is a part and, in the case of a Eurocurrency Borrowing with an Interest Period of more than three months’ duration, each day prior to the last day of such Interest Period that occurs at intervals of three months’ duration after the first day of such Interest Period.
“Interest Period” means, with respect to any Eurocurrency Borrowing, the period commencing on the date of such Borrowing and ending on the numerically corresponding day in the calendar month that is one, two, three or six months thereafter (or twelve months thereafter or any duration shorter than one month thereafter if, at the time of the Borrowing or conversion or continuation thereof, all Lenders participating therein agree to make an interest period of such duration available), as the Borrower may elect, or, if the Administrative Agent and the Borrower agrees, such other period whose end would coincide with a payment due date on the Term Loans pursuant to Section 2.10 or the payment under Swap Obligations; provided that (a) if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the preceding Business Day and (b) any Interest Period that commences on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
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“Investment” means (i) any purchase or other acquisition by the Parent or any of the Restricted Subsidiaries of, or of a beneficial interest in, any Equity Interests or Indebtedness of any other Person (including any Subsidiary) and (ii) any loan or advance constituting Indebtedness of such other Person (other than trade or accounts receivable, trade credit, advances to officers, directors, members of management and employees for moving, entertainment and travel expenses, drawing accounts and similar expenditures in the ordinary course of business) or capital contribution by the Parent or any of the Restricted Subsidiaries to any other Person (including any Subsidiary); provided that, in the event that any Investment is made by the Parent or any Restricted Subsidiary in any Person through substantially concurrent interim transfers of any amount through any other Restricted Subsidiaries, then such other substantially concurrent interim transfers shall be disregarded for purposes of Section 6.04. The amount of any Investment outstanding as of any time shall be the original cost of such Investment (which, in the case of any Investment constituting the contribution of an asset or property, shall be based on the Parent’s good faith estimate of the fair market value of such asset or property at the time such Investment is made) plus the cost of all additions thereto, without any adjustments for increases or decreases in value, or write-ups, write-downs or write-offs with respect to such Investment, less all Returns received by the Parent or any Restricted Subsidiary in respect thereof.
“IRS” means the United States Internal Revenue Service.
“ISP” means, with respect to any Letter of Credit, the “International Standby Practices 1998” published by the Institute of International Banking Law & Practice, Inc. (or such later version thereof as may be in effect at the time of issuance).
“Issuing Bank” means, as the context may require, (a) (i) JPMorgan Chase Bank, N.A. and (ii) any other Revolving Lender selected by the Borrower that agrees to be an Issuing Bank, each in its capacity as the issuer of Letters of Credit hereunder, and its successors in such capacity as provided in Section 2.05(k), and (b) with respect to each Existing Letter of Credit, any Lender that, or any Lender whose Affiliate, issued such Existing Letter of Credit. Any Issuing Bank may, with the consent of the Borrower, arrange for one or more Letters of Credit to be issued by an Affiliate of such Issuing Bank, in which case the term “Issuing Bank” shall include any such Affiliate with respect to Letters of Credit issued by such Affiliate. At any time the Borrower shall have the right to select the applicable Issuing Bank. “Issuing Bank” means, as appropriate, the relevant Issuing Bank or any or all of the Issuing Banks.
“Joint Venture” means a joint venture, joint operation, partnership or similar arrangement, whether in corporate, partnership or other legal form.
“Judgment Currency” has the meaning assigned to such term in Section 9.17.
“Latest Maturity Date” means, at any date of determination, the latest maturity date applicable to any Loan or Commitment hereunder at such time, including the latest maturity date of any Initial Term Loan, Incremental Term Loan, Initial Revolving Commitment, Incremental Revolving Commitment, Initial Revolving Loan, Incremental Revolving Loan, Extended Term Loan, Extended Revolving Commitment, Extended Revolving Loan, Other Term Loan, Other Term Commitment, Other Revolving Loan, any Other Revolving Commitment or any Replacement Term Loan, in each case as extended in accordance with this Agreement from time to time.
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“LC Disbursement” means a payment made by the Issuing Bank pursuant to a Letter of Credit. The amount of any LC Disbursement made by the Issuing Bank in Euros or other Alternative Currency and not reimbursed by the Borrower shall be determined as set forth in Section 2.05(e).
“LC Exposure” means, at any time, the sum of (a) the aggregate undrawn amount of all outstanding Letters of Credit denominated in Dollars at such time, (b) the Dollar Equivalent of the aggregate undrawn amount of all outstanding Letters of Credit denominated in Euros or other Alternative Currency at such time, (c) the aggregate amount of all LC Disbursements made in Dollars that have not yet been reimbursed by or on behalf of the Borrower at such time and (d) the Dollar Equivalent of the aggregate amount of all LC Disbursements made in Euros or other Alternative Currency that have not yet been reimbursed by or on behalf of the Borrower at such time. The LC Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the aggregate LC Exposure at such time.
“LC Sublimit” means $75,000,000 as such amount may be modified from time to time in accordance with the terms hereof.
“Lead Arrangers” means JPMorgan Chase Bank, N.A., Barclays Bank PLC, HSBC Securities (USA) Inc., The Royal Bank of Scotland plc and Merrill Lynch, Pierce, Fenner & Smith Incorporated, each in its capacity as a joint lead arranger and as joint bookrunner in respect of the credit facilities provided herein. The Lead Arrangers are sometimes also referred to herein as the “Arrangers.”
“Lender Counterparty” means any counterparty to a Secured Swap Agreement or Secured Cash Management Agreement.
“Lenders” means the Persons who are “Lenders” under this Agreement on the Effective Date, any Additional Lenders, any Additional Refinancing Lenders and any other Person that shall have become a party hereto as a Lender pursuant to Section 9.04, other than any such Person that ceases to be a party hereto pursuant to Section 9.04. Unless the context otherwise requires, the term “Lenders” includes the Swingline Lender.
“Letter of Credit” means (a) any standby letter of credit issued pursuant to this Agreement (including each Existing Letter of Credit) or (b) any guarantee, indemnity or other instrument, in each case in a form requested by the Borrower and agreed by the applicable Issuing Bank.
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“Letter of Credit Application” means an application and agreement for the issuance or amendment of a Letter of Credit in the form from time to time in use by the Issuing Bank.
“Letter of Credit Expiration Date” means the day that is five (5) Business Days prior to the Revolving Maturity Date (or, if such day is not a Business Day, the immediately preceding Business Day).
“Lien” means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, charge, assignment by way of security, hypothecation, security interest or similar encumbrance given in the nature of a security interest in, on or of such asset and (b) the interest of a vendor or a lessor under any conditional sale agreement, capital or finance lease or title retention agreement (or any financing lease having substantially the same economic effect as any of the foregoing) relating to such asset.
“Limited Condition Transaction” shall mean (i) any acquisition or investments and (ii) any redemption, repurchase, defeasance, satisfaction and discharge or repayment of Indebtedness requiring irrevocable notice in advance of such redemption, repurchase, defeasance, satisfaction and discharge or repayment.
“Listing Rules” means the latest edition of the “Listing Rules” made by the FCA under Part VI of the FSMA.
“Loan Documents” means this Agreement (including any amendment hereto), each Incremental Facility Amendment, each Refinancing Amendment, the Pari Passu Intercreditor Agreement, the Second Lien Intercreditor Agreement (if any) and the Security Documents.
“Loan Parties” means, collectively, all US Loan Parties and UK Loan Parties, and each individually, a “Loan Party.”
“Loans” means the Term Loans, the Revolving Loans, the Swingline Loans and any other loans made by any Lenders to the Borrower pursuant to this Agreement, any Incremental Facility Amendment, Extension Amendment, any Refinancing Amendment or amendment in respect of Replacement Term Loans.
“Margin Stock” has the meaning assigned thereto in Regulation U of the Board.
“Material Adverse Effect” means (a) on the Effective Date, a Seattle Material Adverse Effect or (b) after the Effective Date, a material and adverse effect on (i) the business, results of operations or financial condition of the Parent and its Restricted Subsidiaries, taken as a whole or (ii) the remedies available to the Administrative Agent and the Lenders under the Loan Documents, taken as a whole.
“Material Indebtedness” means any Indebtedness (other than the Loans and Letters of Credit) of the Parent or any Restricted Subsidiary an outstanding principal amount exceeding $125,000,000 at such time.
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“Material Real Property” means any parcel of real property and improvements thereto owned in fee simple by a Loan Party and which has a fair market value (estimated in good faith by the Borrower or such other Loan Party) in excess of $60,000,000 as of the time such property is acquired (or, (x) if such property is owned by a Person at the time it becomes a Loan Party pursuant to Section 5.11, as of such date and (y) if such Property is owned by a Loan Party as of the Effective Date); provided, however, the term “Material Real Property” shall not include any Excluded Property.
“Material Subsidiary” shall mean, at any date of determination, each Restricted Subsidiary of the Parent that is not an Immaterial Subsidiary.
“Maximum Rate” has the meaning assigned to such term in Section 9.13.
“Merger” has the meaning assigned to such term in the recitals to this Agreement.
“Merger Agreement” has the meaning assigned to such term in the recitals to this Agreement.
“Merger Sub” has the meaning assigned to such term in the recitals to this Agreement.
“Miami Material Adverse Effect” has the meaning specified in the Merger Agreement.
“Micro Focus Historical Financial Statements” means (i) the audited consolidated statement of financial position of the Parent and its subsidiaries as at April 30, 2015 and April 30, 2016, and to the extent the Effective Date is at least 120 days after April 30, 2017, as at April 30, 2017, and the related audited consolidated statements of comprehensive income and cash flows of the Parent and its subsidiaries for the years ended April 30, 2015 and April 30, 2016, and to the extent the Effective Date is at least 120 days after April 30, 2017, for the year ended April 30, 2017 and (ii) the unaudited consolidated statement of financial position of the Parent and its subsidiaries for the six (6) month period of the Parent ended October 31, 2016 or to the extent the Effective Date is at least 45 days after October 31, 2017, October 31, 2017, and the related unaudited consolidated statement of comprehensive income of the Parent and its subsidiaries for the six (6) month period of the Parent then ended.
“Midco” means Micro Focus Midco Limited, a company organized under the laws of England and Wales.
“Minimum Extension Condition” has the meaning set forth in Section 2.24(b).
“Moody’s” means Moody’s Investors Service, Inc.
“Mortgages” means, collectively, the UK Mortgages and the US Mortgages.
“Mortgage Policy” has the meaning assigned to such term in Section 5.11(f).
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“Mortgaged Property” means, each parcel of Material Real Property owned by a Loan Party respect to which a Mortgage is granted pursuant to Section 5.11 or Section 5.12.
“Multiemployer Plan” means a multiemployer plan as defined in Section 4001(a)(3) of ERISA.
“Nationally Recognized Statistical Rating Organization” means a nationally recognized statistical rating organization within the meaning of Rule 436 under the Securities Act.
“Net Proceeds” means, with respect to any event, (a) the cash proceeds received in respect of such event, including (x) in the case of a Disposition of an asset (including pursuant to a Sale Leaseback transaction or a casualty or a condemnation or similar proceeding), any cash received in respect of any non-cash proceeds (including any cash payments received by way of deferred payment of principal pursuant to a note or installment receivable or purchase price adjustment or earn-out, but excluding any reasonable interest payments), but only as and when received, (y) in the case of a casualty, cash insurance proceeds, and (z) in the case of a condemnation or similar event, cash condemnation awards and similar payments received in connection therewith, minus (b) the sum of (i) all reasonable fees and expenses (including commissions, discounts, transfer taxes and legal, accounting and other professional and transactional fees) paid or payable by the Parent and the Restricted Subsidiaries to third parties in connection with such event, (ii) in the case of a Disposition of an asset (including pursuant to a Sale Leaseback transaction or a casualty or a condemnation or similar proceeding), the amount of payments made or required to be made in respect of Indebtedness (other than Loans and Seattle Term Loans) secured by such asset or otherwise subject to mandatory prepayment (other than under this Agreement or the Seattle Credit Agreement) as a result of such event, or which by applicable law be repaid out of the proceeds of such Disposition, casualty, condemnation or similar proceeding, (iii) the amount of all Taxes (or Restricted Payments in respect of such Taxes), including as a result of the repatriation of funds, paid (or reasonably estimated to be payable or accrued as a liability under IFRS) by the Parent and the Restricted Subsidiaries or any affiliate thereof as a result of such event, (iv) the amount of any reserves established by the Parent or the applicable Restricted Subsidiaries to fund liabilities estimated to be payable as a result of such event (as determined in good faith by the applicable Responsible Officer of the Parent or such Restricted Subsidiary), (v) in the case of any Disposition or casualty or condemnation or similar proceeding by a non-wholly owned Restricted Subsidiary, the pro rata portion of the Net Proceed thereof (calculated without regard to this clause (v)) attributable to minority interests and not available for distribution to or for the account of the Parent or a wholly owned Restricted Subsidiary as a result thereof and (vi) any funded escrow established pursuant to the documents evidencing any such sale or disposition to secure any indemnification obligations or adjustments to the purchase price associated with any such sale or disposition.
“Non-Consenting Lender” has the meaning assigned to such term in Section 9.02(c).
“Nonrenewal Notice Date” has the meaning specified in Section 2.05(c).
“Note” means a Term Note or a Revolving Note, as the context may require.
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“Obligations” means all obligations of every nature of each Loan Party, including obligations from time to time owed to the Administrative Agent, the Collateral Agent, any Arranger, any other Agent, the Issuing Bank, the Swingline Lender, the Lenders or any of them, arising under any Loan Document, whether for principal, interest (including interest which, but for the filing of a petition in bankruptcy with respect to such Loan Party, would have accrued on any Obligation, whether or not a claim is allowed against such Loan Party for such interest in the related bankruptcy proceeding), prepayment premiums, reimbursement of amounts drawn under Letters of Credit, fees (including fees and expenses which, but for the filing of a petition in bankruptcy with respect to such Loan Party, would have accrued on any Obligation, whether or not a claim is allowed against such Loan Party for such fees and expenses in the related bankruptcy proceeding), expenses, indemnification or otherwise; provided that for the avoidance of doubt, the “Obligations” of any Loan Party shall not include any Excluded Swap Obligations of such Loan Party.
“OFAC” has the meaning set forth in Section 3.19(a).
“Organizational Documents” of any Person means the charter, constitution, memorandum and articles of association, articles and/or certificate of organization or incorporation and bylaws or other organizational or governing or constitutive documents of such Person.
“Other Applicable Indebtedness” has the meaning assigned to such term in Section 2.11(c).
“Other Revolving Commitments” means, with respect to each Additional Refinancing Lender, the commitment, if any, of such Additional Refinancing Lender to make one or more Classes of Other Revolving Loans under any Refinancing Amendment, expressed as an amount representing the maximum principal amount of the Other Revolving Loans to be made by such Lender under such Refinancing Amendment, as such commitment may be (a) reduced pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 or as otherwise set forth herein.
“Other Revolving Loans” means the Revolving Loans made pursuant to any Other Revolving Commitment.
“Other Taxes” means any and all present or future recording, stamp, documentary, excise, transfer, sales, property, intangible, filing or similar Taxes, charges or levies arising from any payment made under any Loan Document or from the execution, delivery, performance, registration or enforcement of, or from the registration, receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document.
“Other Term Commitments” means, with respect to each Additional Refinancing Lender, the commitment, if any, of such Additional Refinancing Lender to make one or more Classes of Other Term Loans under any Refinancing Amendment, expressed as an amount representing the maximum principal amount of the Other Term Loans to be made by such Lender under such Refinancing Amendment, as such commitment may be (a) reduced pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 or as otherwise set forth herein.
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“Other Term Loans” means one or more Classes of Term Loans made pursuant to or that result from a Refinancing Amendment.
“Parent” has the meaning assigned to such term in the preamble to this Agreement.
“Parent Companies Guaranty” means that certain Parent Companies Guaranty dated November 20, 2014 as it may be from time to time amended, restated, amended and restated, supplemented or otherwise modified, among the Parent, Midco and Holdco and the Collateral Agent, together with each supplement to the Parent Companies Guaranty in respect of the Obligations delivered pursuant to Section 5.11.
“Parent Entity” means any holding companies established by any Permitted Holder for purposes of holding its investment in the Parent.
“Pari Passu Intercreditor Agreement” means (i) the Intercreditor Agreement, to be entered into on or after the Acquisition Closing Date (but in any event, on or before the date described on Schedule 5.163 hereof, or such later date as may be agreed to by the Administrative Agent in its reasonable discretion), by and among the Parent, Holdco, the Borrower, the Collateral Agent, the Seattle Agent and the representatives for purposes thereof for holders of one of more classes of Indebtedness and (ii) any other Intercreditor Agreement substantially in the form of Exhibit K-1 (with (A) any immaterial changes and (B) changes implementing extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Borrower, the Administrative Agent and/or Collateral Agent).
“Participant” has the meaning assigned to such term in Section 9.04(c).
“Participant Register” has the meaning specified in Section 9.04(c).
“Participating Member State” means each state so described in any EMU Legislation.
“Participating Lender” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Patriot Act” has the meaning assigned to such term in Section 9.14.
“PBGC” means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions.
3 | To include requirement to deliver Pari Passu Intercreditor Agreement within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security. |
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“Permitted Acquisition” means any Acquisition by the Parent or any Restricted Subsidiary if (a) at the time of execution of a binding agreement in respect of such Acquisition, no Event of Default under Sections 7.01(a), 7.01(b), 7.01(h) or 7.01(i), has occurred and is continuing or would result therefrom, (b) all actions required to be taken with respect to such acquired or newly formed Restricted Subsidiary (other than any Excluded Subsidiary) or such acquired assets (other than Excluded Property) under Section 5.11 and Section 5.12 will be taken in accordance therewith (to the extent required) and (c) after giving effect to such Acquisition, the Parent and its Restricted Subsidiaries are in compliance with Section 5.14.
“Permitted Debt Exchange” has the meaning specified in Section 2.25(a).
“Permitted Debt Exchange Offer” has the meaning specified in Section 2.25(a).
“Permitted Encumbrances” means:
(a) Liens imposed by law for taxes, assessments or other governmental charges or levies that are not yet due or delinquent, are not more than 60 days overdue, are not required to be paid pursuant to Section 5.05 or are being contested in compliance with Section 5.05;
(b) carriers’, warehousemen’s, supplier’s, construction contractor’s, workmen, mechanics,’ materialmen’s, repairmen’s, landlords’ and other like Liens imposed by law or contract, arising in the ordinary course of business and securing obligations (i) that are not yet due or (ii) (x) that are not overdue by more than 60 days, (y) are not required to be paid pursuant to Section 5.05 or (z) are being contested in compliance with Section 5.05;
(c) Liens, pledges and deposits made in the ordinary course of business in compliance with workers’ compensation, unemployment insurance and other social security laws or regulations (and obligations in respect of letters of credit or bank guarantees that have been posted to support payment of the items);
(d) (i) Liens, pledges and deposits to secure the performance of bids, government contracts, trade contracts (other than for borrowed money), leases, statutory obligations, deductibles, co-payment, co-insurance, retentions, premiums, reimbursement obligations or similar obligations to providers of insurance, self-insurance or reinsurance obligations, surety, stay, customs and appeal or similar bonds, performance bonds and other obligations of a like nature (including those to secure health, safety and environmental obligations) and other similar obligations and (ii) obligations in respect of letters of credit or bank guarantees that have been posted to support payment of the items set forth in clause (i) of this section (d);
(e) attachment or judgment Liens in respect of judgments or decrees that do not constitute an Event of Default under Section 7.01(j);
(f) (i) easements, zoning restrictions, rights-of-way, encroachments, minor defects or irregularities in title and similar encumbrances on real property imposed by law or arising in the ordinary course of business and that either (x) individually or in the aggregate do not materially interfere with the ordinary conduct of business of the Parent and its Restricted Subsidiaries, taken as a whole or (y) are described in a mortgage policy of title insurance or survey with respect to any real property and (ii) Liens on real property in Canada that constitute a reservation in any original grant from the Crown;
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(g) customary rights of first refusal and tag, drag and similar rights in Joint Venture agreements;
(h) Liens arising from Cash Equivalents described in clause (d) of the definition of the term “Cash Equivalents”; and
(i) with respect to any Foreign Subsidiary, other Liens and privileges arising mandatorily by any Requirement of Law.
“Permitted Holders” means the Equity Investors and their respective Affiliates.
“Permitted First Priority Replacement Debt” means any secured Indebtedness (including any Registered Equivalent Notes) incurred by the Borrower and/or the other Loan Parties in the form of one or more series of senior secured notes or senior secured loans (or revolving commitments in respect thereof, with the revolving commitments deemed loans in the full amount of such commitment); provided that (i) such Indebtedness may only be secured by assets consisting of Collateral on a pari passu basis (but without regard to the control of remedies) with the Initial Term Loans and/or Initial Revolving Commitments, (ii) such Indebtedness satisfies the requirements set forth in clauses (w) through (z) of the definition of “Credit Agreement Refinancing Indebtedness,” (iii) such secured notes do not require any scheduled payment of principal or mandatory redemption or redemption at the option of the holders thereof (except for redemptions in respect of asset sales (which may be offered to prepay such notes or loans in accordance with Section 2.11(c)), changes in control or similar events (which may be offered to prepay such notes or loans in accordance with Section 2.11(c)) and AHYDO Catch-Up Payments) prior to the Latest Maturity Date in effect as of the time such secured notes are incurred, and (v) the secured parties thereunder, or a trustee or collateral agent or other Senior Representative on their behalf, shall have become a party to the Pari Passu Intercreditor Agreement or other customary intercreditor agreement with the Administrative Agent and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing Obligations), which shall be entered into or shall be amended prior to or concurrently with the first issuance of Permitted First Priority Replacement Debt in accordance with the terms thereof to provide for the sharing of the Collateral on a pari passu basis among the holders of the Secured Obligations and the holders of such Permitted First Priority Replacement Debt.
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“Permitted Refinancing” means modifications, replacements, restructurings, refinancings, refundings, renewals, amendments, restatements or extensions of all or any portion of Indebtedness (including any type of debt facility or debt security); provided that (a) the amount of such Indebtedness is not increased (unless the additional amount is permitted pursuant to another provision of Section 6.01) at the time of such refinancing, refunding, renewal or extension except by an amount equal to the existing unutilized commitments thereunder, accrued but unpaid interest thereon and a reasonable premium paid, and fees and expenses reasonably incurred, in connection with such refinancing, refunding, restructuring, renewal or extension (including any fees and original issue discount incurred in respect of such resulting Indebtedness), (b) the direct and contingent obligors of such Indebtedness shall not be expanded as a result of or in connection with such refinancing, refunding, restructuring, renewal or extension (other than to the extent (i) any such additional obligors are or will become a Loan Party, (ii) none of such obligors on the Indebtedness being modified, replaced, refinanced refunded, restructured, renewed or extended are Loan Parties or (iii) as otherwise permitted by Section 6.01), (c) to the extent such Indebtedness being so refinanced, refunded, renewed or extended is subordinated in right of payment and/or in right of Lien to any of the Obligations, such refinancing, refunding, renewal or extension is subordinated in right of payment and/or in right of Lien (or, in the case of Lien subordination, not secured) to such Obligations on terms (taken as a whole) at least as favorable to the Lenders as those contained in the documentation governing the Indebtedness being so modified, refinanced, refunded, renewed or extended (as determined in good faith by the Borrower) or otherwise reasonably acceptable to the Administrative Agent and (d) other than with respect to Indebtedness under Section 6.01(a)(iv) or (v), such refinancing, refunding, renewal or extension has a final maturity date equal to or later than the final maturity date of, the Indebtedness being refinanced, refunded, renewed or extended.
“Permitted Sale Leaseback” means any Sale Leaseback with respect to the sale, transfer or Disposition of real property or other property consummated by the Parent or any of its Restricted Subsidiaries after the Effective Date; provided that any such Sale Leaseback that is not between (a) a Loan Party and another Loan Party or (b) a Restricted Subsidiary that is not a Loan Party and another Restricted Subsidiary that is not a Loan Party, must be consummated for fair value as determined at the time of consummation in good faith by the Borrower or such Restricted Subsidiary (which such determination may take into account any retained interest or other Investment of the Borrower or such Restricted Subsidiary in connection with, and any other material economic terms of, such Sale Leaseback).
“Permitted Second Priority Replacement Debt” means secured Indebtedness (including any Registered Equivalent Notes) incurred by the Borrower and/or the other Loan Parties in the form of one or more series of second Lien secured notes or second Lien secured loans (or revolving commitments in respect thereof, with the revolving commitments deemed to be loans in the full amount of such commitments); provided that (i) such Indebtedness may only be secured by assets consisting of Collateral on a second lien basis vis-à-vis the Initial Term Loans and/or Initial Revolving Commitments, (ii) such Indebtedness satisfies the requirements set forth in clauses (w) through (z) of the definition of “Credit Agreement Refinancing Indebtedness”, (iii) to the extent constituting secured notes, such Indebtedness does not require any scheduled payment of principal or mandatory redemption or redemption at the option of the holders thereof (except for redemptions in respect of asset sales, changes in control or similar events and AHYDO Catch-Up Payments) prior to the Latest Maturity Date in effect as of the time such secured notes are incurred, and (iv) a Senior Representative acting on behalf of the holders of such Indebtedness shall have become party to a Second Lien Intercreditor Agreement; provided that if such Indebtedness is the initial Permitted Second Priority Replacement Debt incurred by the applicable Loan Party, then the Parent, the Borrower, Holdco, the Subsidiary Loan Parties, the Collateral Agent and the Senior Representative for such Indebtedness shall have executed and delivered the Second Lien Intercreditor Agreement.
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“Permitted Tax Restructuring” means (a) the re-organization and other activities related to the integration of the Foreign Subsidiaries of Serena Software, Inc. as direct or indirect subsidiaries of Micro Focus CHC Limited, (b) the re-organization and other activities related to the partnership formation or integration of the Foreign Subsidiaries of Parent and the Company in connection with the Transactions and (c) any other re-organizations and other activities related to tax planning and re-organization so long as, after giving effect thereto, taken as a whole, the security interests of the Lenders in the Collateral are not materially impaired.
“Permitted Unsecured Replacement Debt” means unsecured Indebtedness (including any Registered Equivalent Notes) incurred by the Borrower and/or the other Loan Parties in the form of one or more series of unsecured notes or loans (or revolving commitments in respect thereof, with the revolving commitments deemed to loans in the full amount of such commitments); provided that (i) such Indebtedness satisfies the requirements set forth in clauses (w) through (z) of the definition of “Credit Agreement Refinancing Indebtedness”, (ii) such Indebtedness (including any guarantee thereof) is not secured by any Lien on any property or assets of the Parent or any Restricted Subsidiary, and (iii) such Indebtedness does not require any scheduled payment of principal or mandatory redemption or redemption at the option of the holders thereof (except for redemptions in respect of asset sales, changes in control or similar events and AHYDO Catch-Up Payments) prior to the Latest Maturity Date in effect as of the time such Indebtedness is incurred.
“Person” means any natural person, corporation, company, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
“Plan” means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which Holdco or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.
“Platform” has the meaning assigned to such term in Section 5.01.
“Prepayment Event” means:
(a) any Disposition (including pursuant to a Sale Leaseback transaction and by way of merger or consolidation) of any property or asset of the Parent or any Restricted Subsidiary permitted pursuant to clause (k) or (v) of Section 6.05 resulting in aggregate Net Proceeds exceeding (A) $30,000,000 in the case of any single transaction or series of related transactions and (B) $75,000,000 for all such transactions during any fiscal year of the Parent;
(b) any casualty or other insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Parent or any Restricted Subsidiary with a fair market value immediately prior to such event equal to or greater than $30,000,000; or
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(c) the incurrence by the Parent or any Restricted Subsidiary of any Indebtedness, other than Indebtedness permitted under Section 6.01 or otherwise permitted by the Required Lenders (other than Credit Agreement Refinancing Indebtedness).
“Prime Rate” means the rate of interest per annum announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City and notified to the Borrower; each change in the Prime Rate shall be effective from and including the date such change is announced as being effective.
“Private Lender” means any Lender other than a Public Lender.
“Proceeds” has the meaning assigned thereto in the UCC.
“Pro Forma Basis” means, with respect to the calculation of the First Lien Leverage Ratio, the Total Leverage Ratio, the amount of Consolidated EBITDA or Consolidated Total Assets or any other financial test or ratio hereunder, for purposes of determining the permissibility of asset sales, prepayments required pursuant to Section 2.11(c) and Section 2.11(d), the Applicable Margin and for any other specified purpose hereunder, and for purposes of determining compliance with the covenant under Section 6.12, in each case as of any date, that such calculation shall give pro forma effect to the Transactions and all Specified Transactions (with any such incurrence of Indebtedness being deemed to be amortized over the applicable testing period in accordance with its terms) (and the application of the proceeds from any such asset sale or debt incurrence) that have occurred during the relevant testing period for which such financial test or ratio is being calculated and during the period immediately following the Applicable Date of Determination therefor and prior to or simultaneously with the event for which the calculation of any such ratio on such date of determination is made, including pro forma adjustments arising out of events which are attributable to the Transactions or the proposed Specified Transaction, including giving effect to those specified in accordance with the definition of “Consolidated EBITDA,” in each case as certified on behalf of the Borrower by a Financial Officer of the Borrower, using, for purposes of determining such financial test or ratio (including any incurrence test), the historical financial statements of all entities, divisions or lines or assets so acquired or sold and the consolidated financial statements of the Parent and/or any of its Restricted Subsidiaries, calculated as if the Transactions or such Specified Transaction, and all other Specified Transactions that have been consummated during the relevant period, and any Indebtedness incurred or repaid in connection therewith, had been consummated (and the change in Consolidated EBITDA resulting therefrom) and incurred or repaid at the beginning of such period and Consolidated Total Assets shall be calculated after giving effect thereto.
Whenever pro forma effect is to be given to the Transactions or a Specified Transaction, the pro forma calculations shall be made in good faith by a Financial Officer of the Borrower (including adjustments for costs and charges arising out of the Transactions or the proposed Specified Transaction and the “run-rate” cost savings, operating expense reductions, other operating improvements and initiatives and synergies resulting from the Transactions or such Specified Transaction that have been or are reasonably anticipated to be realizable (“run-rate” means the full recurring benefit for a test period that is associated with any action taken or expected to be taken or for which a plan for realization has been established (including any savings expected to result from the elimination of a public target’s compliance costs with public company requirements), net of the amount of actual benefits realized during such test period from such actions), and any such adjustments included in the initial pro forma calculations shall continue to apply to subsequent calculations of such financial ratios or tests, including during any subsequent test periods in which the effects thereof are expected to be realizable); provided that (i) such amounts are projected by the Borrower in good faith to result from actions either taken or expected to be taken or a plan for realization shall have been established within 18 months after the end of the test period in which the Transactions or the Specified Transaction occurred and, in each case, certified by a Financial Officer of the Borrower and (ii) no amounts shall be added pursuant to this paragraph to the extent duplicative of any amounts that are otherwise added back in computing Consolidated EBITDA for such test period.
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If any Indebtedness bears a floating rate of interest and is being given pro forma effect, the interest on such Indebtedness shall be calculated as if the rate in effect on the date of the event for which the calculation is made had been the applicable rate for the entire test period (taking into account any interest hedging arrangements applicable to such Indebtedness). Interest on a Capital Lease Obligation shall be deemed to accrue at an interest rate reasonably determined by a Financial Officer of the Borrower to be the rate of interest implicit in such Capital Lease Obligation in accordance with IFRS. Interest on Indebtedness that may optionally be determined at an interest rate based upon a factor of a prime or similar rate, a eurocurrency interbank offered rate, or other rate, shall be determined to have been based upon the rate actually chosen, or if none, then based upon such optional rate chosen as the Borrower or the applicable Restricted Subsidiary may designate.
“Projections” has the meaning assigned to such term in Section 5.01(d).
“Proposed Change” has the meaning assigned to such term in Section 9.02(c).
“Public Lender” has the meaning assigned to such term in Section 5.01.
“Qualified Equity Interests” means any Equity Interests other than Disqualified Equity Interests.
“Qualified Securitization Financing” means any Securitization Facility of a Securitization Subsidiary that meets the following conditions: (i) the Borrower shall have determined in good faith that such Securitization Facility (including financing terms, covenants, termination events and other provisions) is in the aggregate economically fair and reasonable to the Parent and its Restricted Subsidiaries; (ii) all sales of Securitization Assets and related assets by the Parent or any Restricted Subsidiary to the Securitization Subsidiary or any other Person are made at fair market value (as determined in good faith by the Borrower); (iii) the financing terms, covenants, termination events and other provisions thereof shall be on market terms (as determined in good faith by the Borrower) and may include Standard Securitization Undertakings; and (iv) the obligations under such Securitization Facility are non-recourse (except for customary representations, warranties, covenants and indemnities made in connection with such facilities) to the Parent or any of its Restricted Subsidiaries (other than a Securitization Subsidiary).
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“Qualifying Bids” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Receivables Assets” means (a) any trade or accounts receivable owed to the Parent or a Restricted Subsidiary subject to a Receivables Facility and the proceeds thereof and (b) all collateral securing such trade or accounts receivable, all contracts and contract rights, guarantees or other obligations in respect of such trade or accounts receivable, all records with respect to such trade or accounts receivable and any other assets customarily transferred together with trade or accounts receivables in connection with a non-recourse trade or accounts receivable factoring arrangement and which are sold, conveyed, assigned or otherwise transferred or pledged by the Borrower to a commercial bank or an Affiliate thereof in connection with a Receivables Facility.
“Receivables Facility” means an arrangement between the Parent or a Restricted Subsidiary and a commercial bank or an Affiliate thereof pursuant to which (a) the Parent or such Restricted Subsidiary, as applicable, sells (directly or indirectly) to such commercial bank (or such Affiliate) trade or accounts receivable owing by customers, together with Receivables Assets related thereto, at a maximum discount, for each such trade or accounts receivable, not to exceed 5.0% of the face value thereof, (b) the obligations of the Parent or such Restricted Subsidiary, as applicable, thereunder are non-recourse (except for Securitization Repurchase Obligations) to the Parent and such Restricted Subsidiary and (c) the financing terms, covenants, termination events and other provisions thereof shall be on market terms (as determined in good faith by the Parent) and may include Standard Securitization Undertakings, and shall include any guaranty in respect of such arrangement.
“Recipient” means, as applicable, (a) the Administrative Agent, (b) any Lender, (c) any Issuing Bank or (d) solely for U.S. federal withholding Tax purposes, any Beneficial Owner.
“Redemption Notice” has the meaning assigned to such term in Section 6.08(b)(viii).
“Refinanced Term Loans” has the meaning assigned to such term in Section 9.02(d).
“Refinancing Amendment” means an amendment to this Agreement in form reasonably satisfactory to the Borrower executed by each of (a) the Parent, Holdco and the Borrower (and to the extent it directly and adversely affects the rights or obligations of the Administrative Agent beyond those of the type already required to perform under the Loan Documents, the Administrative Agent) and (b) each Additional Refinancing Lender that agrees to provide any portion of the Credit Agreement Refinancing Indebtedness being incurred pursuant thereto, in accordance with Section 2.21. In the event a Refinancing Amendment is effected without the consent of the Administrative Agent and to which the Administrative Agent is not a party, the Borrower shall furnish a copy of such Refinancing Amendment to the Administrative Agent.
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“Refinancing Notes” means Permitted First Priority Replacement Debt, Permitted Second Priority Replacement Debt and Permitted Unsecured Replacement Debt.
“Register” has the meaning assigned to such term in Section 9.04(b)(iv).
“Registered Equivalent Notes” means, with respect to any notes originally issued in a Rule 144A or other private placement transaction under the Securities Act, substantially identical notes (having the same guarantees) issued in a dollar-for-dollar exchange therefor pursuant to an exchange offer registered with the SEC.
“Regulatory Information Service” means a service approved by the FCA under the Listing Rules for the distribution to the public of announcements in accordance with the Listing Rules.
“Related Parties” means, with respect to any specified Person, such Person’s Affiliates and the respective partners, directors, officers, employees, trustees, agents and advisors of such Person and such Person’s Affiliates.
“Related Taxes” means any Taxes, including sales, use, transfer, rental, ad valorem, value added, stamp, property, consumption, franchise, license, capital, registration, business, customs, net worth, gross receipts, excise, occupancy, intangibles or similar Taxes (other than (x) Taxes measured by income and (y) withholding Taxes), required to be paid (provided such Taxes are in fact paid) by any Parent Entity by virtue of its:
(a) being organized or having Equity Interests outstanding (but not by virtue of owning stock or other equity interests of any corporation or other entity other than, directly or indirectly, the Parent or any Restricted Subsidiary);
(b) being a holding company parent, directly or indirectly, of the Parent or any Restricted Subsidiary;
(c) receiving dividends from or other distributions in respect of the Equity Interests of, directly or indirectly, the Parent or any Restricted Subsidiary; or
(d) having made any payment in respect to any of the items for which the Parent is permitted to make payments to any Parent Entity pursuant to Section 6.08; or
(e) having made any payment in respect to any of the items for which the Parent is permitted to make payments to any Parent Entity or an Affiliate pursuant to Section 2.11(f).
“Release” means any release, spill, emission, leaking, dumping, injection, pouring, deposit, disposal, discharge, dispersal, leaching or migration into or through the environment (including ambient air, surface water, groundwater, land surface or subsurface strata).
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“Replacement Term Loans” has the meaning assigned to such term in Section 9.02(d).
“Reply Amount” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Reply Discount” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Repricing Transaction” means any repayment, prepayment, refinancing or replacement of all or a portion of the Tranche B-2 Term Loans, Tranche B-3 Term Loans or Euro Tranche Term Loans, as applicable, with the substantially concurrent incurrence by the Borrower of any first Lien secured bank-syndicated term loans incurred for the primary purpose of repaying, refinancing, substituting or replacing such Class of Tranche B-2 Term Loans, Tranche B-3 Term Loans or Euro Tranche Term Loans (other than in connection with (x) a Change in Control, (y) an Acquisition or other transaction not otherwise permitted hereunder or (z) an acquisition which, if consummated, would not provide the Parent and its Subsidiaries with adequate flexibility under this Agreement for the continuation and/or expansion of their combined operations following such consummation, as determined by the Borrower in good faith) with an effective Yield that is less than the Yield of the applicable Class of Tranche B-2 Term Loans, Tranche B-3 Term Loans or Euro Tranche Term Loans, as applicable, being repaid, refinanced, substituted or replaced, including as may be effected by an amendment of any provisions of this Agreement relating to the Applicable Margin or Alternate Base Rate or Adjusted Eurocurrency Rate “floors” for, or Yield of, the Tranche B-2 Term Loans, the Tranche B-3 Term Loans or the Euro Tranche Term Loans, as applicable.
“Required Lenders” means, (a) at any time prior to the Acquisition Closing Date, Lenders (other than Defaulting Lenders) having Revolving Exposures, outstanding Term Loans and unused Commitments (other than Swingline Commitments) representing more than 50% of the aggregate Revolving Exposures, outstanding Term Loans and unused Commitments (other than Swingline Commitments) at such time (calculated, in each case, using the Exchange Rate in effect on the applicable date of determination) and (b) at any time thereafter, (i) with respect to any waiver, amendment or modification that (x) would apply to a provision that is contained (and substantially identical) in both this Agreement and the Seattle Credit Agreement (or relates to or is otherwise in connection with Revolving Loans, Revolving Commitments, Swingline Loans or Letters of Credit which, in each case, is not required to be approved by the Required Revolving Lenders) and (y) other than in connection with Revolving Loans, Revolving Commitments, Swingline Loans or Letters of Credit, for which the Borrower is seeking a waiver, amendment or modification of such provision in both this Agreement and the Seattle Credit Agreement, Lenders (other than Defaulting Lenders) and Seattle Lenders (other than Defaulting Seattle Lenders collectively), having Revolving Exposures, outstanding Term Loans and Seattle Term Loans and unused Commitments (other than Swingline Commitments) and Seattle Commitments representing more than 50% of the aggregate Revolving Exposures, outstanding Term Loans and Seattle Term Loans and unused Commitments (other than Swingline Commitments) and Seattle Commitments at such time (calculated, in each case, using the Exchange Rate in effect on the applicable date of determination) and (ii) with respect to any waiver, amendment or modification to which the foregoing clause (i) does not apply, Lenders (other than Defaulting Lenders) having Revolving Exposures, outstanding Term Loans and unused Commitments (other than Swingline Commitments) representing more than 50% of the aggregate Revolving Exposures, outstanding Term Loans and unused Commitments (other than Swingline Commitments) at such time (calculated, in each case, using the Exchange Rate in effect on the applicable date of determination). No Defaulting Lender or Defaulting Seattle Lender shall be included in the calculation of Required Lenders.
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“Required Percentage” means, with respect to any fiscal year of the Parent, (a) 50%, if the First Lien Leverage Ratio at the end of such fiscal year is greater than 3.30 to 1.00, (b) 25%, if the First Lien Leverage Ratio at the end of such fiscal year is less than or equal to 3.30 to 1.00 but greater than 3.00 to 1.00 and (c) 0%, if the First Lien Leverage Ratio at the end of such fiscal year is less than or equal to 3.00 to 1.00 (in each case, such First Lien Leverage Ratio to be calculated on a Pro Forma Basis to give pro forma effect to any reduction of Indebtedness made after the relevant fiscal year and on or prior to the date the relevant Excess Cash Flow prepayment is due).
“Required Revolving Lenders” means, at any time, Revolving Lenders (other than Defaulting Lenders) having Revolving Exposures and unused Revolving Commitments (other than Swingline Commitments) representing more than 50% of the aggregate Revolving Exposures and unused Revolving Commitments (other than Swingline Commitments) at such time (calculated, in each case, using the Exchange Rate in effect on the applicable date of determination). No Defaulting Lender shall be included in the calculation of Required Revolving Lenders.
“Requirement of Law” means, with respect to any Person, any statute, law, treaty, rule, regulation, order, executive order, ordinance, decree, writ, injunction or determination of any arbitrator or court or other Governmental Authority, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject.
“Responsible Officer” of any Person means the chief executive officer, president or any Financial Officer of such Person, and any other officer (or, in the case of any such Person that is a Foreign Subsidiary, director or managing partner or similar official) of such Person with responsibility for the administration of the obligations of such Person under this Agreement and, solely for purposes of notices given to Article II, any other officer of the applicable Loan Party so designated by any of the foregoing officers in a notice to the Administrative Agent or any other officer or employee of the applicable Loan Party designated in or pursuant to an agreement between the applicable Loan Party and the Administrative Agent.
“Restricted Payment” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interests in the Parent or any Restricted Subsidiary, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancelation or termination of any Equity Interests in the Parent or any Restricted Subsidiary, or any option, warrant or other right to acquire any such Equity Interests in the Parent or any Restricted Subsidiary, other than the payment of compensation in the ordinary course of business to holders of any such Equity Interests who are employees of the Parent or any Restricted Subsidiary and other than payments of intercompany indebtedness permitted under this Agreement.
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“Restricted Subsidiary” means any Subsidiary other than an Unrestricted Subsidiary. Unless otherwise specified, all references herein to a “Restricted Subsidiary” or to “Restricted Subsidiaries” shall refer to a Restricted Subsidiary or Restricted Subsidiaries of the Parent. For the avoidance of doubt, the Borrower shall always constitute a Restricted Subsidiary.
“Retained Asset Sale Proceeds” has the meaning set forth in Section 2.11(c).
“Retained Declined Proceeds” has the meaning set forth in Section 2.11(g).
“Return” means, with respect to any Investment, any dividend, distribution, interest, fee, premium, return of capital, repayment of principal, income, profit (from a disposition or otherwise) and any other amount received or realized in respect thereof.
“Return Bid” has the meaning assigned to such term in the definition of “Dutch Auction.”
“Return of Value Payment” has the meaning assigned to such term in the recitals to this Agreement.
“Revolving Availability Period” means the period from and including the Effective Date to but excluding the earlier of the Revolving Maturity Date and the date of termination of the Revolving Commitments.
“Revolving Commitment” means, with respect to each Lender, the commitment, if any, of such Lender to make Revolving Loans and to acquire participations in Letters of Credit and Swingline Loans hereunder, expressed as an amount representing the maximum principal aggregate amount of such Lender’s Revolving Exposure hereunder, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Lender pursuant to Section 9.04 or as otherwise set forth herein. The initial amount of each Lender’s Revolving Commitment is set forth on Schedule 2.01 or in the Assignment and Assumption pursuant to which such Lender shall have assumed its Revolving Commitment, as the case may be. References to the “Revolving Commitments” shall mean the Revolving Commitment of each Lender taken together. As of the Effective Date, the Revolving Commitments consist solely of the Initial Revolving Commitments.
“Revolving Exposure” means, at any time, the sum of (a) the aggregate principal amount of the Revolving Loans denominated in Dollars outstanding at such time, (b) the Dollar Equivalent of the aggregate principal amount of the Revolving Loans denominated in Euros or other Alternative Currency outstanding at such time, (c) the LC Exposure at such time and (d) the Swingline Exposure at such time. The Revolving Exposure of any Lender at any time shall be its Applicable Percentage of the Revolving Exposure at such time.
“Revolving Lender” means a Lender with a Revolving Commitment or, if the Revolving Commitments have terminated or expired, a Lender with Revolving Exposure.
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“Revolving Loan” means an Initial Revolving Loan, an Extended Revolving Loan, an Incremental Revolving Loan and/or an Other Revolving Loan, as the context requires.
“Revolving Maturity Date” means (i) prior to the Acquisition Closing Date, November 20, 2019 (or if such anniversary is not a Business Day, the next preceding Business Day) and (y) on and after the Acquisition Closing Date, the fifth anniversary of the Effective Date (or if such anniversary is not a Business Day, the next preceding Business Day), but, as to any specific Revolving Commitment, as the maturity of such Revolving Commitment shall have been extended by the holder thereof in accordance with the terms hereof.
“Revolving Note” means a promissory note of the Borrower evidencing Revolving Loans made or held by a Revolving Lender, substantially in the form of Exhibit F-4.
“S&P” means Standard & Poor’s Ratings Services, a Standard & Poor’s Financial Services LLC Business.
“Sale Leaseback” means any transaction or series of related transactions pursuant to which the Parent or any of the Restricted Subsidiaries (a) sells, transfers or otherwise disposes of any property, real or personal, whether now owned or hereafter acquired, and (b) as part of such transaction, thereafter rents or leases such property that it intends to use for substantially the same purpose or purposes as the property being sold, transferred or disposed.
“Sanctions” means economic sanctions administered or enforced by the United States Government (including without limitation, sanctions enforced by OFAC), the United Nations Security Council, the European Union or Her Majesty’s Treasury.
“Seattle Acquisition” has the meaning assigned to such term in the recitals to this Agreement.
“Seattle Additional Debt” means the “Additional Debt” as defined in the Seattle Credit Agreement.
“Seattle Additional Term Notes” means the “Additional Term Notes” as defined in the Seattle Credit Agreement.
“Seattle Agent” means JPMorgan Chase Bank, N.A., as administrative agent and collateral agent under the Seattle Credit Agreement and the other Seattle Loan Documents, and its successors in such capacity as provided under the Seattle Credit Agreement.
“Seattle Business” has the meaning specified in the Merger Agreement.
“Seattle Commitments” means “Commitments” as defined in the Seattle Credit Agreement.
“Seattle Extension Amendment” means an “Extension Amendment” as defined in the Seattle Credit Agreement.
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“Seattle Credit Agreement” means the Credit Agreement, dated as of the date hereof, by and among the Company, the Seattle Lenders and the Seattle Agent.
“Seattle Credit Agreement Refinancing Indebtedness” means the “Credit Agreement Refinancing” as defined in the Seattle Credit Agreement.
“Seattle Escrow Term Loan Agreement” means the “Escrow Term Loan Agreement” as defined in the Seattle Credit Agreement.
“Seattle Extended Term Loans” means “Extended Term Loans” as defined in the Seattle Credit Agreement.
“Seattle Historical Financial Statements” means (i) the audited combined financial statements of the Seattle Business prepared in accordance with GAAP consistently applied, including the combined balance sheets of the Seattle Business as of October 31, 2013, October 31, 2014 and October 31, 2015, and the combined statements of income, equity and cash flows of the Seattle Business for the fiscal years ended October 31, 2013, October 31, 2014 and October 31, 2015, (ii) the unaudited combined financial statements of the Seattle Business prepared in accordance with IFRS consistently applied, including the combined balance sheets of the Seattle Business as of October 31, 2013, October 31, 2014 and October 31, 2015, and the combined statements of income, equity and cash flows of the Seattle Business for the fiscal years ended October 31, 2013, October 31, 2014 and October 31, 2015, (iii) to the extent the Effective Date has not occurred prior to May 30, 2017, the audited combined balance sheets of the Seattle Business as of October 31, 2014, October 31, 2015 and October 31, 2016 and the audited combined statements of income, equity and cash flows of the Seattle Business for the fiscal years ended October 31, 2014, October 31, 2015 and October 31, 2016, prepared in accordance with both GAAP and IFRS, (iv) to the extent the Effective Date has not occurred prior to May 30, 2017, the unaudited combined balance sheets of the Seattle Business as of January 31, 2017 and the combined statements of income, equity and cash flows of the Seattle Business for the three months ended January 31, 2016 and January 31, 2017, prepared in accordance with GAAP, (v) to the extent the Effective Date has not occurred prior to August 15, 2017, the unaudited combined balance sheets of the Seattle Business as of April 30, 2017 and the combined statements of income, equity and cash flows of the Seattle Business for the six months ended April 30, 2016 and April 30, 2017, prepared in accordance with both GAAP and IFRS, (vi) for each fiscal quarter (other than a fiscal quarter that is also a fiscal year end) of the Seattle Business ended after May 1, 2017 and at least 90 days prior to the Effective Date (or 105 days in the case of suchfinancial statements prepared in accordance with IFRS), the unaudited pre-tax combinedstatements of income, equity and cash flows for each such fiscal quarter and the unaudited pretaxcombined balance sheets as of the end of such fiscal quarter, in each case prepared inaccordance with GAAP and IFRS and (vii) for each fiscal year of the Seattle Business endedafter November 1, 2016 and at least 120 days prior to the Effective Date, the audited combinedstatements of income, equity and cash flows for the Seattle Business for such fiscal year and theaudited combined balance sheets as of the end of such fiscal year, in each case prepared inaccordance with GAAP and IFRS.
“Seattle Incremental Facility Amendment” means an “Incremental Facility Amendment” as defined in the Seattle Credit Agreement.
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“Seattle Incremental Term Loans” means the “Incremental Term Loans” as defined in the Seattle Credit Agreement.
“Seattle Lenders” means the Persons who are “Lenders” under and as defined in the Seattle Credit Agreement from time to time.
“Seattle Loan Documents” means the “Loan Documents” as defined in the Seattle Credit Agreement.
“Seattle Material Adverse Effect” has the meaning specified in the Merger Agreement.
“Seattle Parent” has the meaning specified in the Merger Agreement.
“Seattle Payment” means the “Seattle Payment” as defined in the Seattle Credit Agreement.
“Seattle Refinancing Amendment” means a “Refinancing Amendment” as defined in the Seattle Credit Agreement.
“Seattle Refinancing Notes” means “Refinancing Notes” as defined in the Seattle Credit Agreement.
“Seattle Replacement Term Loans” means “Replacement Term Loans” as defined in the Seattle Credit Agreement.
“Seattle Term Loans” means the “Term Loans” as defined in the Seattle Credit Agreement.
“Seattle Term Loan Exchange Notes” means “Term Loan Exchange Notes” as defined in the Seattle Credit Agreement.
“Seattle Transaction Costs” means the “Transaction Costs” under and as defined in the Seattle Credit Agreement.
“Seattle Unrestricted Additional Debt” means indebtedness incurred under Section 6.01(a)(xxxii)(a)(1) of the Seattle Credit Agreement.
“Seattle Unrestricted Additional Term Notes” means “Unrestricted Additional Term Notes” as defined in the Seattle Credit Agreement.
“Seattle Unrestricted Incremental First Lien Indebtedness” means “Unrestricted Incremental First Lien Indebtedness” as defined in the Seattle Credit Agreement.
“SEC” means the Securities and Exchange Commission or any Governmental Authority succeeding to any of its principal functions.
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“Second Lien Intercreditor Agreement” means a “junior lien” intercreditor agreement among the Administrative Agent and/or Collateral Agent, the Borrower and one or more Senior Representatives for holders of Indebtedness substantially consistent with the terms set forth on Exhibit K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations).
“Secured Cash Management Agreement” means any Cash Management Agreement that (a) is in effect on the Effective Date between the Parent and/or any Restricted Subsidiary and a counterparty that is any Agent or a Lender or an Affiliate of any Agent or a Lender as of the Effective Date, (b) is between the Parent and/or any Restricted Subsidiary and a counterparty that is any Agent or a Lender or an Affiliate of any Agent or a Lender (regardless of whether entered into before or after the Effective Date) or (c) is entered into after the Effective Date by the Parent and/or any Restricted Subsidiary with any counterparty that is an Agent or a Lender or an Affiliate of any Agent or a Lender at the time such arrangement is entered into, and in the case of each of clauses (a), (b) and (c) hereof, the Borrower designates in writing to the Administrative Agent that such Cash Management Agreement shall be a Secured Cash Management Agreement.
“Secured Cash Management Obligations” means all Cash Management Obligations under any Secured Cash Management Agreement.
“Secured Obligations” means, collectively, (a) the Obligations, (b) the Secured Swap Obligations and (c) the Secured Cash Management Obligations.
“Secured Parties” means, collectively, the Administrative Agent, the Collateral Agent, any Arranger, any other Agent, the Issuing Bank, the Swingline Lender, the Lenders and the Lender Counterparties.
“Secured Swap Agreements” means any Swap Agreement permitted under this Agreement that (a) is in effect on the Effective Date between the Parent and/or any Restricted Subsidiary and a counterparty that is an Agent or a Lender or an Affiliate of an Agent or a Lender as of the Effective Date, (b) is between the Parent and/or any Restricted Subsidiary and a counterparty that is any Agent or a Lender or an Affiliate of any Agent or a Lender (regardless of whether entered into before or after the Effective Date) or (c) is entered into after the Effective Date by the Parent and/or any Restricted Subsidiary with any counterparty that is an Agent or a Lender or an Affiliate of an Agent or a Lender at the time such Swap Agreement is entered into, and in the case of each of clauses (a), (b) and (c) hereof, the Borrower designates in writing to the Administrative Agent that such Swap Agreement shall be a Secured Swap Agreement; provided that the “Secured Swap Obligations” of any Loan Party shall exclude any Excluded Swap Obligations of such Loan Party.
“Secured Swap Obligations” means all Swap Obligations under any Secured Swap Agreement.
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“Securities Act” means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder, as amended.
“Securitization Asset” means (a) any trade or accounts receivables or related assets and the proceeds thereof, in each case subject to a Securitization Facility and (b) all collateral securing such receivable or asset, all contracts and contract rights, guaranties or other obligations in respect of such receivable or asset, lockbox accounts and records with respect to such account or asset and any other assets customarily transferred (or in respect of which security interests are customarily granted), together with accounts or assets in a securitization financing and which in the case of clause (a) and (b) above are sold, conveyed, assigned or otherwise transferred or pledged by the Parent or any Restricted Subsidiary in connection with a Qualified Securitization Financing.
“Securitization Facility” means any transaction or series of securitization financings that may be entered into by the Parent or any of its Restricted Subsidiaries pursuant to which the Parent or any of its Restricted Subsidiaries may sell, convey or otherwise transfer, or may grant a security interest in, Securitization Assets to either (a) a Person that is not a Restricted Subsidiary or (b) a Securitization Subsidiary that in turn sells such Securitization Assets to a Person that is not a Restricted Subsidiary, or may grant a security interest in, any Securitization Assets of the Parent or any of its Subsidiaries.
“Securitization Fees” means distributions or payments made directly or by means of discounts with respect to any Securitization Asset or participation interest therein issued or sold in connection with, and other fees and expenses (including reasonable fees and expenses of legal counsel) paid to a Person that is not a Restricted Subsidiary in connection with, any Qualified Securitization Financing or a Receivables Facility.
“Securitization Repurchase Obligation” means any obligation of a seller (or any guaranty of such obligation) of Securitization Assets or Receivables Assets in a Qualified Securitization Financing or a Receivables Facility to repurchase Securitization Assets arising as a result of a breach of a representation, warranty or covenant or otherwise, including, without limitation, as a result of a receivable or portion thereof becoming subject to any asserted defense, dispute, offset or counterclaim of any kind as a result of any action taken by, any failure to take action by or any other event relating to the seller.
“Securitization Subsidiary” means any Subsidiary of the Parent in each case formed for the purpose of and that solely engages in one or more Qualified Securitization Financings and other activities reasonably related thereto or another Person formed for the purposes of engaging in a Qualified Securitization Financing in which the Parent or any Subsidiary of the Parent makes an Investment and to which the Parent or any Subsidiary of the Parent transfers Securitization Assets and related assets.
“Security Documents” means collectively, the US Security Documents and the UK Security Documents, the Mortgages (if any) and each other security agreement or other instrument or document executed and delivered pursuant to Section 5.11, Section 5.12 or Section 5.16 to secure the Secured Obligations.
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“Senior Representative” means, with respect to any series of Indebtedness, the trustee, administrative agent, collateral agent, security agent or similar agent under the indenture or agreement pursuant to which such Indebtedness is issued, incurred or otherwise obtained, as the case may be, and each of their successors in such capacities.
“Separation Agreement” has the meaning specified in the Merger Agreement.
“Software” means any and all computer programs, including any and all software implementations of algorithms, models and methodologies, whether in source code or object code; databases and compilations, including any and all data and collections of data, whether machine readable or otherwise; descriptions, flow-charts and other work product used to design, plan, organize and develop any of the foregoing, screens, user interfaces, report formats, firmware, development tools, templates, menus, buttons and icons; and all documentation including user manuals and other training documentation related to any of the foregoing.
“Solvent” means, with respect to the Parent and its Subsidiaries, on a consolidated basis, that as of the date of determination: (a) the fair value of the assets (on a going concern basis) of the Parent and its Subsidiaries, on a consolidated basis, exceeds, on a consolidated basis, their debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property (on a going concern basis) of the Parent and its Subsidiaries, on a consolidated basis, is greater than the amount that will be required to pay the probable liability, on a consolidated basis, of their debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured in the ordinary course of business; (c) the Parent and its Subsidiaries, on a consolidated basis, are able to pay their debts and liabilities, subordinated, contingent or otherwise, as such liabilities become absolute and matured in the ordinary course of business; and (d) the Parent and its Subsidiaries, on a consolidated basis, are not engaged in, and are not about to engage in, business contemplated as of the date hereof for which they have unreasonably small capital. For purposes of this definition, the amount of any contingent liability at any time shall be computed as the amount that would reasonably be expected to become an actual and matured liability.
“Solvency Certificate” means the solvency certificate executed and delivered by a Financial Officer of the Parent on the Effective Date, substantially in the form of Exhibit C.
“Specified Merger Agreement Representations” means the representations made by Houston and its subsidiaries in the Merger Agreement that are material to the interests of the Lenders, but only to the extent that the Parent (or any of its Affiliates) has the right to terminate its obligations under the Merger Agreement or to refuse to consummate the Merger Agreement as a result of a breach of such representations in the Merger Agreement.
“Specified Representations” means the representations and warranties made by the Borrower and, to the extent applicable, any Guarantor providing a guarantee on of the Effective Date (the “Effective Date Guarantors”), with respect to the Borrower and the Effective Date Guarantors, as applicable, set forth in Sections 3.01(a) and (b)(ii), Section 3.02, Section 3.03(b), Section 3.08, Section 3.14, Section 3.15, Section 3.19(a) and Section 3.19(b).
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“Specified Transaction” means any (a) disposition of all or substantially all the assets of or all the Equity Interests of any Restricted Subsidiary of the Parent or of any product line, business unit, line of business or division of the Borrower or any of the Restricted Subsidiaries of the Parent for which historical financial statements are available (including the termination or discontinuance of activities constituting a business), (b) Permitted Acquisitions (including commencement of activities constituting a business), (c) Investment that results in a Person becoming a Restricted Subsidiary of the Parent, (d) designation of any Restricted Subsidiary as an Unrestricted Subsidiary, or of any Unrestricted Subsidiary as a Restricted Subsidiary, (e) the proposed incurrence of Indebtedness or making of a Restricted Payment or payment in respect of Indebtedness or other transaction in respect of which compliance with any financial ratio is by the terms of this Agreement required to be calculated on a Pro Forma Basis or (f) any operating improvement, restructurings, cost savings, or other business optimization initiatives and other similar initiatives and transactions.
“SPV” has the meaning assigned to such term in Section 9.04(e).
“Standard Securitization Undertakings” means representations, warranties, covenants and indemnities entered into by the Parent or any Subsidiary of the Parent which the Borrower has determined in good faith to be customary in a Securitization Facility, including, without limitation, those relating to the servicing of the assets of a Securitization Subsidiary, it being understood that any Securitization Repurchase Obligation shall be deemed to be a Standard Securitization Undertaking or, in the case of a Receivables Facility, a non-credit related recourse trade or accounts receivable factoring arrangement.
“Sterling” or “£” means the lawful currency of the United Kingdom.
“Subject Loans” has the meaning assigned to such term in Section 2.11(i).
“Subordinated Indebtedness” means Indebtedness incurred by a Loan Party that is contractually subordinated in right of payment to the prior payment of all Obligations of such Loan Party under the Loan Documents.
“subsidiary” means, with respect to any Person (the “parent”) at any date, any corporation, company, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the ordinary voting power for the election of the members of the governing body or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned or controlled by the parent and/or one or more subsidiaries of the parent.
“Subsidiary” means any subsidiary of the Parent.
“Subsidiary Guaranty” means that certain Subsidiary Guaranty dated November 20, 2014 as it may be from time to time amended, restated, amended and restated, supplemented or otherwise modified, among the Loan Parties party thereto from time to time and the Collateral Agent, together with each supplement to the Subsidiary Guaranty in respect of the Obligations delivered pursuant to Section 5.11 and Section 5.16.
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“Subsidiary Loan Party” means any Restricted Subsidiary (other than Holdco, Midco and the Borrower) that has Guaranteed the Obligations pursuant to the Subsidiary Guaranty.
“Successor Company” has the meaning assigned to such term in Section 6.03(a).
“Swap Agreement” means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward contracts, future contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, repurchase agreements, reverse repurchase agreements, sell buy back and buy sell back agreements, and securities lending and borrowing agreements or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement (any such master agreement, together with any related schedules, a “Master Agreement”), including any such obligations or liabilities under any Master Agreement.
“Swap Obligation” means, with respect to any Person, any obligation to pay or perform under any agreement, contract or transaction that constitutes a “swap” within the meaning of Section 1a(47) of the Commodity Exchange Act.
“Swap Termination Value” means, in respect of any one or more Secured Swap Agreements, after taking into account the effect of any legally enforceable netting agreement relating to such Secured Swap Agreements, (a) for any date on or after the date such Secured Swap Agreements have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark to market value(s) for such Secured Swap Agreements, as determined by the Lender Counterparty and the Borrower in accordance with the terms thereof and in accordance with customary methods for calculating mark-to-market values under similar arrangements by the Lender Counterparty and the Borrower.
“Swingline Commitment” means the commitment of the Swingline Lender to make Swingline Loans. The initial amount of the Swingline Lender’s Swingline Commitment is set forth on Schedule 2.01.
“Swingline Exposure” means, at any time, the aggregate principal amount of all Swingline Loans outstanding at such time. The Swingline Exposure of any Revolving Lender at any time shall be its Applicable Percentage of the Swingline Exposure at such time.
“Swingline Lender” means JPMorgan Chase Bank, N.A., in its capacity as lender of Swingline Loans hereunder.
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“Swingline Loan” means a Loan made pursuant to Section 2.04.
“Swingline Loan Notice” means a notice of a Swingline Loan pursuant to Section 2.04(b), which shall be substantially in the form of Exhibit H or such other form as approved by the Administrative Agent and the Borrower (including any form on an electronic platform or electronic transmission system as shall be approved by the Administrative Agent), appropriately completed and signed by a Responsible Officer of the Borrower.
“Swingline Sublimit” means $60,000,000 as such amount may be modified from time to time in accordance with the terms hereof.
“Synthetic Lease” means, as to any Person, any lease (including leases that may be terminated by the lessee at any time) of any property (whether real, personal or mixed) that is designed to permit the lessee (a) to treat such lease as an operating lease, or not to reflect the leased property on the lessee’s statement of financial position, under IFRS and (b) to claim depreciation on such property for U.S. federal income tax purposes, other than any such lease under which such Person is the lessor.
“Synthetic Lease Obligations” of any Person means the obligations of such Person to pay rent or other amounts under any Synthetic Lease, and the amount of such obligations shall be equal to the sum (without duplication) of (a) the capitalized amount thereof that would appear on a statement of financial position of such Person in accordance with IFRS, if such obligations were accounted for as Capital Lease Obligations and (b) the amount payable by such Person as the purchase price for the property subject to such lease assuming the lessee exercises the option to purchase such property at the end of the term of such lease.
“Target Person” has the meaning assigned to such term in Section 6.04.
“Taxes” means any and all present or future taxes, levies, imposts, duties, deductions, assessments, fees, other charges or withholdings imposed by any Governmental Authority, including any interest, additions to tax or penalties applicable thereto.
“Term Commitment” means, an Initial Term Commitment, an Incremental Term Commitment or an Other Term Commitment.
“Termination Date” means the date upon which (i) all of the Obligations (other than (A) as set forth in clause (ii) and (B) contingent indemnification obligations not yet due and payable) have been paid in full, (ii) all Letters of Credit have been cancelled, Cash Collateralized or otherwise backstopped on terms reasonably satisfactory to the Issuing Bank (including by “grandfathering” on terms reasonably acceptable to the Issuing Bank of the applicable Letters of Credit into a future credit facility) and (iii) all Commitments have expired or been terminated.
“Term Lender” means a Lender with an outstanding Term Commitment or an outstanding Term Loan.
“Term Loan Exchange Effective Date” has the meaning set forth in Section 2.25(a).
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“Term Loan Exchange Notes” has the meaning set forth in Section 2.25.
“Term Loan Maturity Date” means, with respect (a) to the Tranche B-2 Term Loans, November 20, 2021 (or if such anniversary is not a Business Day, the next preceding Business Day), (b) to the Tranche B-3 Term Loans, the seventh anniversary of the Escrow Funding Date (or if such anniversary is not a Business Day, the next preceding Business Day), (c) to the Euro Tranche Term Loans, the seventh anniversary of the Escrow Funding Date (or if such anniversary is not a Business Day, the next preceding Business Day) and (d) with respect to any Incremental Term Loan, Other Term Loan, Extended Term Loan or Replacement Term Loan, as provided in the respective documentation therefor, but, as to any specific Term Loan, as the maturity of such Term Loan shall have been extended by the holder thereof in accordance with the terms hereof.
“Term Loans” means, collectively, the Initial Term Loans unless the context otherwise requires, any Incremental Term Loans, any Other Term Loans, any Replacement Term Loans and any Extended Term Loans.
“Term Note” means a promissory note of the Borrower payable to any Lender or its registered assigns, in substantially the form of Exhibit F-1 through Exhibit F-3 hereto, evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from the applicable Class of Term Loans made by such Lender.
“Title Company” means one or more title insurance companies reasonably satisfactory to the Administrative Agent.
“Total Indebtedness” means, as of any date, the aggregate outstanding principal amount of funded Indebtedness of the Parent and its Restricted Subsidiaries, on a consolidated basis, for borrowed money, Capital Lease Obligations and purchase money Indebtedness (other than, in each case, any intercompany indebtedness). Total Indebtedness shall be calculated subject to Section 1.06, and shall exclude, for the avoidance of doubt, Indebtedness in respect of any Receivables Facility or Cash Management Services.
“Total Leverage Ratio” means, on any date of determination, the ratio of (a) Total Indebtedness as of such date, less the aggregate amount of unrestricted cash and Cash Equivalents of the Parent and its Restricted Subsidiaries as of such date to (b) Consolidated EBITDA for the period of four consecutive fiscal quarters of the Parent most recently ended on or prior such date of determination for which financial statements have been furnished pursuant to Section 9 of Amendment No. 3 or Section 5.01, as applicable.
“Tranche B-2 Term Commitment” means, with respect to each Term Lender with a Tranche B-2 Commitment, the commitment of such Term Lender to roll over and continue its Tranche B-2 Term Loans under the Existing Credit Agreement in an equal aggregate principal amount of Tranche B-2 Term Loans hereunder on the Effective Date pursuant to Amendment No. 3, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Term Lender pursuant to Section 9.04.
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“Tranche B-2 Term Loan” means the term loans rolled over and continued to remain issued under and outstanding pursuant to this Agreement on the Effective Date, pursuant to Section 2.01(a)(i) pursuant to the Tranche B-2 Term Commitment.
“Tranche B-3 Term Commitment” means, with respect to each Term Lender with a Tranche B-3 Commitment, the commitment of such Term Lender to convert its Dollar-denominated term loans under the Escrow Credit Agreement for an equal aggregate principal amount of Tranche B-3 Term Loans hereunder on the Effective Date, as such commitment may be (a) reduced from time to time pursuant to Section 2.08 and (b) reduced or increased from time to time pursuant to assignments by or to such Term Lender pursuant to Section 9.04.
“Tranche B-3 Term Loan” means the term loans converted into and deemed issued under and outstanding pursuant to this Agreement on the Effective Date, pursuant to Section 2.01(a)(ii) pursuant to the Tranche B-3 Term Commitment.
“Transaction Costs” means collectively, (a) all premiums, fees, costs and expenses incurred or payable by or on behalf of the Parent, any Restricted Subsidiary or the Company and its subsidiaries in connection with the Transactions (including, without limitation, bonuses and any loan forgiveness and associated tax gross up payments) or in connection with the negotiation, execution, delivery and performance of the Loan Documents and the transactions contemplated thereby, including to fund any original issue discount, upfront fees or legal fees and to grant and perfect any security interests and (b) the Seattle Transaction Costs.
“Transactions” means (a) the transactions contemplated by this Agreement and the other Loan documents (including the entering into of Amendment No. 3 and the Escrow Term Loan Agreement, the funding of the loans thereunder and the release of funds therein, the merger of the Escrow Borrower into the Borrower and the borrowing of the Loans hereunder on the Effective Date), (b) the making of the Borrower Intercompany Loan, (c) the making of the Return of Value Payment, if any, (d) the Seattle Acquisition and Merger, (e) the transactions contemplated by the Seattle Credit Agreement and the other Seattle Loan Documents including the entering into of the Seattle Escrow Term Loan Agreement, the funding of the loans thereunder and the release of the funds therein and borrowing of the Seattle Term Loans, (f) the making of the Seattle Payment and (g) the payment of Transaction Costs.
“Transition Services Agreement” means the Transition Services Agreement to be entered into at or prior to the Acquisition Closing Date between Houston and the Seattle Business.
“Type,” when used in reference to any Loan or Borrowing, refers to whether the rate of interest on such Loan, or on the Loans comprising such Borrowing, is determined by reference to the Adjusted Eurocurrency Rate or the Alternate Base Rate.
“UCC” means the Uniform Commercial Code as in effect from time to time in the State of New York; provided, however, that in the event that, by reason of mandatory provisions of law, any or all of the perfection or priority of, or remedies with respect to, any Collateral is governed by the Uniform Commercial Code as enacted and in effect in a jurisdiction other than the State of New York, the term “UCC” shall mean the Uniform Commercial Code as enacted and in effect in such other jurisdiction solely for purposes of the provisions hereof relating to such perfection, priority or remedies.
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“UKLA” means the UK Listing Authority or any Governmental Authority succeeding to any of its principal functions.
“UK Collateral Agreement” means the English law security agreement dated as of November 20, 2014, as it may be from time to time amended, restated, amended and restated, supplemented or otherwise modified, among the Parent, Holdco and the other UK Loan Parties thereto from time to time and the Collateral Agent.
“UK Loan Parties” means the Parent, Holdco and any Restricted Subsidiary organized under the laws of England and Wales that has Guaranteed the Obligations pursuant to the Subsidiary Guaranty. As of the Effective Date, the UK Loan Parties are set forth on Schedule 1.01(c).
“UK Mortgage” means a mortgage, charge, deed of trust, or other security document granting a Lien on any Mortgaged Property located in England or Wales to secure the Secured Obligations.
“UK Security Documents” means each of the agreements, guaranties and/or other instruments listed on Schedule 1.01(d) hereto and each other security agreement, guaranty or other instrument or document executed and delivered by any UK Loan Party pursuant to Section 5.11,5.12 or 5.16 to secure the Secured Obligations and the UK Mortgages (if any).
“UK Subsidiary” means any Subsidiary of the Parent that is incorporated or organized under the laws of England and Wales.
“Unrestricted Additional Debt” has the meaning set forth in Section 6.01(a)(xxxii).
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“Unrestricted Additional Term Notes” means first priority senior secured notes and/or junior Lien secured notes and/or unsecured notes, in each case issued pursuant to an indenture, note purchase agreement or other agreement and in lieu of the incurrence of Unrestricted Incremental First Lien Indebtedness; provided that (a) such Unrestricted Additional Term Notes rank pari passu or junior in right of payment and (if secured) of security with the Initial Term Loans hereunder, (b) the Unrestricted Additional Term Notes have a final maturity date that is on or after the then existing Latest Maturity Date with respect to the Initial Term Loans and a Weighted Average Life to Maturity (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Initial Term Loans) equal to or longer than the remaining Weighted Average Life to Maturity of the then existing Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans); provided that this clause (b) shall not restrict the issuance or incurrence by the Parent or any of its Restricted Subsidiaries after the Effective Date of up to $1,700,000,000 aggregate principal amount of Additional Debt, Additional Term Notes, Unrestricted Additional Term Notes, Incremental Term Loans, Seattle Additional Debt, Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes and Seattle Incremental Term Loans having (x) a final maturity date that is prior to the Latest Maturity Date with respect to the Initial Term Loans so long as such final maturity date is at least five years from the date of such issuance or incurrence and (y) a Weighted Average Life to Maturity shorter than the remaining Weighted Average Life to Maturity of the Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans) so long as such debt does not require annual amortization or similar regularly scheduled prepayments in excess of 10% of the original amount of such debt at issuance or incurrence in any year, (c) the covenants, events of default and other terms of which (other than maturity, fees, discounts, interest rate, redemption terms and redemption premiums, which shall be determined in good faith by the Borrower) of such Unrestricted Additional Term Notes, shall be on market terms at the time of issuance (as determined in good faith by the Borrower) of the Unrestricted Additional Term Notes; provided that the Additional Term Notes shall not have the benefit of any financial maintenance covenant unless (x) the Initial Term Loans have the benefit of such financial maintenance covenant on the same terms or (y) the Initial Term Loans have in the future been provided with the benefit of a financial maintenance covenant, in which case such Additional Term Notes issued after such future date may be provided with the benefit of the same financial maintenance covenant on the same or less favorable terms, (d) no Restricted Subsidiary is a borrower or a guarantor with respect to such Indebtedness unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently guaranteed or borrowed, as applicable, the Obligations, (e) if such Unrestricted Additional Term Notes are secured, (i) the obligations in respect thereof shall not be secured by Liens on the assets of the Parent and its Restricted Subsidiaries, other than assets constituting Collateral and (ii) (x) if such Unrestricted Additional Term Notes are secured on a paripassu basis with the Obligations, the Senior Representative for such Unrestricted Additional Term Notes shall enter into the Pari Passu Intercreditor Agreement or other customary intercreditor agreement and (y) if such Unrestricted Additional Term Notes are secured on a junior basis to the Obligations, the Senior Representative for such Unrestricted Additional Term Notes shall enter into a Second Lien Intercreditor Agreement or other customary intercreditor agreement, in each case with the Administrative Agent and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may be secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations), and (f) any Unrestricted Additional Term Notes issued shall reduce or be counted against, on a dollar-for-dollar basis, the amount available to be drawn as Unrestricted Incremental First Lien Indebtedness (it being understood that the Borrower may redesignate any such Indebtedness originally designated as Unrestricted Additional Term Notes as Additional Term Notes if at the time of such redesignation, the Borrower would be permitted to incur the aggregate principal amount of Indebtedness being so redesignated in accordance with the definition thereof (for purpose of clarity, with any such redesignation having the effect of increasing the Borrower’s ability to incur Unrestricted Incremental First Lien Indebtedness as of the date of such redesignation by the amount of such Indebtedness so redesignated)).
“Unrestricted Incremental First Lien Indebtedness” has the meaning assigned to such term in Section 2.20(a).
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“Unrestricted Subsidiary” means (a) any Subsidiary of the Parent designated as an “Unrestricted Subsidiary” from time to time pursuant to Section 5.13 and (b) any Subsidiary of an Unrestricted Subsidiary.
“U.S. Person” means a “United States person” within the meaning of Section 7701(a)(30) of the Code.
“US Collateral Agreement” means the Security Agreement dated as of November 20, 2014, as it may be from time to time amended, restated, amended and restated, supplemented or otherwise modified, among the Borrower and the other US Loan Parties thereto from time to time and the Collateral Agent.
“US Loan Parties” means the Borrower and any Domestic Restricted Subsidiary that has Guaranteed the Obligations pursuant to the Subsidiary Guaranty. As of the Effective Date, the US Loan Parties are set forth on Schedule 1.01(c).
“US Mortgage” means a mortgage, deed of trust, or other security document granting a Lien on any Mortgaged Property located in the United States, any State or province thereof or the District of Columbia to secure the Secured Obligations. Each Mortgage shall be substantially in the form attached as Exhibit I hereto or otherwise in form and substance approved by Administrative Agent in its reasonable discretion, or at Administrative Agent’s option, in the case of an Additional Mortgaged Property, an amendment to an existing Mortgage, in form satisfactory to the Administrative Agent in its reasonable discretion, adding such Additional Mortgaged Property to the real property encumbered by such existing Mortgage.
“US Security Documents” means the US Collateral Agreement, the US Mortgages (if any), each of the agreements listed on Schedule 5.11(c), and each other security agreement or other instrument or document executed and delivered by a US Loan Party pursuant to Section 5.11, Section 5.12 or Section 5.16 to secure the Secured Obligations.
“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (b) the then outstanding principal amount of such Indebtedness.
“wholly owned Subsidiary” or “wholly owned subsidiary” means, with respect to any Person at any date, a subsidiary of such Person of which securities or other ownership interests representing 100% of the Equity Interests (other than (x) directors’ qualifying shares or (y) shares issued to foreign nationals to the extent required by applicable law) are, as of such date, owned, controlled or held by such Person or one or more wholly owned subsidiaries of such Person or by such Person and one or more wholly owned subsidiaries of such Person. For the avoidance of doubt, “wholly owned Restricted Subsidiary” means a wholly owned Subsidiary that is a Restricted Subsidiary.
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“Withdrawal Liability” means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA.
“Write-Down and Conversion Powers” means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
“Yield” means, with respect to any Loan, Revolving Commitment, or Repricing Transaction, as the case may be, on any date of determination as calculated by the Administrative Agent, (a) any interest rate margin, (b) increases in interest rate floors (but only to the extent that an increase in the interest rate floor with respect to the Class of Term Loans would cause an increase in the interest rate then in effect at the time of determination hereunder, and, in such case for purposes of Section 2.20, then the interest rate floor (but not the interest rate margin solely for determinations under this clause (b)) applicable to such Class of Term Loans shall be increased to the extent of such differential between interest rate floors), (c) original issue discount and (d) upfront fees paid generally to all Persons providing such Loan or Commitment (with original issue discount and upfront fees being equated to interest based on the shorter of (x) the Weighted Average Life to Maturity of such Loans and (y) four years), but exclusive of any amendment or consent fees and arrangement, structuring, underwriting or similar fee paid to any Person in connection therewith that are not shared generally with all Persons providing such Loan or Commitment.
Section 1.02 Classification of Loans and Borrowings. For purposes of this Agreement, Loans may be classified and referred to by Class (e.g., a “Revolving Loan”) or by Type (e.g., a “Eurocurrency Loan”) or by Class and Type (e.g., a “Eurocurrency Revolving Loan”). Borrowings also may be classified and referred to by Class (e.g., a “Revolving Loan Borrowing”) or by Type (e.g., a “Eurocurrency Borrowing”) or by Class and Type (e.g., a “Eurocurrency Revolving Loan Borrowing”).
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Section 1.03 Terms Generally. The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words “include,” “includes” and “including” shall be deemed to be followed by the phrase “without limitation.” The word “will” shall be construed to have the same meaning and effect as the word “shall.” Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, amended and restated, supplemented or otherwise modified (including pursuant to any permitted refinancing, extension, renewal, replacement, restructuring or increase (in each case, whether pursuant to one or more agreements or with different lenders or different agents), but subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person’s successors and permitted assigns and, in the case of any Governmental Authority, any other Governmental Authority that shall have succeeded to any or all of the functions thereof, (c) the words “herein,” “hereof” and “hereunder,” and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (e) the words “asset” and “property” shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights, (f) any reference to any Requirement of Law shall, unless otherwise specified, refer to such Requirement of Law as amended, modified or supplemented from time to time and shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Requirement of Law, (g) the phrase “for the term of this Agreement” and any similar phrases shall mean the period beginning on the Effective Date and ending on the Latest Maturity Date, the term “manifest error” shall be deemed to include any clearly demonstrable error whether or not obvious on the face of the document containing such error, (h) all references to “knowledge” or “awareness” of any Loan Party or a Restricted Subsidiary thereof means the actual knowledge of a Responsible Officer of a Loan Party or such Restricted Subsidiary and (i) all references to “in the ordinary course of business” of the Parent or any Subsidiary thereof means (x) in the ordinary course of business of, or in furtherance of an objective that is in the ordinary course of business of, the Parent and/or such Subsidiary, as applicable, (y) customary and usual in the software industry where the Parent’s or any Subsidiary’s businesses are located or performed or (z) generally consistent with the past or current practice of the Parent or any Subsidiary thereof and/or similarly situated software companies where the Parent’s or any Subsidiary’s businesses are located or performed. Unless otherwise specified, all references herein to times of day shall be references to New York City time (daylight or standard, as applicable).
Section 1.04 Accounting Terms; IFRS. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with IFRS, as in effect from time to time. In the event that any Accounting Change (as defined below) shall occur and such change results in a change in the method of calculation of financial covenants, standards or terms in this Agreement, then the Parent, Holdco, the Borrower and the Administrative Agent agree to enter into good faith negotiations in order to amend such provisions of this Agreement so as to equitably reflect such Accounting Change with the desired result that the criteria for evaluating the Parent’s and the Subsidiaries’ consolidated financial condition shall be the same after such Accounting Change as if such Accounting Change had not been made. Until such time as such an amendment shall have been executed and delivered by the Parent, Holdco, the Borrower, the Administrative Agent and the Required Lenders, all financial ratios, covenants, standards and terms in this Agreement shall continue to be calculated or construed as if such Accounting Change had not occurred. “Accounting Change” refers to any change in accounting principles required by (A) the promulgation of any rule, regulation, pronouncement or opinion by the IFRS Interpretations Committee and (B) any applicable change to the Companies Act 2006 applicable to companies reporting under IFRS.
Notwithstanding anything in this Agreement to the contrary, any change in IFRS or the application or interpretation thereof that would require operating leases to be treated similarly as a capital or finance lease shall not be given effect in the definitions of Indebtedness or Liens or any related definitions or in the computation of any financial ratio or requirement.
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Section 1.05 Pro Forma Calculations.
(a) With respect to any period during which the Transactions or any Specified Transaction occurs, for purposes of determining the prepayments required pursuant to Section 2.11(c), Section 2.11(d) or Section 2.11(k), permissibility of asset sales, compliance with any test contained in this Agreement (including any incurrence test) or for any other specified purpose hereunder (including for purposes of (i) testing the covenant set forth in Section 6.12 and (ii) determining the Applicable Margin in respect of any period), calculation of the First Lien Leverage Ratio, Consolidated EBITDA, Consolidated Total Assets and the Total Leverage Ratio or for any other purpose hereunder, such determinations and calculations with respect to such period shall be made on a Pro Forma Basis.
(b) Notwithstanding anything in this Agreement or any Loan Document to the contrary, in connection with any action being taken in connection with a Limited Condition Transaction, for purposes of:
(i) determining compliance with any provision of this Agreement (including the determination of compliance with representations, warranties or any other provision of this Agreement which requires no Default or Event of Default has occurred or is continuing or would result therefrom); or
(ii) calculating any ratio or testing availability under baskets set forth in this Agreement (including the Available Amount or any other baskets (including incremental facilities or any baskets measured as a percentage of Consolidated EBITDA or Consolidated Total Assets));
(iii) in each case, at the option of the Borrower (the Borrower’s election to exercise such option in connection with any Limited Condition Transaction, an “LCT Election”), the date of determination of whether any such action is permitted hereunder (including the determination of any such ratio, amount or availability of the Available Amount, or any other basket and the determination of the accuracy of any representation or warranty or whether a Default or Event of Default has occurred, is continuing or would result therefrom, or other applicable covenant) shall be deemed to be the date the definitive agreement for such Limited Condition Transaction is entered into (the “LCT Test Date”), and if, after giving pro forma effect to the Limited Condition Transaction, the Borrower or any of its Restricted Subsidiaries would have been permitted to take such action on the relevant LCT Test Date in compliance with such ratio, test or basket, such ratio, test or basket shall be deemed to have been complied with. For the avoidance of doubt, if the Borrower has made an LCT Election and any of the ratios, tests or baskets for which compliance was determined or tested as of the LCT Test Date would have failed to have been satisfied as a result of fluctuations in any such ratio, test or basket, including due to fluctuations in Consolidated EBITDA or Consolidated Total Assets, at or prior to the consummation of the relevant transaction or action, such baskets, tests or ratios will not be deemed to have failed to have been satisfied as a result of such fluctuations. If the Borrower has made an LCT Election for any Limited Condition Transaction, then in connection with any event or transaction occurring after the relevant LCT Test Date and prior to the earlier of the date on which such Limited Condition Transaction is consummated or the date that the definitive agreement or date for redemption, repurchase, defeasance, satisfaction and discharge or repayment specified in an irrevocable notice for such Limited Condition Transaction is terminated, expires or passes, as applicable, without consummation of such Limited Condition Transaction (a “Subsequent Transaction”) in connection with which a ratio, test or basket availability calculation must be made on a Pro Forma Basis or giving pro forma effect to such Subsequent Transaction, for purposes of determining whether such ratio, test or basket availability has been complied with under this Agreement, any such ratio, test or basket shall be calculated (x) on a Pro Forma Basis assuming such Limited Condition Transaction and other transactions in connection therewith have been consummated and (y) for Restricted Payments only, without giving effect to such Limited Condition Acquisition.
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Section 1.06 Currency Translation.
(a) For purposes of determining compliance as of any date after the Effective Date with Section 5.14, Section 6.01, Section 6.02, Section 6.03, Section 6.04, Section 6.05, Section 6.08, Section 6.09 or Section 6.12, or for purposes of making any determination under Section 7.01(f), (g), (j), or (l), or for any other specified purpose hereunder, amounts incurred or outstanding in currencies other than Dollars shall be translated into Dollars at the exchange rates in effect on the last Business Day of the fiscal quarter immediately preceding the fiscal quarter in which such determination occurs or in respect of which such determination is being made, as such exchange rates shall be determined in good faith by the Borrower by reference to customary indices; provided that for purposes of determining compliance with the First Lien Leverage Ratio or Total Leverage Ratio on any date of determination, amounts denominated in a currency other than Dollars will be translated into Dollars (i) with respect to income statement items, at the currency exchange rates used in calculating Consolidated Net Income in the Parent’s latest financial statements delivered pursuant to Section 5.01(a) or (b) and (ii) with respect to statement of financial position items, at the currency exchange rates used in calculating statement of financial position items in the Parent’s latest financial statements delivered pursuant to Section 5.01(a) or (b) and will, in the case of Indebtedness, reflect the currency translation effects, determined in accordance with IFRS, of Swap Agreements permitted hereunder for currency exchange risks with respect to the applicable currency in effect on the date of determination of the Dollar equivalent of such Indebtedness. No Default or Event of Default shall arise as a result of any limitation or threshold set forth in Dollars in Section 5.12, Section 6.01, Section 6.02, Section 6.03, Section 6.04, Section 6.05, Section 6.08, Section 6.09, Section 6.12 or Section 7.01(f), (g), (j), or (l), being exceeded solely as a result of changes in currency exchange rates from those rates applicable on the last day of the fiscal quarter immediately preceding the fiscal quarter in which such determination occurs or in respect of which such determination is being made.
(b) The Administrative Agent (or the Issuing Bank to the extent otherwise set forth in this Agreement) shall determine the Dollar Equivalent of any Letter of Credit denominated in Euros or any other Alternative Currency as of (i) each date (with such date to be reasonably determined by the Administrative Agent or Issuing Bank, as applicable) that is on or about the date of each request for the issuance, amendment, renewal or extension of any Letter of Credit, (ii) each date on which the Dollar Equivalent in respect of any Borrowing is determined pursuant to paragraph (c) of this Section, and each such amount shall be the Dollar Equivalent of such Letter of Credit until the next required calculation thereof pursuant to this Section 1.06(b) and (iii) from time to time with notice to the Borrower in its reasonable discretion.
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(c) The Administrative Agent shall determine the Dollar Equivalent of any Borrowing denominated in Euros or any other Alternative Currency as of (i) each date (with such date to be reasonably determined by the Administrative Agent) that is on or about the date of a Borrowing Request or Interest Election Request or the beginning of each Interest Period with respect to any Borrowing, (ii) each date on which the Dollar Equivalent in respect of any Letter of Credit is determined pursuant to paragraph (b) of this Section, and each such amount shall be the Dollar Equivalent of such Borrowing until the next required calculation thereof pursuant to this Section 1.06(c) and (iii) from time to time with notice to the Borrower in its reasonable discretion; provided that if a prepayment of Term Loans is required under Section 2.11, the Dollar Equivalent of such Term Loans for purposes of determining the relative application of the prepayment among multiple Classes of Term Loans shall be determined as of the date of such prepayment, or if earlier, the date that notice of such prepayment is furnished by the Borrower.
(d) The Dollar Equivalent of any LC Disbursement made by the Issuing Bank in Euros or any other Alternative Currency and not reimbursed by the Borrower shall be determined as set forth in Section 2.05(e).
(e) The Administrative Agent (or the Issuing Bank) shall notify the Borrower, the applicable Lenders and the Issuing Bank of each calculation of the Dollar Equivalent of each Letter of Credit, Borrowing and LC Disbursement.
Section 1.07 Rounding. Any financial ratios required to be maintained pursuant to this Agreement (or required to be satisfied in order for a specific action to be permitted under this Agreement) shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio is expressed herein and rounding the result up or down to the nearest number (with a rounding-up for five). For example, if the relevant ratio is to be calculated to the hundredth decimal place and the calculation of the ratio is 5.125, the ratio will be rounded up to 5.13.
Section 1.08 Timing of Payment or Performance. When the payment of any obligation or the performance of any covenant, duty or obligation is stated to be due or performance required on (or before) a day which is not a Business Day, the date of such payment (other than as described in the definition of “Interest Period”) or performance shall extend to the immediately succeeding Business Day, and such extension of time shall be reflected in computing interest or fees, as the case may be.
Section 1.09 Letter of Credit Amounts. Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the stated amount of such Letter of Credit in effect at such time; provided, however, that with respect to any Letter of Credit that, by its terms or the terms of any Letter of Credit Application related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time. For all purposes of this Agreement, if on any date of determination a Letter of Credit has expired by its terms but any amount may still be drawn thereunder by any reason of the operation of Rule 3.14 of the ISP, such Letter of Credit shall be deemed to be “outstanding” in the amount so remaining available to be drawn.
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Section 1.10 Certifications; Provision of Information. All provisions of information, presentations, statements and certifications to be made hereunder by a director, officer or other representative of a Loan Party or other Restricted Subsidiary shall be made by such a Person in his or her capacity solely as an officer or a representative of such Loan Party or other Restricted Subsidiary, on such Loan Party’s or such Restricted Subsidiary’s behalf and not in such Person’s individual capacity, and without personal liability.
Section 1.11 Compliance with Article VI. In the event that any Lien, Investment, Indebtedness (whether at the time of incurrence or upon application of all or a portion of the proceeds thereof), Disposition, Restricted Payment, Affiliate transaction, restrictive agreement or prepayment of Indebtedness meets the criteria of one or more than one of the categories of transactions then permitted pursuant to any clause of such Sections in Article VI, such transaction (or portion thereof) at any time shall be permitted under one or more of such clauses as determined by the Borrower in its sole discretion at such time.
Section 1.12 Reversion Provision. The parties hereto agree that if the Seattle Acquisition is not consummated on or prior to the Applicable Acquisition Consummation Deadline, then (w) any provision in this Agreement that provides the Parent or any of its Subsidiaries (including, for the avoidance of doubt, the Borrower) additional capacity for incurrence under fixed dollar baskets under Article VI or increased dollar thresholds under Article VII, in each case, relative to the corresponding provision in the Existing Credit Agreement, shall instead be deemed to be replaced by such corresponding provision in the Existing Credit Agreement, (x) the dollar amounts set forth in (i) clause (x) of the definition of “Unrestricted Incremental First Lien Indebtedness”, (ii) the provisos to clauses (D) and (E) of Section 2.20(b), (iii) the proviso to clause (i) of the definition of “Additional Debt”, (iv) the second proviso to the definition of “Additional Term Notes”, (vi) the proviso to clause (b) of the definition of “Unrestricted Additional Term Notes”, and (v) clause (a)(1) of Section 6.01(a)(xxxii), in each case, shall be deemed to be replaced by such corresponding provision in the Existing Credit Agreement, (y) the initial aggregate principal of the Lender’s Revolving Commitments shall be $375,000,000 (with the Initial Revolving Loans and Initial Revolving Commitments reallocated by the Administrative Agent among the Revolving Lenders on a pro rata basis) and (z) (i) the LC Sublimit shall be $40,000,000 and (ii) the Swingline Sublimit shall be $20,000,000.
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Article II
The Credits
Section 2.01 Commitments.
(a) Subject to the terms and express conditions set forth herein:
(i) each Lender with a Tranche B-2 Term Commitment severally agrees, on the terms and conditions set forth in Amendment No. 3 and herein, to have the outstanding principal amount of its Tranche B-2 Term Loans (or such lesser amount as notified and allocated to such Lender by the Administrative Agent, as determined by the Administrative Agent and the Borrower in their sole discretion) in an amount not to exceed its Tranche B-2 Term Commitment, automatically rolled over and continued as Tranche B-2 Term Loans denominated in Dollars, and remaining outstanding pursuant to this Agreement, effective as of the Effective Date;
(ii) each Lender with a Tranche B-3 Term Commitment severally agrees, on the terms and conditions set forth in the Escrow Credit Agreement and herein, to have the outstanding principal amount of its Dollar-denominated term loans (or such lesser amount as notified and allocated to such Lender by the Administrative Agent, as determined by the Administrative Agent and the Borrower in their sole discretion) in an amount not to exceed its Tranche B-3 Term Commitment, automatically converted into and deemed issued as Tranche B-3 Term Loans denominated in Dollars under and outstanding pursuant to this Agreement, effective as of the Effective Date; and
(iii) each Lender with a Euro Tranche Term Commitment severally agrees, on the terms and conditions set forth in the Escrow Credit Agreement and herein, to have the outstanding principal amount of its Euro-denominated term loans (or such lesser amount as notified and allocated to such Lender by the Administrative Agent, as determined by the Administrative Agent and the Borrower in their sole discretion) in an amount not to exceed its Euro Tranche Term Commitment, automatically converted into and deemed issued as Euro Tranche Term Loans denominated in Euros under and outstanding pursuant to this Agreement, effective as of the Effective Date.
(b) Subject to the terms and express conditions set forth herein, each applicable Lender severally agrees to make Revolving Loans to the Borrower from time to time during the Revolving Availability Period in Dollars in an aggregate principal amount that will not result in such Lender’s Revolving Exposure exceeding such Lender’s Revolving Commitment.
(c) Within the foregoing limits and subject to the terms and express conditions set forth herein, the Borrower may borrow, prepay and reborrow Revolving Loans (without premium or penalty). Amounts repaid or prepaid in respect of Term Loans may not be reborrowed. The Tranche B-2 Term Commitments, the Tranche B-3 Term Commitments and the Euro Tranche Term Commitments will terminate in full upon the making, rollover, conversion and deemed issuance of the Loans referred to in clause (a) above.
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Section 2.02 Loans and Borrowings.
(a) Each Loan (other than a Swingline Loan) shall be made as part of a Borrowing consisting of Loans of the same Class, Type and currency by the Lenders ratably in accordance with their respective Commitments of the applicable Class. The failure of any Lender to make any Loan required to be made by it shall not relieve any other Lender of its obligations hereunder, provided that the Commitments of the Lenders are several and no Lender shall be responsible for any other Lender’s failure to make Loans as required.
(b) Subject to Section 2.14, (i) each Revolving Loan Borrowing denominated in Euros or other Alternative Currency shall be comprised entirely of Eurocurrency Loans, (ii) each Term Loan Borrowing denominated in Euros shall be comprised entirely of Eurocurrency Loans and (iii) each Revolving Loan Borrowing and Term Loan Borrowing denominated in Dollars shall be comprised entirely of ABR Loans or Eurocurrency Loans as the Borrower may request in accordance herewith. Each Swingline Loan shall be an ABR Loan. Each Lender at its option may make any Eurocurrency Loan by causing any domestic or foreign branch or Affiliate of such Lender to make such Loan, provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement.
(c) At the commencement of each Interest Period for any Eurocurrency Borrowing, such Borrowing shall be in an aggregate amount that is an integral multiple of $500,000 (or, in the case of Borrowings denominated in (i) Euros, €500,000 or (ii) any other Alternative Currency, a like amount) and not less than $500,000 (or, in the case of Borrowings denominated in (i) Euros, €500,000 or (ii) any other Alternative Currency, a like amount). At the time that each ABR Revolving Loan Borrowing is made, such Borrowing shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $100,000. Each Swingline Loan shall be in an amount that is an integral multiple of $100,000 and not less than $100,000. Borrowings of more than one Type and Class may be outstanding at the same time, provided that there shall not at any time be more than a total of 16 Eurocurrency Borrowings outstanding plus up to an additional 3 Interest Periods in respect of each (i) Incremental Facility, (ii) Extended Term Loans and Extended Revolving Commitments, and (iii) Other Term Loans and Other Revolving Loans. Notwithstanding anything to the contrary herein, the Revolving Loans comprising any Borrowing may be in an aggregate amount that is equal to the entire unused balance of the aggregate Revolving Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e), and a Swingline Loan may be in an aggregate amount that is equal to the entire unused balance of the aggregate Swingline Commitments or that is required to finance the reimbursement of an LC Disbursement as contemplated by Section 2.05(e).
(d) Notwithstanding any other provision of this Agreement, the Borrower shall not be entitled to request, or to elect to convert or continue, any Borrowing if the Interest Period requested with respect thereto would end after the applicable Revolving Maturity Date (in the case of such Revolving Loan) or the Term Loan Maturity Date applicable to such Borrowing (in the case of such Term Loan), as the case may be.
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(e) The obligations of the Revolving Lenders hereunder to make Revolving Loans, to fund participations in Letters of Credit and Swingline Loans and to make payments pursuant to Section 9.03(c) are several and not joint (it being understood that the foregoing shall in no way be in derogation of the reallocation of participations in Letters of Credit and Swingline Loans among the Revolving Lenders contemplated by Section 2.22(a)(iv)).
Section 2.03 Requests for Borrowings. To request a Revolving Loan Borrowing, the Borrower shall notify the Administrative Agent of such request by telephone (a) in the case of a Eurocurrency Borrowing denominated in Dollars, not later than 1:00 p.m., New York City time, three Business Days before the date of the proposed Borrowing, (b) in the case of a Eurocurrency Borrowing denominated in Euros or Sterling, not later than 1:00 p.m., London time, three Business Days before the date of the proposed Borrowing, (c) in the case of a Eurocurrency Borrowing denominated in any other Alternative Currency, no later than 1:00 p.m., London time, four Business Days before the date of the proposed Borrowing (or a shorter notice period to be agreed between the Borrower and the Administrative Agent at the time any Alternative Currency is specified other than the Alternative Currencies provided for in clauses (a) and (b)) or (d) in the case of an ABR Borrowing, not later than 10:00 a.m., New York City time, on the date of the proposed Borrowing; provided that any notice of a Borrowing to be made on the Effective Date (whether a Eurocurrency Borrowing or ABR Borrowing or denominated in Euros) may be given not later than 11:00 a.m., New York City time (or such later time as the Administrative Agent may reasonably agree), one Business Day prior to the date of the proposed Borrowing, which notice may be subject to the effectiveness of the Credit Agreement. Each such telephonic Borrowing Request shall be confirmed promptly by hand delivery, electronic communication (including Adobe pdf file) or facsimile to the Administrative Agent of a written Borrowing Request signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information:
(i) the Class of such Borrowing;
(ii) the currency and aggregate amount of such Borrowing;
(iii) the date of such Borrowing, which shall be a Business Day;
(iv) whether such Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing;
(v) in the case of a Eurocurrency Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term “Interest Period”; provided, however, that if the Borrower wishes to request a Eurocurrency Borrowing having an Interest Period other than one, two, three or six months in duration as provided in the definition of “Interest Period,” the applicable notice must be received by the Administrative Agent not later than 11:00 a.m., New York City time, four Business Days (or Five Business Days in the case of an Alternative Currency (other than Euros or Sterling)) prior to the requested date of such Borrowing, conversion or continuation, whereupon the Administrative Agent shall give prompt notice to the applicable Lenders of such request and determine whether the requested Interest Period is acceptable to all of them. Not later than 11:00 a.m., New York City time, three Business Days (or four Business Days in the case of an Alternative Currency (other than Euros or Sterling)) before the requested date of such Borrowing, conversion or continuation, the Administrative Agent shall notify the Borrower (which notice may be by telephone) whether or not the requested Interest Period has been consented to by all the applicable Lenders;
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(vi) the location and number of the Borrower’s account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06; and
(vii) in the case of a Borrowing Request made in respect of a Revolving Loan Borrowing (other than a Revolving Loan Borrowing made on the Effective Date), that as of such date the express conditions in Section 4.02(a) and (b) are satisfied (or waived).
If no currency is specified with respect to any Eurocurrency Borrowing, the Borrower shall be deemed to have selected Dollars. If no election as to the Type of Borrowing is specified, then the requested Borrowing shall be (A) in the case of a Borrowing denominated in Dollars, an ABR Borrowing and (B) in the case of a Borrowing denominated in Euros or other Alternative Currency, a Eurocurrency Borrowing. If no Interest Period is specified with respect to any requested Eurocurrency Borrowing, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Administrative Agent shall advise each Lender of the details thereof and of the amount of such Lender’s Loan to be made as part of the requested Borrowing.
Section 2.04 Swingline Loans.
(a) General. Subject to the terms and express conditions set forth herein, the Swingline Lender agrees to make Swingline Loans to the Borrower in Dollars from time to time on any Business Day during the Revolving Availability Period, in an aggregate principal amount at any time outstanding that will not result in (i) the aggregate principal amount of outstanding Swingline Loans exceeding the Swingline Sublimit or (ii) after giving effect to Section 2.22(a)(iv), the aggregate Revolving Exposures exceeding the aggregate Revolving Commitments, provided that the Swingline Lender shall not be required to make a Swingline Loan to refinance an outstanding Swingline Loan. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Swingline Loans. Each Swingline Loan shall bear interest only at a rate based on the Alternate Base Rate. Immediately upon the making of a Swingline Loan, each Revolving Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Swingline Lender a risk participation in such Swingline Loan in an amount equal to the product of such Revolving Lender’s Applicable Percentage times the amount of such Swingline Loan.
(b) Borrowing Procedures. Each Swingline Loan shall be made upon the Borrower’s notice to the Swingline Lender and the Administrative Agent, which may be given by (A) telephone or (B) a Swingline Loan Notice; provided that any telephonic notice shall be irrevocable and must be confirmed promptly by delivery to the Swingline Lender and the Administrative Agent of a Swingline Loan Notice. Each such notice must be received by the Swingline Lender and the Administrative Agent not later than 1:00 p.m., New York City time, on the requested borrowing date and shall specify (i) the amount to be borrowed, which shall be a minimum of $100,000, and (ii) the requested borrowing date, which shall be a Business Day. Promptly after receipt by the Swingline Lender of any Swingline Loan Notice, the Swingline Lender will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has also received such Swingline Loan Notice and, if not, the Swingline Lender will notify the Administrative Agent (by telephone or in writing) of the contents thereof. Unless the Swingline Lender has received notice (by telephone or in writing) from the Administrative Agent (including at the request of any Revolving Lender) prior to 2:00 p.m., New York City time, on the date of the proposed Swingline Loan (A) directing the Swingline Lender not to make such Swingline Loan as a result of the limitations set forth in the first proviso to the first sentence of Section 2.04(a) or (B) that one or more of the applicable conditions specified in Article IV is not then satisfied, then, subject to the terms and conditions hereof, the Swingline Lender will, not later than 3:00 p.m., New York City time, on the borrowing date specified in such Swingline Loan Notice, make the amount of its Swingline Loan available to the Borrower at its office by crediting the account of the Borrower on the books of the Swingline Lender in immediately available funds.
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(c) Refinancing of Swingline Loans.
(i) The Swingline Lender at any time in its sole and absolute discretion may request, on behalf of the Borrower (which hereby irrevocably authorizes the Swingline Lender to so request on its behalf), that each Revolving Lender make a Revolving Loan in an amount equal to such Revolving Lender’s Applicable Percentage of the amount of Swingline Loans then outstanding. Such request shall be made in writing and in accordance with the requirements of Section 2.02, without regard to the minimum and multiples specified therein for the principal amount of a Revolving Loan Borrowing, but subject to the unutilized portion of the aggregate Revolving Commitment and the conditions set forth in Section 9 of Amendment No. 3. The Swingline Lender shall furnish the Borrower with a copy of the applicable written request promptly after delivering such notice to the Administrative Agent. Each Revolving Lender shall make an amount equal to its Applicable Percentage of the amount specified in such written request available to the Administrative Agent in immediately available funds for the account of the Swingline Lender at the Administrative Agent’s Office not later than 1:00 p.m., New York City time, on the day specified in such written request, whereupon, subject to Section 2.04(d), each Revolving Lender that so makes funds available shall be deemed to have made a Revolving Loan to the Borrower in such amount. The Administrative Agent shall remit the funds so received to the Swingline Lender.
(ii) If for any reason any Swingline Loan cannot be refinanced by such a Revolving Loan Borrowing in accordance with Section 2.04(c)(i), the request for a Revolving Loan Borrowing submitted by the Swingline Lender as set forth herein shall be deemed to be a request by the Swingline Lender that each of the Revolving Lenders fund its risk participation in the relevant Swingline Loan and each Revolving Lender’s payment to the Administrative Agent for the account of the Swingline Lender pursuant to Section 2.04(c)(i) shall be deemed payment in respect of such participation.
(iii) If any Revolving Lender fails to make available to the Administrative Agent for the account of the Swingline Lender any amount required to be paid by such Lender pursuant to the foregoing provisions of this Section 2.04(c) by the time specified in Section 2.04(c)(i), the Swingline Lender shall be entitled to recover from such Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swingline Lender at a rate per annum equal to the greater of the Federal Funds Effective Rate and a rate determined by the Swingline Lender in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Swingline Lender in connection with the foregoing. If such Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Lender’s Loan included in the relevant Borrowing or funded participation in the relevant Swingline Loan, as the case may be. A certificate of the Swingline Lender submitted to any Lender (through the Administrative Agent) with respect to any amounts owing under this clause (iii) shall be conclusive absent manifest error.
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(iv) Each Revolving Lender’s obligation to make Revolving Loans or to purchase and fund risk participations in Swingline Loans pursuant to this Section 2.04(c) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right which such Lender may have against the Swingline Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default, or (C) any other occurrence, event or condition, whether or not similar to any of the foregoing; provided, however, that each Revolving Lender’s obligation to make Revolving Loans pursuant to this Section 2.04(c) is subject to the conditions set forth in Section 4.02. No such funding of risk participations shall relieve or otherwise impair the obligation of the Borrower to repay Swingline Loans, together with interest as provided herein.
(d) Repayment of Participations.
(i) At any time after any Revolving Lender has purchased and funded a risk participation in a Swingline Loan, if the Swingline Lender receives any payment on account of such Swingline Loan, the Swingline Lender will distribute to such Revolving Lender its Applicable Percentage thereof in the same funds as those received by the Swingline Lender.
(ii) If any payment received by the Swingline Lender in respect of principal or interest on any Swingline Loan is required to be returned by the Swingline Lender under any of the circumstances described in Section 9.08 (including pursuant to any settlement entered into by the Swingline Lender in its discretion), each Revolving Lender shall pay to the Swingline Lender its Applicable Percentage thereof on demand of the Administrative Agent, plus interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swingline Lender at a rate per annum equal to the greater of the Federal Funds Effective Rate and a rate determined by the Swingline Lender in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by the Swingline Lender in connection with the foregoing, such amount to be payable on demand. The Administrative Agent will make such demand upon the request of the Swingline Lender. The obligations of the Lenders under this clause (ii) shall survive the payment in full of the Obligations and the termination of this Agreement.
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(e) Interest for Account of Swingline Lender. The Swingline Lender shall be responsible for invoicing the Borrower for interest on the Swingline Loans. Until each Revolving Lender funds its Revolving Loan or risk participation pursuant to this Section 2.04 to refinance such Revolving Lender’s Applicable Percentage of any Swingline Loan, interest in respect of such Applicable Percentage shall be solely for the account of the Swingline Lender.
(f) Payments Directly to Swingline Lender. The Borrower shall make all payments of principal and interest in respect of the Swingline Loans directly to the Swingline Lender.
Section 2.05 Letters of Credit.
(a) General. On the Effective Date, each Existing Letter of Credit will, automatically and without any action on the part of any Person, be deemed to be a Letter of Credit issued under the revolving credit facility as set forth on Schedule 1.03 hereto for all purposes of this Agreement and the other Loan Documents. Subject to the terms and express conditions set forth herein, the Borrower may request (and the Issuing Bank shall issue) the issuance of Letters of Credit for its own account (or for the account of the Parent or any Subsidiary) in a form reasonably acceptable to the Issuing Bank, at any time and from time to time prior to the end of the Revolving Availability Period.
(b) Notice of Issuance, Amendment, Renewal, Extension; Certain Conditions.
(i) To request the issuance of a Letter of Credit (or the amendment, renewal or extension of an outstanding Letter of Credit), the Borrower shall hand deliver or telecopy (or transmit by electronic communication reasonably acceptable to the Issuing Bank) to the Issuing Bank (except that the Issuing Bank in respect of Existing Letters of Credit shall not issue any additional Letters of Credit, except to the extent that it otherwise becomes or continues as an Issuing Bank hereunder, and, unless agreed by it, shall not be required to amend, renew or extend an Existing Letter of Credit) and the Administrative Agent (not later than 1:00 p.m., New York City time, at least two (2) Business Days in advance (or, with respect to a Letter of Credit to be denominated in an Alternative Currency, at least three (3) Business Days in advance) or a shorter time period if approved by the Issuing Bank in its reasonable discretion, of the requested date of issuance, amendment, renewal or extension) a notice requesting the issuance of a Letter of Credit, or identifying the Letter of Credit to be amended, renewed or extended, and specifying the date of issuance, amendment, renewal or extension (which shall be a Business Day), the date on which such Letter of Credit is to expire (which shall comply with paragraph (c) of this Section), the amount of such Letter of Credit, the currency in which such Letter of Credit is to be denominated (which shall be in Dollars, Euros or any other Alternative Currency), the name and address of the beneficiary thereof, the documents to be presented by such beneficiary in case of any drawing thereunder, the full text of any certificate to be presented by such beneficiary in case of any drawing thereunder, such other matters as the Issuing Bank may reasonably require and such other information as shall be necessary to prepare, amend, renew or extend such Letter of Credit. If requested by the Issuing Bank, the Borrower also shall submit a letter of credit application on the Issuing Bank’s standard form in connection with any request for a Letter of Credit. A Letter of Credit shall be issued, amended, renewed or extended only if, after giving effect to such issuance, amendment, renewal or extension, (i) the LC Exposure shall not exceed the LC Sublimit and (ii) the aggregate Revolving Exposure shall not exceed the aggregate Revolving Commitments.
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(ii) Promptly after receipt of any such request pursuant to Section 2.05(b)(i), the Issuing Bank will confirm with the Administrative Agent (by telephone or in writing) that the Administrative Agent has received a copy of such request from the Borrower and, if not, the Issuing Bank will provide the Administrative Agent with a copy thereof. Unless the Issuing Bank has received written notice from any Revolving Lender, the Administrative Agent or any Loan Party, at least one Business Day prior to the requested date of issuance or amendment of the applicable Letter of Credit, that one or more applicable express conditions contained in Section 4.02 shall not then be satisfied, then, subject to the terms and express conditions hereof, the Issuing Bank shall, on the requested date, issue a Letter of Credit for the account of the Borrower (or the Parent or the applicable Subsidiary) or enter into the applicable amendment, as the case may be, in each case in accordance with the Issuing Bank’s usual and customary business practices. Immediately upon the issuance of each Letter of Credit, each Revolving Lender shall be deemed to, and hereby irrevocably and unconditionally agrees to, purchase from the Issuing Bank a risk participation in such Letter of Credit in an amount equal to the product of such Revolving Lender’s Applicable Percentage times the amount of such Letter of Credit.
(iii) The Issuing Bank shall not be under any obligation to issue or renew any Letter of Credit if:
(A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms enjoin or restrain the Issuing Bank from issuing the Letter of Credit, or any law applicable to the Issuing Bank or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over the Issuing Bank shall prohibit, or request that the Issuing Bank refrain from, the issuance of letters of credit generally or the Letter of Credit in particular or shall impose upon the Issuing Bank with respect to the Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Bank is not otherwise compensated hereunder) in each case not in effect on the Closing Date, or shall impose upon the Issuing Bank any unreimbursed loss, cost or expense which was not applicable on the Closing Date (for which the Issuing Bank is not otherwise compensated hereunder);
(B) the issuance of such Letter of Credit would violate (x) any laws binding upon or otherwise applicable to the Issuing Bank or (y) one or more policies of the Issuing Bank regarding completion of customary “know your customer” requirements on the beneficiary of such Letter of Credit and any Subsidiary of the Borrower that is a co-applicant for such Letter of Credit;
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(C) the applicable Letter of Credit is of the type described in clause (b) of the definition of “Letter of Credit” and the Issuing Bank does not as of the issuance date of the requested Letter of Credit issue Letters of Credit of such type;
(D) the Letter of Credit is to be (x) denominated in a currency other than Dollars, Euros, Sterling, or any other Alternative Currency unless otherwise agreed by the Issuing Bank or (y) such Letter of Credit is a guarantee, indemnity or other instrument issued by a lending office of the Issuing Bank outside of any state, commonwealth or territory of the United States of America or the United Kingdom unless, unless otherwise agreed by such Issuing Bank; and
(E) it is not required to do so pursuant to Section 2.22(c).
(iv) The Issuing Bank shall be under no obligation to amend any Letter of Credit if (A) the Issuing Bank would have no obligation at such time to issue the Letter of Credit in its amended form under the terms hereof, or (B) the beneficiary of the Letter of Credit does not accept the proposed amendment to the Letter of Credit.
(v) The Issuing Bank shall act on behalf of the Revolving Lenders with respect to any Letters of Credit issued by it and the documents associated therewith, and the Issuing Bank shall have all of the benefits and immunities (A) provided to the Administrative Agent in Article VIII with respect to any acts taken or omissions suffered by the Issuing Bank in connection with Letters of Credit issued by it or proposed to be issued by it and Letter of Credit Application pertaining to such Letters of Credit as fully as if the term “Administrative Agent” as used in Article VIII included the Issuing Bank with respect to such acts or omissions, and (B) as additionally provided herein with respect to the Issuing Bank.
(vi) Promptly after its delivery of any Letter of Credit or any amendment to a Letter of Credit to an advising bank with respect thereto or to the beneficiary thereof, the Issuing Bank will also deliver to the Borrower and the Administrative Agent a true and complete copy of such Letter of Credit or amendment.
(c) Expiration Date. Each Letter of Credit shall expire at or prior to the close of business on the earlier of (i) the date that is one year after the date of the issuance of such Letter of Credit (or, in the case of any renewal or extension thereof, one year after such renewal or extension) and (ii) the Letter of Credit Expiration Date, provided if the Borrower so requests in any applicable Letter of Credit Application, the Issuing Bank shall agree to issue a Letter of Credit that has automatic renewal provisions (each, an “Auto-Renewal Letter of Credit”); provided that any such Auto-Renewal Letter of Credit must permit the Issuing Bank to prevent any such renewal at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “Nonrenewal Notice Date”) in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the Issuing Bank, the Borrower shall not be required to make a specific request to the Issuing Bank for any such renewal. Once an Auto-Renewal Letter of Credit has been issued, the Revolving Lenders shall be deemed to have authorized (but may not require) the Issuing Bank to permit the renewal of such Letter of Credit at any time to an expiry date not later than the Letter of Credit Expiration Date; provided that the Issuing Bank shall not permit any such renewal if (A) the Issuing Bank has determined that it would have no obligation at such time to issue such Letter of Credit in its renewed form under the terms hereof (by reason of the provisions of Section 2.05(b)(ii) or otherwise), or (B) it has received notice (which may be by telephone, followed promptly in writing, or in writing) on or before the day that is thirty (30) days before the Nonrenewal Notice Date from the Administrative Agent or any Revolving Lender, as applicable, or the Borrower that one or more of the applicable express conditions specified in Section 4.02 is not then satisfied (or waived), and providedfurther that, if agreed to by the Issuing Bank in its sole discretion, a Letter of Credit may, upon the request of the Borrower, be renewed for a period beyond the date that is the Revolving Maturity Date if, at the time of such request or such other time as may be agreed by the Issuing Bank, such Letter of Credit has become subject to cash collateralization (at 103% of the face value of such Letter of Credit) or other arrangements satisfactory to the Issuing Bank.
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(d) Participations. By the issuance of a Letter of Credit (or an amendment to a Letter of Credit increasing the amount thereof) and without any further action on the part of the Issuing Bank or the Revolving Lenders, the Issuing Bank hereby grants to each Revolving Lender, and each Revolving Lender hereby acquires from the Issuing Bank, a participation in such Letter of Credit equal to such Revolving Lender’s Applicable Percentage of the aggregate amount available to be drawn under such Letter of Credit. In consideration and in furtherance of the foregoing each Revolving Lender hereby absolutely and unconditionally agrees to pay to the Administrative Agent, for the account of the Issuing Bank, such Revolving Lender’s Applicable Percentage of (i) each LC Disbursement made by the Issuing Bank in Dollars and (ii) the Dollar Equivalent, using the Exchange Rate in effect on the date such payment is required, of each LC Disbursement made by the Issuing Bank in Euros or other Alternative Currency and, in each case, not reimbursed by the Borrower on the date due as provided in Section 2.05(e), or of any reimbursement payment required to be refunded to the Borrower for any reason. Each Revolving Lender acknowledges and agrees that its obligation to acquire participations pursuant to this paragraph in respect of Letters of Credit is absolute and unconditional and shall not be affected by any circumstance whatsoever, including any amendment, renewal or extension of any Letter of Credit or the occurrence and continuance of a Default or reduction or termination of the Commitments, and that each such payment shall be made without any offset, abatement, withholding or reduction whatsoever.
(e) Reimbursement. If the Issuing Bank shall honor a Letter of Credit drawing presented under a Letter of Credit, the Borrower shall reimburse such Letter of Credit honored by paying to the Administrative Agent an amount equal to the Dollar Equivalent, calculated using the Exchange Rate when such payment is due, of such LC Disbursement, in Dollars, in each case, not later than 3:00 p.m., New York City time, on the second Business Day succeeding the date on which the Issuing Bank notifies the Borrower in writing of such Letter of Credit honoring or the Applicable Time on the date of any payment by the Issuing Bank under a Letter of Credit to be reimbursed in an Alternative Currency, provided that, if such LC Applicable Disbursement is not less than $500,000, the Borrower may, subject to the express conditions to borrowing set forth herein, request in accordance with Section 2.03 or Section 2.04 that such payment be financed with a Revolving Loan Borrowing of the same Class or a Swingline Loan in an amount equal to the Dollar Equivalent, calculated using the Exchange Rate on the date when such payment is due, of such LC Disbursement and, to the extent so financed, the Borrower’s obligation to make such payment shall be discharged and replaced by the resulting Revolving Loan Borrowing or Swingline Loan. If the Borrower fails to make such payment when due, then the Administrative Agent shall notify each Revolving Lender of the applicable LC Disbursement, the payment then due from the Borrower in respect thereof and such Revolving Lender’s Applicable Percentage thereof. Promptly following receipt of such notice, each Revolving Lender shall pay to the Administrative Agent its Applicable Percentage of the payment then due from the Borrower (such payment from such Revolving Lender to be made on demand with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Issuing Bank at a rate per annum equal to the greater of the Federal Funds Effective Rate and a rate determined by the Issuing Bank in accordance with banking industry rules on interbank compensation, plus any administrative, processing or similar fees customarily charged by such Issuing Bank in connection with the foregoing), in the same manner as provided in Section 2.06 with respect to Loans made by such Revolving Lender (and Section 2.06 shall apply, mutatismutandis, to the payment obligations of the Revolving Lender), and the Administrative Agent shall promptly pay to the Issuing Bank the amounts so received by it from the Revolving Lender. Promptly following receipt by the Administrative Agent of any payment from the Borrower pursuant to this paragraph, the Administrative Agent shall distribute such payment to the Issuing Bank or, to the extent that Revolving Lenders have made payments pursuant to this paragraph to reimburse the Issuing Bank, then to such Revolving Lenders and the Issuing Bank as their interests may appear. Any payment made by a Revolving Lender pursuant to this paragraph to reimburse the Issuing Bank for any LC Disbursement (other than the funding of Revolving Loans or a Swingline Loan as contemplated above) shall not constitute a Loan and shall not relieve the Borrower of its obligation to reimburse such LC Disbursement.
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(f) Repayment of Participations.
(i) At any time after the Issuing Bank has made an LC Disbursement and has received from any Revolving Lender such Revolving Lender’s payment in respect of such LC Disbursement pursuant to Section 2.05(e), if the Administrative Agent receives for the account of the Issuing Bank any payment in respect of the related LC Disbursement or interest thereon (whether directly from the Borrower or otherwise, including proceeds of Cash Collateral applied thereto by the Administrative Agent in accordance with this Agreement), the Administrative Agent will distribute to such Revolving Lender its Applicable Percentage thereof in the same funds as those received by the Administrative Agent.
(ii) If any payment received by the Administrative Agent for the account of the Issuing Bank pursuant to Section 2.05(e) is required to be returned under any of the circumstances described in Section 9.08 (including pursuant to any settlement entered into by the Issuing Bank in its discretion), each Revolving Lender shall pay to the Administrative Agent for the account of the Issuing Bank its Applicable Percentage thereof on demand of the Administrative Agent, plus interest thereon from the date of such demand to the date such amount is returned by such Revolving Lender, at a rate per annum equal to the Federal Funds Effective Rate from time to time in effect. The obligations of the Lenders under this clause (ii) shall survive the payment in full of the Obligations and the termination of this Agreement.
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(g) Obligations Absolute. The Borrower’s obligations to reimburse LC Disbursements as provided in paragraph (e) of this Section shall be absolute, unconditional and irrevocable, and shall be performed strictly in accordance with the terms of this Agreement under any and all circumstances whatsoever and irrespective of (i) any lack of validity or enforceability of any Letter of Credit or this Agreement, or any term or provision therein, (ii) any draft or other document presented under a Letter of Credit proving to be forged, fraudulent or invalid in any respect or any statement therein being untrue or inaccurate in any respect, (iii) payment by the Issuing Bank under a Letter of Credit against presentation of a draft or other document that does not comply with the terms of such Letter of Credit, (iv) any adverse change in the relevant exchange rates or in the availability of the relevant Alternative Currency to the Parent or any of its Subsidiaries or in the relevant currency markets generally or (v) any other event or circumstance whatsoever, whether or not similar to any of the foregoing, that might, but for the provisions of this Section, constitute a legal or equitable discharge of, or provide a right of setoff against, the Borrower’s obligations hereunder (other than the defense of payment or performance). Neither the Administrative Agent, the Lenders nor the Issuing Bank, nor any of their Related Parties, shall have any liability or responsibility by reason of or in connection with the issuance or transfer of any Letter of Credit or any payment or failure to make any payment thereunder (irrespective of any of the circumstances referred to in the preceding sentence), or any error, omission, interruption, loss or delay in transmission or delivery of any draft, notice or other communication under or relating to any Letter of Credit (including any document required to make a drawing thereunder), any error in interpretation of technical terms or any consequence arising from causes beyond the control of the Issuing Bank, provided that the foregoing shall not be construed to excuse the Issuing Bank from liability to the Borrower to the extent of any direct damages (as opposed to consequential or punitive damages, claims in respect of which are hereby waived by the Borrower to the extent permitted by applicable law) suffered by the Borrower that are caused by the Issuing Bank’s failure to exercise care when determining whether drafts and other documents presented under a Letter of Credit comply with the terms thereof. The parties hereto expressly agree that, in the absence of bad faith, gross negligence, material breach of its obligations as an Issuing Bank hereunder, or willful misconduct on the part of the Issuing Bank (as finally determined by a court of competent jurisdiction) and compliance by the Issuing Bank with the applicable standards of care set forth in the UCC in the State of New York, the Issuing Bank shall be deemed to have exercised care in each such determination as Issuing Bank. In furtherance of the foregoing and without limiting the generality thereof, the parties agree that, with respect to documents presented that appear on their face to be in substantial compliance with the terms of a Letter of Credit, the Issuing Bank may, in its sole discretion, either accept and make payment upon such documents without responsibility for further investigation, regardless of any notice or information to the contrary, or refuse to accept and make payment upon such documents if such documents are not in strict compliance with the terms of such Letter of Credit, and any such acceptance or refusal shall be deemed not to constitute bad faith, gross negligence or willful misconduct.
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(h) Disbursement Procedures. The Issuing Bank shall, promptly following its receipt thereof, examine all documents purporting to represent a demand for payment under a Letter of Credit. The Issuing Bank shall promptly notify the Administrative Agent and the Borrower of such demand for payment and whether the Issuing Bank has made or will make an LC Disbursement thereunder, provided that any failure to give or delay in giving such notice shall not relieve the Borrower of its obligation to reimburse the Issuing Bank and the Revolving Lender with respect to any such LC Disbursement in accordance with Section 2.05(e).
(i) Interim Interest. If the Issuing Bank shall make any LC Disbursement, then, unless the Borrower shall reimburse such LC Disbursement in full as set forth in Section 2.05(e), the unpaid amount thereof shall bear interest, for each day from and including the first Business Day after receipt of notice to but excluding the date that the Borrower reimburses such LC Disbursement, at the rate per annum then applicable to ABR Revolving Loans; provided that, if the Borrower fails to reimburse such LC Disbursement when due pursuant to Section 2.05(e) (after the expiration of any applicable grace period), then Section 2.13(c) shall apply. Interest accrued pursuant to this paragraph shall be for the account of the Issuing Bank, except that interest accrued on and after the date of payment by any Revolving Lender pursuant to Section 2.05(e) to reimburse the Issuing Bank shall be for the account of such Revolving Lender to the extent of such payment.
(j) Role of Issuing Bank. Each Lender and the Borrower agree that, in paying any drawing under a Letter of Credit, the Issuing Bank shall not have any responsibility to obtain any document (other than any sight draft, certificates and documents expressly required by the Letter of Credit) or to ascertain or inquire as to the validity or accuracy of any such document or the authority of the Person executing or delivering any such document. None of the Issuing Bank, the Administrative Agent, any of their respective Related Parties nor any correspondent, participant or assignee of the Issuing Bank shall be liable to any Lender for (i) any action taken or omitted in connection herewith at the request or with the approval of the Required Revolving Lenders or the Required Lenders, as applicable; (ii) any action taken or omitted in the absence of gross negligence or willful misconduct; or (iii) the due execution, effectiveness, validity or enforceability of any document or instrument related to any Letter of Credit or Letter of Credit Application. The Borrower hereby assumes all risks of the acts or omissions of any beneficiary or transferee with respect to its use of any Letter of Credit; provided, however, that this assumption is not intended to, and shall not, preclude the Borrower from pursuing such rights and remedies as it may have against the beneficiary or transferee at law or under any other agreement.
(k) Replacement of the Issuing Bank. The Issuing Bank may be replaced at any time by written agreement among the Borrower, the Administrative Agent, the replaced Issuing Bank and the successor Issuing Bank. The Administrative Agent shall notify the Revolving Lenders of any replacement of an Issuing Bank. At the time any such replacement shall become effective, the Borrower shall pay all unpaid fees accrued for the account of the replaced Issuing Bank pursuant to Section 2.12(c). From and after the effective date of any such replacement, (i) the successor Issuing Bank shall have all the rights and obligations of the Issuing Bank under this Agreement with respect to Letters of Credit to be issued thereafter and (ii) references herein to the term “Issuing Bank” shall be deemed to refer to such successor or to any previous Issuing Bank, or to such successor and all previous Issuing Banks, as the context shall require. After the replacement of an Issuing Bank hereunder, the replaced Issuing Bank shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Bank under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.
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(l) Notwithstanding that a Letter of Credit issued or outstanding hereunder is in support of any obligations of, or is for the account of, the Parent or any Subsidiary, the Borrower shall be obligated to reimburse the applicable Issuing Bank hereunder for any and all drawings under such Letter of Credit. The Borrower hereby acknowledges that the issuance of Letters of Credit for the account of the Parent and/or any Subsidiaries inures to the benefit of the Borrower, and that the Borrower’s business derives substantial benefits from the businesses of the Parent or such Subsidiaries.
(m) Applicability of ISP and UCP. Unless otherwise expressly agreed by the Issuing Bank and the Borrower, when a Letter of Credit is issued (including any such agreement applicable to an Existing Letter of Credit), the rules of the ISP shall apply to each Letter of Credit.
(n) Conflict with Letter of Credit Application. In the event of any inconsistency between the terms and conditions of this Agreement and the terms and conditions of any Letter of Credit Application or other agreement submitted by the Borrower to, or entered into by the Borrower with, the Issuing Bank relating to any Letter of Credit, the terms and conditions of this Agreement shall control, and any grant of a security interest in any form of Letter of Credit Application or other agreement shall be null and void.
(o) Provisions Related to Extended Revolving Commitments. If the maturity date in respect of any tranche of Revolving Commitments occurs prior to the expiration of any Letter of Credit, then (i) if one or more other tranches of Revolving Commitments in respect of which the maturity date shall not have occurred are then in effect, such Letters of Credit shall automatically be deemed to have been issued (including for purposes of the obligations of the Revolving Lenders to purchase participations therein and to make Revolving Loans and payments in respect thereof pursuant to Section 2.05(c)) under (and ratably participated in by Lenders pursuant to) the Revolving Commitments in respect of such non-terminating tranches up to an aggregate amount not to exceed the aggregate principal amount of the unutilized Revolving Commitments thereunder at such time (it being understood that no partial face amount of any Letter of Credit may be so reallocated and no Letter of Credit denominated in an Alternative Currency may be reallocated to Revolving Commitments that do not permit Borrowings in such currency) and (ii) to the extent not reallocated pursuant to immediately preceding clause (i), the Borrower shall Cash Collateralize any such Letter of Credit in accordance with Section 2.05(c) or otherwise backstop such Letter of Credit on terms reasonably satisfactory to the Issuing Bank. If, for any reason, such Cash Collateral is not provided or the reallocation does not occur, the Revolving Lenders under the maturing tranche shall continue to be responsible for their participating interests in the Letters of Credit. Except to the extent of reallocations of participations pursuant to clause (i) of the second preceding sentence, the occurrence of a maturity date with respect to a given tranche of Revolving Commitments shall have no effect upon (and shall not diminish) the percentage participations of the Revolving Lenders in any Letter of Credit issued before such maturity date. Commencing with the maturity date of any tranche of Revolving Commitments, the sublimit for Letters of Credit shall be agreed with the Lenders under the extended tranches.
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(p) Addition of an Issuing Bank. A Revolving Lender (or any of its Subsidiaries or Affiliates) may become an additional Issuing Bank hereunder pursuant to a written agreement among the Borrower, the Administrative Agent and such Revolving Lender. The Administrative Agent shall notify the Revolving Lenders of any such additional Issuing Bank.
Section 2.06 Funding of Borrowings.
(a) Each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds by (i) 11:00 a.m., New York City time, in the case of a Eurocurrency Borrowing denominated in Dollars or an ABR Borrowing for which notice has been provided one Business Day prior to the date of the proposed Borrowing, (ii) 9:00 a.m., New York City time, in the case of any Borrowings denominated in an Alternative Currency, or (iii) 3:00 p.m., New York City time, in the case of an ABR Borrowing (other than as provided in clause (i)), in each case to the account of the Administrative Agent most recently designated by it for such purpose by notice to the Lenders, provided that Swingline Loans shall be made as provided in Section 2.04. The Administrative Agent will make such Loans available to the Borrower by wire transfer of the amounts so received, in immediately available funds, to an account of the Borrower, in each case designated by the Borrower in the applicable Borrowing Request, provided that ABR Revolving Loans or Swingline Loans made to finance the reimbursement of an LC Disbursement as provided in Section 2.05(e) shall be remitted by the Administrative Agent to the Issuing Bank or, to the extent that Revolving Lenders have made payments pursuant to Section 2.05(e) to reimburse the Issuing Bank, then to such Revolving Lenders and the Issuing Bank as their interests may appear.
(b) Unless the Administrative Agent shall have received notice from a Lender prior to the proposed date of any Borrowing that such Lender will not make available to the Administrative Agent such Lender’s share of such Borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption and in its sole discretion, make available to the Borrower a corresponding amount. In such event, after giving effect to the reallocations pursuant to Section 2.22(a)(iv), if a Lender has not in fact made its share of the applicable Borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent, within five (5) Business Days of written notice, such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (i) in the case of such Lender, (A) if such Borrowing is denominated in Dollars, the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) if such Borrowing is denominated in Euros or other Alternative Currency, the rate reasonably determined in accordance with customary practices by the Administrative Agent to be the cost to it of funding such amount, or (ii) in the case of the Borrower, the interest rate applicable to ABR Loans. If such Lender pays such amount to the Administrative Agent, then such amount shall constitute such Lender’s Loan included in such Borrowing.
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Section 2.07 Interest Elections.
(a) Each Revolving Loan Borrowing and Term Loan Borrowing initially shall be of the Type specified in the applicable Borrowing Request or designated by Section 2.03 and, in the case of a Eurocurrency Borrowing, shall have an initial Interest Period as specified in such Borrowing Request or designated by Section 2.03. Thereafter, the Borrower may elect to convert such Borrowing to a different Type or to continue such Borrowing and, in the case of a Eurocurrency Borrowing, may elect Interest Periods therefor, all as provided in this Section, provided that the Borrower may not elect to convert any Borrowing denominated in Euros or an Alternative Currency to an ABR Borrowing and may not change the currency of any Borrowing. The Borrower may elect different options with respect to different portions of the affected Borrowing, in which case each such portion shall be allocated ratably among the Lenders holding the Loans comprising such Borrowing, and the Loans comprising each such portion shall be considered a separate Borrowing. This Section shall not apply to Swingline Loan Borrowings, which may not be converted or continued.
(b) To make an election pursuant to this Section, the Borrower shall notify the Administrative Agent of such election by telephone by the time that a Borrowing Request would be required under Section 2.03 if the Borrower were requesting a Revolving Loan Borrowing of the Type resulting from such election to be made on the effective date of such election. Each such telephonic Interest Election Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Administrative Agent of a written Interest Election Request substantially in the form of Exhibit B and signed by the Borrower.
(c) Each telephonic and written Interest Election Request shall specify the following information in compliance with Section 2.02:
(i) the Borrowing to which such Interest Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing);
(ii) the effective date of the election made pursuant to such Interest Election Request, which shall be a Business Day;
(iii) whether the resulting Borrowing is to be an ABR Borrowing or a Eurocurrency Borrowing; and
(iv) if the resulting Borrowing is a Eurocurrency Borrowing, the Interest Period to be applicable thereto after giving effect to such election, which shall be a period contemplated by the definition of the term “Interest Period.”
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If any such Interest Election Request requests a Eurocurrency Borrowing but does not specify an Interest Period, then the Borrower shall be deemed to have selected an Interest Period of one month’s duration.
(d) Promptly following receipt of an Interest Election Request, the Administrative Agent shall advise each Lender of the details thereof and of such Lender’s portion of each resulting Borrowing.
(e) If the Borrower fails to deliver a timely Interest Election Request with respect to a Eurocurrency Borrowing prior to the end of the Interest Period applicable thereto, then, unless such Borrowing is repaid as provided herein, at the end of such Interest Period (i) if such Borrowing is denominated in Dollars, such Borrowing shall be converted to an ABR Borrowing and (ii) if such Borrowing is denominated in Euros or an Alternative Currency, such Borrowing shall continue as a Eurocurrency Borrowing with an Interest Period of one month. Notwithstanding any contrary provision hereof, if an Event of Default under Section 7.01(a), 7.01(b), 7.01(h) or 7.01(i) has occurred and is continuing and the Administrative Agent, at the request of the Required Lenders, so notifies the Borrower, then, so long as such Event of Default is continuing, no outstanding Borrowing may be continued for an Interest Period of more than one month’s duration.
Section 2.08 Termination and Reduction of Commitments.
(a) Unless previously terminated or extended, the Revolving Commitments shall terminate on the Revolving Maturity Date.
(b) The Borrower may at any time, without premium or penalty, terminate, or from time to time reduce, the Commitments of any Class; provided that (i) each reduction of the Commitments of any Class shall be in an amount that is an integral multiple of $1,000,000 and (ii) the Borrower shall not terminate or reduce any Class of Revolving Commitments to the extent that, after giving effect to any concurrent prepayment of the Revolving Loans of such Class in accordance with Section 2.11, the aggregate Revolving Exposure (calculated using the Exchange Rate in effect as of the date of the proposed termination or reduction) of such Class (excluding the portion of the Revolving Exposure attributable to outstanding Letters of Credit if and to the extent that the Borrower has Cash Collateralized (at 103% of the face value of such Letters of Credit) or made other arrangements satisfactory to the Issuing Bank with respect to such Letters of Credit) would exceed the aggregate Revolving Commitments of such Class.
(c) The Borrower shall notify the Administrative Agent of any election to terminate or reduce the Commitments under paragraph (b) of this Section at least one Business Day prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Promptly following receipt of any such notice, the Administrative Agent shall advise the Lenders of the contents thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable, provided that a notice of termination of the Commitments of any Class delivered by the Borrower may state that such notice is conditioned upon the consummation of an acquisition or sale transaction or upon the effectiveness of other credit facilities or the receipt of proceeds from the issuance of other Indebtedness or any other specified event, in which case such notice may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitments of any Class shall be permanent. Each reduction of the Commitments of any Class shall be made ratably among the Lenders in accordance with their respective Commitments of such Class.
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(d) The Borrower, in its sole discretion, shall have the right, but not the obligation, upon at least one Business Days’ notice to a Defaulting Lender (with a copy to the Administrative Agent), to terminate in whole such Defaulting Lender’s Commitment; provided that, after giving effect to such termination, the aggregate Revolving Exposure of all Revolving Lenders does not exceed the aggregate Revolving Commitments. Such termination shall be effective with respect to such Defaulting Lender’s unused portion of its Commitment on the date set forth in such notice. No termination of the Commitment of a Defaulting Lender shall be deemed a waiver or release of any claim the Borrower, the Administrative Agent, the Issuing Bank, the Swingline Lender or any Lender may have against the Defaulting Lender.
Section 2.09 Repayment of Loans; Evidence of Debt.
(a) The Borrower unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Term Loan of such Lender as provided in Section 2.10. The Borrower unconditionally promises to pay to the Administrative Agent for the account of each Lender the then unpaid principal amount of each Revolving Loan of such Lender made to the Borrower on the Revolving Maturity Date and, to the Swingline Lender, the then unpaid principal amount of each Swingline Loan on the earlier of the Revolving Maturity Date and the first date after such Swingline Loan is made that is the 15th or last day of a calendar month and is at least five Business Days after such Swingline Loan is made, provided that on each date that a Revolving Loan Borrowing is made, the Borrower shall repay all Swingline Loans that were outstanding on the date such Borrowing was requested.
(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of the Borrower to such Lender resulting from each Loan made by such Lender to the Borrower, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(c) The Administrative Agent shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder to the Borrower, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to each Lender hereunder and (iii) the amount of any sum received by the Administrative Agent hereunder from the Borrower for the account of the Lenders and each Lender’s share thereof.
(d) The entries made in the accounts maintained pursuant to paragraph (b) or (c) of this Section shall be primafacie evidence of the existence and amounts of the obligations recorded therein, provided that (i) the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans and pay interest thereon in accordance with the terms of this Agreement and (ii) in the event of any conflict with the Register, the Register shall govern absent manifest error.
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(e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the Borrower shall promptly prepare, execute and deliver to such Lender a promissory note payable to such Lender and its registered assigns and substantially in the form of the applicable Exhibit F; provided that the delivery of any such note shall not be a condition precedent to any Acquisition or Investment. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to such payee and its registered assigns (and ownership shall at all times be recorded in the Register).
Section 2.10 Amortization of Term Loans.
(a) Subject to adjustment pursuant to Section 2.10(d) and subject to Section 2.11(i) and Section 9.04(b)(vii), the Borrower shall repay the Tranche B-2 Term Loans on the last day of each April, July, October and January, commencing with the first such date to occur following the second full fiscal quarter after the Effective Date, in an aggregate principal amount equal to the product of (x) 0.25% multiplied by (y) the aggregate principal amount of the Tranche B-2 Term Loans outstanding on the Effective Date.
(b) Subject to adjustment pursuant to Section 2.10(d) and subject to Section 2.11(i) and Section 9.04(b)(vii), the Borrower shall repay the Tranche B-3 Term Loans on the last day of each April, July, October and January, commencing with the first such date to occur following the second full fiscal quarter after the Effective Date, in an aggregate principal amount equal to the product of (x) 0.25% multiplied by (y) the aggregate principal amount of the Tranche B-3 Term Loans outstanding on the Effective Date.
(c) Subject to adjustment pursuant to Section 2.10(d) and subject to Section 2.11(i) and Section 9.04(b)(vii), the Borrower shall repay the Euro Tranche Term Loans on the last day of each April, July, October and January, commencing with the first such date to occur following the second full fiscal quarter after the Effective Date, in an aggregate principal amount equal to the product of (x) 0.25% multiplied by (y) the aggregate principal amount of the Euro Tranche Term Loans outstanding on the Effective Date.
Without limiting the foregoing, to the extent not previously paid, all Initial Term Loans shall be due and payable on the applicable Term Loan Maturity Date.
(d) Any prepayment of a Term Loan Borrowing of any Class shall be applied (i) in the case of prepayments made pursuant to Section 2.11(a) or (e), to reduce the subsequent scheduled repayments of the Term Loan Borrowings of such Class to be made pursuant to this Section as directed by the Borrower (or, in the absence of such direction, to the remaining scheduled installments of principal of such Class in direct order of maturity), or as otherwise provided in any Extension Amendment, any Incremental Facility Amendment or Refinancing Amendment, (ii) in the case of prepayments made pursuant to Section 2.11(c) or Section 2.11(d), to reduce the subsequent scheduled repayments of the Term Loan Borrowings of such Class to be made pursuant to this Section in direct order of maturity, or as otherwise provided in any Extension Amendment, any Incremental Facility Amendment, or Refinancing Amendment, and (iii) in the case of prepayments made pursuant to Section 2.11(k), to reduce the subsequent scheduled repayments of the Term Loan Borrowings of the Tranche B-3 Term Loans and the Euro Tranche Term Loans in direct order of maturity.
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(e) Prior to any repayment of any Term Loan Borrowings of any Class hereunder, the Borrower shall select the Borrowing or Borrowings of the applicable Class to be repaid and shall notify the Administrative Agent by telephone (confirmed by telecopy) of such election not later than 1:00 p.m., New York City time, on the scheduled date of such repayment. Each repayment of a Borrowing shall be applied ratably to the Loans included in the repaid Borrowing. Repayments of Term Loan Borrowings shall be accompanied by accrued interest on the amount repaid.
Section 2.11 Prepayment of Loans.
(a) The Borrower shall have the right at any time and from time to time, without premium or penalty (but subject to Section 2.16 and the following sentence), to prepay any Borrowing of any Class in whole or in part, as selected and designated by the Borrower, subject to the requirements of this Section. Each voluntary prepayment of any Loan pursuant to this Section 2.11(a) and mandatory prepayment pursuant to Section 2.11(e) shall be made without premium or penalty except that, in the event that prior to the date that is six (6) months after the earlier of (x) the Escrow Funding Date and (y) 61 days after the Closing Date, the Borrower makes any prepayment or repayment of Tranche B-2 Term Loans, Tranche B-3 Term Loans or Euro Tranche Term Loans as a result of a Repricing Transaction or any amendment to this Agreement to effectuate a Repricing Transaction, the Borrower shall pay to the Administrative Agent, for the ratable account of each of the applicable Lenders of such respective Class of Term Loans, a prepayment premium in an amount equal to 1% of the amount of such respective Class of Term Loans being so prepaid, repaid or refinanced or the aggregate amount of the applicable Class of Term Loans outstanding immediately prior to such amendment and otherwise subject to the Repricing Transaction, as applicable. Any such voluntary prepayment shall be applied as specified in Section 2.10(d). Notwithstanding anything to the contrary in this Agreement, (x) after any Extension, the Borrower may voluntarily prepay any Borrowing of any Class of non-extended Term Loans pursuant to which the related Extension Offer was made without any obligation to voluntarily prepay the corresponding Extended Term Loans or may voluntarily prepay any Borrowing of any Extended Term Loans pursuant to which the related Extension Offer was made without any obligation to voluntarily prepay the corresponding non-extended term loans or (y) after the incurrence or issuance of any Incremental Facility, Other Term Loans or Replacement Term Loans, the Borrower may voluntarily prepay any Borrowing of any Initial Term Loans without any obligation to voluntarily prepay any Class of Incremental Term Loans pursuant to any Incremental Facility Amendment, Other Term Loans pursuant to any Refinancing Amendment or pursuant to any Replacement Term Loans, or may voluntarily prepay any Borrowing of any Class of Incremental Term Loans, Other Term Loans or Replacement Term Loans without any obligation to voluntarily prepay the Initial Term Loans.
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(b) In the event and on such occasion that the aggregate Revolving Exposures exceed (A) 105% of the aggregate Revolving Commitments solely as a result of currency fluctuations or (B) the aggregate Revolving Commitments (other than as a result of currency fluctuations), the Borrower shall prepay (no later than one (1) Business Day after written notice from the Administrative Agent to the Borrower) Revolving Loan Borrowings or Swingline Loan Borrowings (or, if no such Borrowings are outstanding, deposit cash collateral in an account with the Administrative Agent pursuant to Section 2.23) in an aggregate amount equal to the amount by which the aggregate Revolving Exposures exceed the aggregate Revolving Commitments.
(c) Subject to paragraph (f) of this Section, and unless the Required Lenders otherwise agree, in the event and on each occasion that any Net Proceeds are received by or on behalf of the Parent or any Restricted Subsidiary in respect of any Prepayment Event, the Borrower shall, within thirty (30) days in the case of any Prepayment Event referenced in paragraph (a) or (b) of the definition thereof, or, five (5) Business Days in the case of a Prepayment Event referenced in paragraph (c) of the definition thereof, after such Net Proceeds are received, prepay Term Loans on a pro rata basis (except, as to Extended Term Loans or Term Loans made pursuant to an Incremental Facility Amendment or a Refinancing Amendment, as otherwise set forth in such Extension Amendment, Incremental Facility Amendment or a Refinancing Amendment, or as to a Replacement Term Loan, in each case, which may be prepaid on a less than pro rata basis), in each case in an aggregate amount equal to 100% of the amount of such Net Proceeds (subject to reduction as set forth below); provided that in the case of any such event described in clause (a) or (b) of the definition of the term “Prepayment Event,” if the Parent or any Restricted Subsidiary applies the Net Proceeds from such event (or a portion thereof) within twelve (12) months after receipt of such Net Proceeds (or eighteen (18) months if the Parent or any such Restricted Subsidiary commits to apply such Net Proceeds within such twelve (12) month period pursuant to a contractual arrangement (including pursuant to a letter of intent or commitment letter) to apply) to reinvest such proceeds in assets of the general type used or useful in the business of the Parent and its Restricted Subsidiaries (including in connection with an acquisition), then no prepayment shall be required pursuant to this paragraph in respect of such Net Proceeds except to the extent of any such Net Proceeds therefrom that have not been so applied by the end of the twelve-month (or, eighteen month, if committed to be so applied) period following receipt of such Net Proceeds, at the end of which period a prepayment shall be required in an amount equal to such Net Proceeds that have not been so applied; provided, further, that with respect to any Prepayment Event referenced in paragraph (a) or (b) of the definition thereof, (i) the Borrower shall not be obligated to make any prepayment otherwise required by this paragraph (c) unless and until the aggregate amount of Net Proceeds from all such Prepayment Events, after giving effect to the reinvestment rights set forth herein, exceeds $45,000,000 (the “Asset Sale Prepayment Trigger”) in any fiscal year of the Parent, but then from all such Net Proceeds in excess of the Asset Sale Prepayment Trigger during such fiscal year and (ii) the Borrower may use a portion of such Net Proceeds to prepay or repurchase Seattle Term Loans, First Lien Senior Secured Notes or any other Indebtedness secured by the Collateral on a pari passu basis with the Liens securing the Obligations (the “Other Applicable Indebtedness”) to the extent required pursuant to the terms of the documentation governing such Other Applicable Indebtedness, in which case, the amount of prepayment required to be made with respect to such Net Proceeds pursuant to this Section 2.11(c) shall be deemed to be the amount equal to the product of (x) the amount of such Net Proceeds multiplied by (y) a fraction, the numerator of which is the outstanding principal amount of Term Loans and Seattle Term Loans required to be prepaid pursuant to this paragraph (c) and the denominator of which is the sum of the outstanding principal amount of such Other Applicable Indebtedness required to be prepaid pursuant to the terms of the documents governing such Other Applicable Indebtedness and the outstanding principal amount of Term Loans required to be prepaid pursuant to this paragraph; provided, further, that with respect to any Prepayment Event referenced in paragraph (a) or (b) of the definition thereof, the Borrower shall not be obligated to make, and may retain, 50% of the prepayment otherwise required by this paragraph (c) (any Net Proceeds of a Prepayment Event referenced in paragraph (a) or (b) of the definition thereof not subject to prepayment and retained by the Borrower pursuant to this proviso and the following proviso, the “Retained Asset Sale Proceeds”) to the extent that the First Lien Leverage Ratio, computed on a Pro Forma Basis (including with respect to such Disposition and any prepayment of Indebtedness) as of the Applicable Date of Determination (solely for purposes of this proviso to this Section 2.11(c), at the time of such Disposition and not for any other purpose hereunder, the Net Proceeds of the applicable Disposition shall not be included as unrestricted cash and Cash Equivalents in clause (i) of the definition of “First Lien Leverage Ratio”), is less than or equal to 3.00:1.00; provided, further, that with respect to any Prepayment Event referenced in paragraph (a) or (b) of the definition thereof, the Borrower shall not be obligated to make, and may retain, 100% of the prepayment otherwise required by this paragraph (c) to the extent that the First Lien Leverage Ratio, computed on a Pro Forma Basis (including with respect to such Disposition and any prepayment of Indebtedness) as of the Applicable Date of Determination (solely for purposes of this proviso to this Section 2.11(c), at the time of such Disposition and not for any other purpose hereunder, the Net Proceeds of the applicable Disposition shall not be included as unrestricted cash and Cash Equivalents in clause (i) of the definition of “First Lien Leverage Ratio”), is less than or equal to 2.50:1.00.
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(d) Subject to paragraph (f) of this Section 2.11 and unless the Required Lenders otherwise agree, following the end of each fiscal year of the Parent, commencing with the fiscal year of Parent ending October 31, 2019, the Borrower shall prepay, Term Loan Borrowings, in an aggregate amount (the “ECF Prepayment Amount”) equal to (i) the Required Percentage of Excess Cash Flow for such fiscal year, minus (ii) the aggregate principal amount of prepayments (other than prepayments pursuant to Section 2.11(c), (d) or (e), but inclusive of purchases of Loans by the Parent and its Subsidiaries at or below par, in which case the amount of prepayments or Loans shall be deemed not to exceed the actual purchase price of such Loans below par) of Term Loans, Seattle Term Loans (other than prepayments pursuant to Section 2.11(c), (d) or (e), but inclusive of purchases of Loans by the Parent and its Subsidiaries at or below par, in which case the amount of prepayments or, at the option of the Borrower, Loans shall be deemed not to exceed the actual purchase price of such Loans below par), Other Applicable Indebtedness and Revolving Loans (to the extent of, in the case of Revolving Loans, a corresponding Revolving Commitment reduction) made during such fiscal year or the period following the end of such fiscal year and prior to the ECF Due Date; provided that the Borrower may use a portion of such ECF Prepayment Amount to prepay or repurchase the Seattle Term Loans and any term loans incurred as Other Applicable Indebtedness pursuant to “excess cash flow” provisions applicable to such term loans to the extent required pursuant to the terms of the Seattle Credit Agreement and the documentation governing such Other Applicable Indebtedness, in which case, the amount of prepayment required to be made with respect to such ECF Prepayment Amount pursuant to this Section 2.11(d) shall be deemed to be the amount equal to the product of (x) the amount of such ECF Prepayment Amount multiplied by (y) a fraction, the numerator of which is the outstanding principal amount of Term Loans required to be prepaid pursuant to this paragraph (d) and the denominator of which is the sum of the outstanding principal amount of the Seattle Term Loans and such Other Applicable Indebtedness required to be prepaid pursuant to the terms of the Seattle Credit Agreement and the documents governing such Other Applicable Indebtedness and the outstanding principal amount of Term Loans required to be prepaid pursuant to this paragraph; provided, further, that the Borrower shall not be obligated to make any prepayment otherwise required by this paragraph (d) unless and until the ECF Prepayment Amount, after giving effect to the deductions set forth herein, exceeds $30,000,000 (the “ECFPrepayment Trigger”) in respect of any fiscal year of the Parent, but then from all such amounts in excess of the ECF Prepayment Trigger for such fiscal year. Each prepayment pursuant to this paragraph shall be made not later than the earlier of (A) 125 days after the end of the fiscal year of the Parent with respect to which such prepayment is made and (B) 10 Business Days after the delivery of the financial statements referred to in Section 5.01(a) for the fiscal year with respect to which such prepayment is made (such earlier date, the “ECF Due Date”). All prepayments made pursuant to this Section 2.11(d) shall be applied solely to the outstanding Initial Term Loans (and any Incremental Term Loans, Extended Term Loans or Other Term Loans to the extent provided for in the applicable Incremental Facility Amendment, Extension Amendment or Refinancing Amendment, or in respect of any Replacement Term Loans, provided that the Initial Term Loans receive not less than the pro rata portion of such prepayment unless otherwise agreed).
(e) If the Borrower incurs or issues any (i) Credit Agreement Refinancing Indebtedness permitted to be incurred or issued hereunder (other than a Permitted Refinancing thereof) or (ii) any other Indebtedness not permitted under Section 6.01, the Borrower shall, substantially contemporaneously with such incurrence or issuance pursuant to clause (i) and otherwise within five (5) Business Days, prepay the principal amount of the corresponding Credit Agreement Refinanced Debt (in the case of clause (i)) or each Class of Term Loans on a pro rata basis (in the case of clause (ii)), in each case in accordance with Section 2.11(g) and in an aggregate amount the Dollar Equivalent of which is equal to 100% of the Net Proceeds of such issuance or incurrence (which prepayment of principal shall be accompanied by payment of, provided such Net Proceeds shall be deemed reduced by an amount equal to the, accrued and unpaid interest, premiums and fees and expenses associated with such principal amount prepaid); provided that such prepayment in connection with a Repricing Transaction shall be subject to the second sentence of Section 2.11(a).
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(f) Notwithstanding any other provisions of this Section 2.11, (i) to the extent that any of or all the Net Proceeds of any Disposition by a Foreign Subsidiary giving rise to a prepayment pursuant to Section 2.11(c) (a “Foreign Disposition”), the Net Proceeds of any Prepayment Event from a Foreign Subsidiary (a “Foreign Prepayment Event”), or Excess Cash Flow would be (x) prohibited or delayed by applicable local law (which, for the avoidance of doubt includes, but is not limited to, financial assistance, corporate benefit, restrictions on upstreaming cash, and the fiduciary and statutory duties of the directors of the relevant subsidiaries), (y) restricted by applicable organizational or constitutive documents or any agreement or (z) subject to other onerous organizational or administrative impediments, from being repatriated to the United States, the portion of such Net Proceeds or Excess Cash Flow so affected will not be required to be applied to repay Term Loans at the times provided in Section 2.11(d) or the Borrower shall not be required to make a prepayment at the times provided in Section 2.11(c), as the case may be, and instead, such amounts may be retained by the applicable Foreign Subsidiary and (ii) to the extent that the Borrower has determined in good faith that repatriation of any of or all the Net Proceeds of any Foreign Disposition, any Foreign Prepayment Event or Excess Cash Flow would have an adverse tax cost consequence with respect to such Net Proceeds or Excess Cash Flow (which for the avoidance of doubt, includes, but is not limited to, any prepayment whereby doing so the Parent or any Restricted Subsidiary or any of their respective affiliates and/or equity partners would incur a tax liability, including a tax dividend, deemed dividend pursuant to Code Section 956 or a withholding tax), the Net Proceeds or Excess Cash Flow so affected may be retained by the applicable Foreign Subsidiary. The non-application of any prepayment amounts as a consequence of the foregoing provisions will not, for the avoidance of doubt, constitute a Default or an Event of Default. Any prepayments made by the Borrower pursuant to Section 2.11(c) or (d) notwithstanding the application of this Section 2.11(f) shall be net of additional Taxes, costs and expenses payable or reserved against as a result thereof (whether or not repatriation actually occurs) and the Parent and its Restricted Subsidiaries shall be permitted to make a Restricted Payment to its equity holders and Affiliates to cover such taxes, costs or expenses to the extent actually paid by such equity holder or Affiliate.
(g) In connection with (i) any optional prepayment of Borrowings hereunder or (ii) any mandatory prepayment of Borrowings hereunder, the Borrower shall, in each case, subject to the provisions of this Section 2.11(g), Section 2.11(k) and Section 2.11(l), select the Borrowing or Borrowings to be prepaid and shall specify such selection in the notice of such prepayment pursuant to Section 2.11(h). The Administrative Agent will promptly notify each Lender holding the applicable Class of Term Loans of the contents of the Borrower’s prepayment notice and of such Lender’s pro rata share of the prepayment. Each such Term Loan Lender may reject all (but not less than all) of its pro rata share of any mandatory prepayment (such declined amounts, the “Declined Proceeds”) of Term Loans required to be made pursuant to Section 2.11(c) or (d) by providing notice to the Administrative Agent at or prior to the time of such prepayment; provided that for the avoidance of doubt, no Lender may reject any prepayment made with the proceeds of Credit Agreement Refinancing Indebtedness or made as a result of clause (c) of the definition of “Prepayment Event.” Any Declined Proceeds remaining thereafter shall be retained by the Borrower (“Retained Declined Proceeds”).
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(h) The Borrower shall notify the Administrative Agent (and, in the case of prepayment of a Swingline Loan, the Swingline Lender) by telephone (confirmed by telecopy) of any prepayment hereunder on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date, the principal amount of each Borrowing or portion thereof to be prepaid and, in the case of a mandatory prepayment, a reasonably detailed calculation of the amount of such prepayment, provided that a notice of optional prepayment may state that such notice is conditional upon the consummation of an acquisition or sale transaction or upon the effectiveness of other credit facilities or the receipt of the proceeds from the issuance of other Indebtedness or the occurrence of any other specified event, in which case such notice of prepayment may be revoked by the Borrower (by notice to the Administrative Agent on or prior to the specified date) if such condition is not satisfied. Promptly following receipt of any such notice (other than a notice solely to Swingline Lenders), the Administrative Agent shall advise the Lenders of the contents thereof. Except as otherwise provided herein, each partial prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13 and any prepayment fees required by Section 2.11(a), to the extent applicable.
(i) Notwithstanding anything to the contrary contained in this Agreement, so long as no Event of Default has occurred and is continuing or would result therefrom, the Parent or any Restricted Subsidiary (in such case, the foregoing being herein referred to as the “Auction Parties” and each, an “Auction Party”) may repurchase outstanding Subject Loans on the following basis:
(A) Such Auction Party may repurchase all or any portion of any Class of (i) Term Loan or (ii) Revolving Loan and Revolving Commitment held by a Revolving Lender that is a Defaulting Lender (such Loans and Revolving Commitments, “Subject Loans”) pursuant to a Dutch Auction (or such other modified Dutch auction conducted pursuant to similar procedures as the Borrower and Administrative Agent may otherwise agree); provided that no proceeds of Revolving Loans shall be used by any Auction Party to repurchase Subject Loans pursuant to such Auction;
(B) Following repurchase by any Auction Party pursuant to this Section 2.11(i), the Subject Loans so repurchased shall, without further action by any Person, be deemed cancelled and/or terminated for all purposes and no longer outstanding (and may not be resold by any Auction Party) or available, for all purposes of this Agreement and the principal amount of the Subject Loans so repurchased shall be applied on a pro rata basis to reduce the scheduled remaining installments of principal on such Class of Term Loans. In connection with any Subject Loans repurchased and cancelled pursuant to this Section 2.11(i), the Administrative Agent is authorized to make appropriate entries in the Register to reflect any such cancellation and/or termination. Any payment made by any Auction Party in connection with a repurchase permitted by this Section 2.11(i) shall not be subject to any of the pro rata payment or sharing requirements of this Agreement. Notwithstanding anything in this Agreement or any other Loan Documents to the contrary, failure by an Auction Party to make any payment to a Lender required by an agreement permitted by this Section 2.11(i) shall not constitute a Default or an Event of Default;
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(C) Each Lender that sells its Subject Loans pursuant to this Section 2.11(i) acknowledges and agrees that (i) the Auction Parties may come into possession of additional information regarding the Loans, the Commitments or the Loan Parties at any time after a repurchase has been consummated pursuant to an Auction hereunder that was not known to such Lender or the Auction Parties at the time such repurchase was consummated and that, when taken together with information that was known to the Auction Parties at the time such repurchase was consummated, may be information that would have been material to such Lender’s decision to enter into an assignment of such Subject Loans hereunder (“Excluded Information”), (ii) such Lender will independently make its own analysis and determination to enter into an assignment of its Loans or Commitments and to consummate the transactions contemplated by an Auction notwithstanding such Lender’s lack of knowledge of Excluded Information and (iii) none of the Auction Parties or any of their respective Affiliates, or any other Person shall have any liability to such Lender with respect to the nondisclosure of the Excluded Information. Each Lender that tenders Loans or Commitments pursuant to an Auction agrees to the foregoing provisions of this clause (C). The Administrative Agent and the Lenders hereby consent to the Auctions and the other transactions contemplated by this Section 2.11(i) and hereby waive the requirements of any provision of this Agreement (including, without limitation, any pro rata payment requirements) (it being understood and acknowledged that purchases of the Loans or Commitments by an Auction Party contemplated by this Section 2.11(i) shall not constitute Investments by such Auction Party) or any other Loan Document that may otherwise prohibit any Auction or any other transaction contemplated by this Section 2.11(i).
(j) Notwithstanding any of the other provisions of this Section 2.11, if any prepayment of Eurocurrency Loans is required to be made under this Section 2.11, prior to the last day of the Interest Period therefor, in lieu of making any payment pursuant to this Section 2.11 in respect of any such Eurocurrency Loan prior to the last day of the Interest Period therefor, the Borrower may, in its sole discretion, deposit with the Administrative Agent in the currency in which such Loan is denominated the amount of any such prepayment otherwise required to be made hereunder until the last day of such Interest Period, at which time the Administrative Agent shall be authorized (without any further action by or notice to or from the Borrower or any other Loan Party) to apply such amount to the prepayment of such Loans in accordance with this Section 2.11. Such deposit shall constitute cash collateral for the Eurocurrency Loans to be so prepaid; provided that the Borrower may at any time direct that such deposit be applied to make the applicable payment required pursuant to this Section 2.11.
(k) If the Seattle Acquisition is not consummated (x) within four (4) Business Days after the Effective Date as a result of trading generally having been suspended or materially limited on the London Stock Exchange (or, if earlier, the first day on which the London Stock Exchange is open for trading following such suspension or material limitation on trading) or (y) if otherwise, within one (1) Business Day after the Effective Date (such applicable date in clause (x) or (y), the “Applicable Acquisition Consummation Deadline”), unless the Required Lenders otherwise agree, subject to the terms of the following provisions, the Borrower shall prepay the Tranche B-3 Term Loans and the Euro Tranche Term Loans, without premium or penalty, at the issue price thereof (for the avoidance of doubt, net of any original issue discount or upfront fees) plus accrued and unpaid interest thereon on the date that is one (1) Business Day following the Applicable Acquisition Consummation Deadline unless the Seattle Acquisition has already been consummated prior to the making of such prepayment on such date; provided that the Borrower shall only be required to make the prepayment (for the avoidance of doubt, net of any original issue discount or upfront fees) otherwise required by this paragraph (k) with respect to $384,800,000 aggregate principal amount of the Tranche B-3 Term Loans and Euro Tranche Term Loans to the extent that the First Lien Leverage Ratio, computed on a Pro Forma Basis (including with respect to any prepayment of Indebtedness) as of the Applicable Date of Determination is less than or equal to 3.30:1.00. Any prepayment pursuant to this paragraph (k) shall be applied pro rata to the Tranche B-3 Term Loans and the Euro Tranche Term Loans and shall be made to the Lenders under such Classes of Term Loans on a pro rata basis.
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(l) Application of Prepayment by Type of Term Loans. In connection with any voluntary prepayments by the Borrower pursuant to Section 2.11(a), any voluntary prepayment thereof shall be applied first to ABR Loans to the full extent thereof before application to Eurocurrency Rate Loans, in each case in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.16. In connection with any mandatory prepayments by the Borrower of the Term Loans pursuant to Section 2.11, such prepayments shall be applied on a pro rata basis to the then outstanding Term Loans being prepaid irrespective of whether such outstanding Term Loans are ABR Loans or Eurocurrency Rate Loans; provided that if no Lenders exercise the right to waive a given mandatory prepayment of the Term Loans pursuant to Section 2.11(g), then, with respect to such mandatory prepayment, the amount of such mandatory prepayment shall be applied first to Term Loans that are ABR Loans to the full extent thereof before application to Term Loans that are Eurocurrency Rate Loans in a manner that minimizes the amount of any payments required to be made by the Borrower pursuant to Section 2.16.
Section 2.12 Fees.
(a) The Borrower agrees to pay to the Administrative Agent for the account of each Revolving Lender, in accordance with its Applicable Percentage of Revolving Commitments, a commitment fee, which shall accrue at a rate per annum equal to 0.50% on the actual daily unused amount of the Revolving Commitment of such Lender during the period from and including the Closing Date to, but excluding, the date on which the Revolving Commitments terminate, subject to adjustment as provided in Section 2.22; provided that the commitment fee shall accrue at a rate per annum equal to 0.375% if the First Lien Leverage Ratio as of the end of the fiscal quarter of Parent for which consolidated financial statements and a Compliance Certificate have theretofore been most recently delivered pursuant to Section 5.01(a) or 5.01(b) is less than or equal to 3.00 to 1.00. For purposes of the foregoing, each change in the commitment fee resulting from a change in the First Lien Leverage Ratio shall be effective during the period commencing on and including the Business Day following the date of delivery to the Administrative Agent pursuant to Section 5.01(a) or 5.01(b) of the consolidated financial statements and related Compliance Certificate indicating such change and ending on the date immediately preceding the effective date of the next such change (and, at the option of the Required Revolving Lenders, commencing upon written notice to the Borrower, such commitment fee shall be 0.50% if the Borrower fails to deliver the consolidated financial statements required to be delivered pursuant to Section 5.01(a) or 5.01(b) or any Compliance Certificate required to be delivered pursuant hereto, within the time periods specified herein for such delivery until the delivery thereof). In the event that a Compliance Certificate is shown to be inaccurate at any time and such inaccuracy, if corrected, would have led to a higher commitment fee for any period (an “Applicable Period”) than the commitment fee applied for such Applicable Period, then (i) the Borrower shall, upon obtaining knowledge promptly deliver to the Administrative Agent a correct Compliance Certificate for such Applicable Period, (ii) the commitment fee shall be determined by reference to the corrected Compliance Certificate for such Applicable Period, and (iii) the Borrower shall pay to the Administrative Agent no later than five (5) Business Days after written demand any additional fees owing as a result of such increased commitment fee for such Applicable Period, which payment shall be promptly applied by the Administrative Agent in accordance with the terms hereof. Notwithstanding anything to the contrary in this Agreement, any additional commitment fee hereunder shall not be due and payable until written demand is made for such payment pursuant to this paragraph and accordingly, any nonpayment of such interest as a result of any such inaccuracy shall not constitute a Default or Event of Default (whether retroactively or otherwise), and no such amounts shall be deemed overdue (and no amounts shall accrue interest at the Default Rate), at any time prior to the date that is five (5) Business Days following such written demand. Accrued commitment fees shall be payable in arrears on the third Business Day following the last day of April, July, October and January of each year and on the date on which the Revolving Commitments terminate, commencing on the first such date to occur after the Effective Date; provided that no commitment fee shall accrue on the Revolving Commitment of a Defaulting Lender so long as such Lender shall be a Defaulting Lender. All commitment fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). For purposes of computing commitment fees, a Revolving Commitment of a Lender shall be deemed to be used to the extent of the outstanding Revolving Loans and LC Exposure of such Lender (and the Swingline Exposure of such Lender shall be disregarded for such purpose).
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(b) [Reserved].
(c) The Borrower agrees to pay (i) to the Administrative Agent for the account of each Revolving Lender a participation fee with respect to its participations in Letters of Credit, which shall accrue at the same Applicable Margin used to determine the interest rate applicable to Eurocurrency Revolving Loans on the actual daily amount of such Revolving Lender’s LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date, to but excluding the date on which such Revolving Lender’s Revolving Commitment terminates, and (ii) to the Issuing Bank a fronting fee in Dollars, which shall accrue at a rate equal to 0.125% per annum on the actual daily amount of the LC Exposure (excluding any portion thereof attributable to unreimbursed LC Disbursements) during the period from and including the Closing Date, to but excluding the date of termination of the Revolving Commitments, as well as the Issuing Bank’s standard fees with respect to the issuance, amendment, renewal or extension of any Letter of Credit or processing of drawings thereunder. Participation fees and fronting fees accrued to and excluding the last day of April, July, October and January of each year shall be payable on the third Business Day following such last day, commencing on the first such date to occur after the Effective Date, provided that all such fees shall be payable on the date on which the Revolving Commitments terminate and any such fees accruing after the date on which the Revolving Commitments terminate shall be payable on demand. Any other fees payable to the Issuing Bank pursuant to this paragraph shall be payable within 30 days after written demand (including reasonable supporting documents). All participation fees and fronting fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day).
(d) The Borrower agrees to pay to the Administrative Agent, for its own account, fees payable in the amounts and at the times separately agreed upon between the Borrower and the Administrative Agent.
(e) All fees payable hereunder shall be paid by the Borrower on the dates due, in immediately available funds, to the Administrative Agent (or to the Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees paid shall not be refundable under any circumstances.
Section 2.13 Interest.
(a) The Loans comprising each ABR Borrowing (including each Swingline Loan) shall bear interest at the Alternate Base Rate plus the Applicable Margin.
(b) The Loans comprising each Eurocurrency Borrowing shall bear interest at the Adjusted Eurocurrency Rate for the Interest Period in effect for such Borrowing plus the Applicable Margin.
(c) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee payable by the Borrower hereunder is not paid when due (after the expiration of any applicable grace period), whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2.00% plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section (including the Applicable Margin) or (ii) in the case of any other amount, 2.00% plus the rate applicable to ABR Revolving Loans as provided in paragraph (a) of this Section; provided that no default rate shall accrue on the Loans of a Defaulting Lender so long as such Lender shall be a Defaulting Lender.
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(d) Accrued interest on each Loan shall be payable in arrears on each Interest Payment Date for such Loan and, in the case of Revolving Loans, upon termination of the applicable Revolving Commitments, provided that (i) interest accrued pursuant to paragraph (c) of this Section shall be payable on written demand, (ii) in the event of any repayment or prepayment of any Loan (other than a prepayment of an ABR Revolving Loan or Swingline Loan prior to the end of the Revolving Availability Period), accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment and (iii) in the event of any conversion of any Eurocurrency Loan prior to the end of the current Interest Period therefor, accrued interest on such Loan shall be payable on the effective date of such conversion.
(e) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to the Alternate Base Rate or Sterling shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate or Adjusted Eurocurrency Rate shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error.
Section 2.14 Alternate Rate of Interest. If prior to the commencement of any Interest Period for a Eurocurrency Borrowing denominated in any currency:
(a) the Administrative Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted Eurocurrency Rate for such Interest Period; or
(b) the Administrative Agent is advised by the Required Lenders that the Adjusted Eurocurrency Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;
then the Administrative Agent shall give written notice thereof to the Borrower and the Lenders or as promptly as practicable thereafter and, until the Administrative Agent notifies the Borrower and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Interest Election Request that requests the conversion of any Borrowing denominated in such currency to, or continuation of any Borrowing denominated in such currency as, a Eurocurrency Borrowing in such currency shall be ineffective, and any Eurocurrency Borrowing denominated in such currency that is requested to be continued (A) if such currency is the Dollar, shall be converted to an ABR Borrowing on the last day of the Interest Period applicable thereto and (B) if such currency is Euros or other Alternative Currency, shall (1) in the case of a Revolving Loan Borrowing, at the option of Borrower, either be repaid on the last day of the Interest Period applicable thereto or bear interest at such rate as the Administrative Agent shall determine adequately and fairly reflects the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period plus the applicable percentage set forth in the definition of “Applicable Margin” under the applicable row under the column “Eurocurrency Loan”, and (2) in the case of a Term Loan Borrowing, bear interest at such rate as the Administrative Agent shall determine adequately and fairly reflects the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period plus the applicable percentage set forth in the definition of “Applicable Margin” under the applicable row under the column “Eurocurrency Loan” and (ii) if any Borrowing Request requests a Eurocurrency Borrowing denominated in such currency, (A) if such currency is the Dollar, such Borrowing shall be made as an ABR Borrowing and (B) if such currency is Euros, such Borrowing Request shall be ineffective.
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Section 2.15 Increased Costs.
(a) If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender or the Issuing Bank (except any such reserve requirement reflected in the Adjusted Eurocurrency Rate);
(ii) impose on any Lender or the Issuing Bank or the London interbank market any other condition, cost or expense affecting this Agreement or Eurocurrency Loans made by such Lender or any Letter of Credit or participation therein (except, in each case, for Indemnified Taxes indemnifiable under Section 2.17 and any Excluded Taxes); or
(iii) subject any Lender or the Issuing Bank to any additional Taxes of any kind whatsoever with respect to this Agreement or any Loan made by it, or change the basis of taxation of payments to such Lender in respect thereof (except, in each case, for Indemnified Taxes indemnifiable under Section 2.17 and any Excluded Taxes);
and the result of any of the foregoing shall be to materially increase the cost to such Lender of making, converting to, continuing or maintaining any Eurocurrency Loan (or of maintaining its obligation to make any such Loan) of the Borrower or to increase the cost to such Lender or the Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or the Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered.
(b) If any Lender or the Issuing Bank determines in good faith that any Change in Law regarding capital or liquidity requirements has or would have the effect of materially reducing the rate of return on such Lender’s or the Issuing Bank’s capital or on the capital of such Lender’s or the Issuing Bank’s holding company, if any, as a consequence of this Agreement or the Loans made by, or participations in Letters of Credit held by such Lender to the Borrower or the Letters of Credit issued by the Issuing Bank for the benefit of the Borrower to a level below that which such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company could have achieved but for such Change in Law (taking into consideration such Lender’s or the Issuing Bank’s policies and the policies of such Lender’s or the Issuing Bank’s holding company with respect to capital and liquidity adequacy), then from time to time the Borrower will pay to such Lender or the Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or the Issuing Bank or such Lender’s or the Issuing Bank’s holding company for any such reduction suffered.
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(c) A certificate of a Lender or the Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or the Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender or the Issuing Bank, as the case may be, the amount shown as due on any such certificate within 30 days after receipt thereof.
(d) Failure or delay on the part of any Lender or the Issuing Bank to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s or the Issuing Bank’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender or the Issuing Bank pursuant to this Section for any increased costs or reductions incurred more than 120 days prior to the date that such Lender or the Issuing Bank, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions and of such Lender’s or the Issuing Bank’s intention to claim compensation therefor, and providedfurther that, if the Change in Law giving rise to such increased costs or reductions is retroactive, then the 120-day period referred to above shall be extended to include the period of retroactive effect thereof.
Section 2.16 Break Funding Payments. In the event of (a) the payment by the Borrower of any principal of any Eurocurrency Loan other than on the last day of an Interest Period applicable thereto (including as a result of an Event of Default), (b) the conversion by the Borrower of any Eurocurrency Loan other than on the last day of the Interest Period applicable thereto, (c) the failure by the Borrower to borrow, convert into, continue or prepay any Eurocurrency Loan on the date specified in any notice delivered pursuant hereto (regardless of whether such notice may be revoked under Section 2.11(h) and is revoked in accordance therewith) or (d) the assignment of any Eurocurrency Loan other than on the last day of the Interest Period applicable thereto as a result of a request by the Borrower pursuant to Section 2.19 or Section 9.02(c), then, in any such event, the Borrower shall compensate each Lender for the loss, cost and expense attributable to such event (other than loss of profit). In the case of a Eurocurrency Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest that would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted Eurocurrency Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest that would accrue on such principal amount for such period at the interest rate that such Lender would bid were it to bid, at the commencement of such period, for Dollar deposits or Euro deposits, as applicable, of a comparable amount and period from other banks in the Eurocurrency market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay such Lender the amount shown as due on any such certificate within 30 days after receipt thereof.
Failure or delay on the part of any Lender to demand compensation pursuant to this Section shall not constitute a waiver of such Lender’s right to demand such compensation, provided that the Borrower shall not be required to compensate a Lender pursuant to this Section for any costs incurred more than 120 days prior to the date of the event giving rise to such costs.
Section 2.17 Taxes.
(a) Each payment by or on account of any Loan Party under any Loan Document shall be made without withholding for any Taxes, unless such withholding is required by any Requirement of Law. If any applicable withholding agent is so required to withhold Taxes, then such withholding agent shall so withhold and shall timely pay the full amount of withheld Taxes to the relevant Governmental Authority in accordance with any applicable law. To the extent such Taxes are Indemnified Taxes, then the amount payable by the applicable Loan Party shall be increased as necessary so that, net of such withholding for Indemnified Taxes (including such withholding applicable to additional amounts payable under this Section 2.17), the applicable Recipient receives the amount it would have received had no such withholding been made.
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(b) In addition, each Loan Party shall pay any Other Taxes imposed on it to the relevant Governmental Authority in accordance with applicable law.
(c) As promptly as possible after any payment of Indemnified Taxes by a Loan Party to a Governmental Authority, such Loan Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment.
(d) Without duplication of their obligations under Section 2.17(a), the Loan Parties shall indemnify each Recipient for the full amount of any Indemnified Taxes that are paid or payable by such Recipient in connection with any Loan Document (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section 2.17) or for which such Loan Party has failed to remit to the Administrative Agent the required receipts or other required documentary evidence and any reasonable third party expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted; provided, however, that if a Recipient does not notify the Loan Parties of any indemnification claim under this Section 2.17(d) within 120 days after such Recipient has received written notice of the claim of a taxing authority giving rise to such indemnification claim, the Loan Parties shall not be required to indemnify such Recipient for any incremental interest or penalties resulting from such Recipient’s failure to notify the Loan Parties within such 120-day period. The indemnity under this paragraph (d) shall be paid within 30 days after the Recipient (or the Administrative Agent, on behalf of such Recipient) delivers to the applicable Loan Party a certificate stating the amount of Indemnified Taxes so payable by such Recipient. Such certificate shall be conclusive of the amount so payable absent manifest error. Such Recipient shall deliver a copy of such certificate to the Administrative Agent.
(e) (i) Any Lender that is entitled to an exemption from, or reduction of, any applicable withholding Tax with respect to any payments under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times prescribed by law or reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without, or at a reduced rate of, withholding. In addition, any Lender, if requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to U.S. backup withholding or information reporting requirements, or any other U.S. or non-U.S. withholding requirements. Upon the reasonable request of the Borrower or the Administrative Agent, any Lender shall update any form or certification previously delivered pursuant to this Section 2.17(e). If any form or certification previously delivered pursuant to this Section 2.17(e) expires or becomes obsolete or inaccurate in any respect with respect to a Lender, such Lender shall promptly (and in any event within 10 days after such expiration, obsolescence or inaccuracy) notify the Borrower and the Administrative Agent in writing of such expiration, obsolescence or inaccuracy and update the form or certification if it is legally eligible to do so.
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(ii) [Reserved].
(iii) If a payment made to any Lender would be subject to U.S. federal withholding Tax imposed under FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Sections 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and Administrative Agent, at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent, such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such other documentation reasonably requested by the Borrower and Administrative Agent requested by the Administrative Agent and the Borrower as may be necessary for the Administrative Agent and the Borrower to comply with their obligations under FATCA, to determine whether such Lender has or has not complied with such Lender’s FATCA obligations and to determine the amount, if any, to deduct and withhold from such payment. Solely for purposes of this clause (iv), “FATCA” shall include any amendments after the date of this Agreement.
(iv) Notwithstanding any other provision of this clause (e), a Lender shall not be required to deliver any form that such Lender is not legally eligible to deliver.
(f) If any Recipient determines, in its sole discretion (in good faith), that it has received a refund of any Indemnified Taxes as to which it has been indemnified pursuant to this Section 2.17 (including additional amounts paid by any Loan Party pursuant to this Section 2.17), it shall promptly pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section 2.17 with respect to the Taxes giving rise to such refund), net of all reasonable out-of-pocket expenses (including any Taxes) of such Recipient and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund), provided that the Borrower, upon the request of such Recipient, shall repay to such Recipient the amount paid to such indemnifying party pursuant to the previous sentence (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event such Recipient is required to repay such refund to such Governmental Authority. This Section 2.17(f) shall not be construed to require any Recipient to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to any Loan Party or any other Person.
(g) On or before the date it becomes a party to this Agreement, any successor or supplemental Administrative Agent that is a U.S. Person shall deliver to the Borrower two duly completed copies of IRS Form W-9, or any subsequent versions or successors to such form, certifying that such Administrative Agent is exempt from U.S. federal backup withholding. Notwithstanding anything to the contrary, nothing in this Section 2.17(g) shall require any successor or supplemental Administrative Agent to deliver any form that it is not legally eligible to deliver as a result of any Change in Law after the date hereof.
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(h) For the avoidance of doubt, for purposes of this Section 2.17, the term “Lender” includes any Issuing Bank and any Swingline Lender.
Section 2.18 Payments Generally; Pro Rata Treatment; Sharing of Setoffs.
(a) The Borrower shall make each payment required to be made by it under any Loan Document (whether of principal, interest, fees or reimbursement of LC Disbursements, or of amounts payable under Section 2.15, Section 2.16, Section 2.17 or otherwise) prior to the time expressly required hereunder or under such other Loan Document for such payment (or, if no such time is expressly required, prior to 2:00 p.m., New York City time, or, in the case of payments denominated in an Alternative Currency, 9:00 a.m., New York time), on the date when due, in immediately available funds, without setoff or counterclaim. Except as otherwise expressly provided herein and except with respect to principal of and interest on Loans denominated in an Alternative Currency, all payments by the Borrower hereunder shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the applicable Administrative Agent’s Office in Dollars and in same day funds not later than 2:00 p.m., New York City time, on the date specified herein. Except as otherwise expressly provided herein, all payments by the Borrower hereunder with respect to principal and interest on Loans denominated in an Alternative Currency shall be made to the Administrative Agent, for the account of the respective Lenders to which such payment is owed, at the applicable Administrative Agent’s Office in such Alternative Currency and in same day funds not later than the Applicable Time specified by the Administrative Agent on the dates specified herein. If, for any reason, the Borrower is prohibited by any Requirement of Law from making any required payment hereunder in an Alternative Currency, the Borrower shall make such payment in Dollars in the Dollar Equivalent of the Alternative Currency. Any amounts received after such time on any date may, in the discretion of the Administrative Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Administrative Agent’s Office, except payments to be made directly to the Issuing Bank or Swingline Lender as expressly provided herein and except that payments pursuant to Section 2.11(i), Section 2.12(d), Section 2.15, Section 2.16, Section 2.17 and Section 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. The Administrative Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. Unless otherwise provided herein, if any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments under each Loan Document of principal or interest in respect of any Loan (or of any breakage indemnity in respect of any Loan) shall be made in the currency of such Loan and, except as otherwise set forth in any Loan Document, all other payments under each Loan Document shall be made in Dollars.
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(b) If at any time insufficient funds are received by and available to the Administrative Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied (i) first, towards payment of interest and fees then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of interest and fees then due to such parties, and (ii) second, towards payment of principal and unreimbursed LC Disbursements then due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal and unreimbursed LC Disbursements then due to such parties.
(c) If, other than as provided elsewhere herein, any Lender shall, by exercising any right of setoff or counterclaim, obtain payment in respect of any principal of or interest on any of its Revolving Loans, Term Loans or participations in LC Disbursements or Swingline Loans resulting in such Lender receiving payment of a greater proportion of the aggregate amount of its Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans and accrued interest thereon than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans, Term Loans and participations in LC Disbursements and Swingline Loans of other Lenders to the extent necessary so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Revolving Loans of the applicable Class, Term Loans of the applicable Class and participations in LC Disbursements of the applicable Class and Swingline Loans, provided that (i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this paragraph shall not be construed to apply to (v) any payment or prepayment made by or on behalf of the Borrower or any other Loan Party pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), (w) the application of Cash Collateral provided in Section 2.23 from time to time (including the application of funds arising from the existence of a Defaulting Lender), (x) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in LC Disbursements to any assignee or participant or the termination of any Lender’s commitment and non-pro rata repayment of Loans pursuant to Section 2.19(b), (y) transactions in connection with an open market purchase or a Dutch Auction, or (z) in connection with a transaction pursuant to an Extension Offer, Refinancing Amendment or Incremental Facility Amendment or amendment in connection with Refinanced Term Loans. For the avoidance of doubt, this Section shall not limit the ability of the Parent or any Restricted Subsidiary to (i) purchase and retire Term Loans pursuant to an open market purchase or a Dutch Auction or (ii) pay principal, fees, premiums and interest with respect to Other Revolving Loans, Other Term Loans, Refinanced Term Loans, Extended Term Loans, Replacement Term Loans, Extended Revolving Loans and Extended Revolving Commitments, Incremental Revolving Loans and Incremental Revolving Commitments or Incremental Term Loans following the effectiveness of any Refinancing Amendment, any Extension Offer or Incremental Facility Amendment, as applicable, on a basis different from the Loans of such Class that will continue to be held by Lenders that were not Additional Refinancing Lenders, Extending Lenders or Additional Lenders or Incremental Revolving Lenders, as applicable.
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(d) Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders or the Issuing Bank hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption and in its sole discretion, distribute to the Lenders or the Issuing Bank, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders or the Issuing Bank, as the case may be, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Effective Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by it pursuant to Section 2.04(c), Section 2.05(d) or (e), Section 2.06 (a) or (b), Section 2.18(d) or Section 9.03(c), then the Administrative Agent may, in its discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter received by the Administrative Agent for the account of such Lender to satisfy such Lender’s obligations under such Sections until all such unsatisfied obligations are fully paid.
Section 2.19 Mitigation Obligations; Replacement of Lender
(a) If any Lender requests compensation under Section 2.15 or Section 2.17, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, then such Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the reasonable judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 2.15 or Section 2.17, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not be inconsistent with its internal policies or otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) If any Lender requests compensation under Section 2.15 or Section 2.17, or if the Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.17, or if any Lender ceases to make Eurocurrency Loans as a result of any of the conditions in Section 2.14 or Section 2.15, or if any Lender becomes a Defaulting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, (1) terminate the unused Commitment of such Lender and/or repay the Loans of such Lender on a non-pro rata basis, or (2) require such Lender (and such Lender shall be obligated) to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (i) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and funded participations in LC Disbursements and Swingline Loans and, other than in the case of a Defaulting Lender, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts), and (ii) in the case of any such assignment resulting from a claim for compensation under Section 2.15 or payments required to be made pursuant to Section 2.17, such assignment will result in a reduction in such compensation or payments.
(c) Any Lender being replaced pursuant to Section 2.19(b) or Section 9.02(c) shall (i) execute and deliver an Assignment and Assumption with respect to such Lender’s Commitment and outstanding Loans and participations in LC Disbursements and Swingline Loans, as applicable (provided that the failure of any such Lender to execute an Assignment and Assumption shall not render such assignment invalid and such assignment shall be recorded in the Register) and (ii) deliver Notes, if any, evidencing such Loans to the Borrower or Administrative Agent. Pursuant to such Assignment and Assumption, (A) the assignee Lender shall acquire all or a portion, as the case may be, of the assigning Lender’s Commitments and outstanding Loans and participations in LC Disbursements and Swingline Loans, as applicable, (B) all obligations of the Loan Parties owing to the assigning Lender relating to the Loan Documents and participations so assigned shall be paid in full by the assignee Lender or the Loan Parties (as applicable) to such assigning Lender concurrently with such assignment and assumption, any amounts owing to the assigning Lender (other than a Defaulting Lender) under Section 2.16 as a consequence of such assignment and (C) upon such payment and, if so requested by the assignee Lender, the assignor Lender shall deliver to the assignee Lender the appropriate Note or Notes executed by the Borrower, the assignee Lender shall become a Lender hereunder and the assigning Lender shall cease to constitute a Lender hereunder with respect to such assigned Loans, Commitments and participations, except with respect to indemnification provisions under this Agreement, which shall survive as to such assigning Lender.
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Section 2.20 Incremental Loans.
(a) At any time and from time to time prior to the Latest Maturity Date, subject to the terms and express conditions set forth herein, the Borrower may by no less than three (3) Business Days’ prior notice to the Administrative Agent (or such lesser number of days reasonably acceptable to the Administrative Agent), request to add one or more new credit facilities (each, an “Incremental Facility”) denominated, at the option of such Borrower, in Dollars, Euros and/or any Alternative Currency, and consisting of one or more additional tranches of term loans or an increase to an existing Class of Term Loans (each, an “Incremental Term Facility”) or one or more additional tranches of revolving commitments or an increase in an existing Class of Revolving Commitments (each, an “Incremental Revolving Facility”), or a combination thereof, so long as (i) immediately before and after giving effect to each Incremental Facility Amendment and the applicable Incremental Facility, no Event of Default has occurred and is continuing or would result therefrom (or to the extent the proceeds of any Incremental Loans are being used to finance a Permitted Acquisition or other permitted Investment, no Event of Default under Section 7.01(a), 7.01(b), 7.01(h) or 7.01(i) has occurred and is continuing at the time of execution of a binding agreement in respect of such Acquisition or Investment and subject to customary “SunGard” limitations), and (ii) subject to the provisos to this sentence, immediately after giving effect to each Incremental Facility Amendment and the establishment of such Incremental Facility (or, at the option of the Borrower, (x) in the case of any Incremental Commitment established and not funded at such time, at the time of the initial funding of such Incremental Facility in lieu of the time at the time of such Incremental Facility Amendment) and/or (y) after giving effect to any acquisition or investment consummated or contemplated pursuant to an agreement in connection herewith, the First Lien Leverage Ratio computed on a Pro Forma Basis (but without giving effect to any Unrestricted Incremental First Lien Indebtedness or Unrestricted Additional Term Notes established and/or funded at such time) shall not be greater than 3.50:1.00 (such indebtedness, “Incurrence Incremental First Lien Indebtedness”) (assuming, solely for purposes of this Section 2.20 at the time of entering into such Incremental Facility Amendment or funding of such Incremental Facility, as applicable, as elected by the Borrower, and not for any other provision hereunder, that (I) all Incremental Facilities and all Additional Term Notes, in each case established and/or issued on or prior to such time are secured on a first Lien basis, whether or not so secured, (II) all Incremental Revolving Facilities and Incremental Term Facilities consisting of delayed draw term loans established but not funded at such time are fully drawn and (III) the proceeds of such Incremental Loans are not included as unrestricted cash and Cash Equivalents in clause (i) of the definition of “First Lien Leverage Ratio”; provided that to the extent the proceeds of such Incremental Loans are to be used to prepay Indebtedness, the use of such proceeds for the prepayment of such Indebtedness may be given pro forma effect); providedfurther that the financial incurrence test set forth in clause (ii) of this paragraph (a) shall not apply to the incurrence of an aggregate principal amount of Indebtedness under Incremental Facilities and Unrestricted Additional Term Notes after the Effective Date not to exceed an amount equal to the sum of (x) the Dollar Equivalent (calculated using the Exchange Rate on the date of effectiveness of such Incremental Facility Amendment and Incremental Facility) of which equals $750,000,000 less any amounts incurred in reliance on Section 6.01(a)(xxxii)(a)(1) or in reliance on clause (x) of the definition of Unrestricted Incremental First Lien Indebtedness in the Seattle Credit Agreement (provided that the maximum amount deducted pursuant to this clause (x) shall not exceed $750,000,000) plus (y) the amount of any voluntary prepayments (or repurchases) of the Term Loans and voluntary permanent reductions of the Revolving Commitments effected after the Effective Date and the amount of any voluntary prepayments (or repurchases) of the Seattle Term Loans, First Lien Senior Secured Notes or any other Indebtedness secured by the Collateral on a pari passu basis with the Liens securing the Obligations effected after the Effective Date (minus any amounts incurred in reliance on Section 6.01(a)(xxxii)(a)(2) or in reliance on clause (y) of the definition of “Unrestricted Incremental First Lien Indebtedness” in the Seattle Credit Agreement) (other than, in each case, any such prepayments or repurchases financed with the proceeds of long-term Indebtedness (other than revolving Indebtedness)) (such Indebtedness in clauses (x) and (y), collectively, the “Unrestricted Incremental First Lien Indebtedness”) (it being understood and agreed that unless notified by the Borrower (I) the Borrower shall be deemed to have utilized amounts of the type described in clause (y) of the Unrestricted Incremental First Lien Indebtedness prior to the utilization of amounts under clause (x) of the Unrestricted Incremental First Lien Indebtedness and Incurrence Incremental First Lien Indebtedness, and the Borrower shall be deemed to have used Incurrence Incremental First Lien Indebtedness, (to the extent compliant therewith) prior to utilization of amounts of the type described in clause (x) of the Unrestricted Incremental First Lien Indebtedness (it being understood and agreed that amounts incurred concurrently with the incurrence of Unrestricted Incremental First Lien Indebtedness or Unrestricted Additional Term Notes shall be permitted to exceed 3.50:1.00), (II) Loans may be incurred in respect of both Incurrence Incremental First Lien Indebtedness and Unrestricted Incremental First Lien Indebtedness, and the proceeds from any such incurrence in respect of both Incurrence Incremental First Lien Indebtedness and Unrestricted Incremental First Lien Indebtedness, may be utilized in a single transaction by first calculating the incurrence in respect of Incurrence Incremental First Lien Indebtedness above and then calculating the incurrence in respect of Unrestricted Incremental First Lien Indebtedness and (III) the Borrower may redesignate any such Indebtedness originally designated as Unrestricted Incremental First Lien Indebtedness as Incurrence Incremental First Lien Indebtedness if, at the time of such redesignation, the Borrower would be permitted to incur under this Section 2.20 the aggregate principal amount of Indebtedness being so redesignated (for purposes of clarity, with any such redesignation having the effect of increasing the Borrowers’ ability to incur Unrestricted Incremental First Lien Indebtedness as of the date of such redesignation by the amount of such Indebtedness so redesignated) in respect of Unrestricted Incremental First Lien Indebtedness. Each Incremental Facility shall be in an integral multiple of $1,000,000 (or, in the case of Incremental Facilities denominated in Euros, €1,000,000) and be in an aggregate principal amount that is not less than $25,000,000 (or, in the case of Incremental Facilities denominated in Euros, €25,000,000), provided that such amount may be less than $25,000,000 (or €25,000,000, as the case may be) if such amount represents all the remaining availability under the aggregate principal amount of Incremental Facilities set forth above.
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(b) Each Incremental Term Facility (i) if made a part of an existing Class of Term Loans, shall have terms identical to those applicable to such Class of Term Loans or (ii) if consisting of an additional tranche of term loans shall have such terms as determined by the Borrower and the lenders providing such Incremental Term Facility; provided that (A) such Incremental Term Facility shall rank paripassu or junior in right of payment and/or security with the Term Loans hereunder or be unsecured, and if junior in right of payment and/or security or is unsecured, shall be established as a separate facility than the facility for the Term Loans secured with the Collateral securing the Initial Term Loans, (B) no Restricted Subsidiary is a borrower or a guarantor with respect to such Indebtedness unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently guaranteed or borrowed, as applicable, the Obligations, (C) if secured, the obligations in respect thereof shall not be secured by Liens on the assets of the Parent and the Restricted Subsidiaries, other than assets constituting Collateral, as applicable, and if established as a separate facility, shall be subject to (x) if such Term Loans are secured on a paripassu basis with the Obligations, the Senior Representative for such Term Loans shall enter into the Pari Passu Intercreditor Agreement or other customary intercreditor agreement and (y) if such Term Loans are secured on a junior basis to the Obligations, the Senior Representative for such Term Loans shall enter into a Second Lien Intercreditor Agreement or other customary intercreditor agreement, in each case with the Administrative Agent’s and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (I) any immaterial changes and (II) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations), (D) no Incremental Term Facility shall have a final maturity date earlier than the then existing Latest Maturity Date with respect to the Initial Term Loans; provided that this clause (D) shall not restrict the issuance or incurrence by the Parent or any of its Restricted Subsidiaries after the Effective Date of up to $1,700,000,000 aggregate principal amount of Additional Debt, Additional Term Notes, Unrestricted Additional Term Notes, Incremental Term Loans, Seattle Additional Debt, Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes and Seattle Incremental Term Loans having a final maturity date that is prior to the Latest Maturity Date with respect to the Initial Term Loans so long as such final maturity date is at least five years from the date of such issuance or incurrence, (E) no Incremental Term Facility shall have a Weighted Average Life to Maturity that is shorter than the Weighted Average Life to Maturity of the then-remaining Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of such Class of Term Loans); provided that this clause (E) shall not restrict the issuance or incurrence by the Parent or any of its Restricted Subsidiaries after the Effective Date of up to $1,700,000,000 aggregate principal amount of Additional Debt, Additional Term Notes, Unrestricted Additional Term Notes, Incremental Term Loans, Seattle Additional Debt, Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes and Seattle Incremental Term Loans having Weighted Average Life to Maturity shorter than the remaining Weighted Average Life to Maturity of the Initial Term Loans (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans) so long as such debt does not require annual amortization or similar regularly scheduled prepayments in excess of 10% of the original amount of such debt at issuance or incurrence in any year, (F) for purposes of mandatory prepayments, shall be treated no more favorably than the Initial Term Loans of the Borrower except those that only apply after the then existing Latest Maturity Date with respect to Initial Term Loans, (G) the pricing, interest rate margins, discounts, premiums, rate floors and fees applicable to any Incremental Term Facility shall be determined by the Borrower and the Lenders providing such Incremental Term Loans; provided that solely in the event that the Yield for any Incremental Term Loans secured on a paripassu basis with the Initial Term Loans (other than (i) Incremental Term Loans incurred in reliance on clause (y) of the definition of Unrestricted Incremental First Lien Indebtedness (except if the capacity under clause (y) results from prepayments made with the proceeds of indebtedness which is pari passu in right of payment and security with the Term Loans (other than the Revolving Loans)) and (ii) any Additional Term Notes) is higher than the Yield for the Tranche B-2 Term Loans, Tranche B-3 Term Loans and the Euro Tranche Term Loans by more than 50 basis points in the case such applicable Class of Initial Term Loans, then the Applicable Margin for the Tranche B-2 Term Loans, Tranche B-3 Term Loans or Euro Tranche Term Loans, as applicable, shall be increased to the extent necessary so that the Yield for such Classes of Term Loans is equal to the Yield for such Incremental Term Loans minus 50 basis points, and (H) other terms may differ and shall be determined by the Borrower and the lenders providing such Incremental Term Loans; provided, however, the covenants and events of default of such Incremental Term Loans, if not consistent with the terms of the Initial Term Loans, shall not be materially more restrictive to the Borrower (as determined in good faith by the Borrower), when taken as a whole, than the terms of the Initial Term Loans unless (x) the Lenders of the Initial Term Loans receive the benefit of such more restrictive terms or (y) any such provisions apply after the Term Loan Maturity Date.
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(c) Each Incremental Revolving Facility (i) if made a part of an existing tranche of Revolving Commitments shall have terms identical to those applicable to such Class of Revolving Commitments or (ii) if consisting of an additional Class of revolving loans and commitments shall be subject to substantially the same terms as the Initial Revolving Commitments (other than pricing, fees, maturity and other immaterial terms which shall be determined by the Borrower and the lenders providing such Incremental Revolving Facility); provided that no Incremental Revolving Facility shall have a final maturity date earlier than the then existing Latest Maturity Date with respect to the Initial Revolving Commitments.
(d) Each notice from the Borrower pursuant to this Section shall set forth the requested amount and proposed terms of the relevant Incremental Facility. Any additional bank, financial institution, existing Lender or other Person that elects to provide Commitments under an Incremental Facility shall be reasonably satisfactory to the Borrower and, in the case of any Incremental Revolving Facility and, to the extent such consent would be required for an assignment of such Loans or Commitments pursuant to Section 9.04, the Issuing Bank and the Swingline Lender (such consent not to be unreasonably withheld, delayed or conditioned) (any such bank, financial institution, existing Lender or other Person being called an “Additional Lender”) and, if not already a Lender, shall become a Lender under this Agreement pursuant to an amendment (an “Incremental Facility Amendment”) to this Agreement and, as appropriate, the other Loan Documents, executed by the Parent, Holdco, the Borrower, such Additional Lender (in the case of this Agreement and, as appropriate, any other Loan Document, as applicable) (and to the extent it directly and adversely affects the rights or duties of the Administrative Agent and/or the Collateral Agent, the Administrative Agent and/or the Collateral Agent, as applicable); provided that in the event an Incremental Facility Amendment is effected without the consent of the Administrative Agent and to which the Administrative Agent is not a party, the Borrower shall furnish a copy of such Incremental Facility Amendment to the Administrative Agent. No Lender shall be obligated to provide any Commitments under an Incremental Facility, unless it so agrees. Commitments in respect of any Incremental Facilities shall become Commitments under this Agreement. An Incremental Facility Amendment may, without the consent of any other Lenders, effect such amendments to any Loan Documents as may be necessary, advisable or appropriate, in the reasonable opinion of the Administrative Agent and the Borrower, to effect the provisions of this Section (including to provide for voting provisions applicable to the Additional Lenders comparable to the provisions of clause (iv) of the first proviso of Section 9.02(b)). The effectiveness of any Incremental Facility Amendment shall, unless otherwise agreed to by the Additional Lenders, be subject to the satisfaction (or waiver) on the date thereof of the express conditions in respect of such Incremental Facility Amendment to be mutually agreed upon by the Additional Lenders and the Borrower customary for transactions of the type in respect of which the applicable Incremental Facility relates. The proceeds of any Loans under an Incremental Facility will be used, directly or indirectly, by the Borrower for working capital and/or general corporate purposes and/or any other purposes not prohibited hereunder (including, without limitation, Restricted Payments, Acquisitions and other Investments). This Section 2.20 shall supersede any provisions in Section 2.11, Section 2.18 and Section 9.02 to the contrary.
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(e) Upon each increase in the Revolving Commitments under any revolving credit facility pursuant to this Section 2.20, each Revolving Lender immediately prior to such increase will automatically and without further act be deemed to have assigned to each Additional Lender providing a portion of the Incremental Revolving Commitment (each, an “Incremental Revolving Lender”) in respect of such increase, and each such Incremental Revolving Lender will automatically and without further act be deemed to have assumed, a portion of such Revolving Lender’s participations hereunder in outstanding Letters of Credit and Swingline Loans under such revolving credit facility such that, after giving effect to each such deemed assignment and assumption of participations, the percentage of the aggregate outstanding participations hereunder in such Letters of Credit and/or Swingline Loans under such revolving credit facility held by each Revolving Lender (including each such Incremental Revolving Lender), as applicable, will equal the percentage of the aggregate Revolving Commitments of all Revolving Lenders under such revolving credit facility. Additionally, if any Revolving Loans are outstanding under a revolving credit facility at the time any Incremental Revolving Commitments are established, the applicable Revolving Lenders immediately after effectiveness of such Incremental Revolving Commitments shall purchase and assign at par such amounts of the Revolving Loans outstanding under such revolving credit facility at such time as the Administrative Agent may require such that each Revolving Lender holds its Applicable Percentage of all Revolving Loans outstanding under such revolving credit facility immediately after giving effect to all such assignments. The Administrative Agent and the Lenders hereby agree that the minimum borrowing, prorata borrowing and pro rata payment requirements contained elsewhere in this Agreement shall not apply to the transactions effected pursuant to the immediately preceding sentence.
Section 2.21 Refinancing Amendments. At any time after the Effective Date, the Borrower may obtain from any existing Lender or any other Person reasonably satisfactory to the Borrower and, in the case of Other Revolving Commitments, the Swingline Lender and the Issuing Bank (any such existing Lender or other Person being called an “Additional Refinancing Lender”) Credit Agreement Refinancing Indebtedness in respect of (a) all or any portion of any Class of Term Loans then outstanding under this Agreement (which for purposes of this clause (a) will be deemed to include any then outstanding Other Term Loans constituting Term Loans) or (b) all or any portion of the Revolving Commitments (including the corresponding portion of the Revolving Loans) under this Agreement (which for purposes of this clause (b) will be deemed to include any then outstanding Other Revolving Commitments (including the corresponding portion of the Other Revolving Loans)) in the form of (x) Other Term Loans or Other Term Commitments in the case of clause (a) or (y) Other Revolving Loans or Other Revolving Commitments in the case of clause (b), in each case pursuant to a Refinancing Amendment; provided that (i) such Credit Agreement Refinancing Indebtedness shall rank paripassu or junior in right of payment and of security with the other Loans and Commitments hereunder, (ii) such Credit Agreement Refinancing Indebtedness shall have such pricing, interest, fees, premiums and optional prepayment and redemption terms as may be agreed by the Borrower and the Additional Refinancing Lenders thereof, (iii) such Credit Agreement Refinancing Indebtedness shall only be secured by assets consisting of Collateral, (iv) the covenants and, events of default of such Credit Agreement Refinancing Indebtedness (other than pricing, interest, fees, premiums and optional prepayment), if not consistent with the terms of the Class of Initial Term Loans, shall reflect market terms (taken as a whole) (as determined in good faith by the Borrower), at the time of issuance or incurrence, (v) such Credit Agreement Refinancing Indebtedness satisfies the requirements set forth in clauses (w) through (z) of the definition of “Credit Agreement Refinancing Indebtedness,” and (vi) if such Credit Agreement Refinancing Indebtedness is secured on a junior basis to the Term Loans, the Collateral Agent acting on behalf of the holders of such Indebtedness shall have become party to a Second Lien Intercreditor Agreement; provided that if such Second Lien Intercreditor Agreement has not previously been executed and delivered, then the Borrower, the Collateral Agent on behalf of the Secured Parties and on behalf of the holders of such Credit Agreement Refinancing Indebtedness shall have executed and delivered the Second Lien Intercreditor Agreement. The effectiveness of any Refinancing Amendment shall be subject to such express conditions as are mutually agreed with the participating Additional Refinancing Lenders. Each Class of Credit Agreement Refinancing Indebtedness (other than in connection with an extension of the maturity of Term Loans, Revolving Loans or Revolving Commitments) incurred under this Section 2.21 shall be in an integral multiple of $1,000,000 and be in an aggregate principal amount that is not less than $25,000,000 (or, in the case of Incremental Facilities denominated in Euros, €25,000,000), provided that such amount may be less than $25,000,000 or €25,000,000 if such amount represents all the remaining availability under the aggregate principal amount of Credit Agreement Refinancing Indebtedness set forth above. Subject to the consent of the Issuing Banks, any Refinancing Amendment may provide for the issuance of Letters of Credit for the account of the Borrower pursuant to any Other Revolving Commitments established thereby on terms substantially equivalent to the terms applicable to Letters of Credit under this Agreement before giving effect to such Refinancing Amendment. The Administrative Agent shall promptly notify each Lender as to the effectiveness of each Refinancing Amendment. Each of the parties hereto hereby agrees that, upon the effectiveness of any Refinancing Amendment, this Agreement shall be deemed amended to the extent (but only to the extent) necessary or reasonably advisable to reflect the existence and terms of the Credit Agreement Refinancing Indebtedness incurred pursuant thereto (including any amendments necessary to treat the Loans and Commitments subject thereto as Other Term Loans, Other Revolving Loans, Other Revolving Commitments and/or Other Term Commitments). Any Refinancing Amendment may, without the consent of any other Lenders, effect such amendments to this Agreement and the other Loan Documents as may be necessary, or reasonably advisable or appropriate, in the reasonable opinion of the Administrative Agent and the Borrower, to effect the provisions of this Section. This Section 2.21 shall supersede any provisions in Section 2.18 and Section 9.02 to the contrary. Notwithstanding anything to the contrary in this Section 2.21 or otherwise, (1) the borrowing and repayment (except for (A) payments of interest and fees at different rates on Other Revolving Commitments (and related outstandings), (B) repayments required upon the maturity date of the Other Revolving Commitments and (C) repayment made in connection with a permanent repayment and termination of commitments) of Loans with respect to Other Revolving Commitments after the date of obtaining any Other Revolving Commitments shall be made on at least a pro rata basis with all other Revolving Commitments, (2) subject to the provisions of Section 2.05(o) to the extent dealing with Letters of Credit which mature or expire after a maturity date when there exist Other Revolving Commitments with a longer maturity date and subject to the consent of the Issuing Bank, all Letters of Credit shall be participated on a pro rata basis by all Revolving Lenders in accordance with all other Revolving Commitments (and except as provided in Section 2.05(o), without giving effect to changes thereto on an earlier maturity date with respect to Letters of Credit theretofore incurred or issued), (3) the permanent repayment of Revolving Loans with respect to, and termination of, Other Revolving Commitments after the date of obtaining any Other Revolving Commitments shall be made on at least a pro rata basis with all other Revolving Commitments, except that the Borrower shall be permitted to permanently repay and terminate commitments of any such Class on a non- rata basis as compared to any other Class with a later maturity date than such Class and (4) assignments and participations of Other Revolving Commitments and Other Revolving Loans shall be governed by the same assignment and participation provisions applicable to Revolving Commitments and Revolving Loans.
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Section 2.22 Defaulting Lenders.
(a) Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:
(i) Waivers and Amendments. That Defaulting Lender’s right to approve or disapprove any amendment, waiver or consent with respect to this Agreement shall be restricted as set forth in Section 9.02.
(ii) Reallocation of Payments. Any payment of principal, interest, fees, indemnity payments or other amounts received by the Administrative Agent for the account of that Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article VII or otherwise, and including any amounts made available to the Administrative Agent by that Defaulting Lender pursuant to Section 9.08), shall be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the payment of any amounts owing by that Defaulting Lender to the Administrative Agent hereunder; second, to the payment on a pro rata basis of any amounts owing by that Defaulting Lender to the Issuing Bank or Swingline Lender; third, if so determined by the Administrative Agent or requested by the Issuing Bank or Swingline Lender, to be held as Cash Collateral for future funding obligations of that Defaulting Lender of any participation in any Swingline Loan or Letter of Credit; fourth, as the Borrower may request, to the funding of any Loan in respect of which that Defaulting Lender has failed to fund its portion thereof as required by this Agreement; fifth, if so determined by the Administrative Agent and the Borrower, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of that Defaulting Lender to fund Loans under this Agreement; sixth, to the payment of any amounts owing to the Lenders, the Issuing Bank or the Swingline Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, the Issuing Bank or the Swingline Lender against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; seventh, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against that Defaulting Lender as a result of that Defaulting Lender’s breach of its obligations under this Agreement; and eighth, to that Defaulting Lender or as otherwise directed by a court of competent jurisdiction; provided that if (x) such payment is a payment of the principal amount of any Loans or LC Disbursement in respect of which that Defaulting Lender has not fully funded its appropriate share and (y) such Loans or LC Disbursements were made at a time when the conditions set forth in Section 4.02 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and LC Disbursements owed to, all non- Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or LC Disbursements owed to, that Defaulting Lender. Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 2.22(a)(ii) shall be deemed paid to and redirected by that Defaulting Lender, and each Lender irrevocably consents hereto.
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(iii) Certain Fees. That Defaulting Lender shall not be entitled to receive any commitment fee pursuant to Sections 2.12(a) or any default rate of interest pursuant to Section 2.13(c), in each case, for any period during which that Lender is a Defaulting Lender and (A) if the participations in the Swingline Loans and/or Letters of Credit are reallocated pursuant to clause (iv) below, then the fees payable to the Lenders pursuant to Sections 2.12(a) and (b) shall be adjusted to reflect the higher amounts of such participations allocated to such Lenders, and (B) if all or any portion of such Defaulting Lender’s LC Exposure is neither reallocated pursuant to clause (iv) below nor Cash Collateralized pursuant to Section 2.23, then, without prejudice to any rights or remedies of the Issuing Bank or any other Lender hereunder, all letter of credit fees payable under Section 2.12(c) with respect to such Defaulting Lender’s LC Exposure shall be payable to the Issuing Bank until and to the extent that such LC Exposure is reallocated and/or Cash Collateralized.
(iv) Reallocation of Pro Rata Shares to Reduce LC Exposure. During any period in which there is a Defaulting Lender with a Revolving Commitment, for purposes of computing the amount of the obligation of each non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit or Swingline Loans, as applicable, the “Applicable Percentage” of each non-Defaulting Lender with a Revolving Commitment shall be computed without giving effect to the Revolving Commitment of that Defaulting Lender, and such obligation to so acquire, refinance or fund participations in such Letters of Credit and Swingline Loans shall automatically be reallocated among the non-Defaulting Lenders with Revolving Commitments upon such Defaulting Lender becoming a Defaulting Lender; provided that the aggregate obligation of each non-Defaulting Lender to acquire, refinance or fund participations in such Letters of Credit and Swingline Loans shall not exceed the positive difference, if any, of (1) the Revolving Commitment of that non-Defaulting Lender minus (2) the aggregate outstanding amount of the Revolving Loans of that Lender. No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender with a Revolving Commitment arising from that Lender having become a Defaulting Lender, including any claim of a non-Defaulting Revolving Lender as a result of such non-Defaulting Lender’s increased exposure following such reallocation.
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(b) Defaulting Lender Cure. If the Borrower, the Administrative Agent, Swingline Lender and the Issuing Bank agree in writing in their sole discretion that a Defaulting Lender should no longer be deemed to be a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), that Lender will, to the extent applicable, purchase that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit and Swingline Loans to be held on a pro rata basis by the Lenders in accordance with their Applicable Percentage without giving effect to Section 2.22(a)(iv), whereupon that Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided, further, that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to non-Defaulting Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender’s having been a Defaulting Lender.
(c) So long as such Lender is a Defaulting Lender, the Swingline Lender shall not be required to fund any Swingline Loan and the Issuing Bank shall not be required to issue, amend, increase, renew or extend any Letter of Credit, unless it has received assurances satisfactory to it that non-Defaulting Lenders will cover the related exposure in accordance with this Section 2.22 and/or Cash Collateral will be provided by the Borrower in accordance with Section 2.23, and participating interests in any newly made Swingline Loan or any newly issued or increased Letter of Credit shall be allocated among non-Defaulting Lenders in a manner consistent with Section 2.22(a)(iv) (and such Defaulting Lender shall not participate therein).
Section 2.23 Cash Collateral.
(a) Certain Credit Support Events. If, as of the date of termination of all Revolving Commitments, any LC Exposure for any reason remains outstanding, the Borrower shall promptly provide Cash Collateral in an amount equal to 103% of the then outstanding amount of all LC Exposure. At any time that there shall exist a Defaulting Lender, within five (5) Business Days after the written request of the Administrative Agent, the Borrower shall (x) deliver to the Administrative Agent Cash Collateral in an amount equal to 100% of all LC Exposure (after giving effect to Section 2.22(a)(iv)) and any Cash Collateral provided by such Defaulting Lender and (y) prepay any Swingline Loans to the extent the participations of such Defaulting Lender therein have not been reallocated pursuant to Section 2.22(a)(iv)). If at any time the Administrative Agent determines that any funds held as Cash Collateral are subject to any right or claim of any Person other than the Administrative Agent or that the total amount of such funds is less than the aggregate outstanding amount of all LC Exposure in respect of the Borrower, the Borrower will, within three (3) Business Days of written demand by the Administrative Agent, pay to the Administrative Agent, as additional funds to be deposited as Cash Collateral, an amount equal to the excess of (x) such aggregate outstanding amount over (y) the total amount of funds, if any, then held as Cash Collateral to secure such LC Exposure that the Administrative Agent determines to be free and clear of any such right and claim. Upon the drawing of any Letter of Credit for which funds are on deposit as Cash Collateral, such funds shall be applied, to the extent permitted under applicable laws, to reimburse the Issuing Bank.
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(b) Grant of Security Interest. All Cash Collateral (other than credit support not constituting funds subject to deposit) shall be maintained in one or more blocked deposit and/or securities accounts with or established by the Administrative Agent (which interest shall accrue for the benefit of the Borrower if such accounts are established in the name of the Borrower). The Borrower, and to the extent provided by any Lender, such Lender, hereby grants to (and subjects to the control of) the Administrative Agent, for the benefit of the Administrative Agent, the Issuing Bank and the applicable Revolving Lenders (including the Swingline Lender), and agrees to maintain, a first priority security interest (subject to Liens of the type permitted by Section 6.02) in all such cash, Cash Equivalents, deposit and/or securities accounts and all balances therein, and all other property so provided as collateral pursuant hereto, and in all proceeds of the foregoing, all as security for the obligations to which such Cash Collateral may be applied pursuant to Section 2.23(c). If at any time the Administrative Agent determines that Cash Collateral is subject to any non-permitted right or claim of any Person other than the Administrative Agent as herein provided, or that the total amount of such Cash Collateral is less than 100% of the applicable LC Exposure and other obligations secured thereby, the Borrower or the relevant Defaulting Lender will, promptly following written demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency.
(c) Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under this Section 2.23 or otherwise in respect of Letters of Credit or Swingline Loans shall be held and applied to the satisfaction of the specific LC Disbursement, Swingline Loans, obligations to fund participations therein (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) and other obligations for which the Cash Collateral was so provided, prior to any other application of such property as may be provided for herein.
(d) Release. Cash Collateral (or the appropriate portion thereof) provided to reduce LC Exposure or other obligations shall be released promptly following (i) the elimination of the applicable LC Exposure or other obligations giving rise thereto (including by the termination of Defaulting Lender status of the applicable Lender (or, as appropriate, its assignee or the termination of the Commitment of the Defaulting Lender) or (ii) the Administrative Agent’s good faith determination that there exists excess Cash Collateral; provided, however, (x) that Cash Collateral furnished by or on behalf of a Loan Party shall not be released during the continuance of an Event of Default and (y) the Person providing Cash Collateral and the Issuing Bank or Swingline Lender, as applicable, may agree that Cash Collateral shall not be released but instead held to support future anticipated LC Exposure or other obligations.
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Section 2.24 Extensions of Term Loans and Revolving Commitments.
(a) Notwithstanding anything to the contrary in this Agreement, pursuant to one or more offers (each, an “Extension Offer”) made from time to time by (i) the Borrower to all Lenders of Term Loans of the applicable Class with a like maturity date or (ii) the Borrower to all Lenders with Revolving Commitments of the applicable Class with a like maturity date, in each case on a pro rata basis (based on the aggregate outstanding principal amount of the respective Term Loans or Revolving Commitments with a like maturity date, as the case may be) and offered on the same terms to each such Lender, the Borrower is hereby permitted to consummate from time to time transactions with individual Lenders that accept the terms contained in such Extension Offers to extend the maturity date of each such Lender’s Term Loans and/or Revolving Commitments and otherwise modify the terms of such Term Loans and/or Revolving Commitments pursuant to the terms of the relevant Extension Offer (including, without limitation, by increasing the interest rate, premiums or fees payable in respect of such Term Loans and/or Revolving Commitments (and related outstandings) and/or modifying the amortization schedule, optional prepayment terms, required prepayment dates and participation in prepayments in respect of such Lender’s Term Loans) (each, an “Extension”, and each group of Term Loans or Revolving Commitments, as applicable, in each case as so extended, as well as the Initial Term Loans and the Initial Revolving Commitments (in each case not so extended), being a separate Class; any Extended Term Loans shall constitute a separate Class of Term Loans from the Class of Term Loans from which they were converted, and any Extended Revolving Commitments shall constitute a separate Class of Revolving Commitments from the Class of Revolving Commitments from which they were converted), so long as the following terms are satisfied (or waived):
(i) except as to interest rates, fees, premiums, amortization, prepayments, AHYDO Catch-Up Payments and final maturity (which shall be determined by the Borrower and set forth in the relevant Extension Offer and which shall be no earlier than the maturity date of the Class of Revolving Commitments for which such Extension Offer was made), the Revolving Commitment of any Revolving Loan Lender that agrees to an Extension with respect to such Revolving Commitment (an “Extending Revolving Loan Lender”) extended pursuant to an Extension (an “Extended Revolving Commitment” and the loans made pursuant thereto, the “Extended Revolving Loans”), and the related outstandings, shall have covenants, and events of default and, if not consistent with the terms of the Revolving Commitments, shall not be materially more restrictive to the Loan Parties (as determined in good faith by the Borrower), when taken as a whole, than the terms of the Revolving Commitment unless (x) the Revolving Lenders receive the benefit of such more restrictive terms or (y) any such provisions apply after the Revolving Maturity Date (as determined in good faith by the Borrower); provided that (1) the borrowing and repayment (except for (A) payments of interest and fees at different rates on Extended Revolving Commitments (and related outstandings), (B) repayments required upon the maturity date of the non-extended Revolving Commitments and (C) repayments made in connection with a permanent repayment and termination of commitments) of Loans with respect to Extended Revolving Commitments after the applicable Extension date shall be made on a pro rata basis or less with all other Revolving Commitments, (2) all Letters of Credit and Swingline Loans shall be participated on a pro rata basis or less by all Lenders with Revolving Commitments in accordance with their percentage of the Revolving Commitments, (3) the permanent repayment of Revolving Loans with respect to, and termination of, Extended Revolving Commitments after the applicable Extension date shall be made on a pro rata basis with all other Revolving Commitments, except that the Borrower shall be permitted to permanently repay and terminate commitments of any such Class on a non-pro rata basis as compared to any other Class with a later maturity date than such Class, (4) assignments and participations of Extended Revolving Commitments and Extended Revolving Loans shall be governed by the same assignment and participation provisions applicable to Revolving Commitments and Revolving Loans, (5) at no time shall there be Revolving Commitments hereunder (including Extended Revolving Commitments and any Initial Revolving Commitments) which have more than four different maturity dates and (6) except as the Swingline Lender may otherwise agree, Swingline Loans shall be required to be paid in full on the maturity date of the non-extended Revolving Commitments (and may, for the avoidance of doubt, be re-borrowed pursuant to the terms hereof after such maturity date),
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(ii) except as to interest rates, fees, premiums, amortization, voluntary prepayments, AHYDO Catch-Up Payments and final maturity (which shall, subject to the immediately succeeding clauses (iv) and (v), be determined by the Borrower and set forth in the relevant Extension Offer), the Term Loans of any Term Lender that agrees to an Extension with respect to such Term Loans (an “Extending Term Lender”, and together with Extending Revolving Loan Lenders, “Extending Lenders”) extended pursuant to any Extension (“Extended Term Loans”) shall have covenants, and events of default, if not consistent with the terms of the Term Loans, shall not be materially more restrictive to the Loan Parties (as determined in good faith by the Borrower), when taken as a whole, than the terms of the Term Loans unless (x) the Lenders of the Term Loans receive the benefit of such more restrictive terms or (y) any such provisions apply after the Term Loan Maturity Date),
(iii) the final maturity date of any Extended Term Loans shall be no earlier than the Term Loan Maturity Date of the Class of Term Loans for which such Extension Offer was made and at no time shall the Term Loans (including Extended Term Loans) have more than six different maturity dates,
(iv) the Weighted Average Life to Maturity of any Extended Term Loans of the corresponding Class shall be no shorter than the remaining Weighted Average Life to Maturity of the Term Loans of the corresponding Class extended thereby (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans),
(v) if the aggregate principal amount of the Class of Term Loans (calculated on the face amount thereof) or Revolving Commitments, as the case may be, in respect of which Term Lenders or Revolving Lenders of such Class, as the case may be, shall have accepted the relevant Extension Offer shall exceed the maximum aggregate principal amount of Term Loans or Revolving Commitments, as the case may be, offered to be extended by the Borrower pursuant to such Extension Offer, then the Class of Term Loans or Revolving Loans, as the case may be, of such Term Lenders or Revolving Lenders of such Class, as the case may be, shall be extended ratably up to such maximum amount based on the respective principal amounts (but not to exceed actual holdings of record) with respect to which such Term Lenders or Revolving Lenders, as the case may be, have accepted such Extension Offer,
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(vi) all documentation in respect of such Extension shall be consistent with the foregoing, and
(vii) any applicable Minimum Extension Condition shall be satisfied unless waived by the Borrower.
(b) With respect to all Extensions consummated by the Borrower pursuant to this Section 2.24, (i) such Extensions shall not constitute voluntary or mandatory payments or prepayments for purposes of Section 2.11 and (ii) no Extension Offer is required to be in any minimum amount or any minimum increment, provided that the Borrower may at its election specify as a condition (a “Minimum Extension Condition”) to consummating any such Extension that a minimum amount (to be determined and specified in the relevant Extension Offer in the Borrower’s sole discretion and may be waived by the Borrower) of the Class of Term Loans or Revolving Commitments (as applicable) of any or all applicable Classes be tendered. The Administrative Agent and the Lenders hereby consent to the consummation of the transactions contemplated by this Section 2.24 (including, for the avoidance of doubt, payment of any interest, fees or premium in respect of any Extended Term Loans and/or Extended Revolving Commitments on such terms as may be set forth in the relevant Extension Offer) and hereby waive the requirements of any provision of this Agreement (including, without limitation, any pro rata payment or amendment section) or any other Loan Document that may otherwise prohibit or restrict any such Extension or any other transaction contemplated by this Section 2.24.
(c) No consent of any Lender or any Agent shall be required to effectuate any Extension, other than (i) the consent of each Lender agreeing to such Extension with respect to one or more of its Term Loans and/or Revolving Commitments (or a portion thereof), (ii) with respect to any Extension of the Revolving Commitments, the consent of each Issuing Bank and the Swingline Lender (to the extent the availability of Letters of Credit or Swingline Loans, as applicable, has also been extended) and (iii) to the extent directly and adversely amending or modifying the rights or obligations of the Administrative Agent beyond those of the type already required to perform under the Loan Documents, the Administrative Agent, which consent shall not be unreasonably withheld or delayed; provided that the Borrower will promptly notify the Administrative Agent of any such Extensions to the extent that the Administrative Agent is not party thereto. All Extended Term Loans, Extended Revolving Commitments and all obligations in respect thereof shall be Obligations under this Agreement and the other Loan Documents that are secured by the Collateral on a pari passu basis with all other applicable Obligations under this Agreement and the other Loan Documents. The Lenders hereby irrevocably authorize the Administrative Agent and, to the extent applicable, the Collateral Agent, to enter into amendments to this Agreement and the other Loan Documents with the Borrower and other Loan Parties as may be necessary or advisable in order to establish new Classes in respect of Revolving Commitments or Term Loans so extended and such technical amendments as may be necessary, advisable or appropriate in the reasonable opinion of the Administrative Agent and the Borrower in connection with the establishment of such new Classes, in each case on terms consistent with this Section 2.24. In addition, any such amendment shall provide that, to the extent consented to by each relevant Issuing Bank, (a) with respect to any Letters of Credit the expiration date for which extend beyond the maturity date for the non-extended Revolving Commitments, participations in such Letters of Credit on such maturity date shall be reallocated from Lenders holding Revolving Commitments to Lenders holding Extended Revolving Commitments in accordance with the terms of such amendment (provided that such participation interests shall, upon receipt thereof by the relevant Lenders holding Revolving Commitments, be deemed to be participation interests in respect of such Revolving Commitments and the terms of such participation interests (including, without limitation, the commission applicable thereto) shall be adjusted accordingly) and (b) limitations on drawings of Revolving Loans and issuances, extensions and amendments to Letters of Credit shall be implemented giving effect to the foregoing reallocation prior to such reallocation actually occurring to ensure that sufficient Extended Revolving Commitments are available to participate in any such Letters of Credit. Without limiting the foregoing, in connection with any Extensions the respective Loan Parties shall (at their expense) amend (and the Administrative Agent is hereby directed to amend) any Mortgage that has a maturity date prior to the latest termination date of any Extended Term Loans or Extended Revolving Commitments so that such maturity date is extended to the latest termination date of any Extended Term Loans or Extended Revolving Commitments (or such later date as may be advised by local counsel to the Administrative Agent). No Lender shall be required to participate in any Extension.
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(d) In connection with any Extension, the Borrower shall provide the Administrative Agent at least 5 Business Days (or such shorter period as may be agreed by the Administrative Agent) prior written notice thereof, and shall agree to such procedures (to ensure reasonable administrative management of the credit facilities hereunder after such Extension), if any, as may be established by, or acceptable to, the Administrative Agent, in each case acting reasonably to accomplish the purposes of this Section 2.24.
Section 2.25 Term Loan Exchange Notes.
(a) The Borrower may by written notice to the Administrative Agent elect to offer (each a “Permitted Debt Exchange Offer”) to issue to Lenders holding any Class of Term Loans under this Agreement first priority senior secured notes and/or junior Lien secured notes and/or unsecured notes (the “Term Loan Exchange Notes”) in exchange for such Class of Term Loans (each such exchange, a “Permitted Debt Exchange”); provided that such Term Loan Exchange Notes may not be in an aggregate principal amount greater than the Term Loans being exchanged plus other Indebtedness that could otherwise be incurred hereunder (subject to a dollar-for-dollar usage of any basket (other than any basket that provides for Term Loan Exchange Notes) set forth in Section 6.01) plus unpaid accrued interest and premium (if any) thereon and underwriting discounts, fees, commissions and expenses in connection with the issuance of the Term Loan Exchange Notes. Each such notice shall specify the date (each, a “Term Loan Exchange Effective Date”) on which the Borrower proposes that the Term Loan Exchange Notes shall be issued, which shall be a date not less than five (5) Business Days after the date on which such notice is delivered to the Administrative Agent (or such shorter period as may be agreed by the Administrative Agent); provided that: (w) the Weighted Average Life to Maturity of such Term Loan Exchange Notes shall not be shorter than the then remaining Weighted Average Life to Maturity of the Class of Term Loans being exchanged (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Term Loans) and the Term Loan Exchange Notes shall not have a final maturity before the Term Loan Maturity Date then in effect for the Class or Classes of Term Loans being exchanged (it being understood that acceleration or mandatory repayment, prepayment, redemption or repurchase of such Term Loan Exchange Notes upon the occurrence of an event of default, a change in control, an event of loss or an asset disposition shall not be deemed to constitute a change in the stated final maturity thereof); (x) if secured, such Term Loan Exchange Notes shall rank pari passu or junior in right of payment and of security with the Loans and Commitments being exchanged hereunder; (y) all other terms and conditions (other than maturity, interest rates, pricing, amortization, AHYDO Catch-Up Payments, optional prepayment terms, and fees) applicable to such Term Loan Exchange Notes shall reflect market terms and conditions at the time of incurrence or issuance (as determined in good faith by the Borrower); provided that the Term Loan Exchange Notes shall not have the benefit of any financial maintenance covenant unless (i) the Term Loans have the benefit of such financial maintenance covenant on the same terms or (ii) the Term Loans have in the future been provided with the benefit of a financial maintenance covenant, in which case such Term Loan Exchange Notes issued after such future date may be provided with the benefit of the same financial maintenance covenant on the same terms; and (z) the obligations in respect of the Term Loan Exchange Notes (A) shall not be secured by Liens on any asset of the Parent or any of its Restricted Subsidiaries other than assets constituting Collateral, (B) (x) if such Term Loan Exchange Notes are secured on a paripassu basis with the Obligations, the Senior Representative for such Term Loan Exchange Notes shall enter into the Pari Passu Intercreditor Agreement or other customary intercreditor agreement and (y) if such Term Loan Exchange Notes are secured on a junior basis to the Obligations, the Senior Representative for such Term Loan Exchange Notes shall enter into a Second Lien Intercreditor Agreement or other customary intercreditor agreement, in each case with the Administrative Agent and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (I) any immaterial changes and (II) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations), or (C) shall not be incurred or Guaranteed by any Restricted Subsidiary unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently Guaranteed or borrowed such Term Loans being exchanged.
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(b) The Borrower shall offer to issue Term Loan Exchange Notes in exchange for the Class of Term Loans to all Lenders holding such Class of Term Loans (other than any Lender that, if requested by the Borrower, is unable to certify that it is (i) a “qualified institutional buyer” (as defined in Rule 144A under the Securities Act), (ii) an institutional “accredited investor” (as defined in Rule 501 under the Securities Act) or (iii) not a “U.S. person” (as defined in Rule 902 under the Securities Act)) on a pro rata basis, and such Lenders may choose to accept or decline to receive such Term Loan Exchange Notes in their sole discretion. Any such Term Loans exchanged for Term Loan Exchange Notes shall be automatically and immediately, without further action by any Person, cancelled on the Term Loan Exchange Effective Date for all purposes of this Agreement (and, if requested by the Administrative Agent, any applicable exchanging Lender shall execute and deliver to the Administrative Agent an Assignment and Assumption, or such other form as may be reasonably requested by the Administrative Agent, in respect thereof pursuant to which the respective Lender assigns its interest in the Term Loans being exchanged pursuant to the Permitted Debt Exchange to the Borrower for immediate cancellation), and accrued and unpaid interest on such Term Loans shall be paid to the exchanging Lenders on the Term Loan Exchange Effective Date, or, if agreed to by the Borrower and the Administrative Agent, the next scheduled Interest Payment Date with respect to such Term Loans (with such interest accruing until the date of consummation of such Permitted Debt Exchange).
(c) If the aggregate principal amount of all Term Loans (calculated on the face amount thereof) of a given Class tendered by Lenders in respect of the relevant Permitted Debt Exchange Offer (with no Lender being permitted to tender a principal amount of Term Loans which exceeds the principal amount thereof of the applicable Class actually held by it) shall exceed the maximum aggregate principal amount of Term Loans of such Class offered to be exchanged by the Borrower pursuant to such Permitted Debt Exchange Offer, then the Borrower shall exchange Term Loans under the relevant Class tendered by such Lenders ratably up to such maximum based on the respective principal amounts so tendered, or, if such Permitted Debt Exchange Offer shall have been made with respect to multiple Classes without specifying a maximum aggregate principal amount offered to be exchanged for each Class, and the aggregate principal amount of all Term Loans (calculated on the face amount thereof) of all Classes tendered by Lenders in respect of the relevant Permitted Debt Exchange Offer (with no Lender being permitted to tender a principal amount of Term Loans which exceeds the principal amount thereof actually held by it) shall exceed the maximum aggregate principal amount of Term Loans of all relevant Classes offered to be exchanged by the Borrower pursuant to such Permitted Debt Exchange Offer, then the Borrower shall exchange Term Loans across all Classes subject to such Permitted Debt Exchange Offer tendered by such Lenders ratably up to such maximum amount based on the respective principal amounts so tendered.
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(d) With respect to all Permitted Debt Exchanges effected by the Borrower pursuant to this Section 2.25, unless waived by the Borrower, such Permitted Debt Exchange Offer shall be made for not less than $25,000,000 in aggregate principal amount of Term Loans; provided that subject to the foregoing the Borrower may at its election specify (A) as a condition to consummating any such Permitted Debt Exchange that a minimum amount (to be determined and specified in the relevant Permitted Debt Exchange Offer in the Borrower’s discretion) of Term Loans of any or all applicable Classes be tendered and/or (B) as a condition to consummating any such Permitted Debt Exchange that no more than a maximum amount (to be determined and specified in the relevant Permitted Debt Exchange Offer in the Borrower’s discretion) of Term Loans of any or all applicable Classes will be accepted for exchange. The Administrative Agent and the Lenders hereby acknowledge and agree that this Section 2.25 shall supersede any provisions of Section 2.11, Section 2.18 and Section 9.02 to the contrary, waive the requirements of any other provision of this Agreement or any other Loan Document that may otherwise prohibit the incurrence of any Indebtedness expressly provided for by this Section 2.25 and hereby agree not to assert any Default or Event of Default in connection with the implementation of any such Permitted Debt Exchange or any other transaction contemplated by this Section 2.25.
(e) In connection with each Permitted Debt Exchange, the Borrower shall provide the Administrative Agent at least five (5) Business Days’ (or such shorter period as may be agreed by the Administrative Agent) prior written notice thereof, and the Borrower and the Administrative Agent, acting reasonably, shall mutually agree to such procedures as may be necessary or advisable to accomplish the purposes of this Section 2.25; provided that the terms of any Permitted Debt Exchange Offer shall provide that the date by which the relevant Lenders are required to indicate their election to participate in such Permitted Debt Exchange shall be not less than ten days following the date on which the Permitted Debt Exchange Offer is made. The Borrower shall provide the final results of such Permitted Debt Exchange to the Administrative Agent no later than three (1) Business Day prior to the proposed date of effectiveness for such Permitted Debt Exchange and the Administrative Agent shall be entitled to conclusively rely on such results.
(f) The Borrower shall be responsible for compliance with, and hereby agrees to comply with, all applicable securities and other laws in connection with each Permitted Debt Exchange, it being understood and agreed that (x) neither the Administrative Agent nor any Lender assumes any responsibility in connection with the Borrower’s compliance with such laws in connection with any Permitted Debt Exchange and (y) each Lender shall be solely responsible for its compliance with any applicable “insider trading” laws and regulations to which such Lender may be subject under the Securities Exchange Act of 1934, as amended.
Article III
Representations and Warranties
Each of the Parent, Holdco and the Borrower represents and warrants to the Lenders that (it being understood that the following representations and warranties shall be deemed made with respect to any Foreign Subsidiary only to the extent relevant under applicable law); provided that, on the Effective Date, each such Person’s representations and warranties shall be limited to the Specified Representations:
Section 3.01 Organization; Powers. Each of the Parent and the Material Subsidiaries is (a) duly organized or incorporated, validly existing and, to the extent such concept is applicable in the corresponding jurisdiction, in good standing under the laws of the jurisdiction of its organization or incorporation and (b) has all requisite organizational or constitutional power and authority to (i) carry on its business as now conducted and as proposed to be conducted and (ii) execute, deliver and perform its obligations under each Loan Document to which it is a party, except in the case of clauses (a) and (b), where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
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Section 3.02 Authorization; Enforceability. This Agreement (and the lending transactions contemplated hereby to occur on the Effective Date) has been duly authorized by all necessary corporate, shareholder or other organizational action by each of the Parent, Holdco and the Borrower, and constitutes, and each other Loan Document to which any Loan Party is a party has been duly authorized by all necessary corporate, shareholder or other organizational action by such Loan Party, and each Loan Document constitutes, or when executed and delivered by such Loan Party, will constitute, a legal, valid and binding obligation of the Parent, Holdco, the Borrower or such other Loan Party (as the case may be), enforceable in accordance with its terms, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and subject to general principles of equity, regardless of whether considered in a proceeding in equity or at law and other matters which are set out as qualifications or reservations as to matters of law of general application in any legal opinion delivered pursuant to the Loan Documents, (ii) the need for filings and registrations necessary to create or perfect the Liens on the Collateral granted by the Loan Parties in favor of the Secured Parties and (iii) with respect to enforceability against Foreign Subsidiaries or under foreign laws, the effect of foreign laws, rules and regulations as they relate to pledges, if any, of Equity Interests in Foreign Subsidiaries and intercompany Indebtedness owed by Foreign Subsidiaries.
Section 3.03 Governmental Approvals; No Conflicts. The execution, delivery and performance by the Loan Parties of the Loan Documents to which such Loan Parties are a party (a) do not require any material consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except (i) such as have been obtained or made and are in full force and effect, in each case as of the Effective Date, (ii) filings and registrations of charges necessary to perfect Liens created under the Loan Documents and to release existing Liens (if any), (iii) stamping of any relevant Loan Documents, and (iv) those consents, approvals, registrations, filings or other actions, the failure of which to obtain or make would not reasonably be expected to result in a Material Adverse Effect, (b) will not violate any Organizational Document of the Parent, Holdco or any other Loan Party, (c) will not violate any Requirement of Law applicable to the Parent or any Restricted Subsidiary, (d) will not violate or result in a default under any indenture, agreement or other instrument in each case constituting Material Indebtedness binding upon the Parent or any Restricted Subsidiary or their respective assets, or give rise to a right thereunder to require any payment to be made by the Parent or any Restricted Subsidiary or give rise to a right of, or result in, termination, cancelation or acceleration of any obligation thereunder, in each case as of the Effective Date and (e) will not result in the creation or imposition of any Lien on any asset of the Parent or any Restricted Subsidiary, except Liens created under the Loan Documents and Liens permitted under Section 6.02; except in the cases of clauses (a), (c) and (d) above where such violations, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
Section 3.04 Financial Condition; No Material Adverse Change.
(a) The Borrower has heretofore furnished to the Administrative Agent the Micro Focus Historical Financial Statements and the Seattle Historical Financial Statements. Such Micro Focus Historical Financial Statements, present fairly in all material respects the consolidated financial position and consolidated results of operations and consolidated cash flows of the Parent and its subsidiaries as of such dates and for such periods in accordance in all material respects with IFRS and subject to, in the case of the unaudited financial statements, the absence of footnotes, changes resulting for year-end audit adjustments and any other adjustments disclosed therein (including the notes thereto), and the inclusion of explanatory notes. To the knowledge of the Borrower, such Seattle Historical Financial Statements present fairly, in all material respects, the combined financial position and the combined results of operations and combined cash flows of the Seattle Business as of such dates and for such periods in accordance in all material respects with GAAP, subject, in the case of the unaudited financial statements, to changes resulting from year-end audit adjustments and to any other adjustments described therein (including the notes thereto), the absence of footnotes and the inclusion of explanatory notes.
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(b) No event, change or condition has occurred that has had, or would reasonably be expected to have, a Material Adverse Effect after the earlier of the Acquisition Closing Date and the Applicable Acquisition Consummation Deadline.
Each Lender and the Administrative Agent hereby acknowledges and agrees that the Parent and its Subsidiaries or the Company and its subsidiaries may be required to restate historical financial statements as the result of the implementation of changes in GAAP or IFRS, or the respective interpretation thereof, and that such restatements will not result in a Default or an Event of Default under the Loan Documents.
Section 3.05 Properties.
(a) Each of the Parent and the Restricted Subsidiaries has good title to, valid leasehold interests in, or rights to use, all its real and personal property material to its business, except for Liens permitted under Section 6.02 and minor defects in title and except where the failure to have such interest would not reasonably be expected to have a Material Adverse Effect.
(b) Each of the Parent and the Restricted Subsidiaries owns or has the right to use all Intellectual Property that is necessary for the operation of their respective businesses as currently conducted, except where the failure of the foregoing would not reasonably be expected to have a Material Adverse Effect.
Section 3.06 Litigation and Environmental Matters.
(a) There are no actions, suits, investigations or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened in writing against the Parent or any Restricted Subsidiary as to which there is a reasonable possibility of an adverse determination and that, if adversely determined would reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters).
(b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect, none of the Parent nor any Restricted Subsidiary (i) has failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) has become subject to any Environmental Liability or (iii) has received written notice of any claim with respect to any Environmental Liability.
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Section 3.07 Compliance with Laws.
Each of the Parent and the Restricted Subsidiaries is in compliance with all Requirements of Law applicable to it or its property, except, where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
Section 3.08 Investment Company Status. None of the Parent, Holdco, the Borrower or any other Loan Party is required to be registered as an “investment company” as defined in, or subject to regulation under, the Investment Company Act of 1940.
Section 3.09 Taxes. Each of the Parent and the Restricted Subsidiaries (a) has timely filed or caused to be filed all Tax returns and reports required to have been filed, except to the extent that failure to do so would not reasonably be expected to result in a Material Adverse Effect, and (b) has paid or caused to be paid all Taxes required to have been paid by it, except (x) any Taxes the failure to pay would not reasonably be expected to result in a Material Adverse Effect or (y) any Taxes that are being contested in good faith by appropriate proceedings for which adequate reserves have been provided in accordance with GAAP, IFRS or other applicable foreign accounting principles.
Section 3.10 ERISA. No ERISA Event or similar event with respect to any Foreign Plan has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events or similar event with respect to any Foreign Plan for which liability is reasonably expected to occur, would reasonably be expected to result in a Material Adverse Effect.
Section 3.11 Disclosure. All written information concerning the Parent, the Company and their respective subsidiaries and their respective businesses furnished by or on behalf of the Parent or any Restricted Subsidiary to the Administrative Agent in connection with the transactions (other than projections, estimates, budgets, forecasts, pro forma financial information and other forward-looking information and information of a general economic or general industry nature and other general market data), when taken as a whole, do not, as of the date furnished, contain any untrue statement of a material fact or omit to state any material fact (solely in the case of this representation when made on or prior to the Acquisition Closing Date, known to the Borrower in the case of any document not furnished by or on behalf of it) necessary to make the statements therein not materially misleading in the light of the circumstances under which they were made (after giving effect to all supplements and updates thereto from time to time). Any projections and pro forma financial information contained in such materials (including any Projections) are based upon good faith estimates and assumptions believed by the Borrower to be reasonable at the time made, it being understood by the Agents and the Lenders that such projections as to future events (i) are not to be viewed as facts, (ii)(A) are subject to significant uncertainties and contingencies, which may be beyond the control of the Loan Parties, (B) no assurance is given by the Loan Parties that the results or forecast in any such projections will be realized and (C) the actual results may differ from the forecast results set forth in such projections and such differences may be material and (iii) are not a guarantee of performance and that actual results during the period or periods covered by any such projections may vary significantly from the projected results and such differences may be material.
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Section 3.12 Labor Matters. As of the Effective Date, there are no strikes, work stoppages or material labor disputes against the Parent or any Restricted Subsidiary pending or, to the actual knowledge of the Borrower, threatened in writing, in each case, that would reasonably be expected to have a Material Adverse Effect.
Section 3.13 Subsidiaries. As of the Effective Date, Schedule 3.13 sets forth, the name of and the ownership by the Parent and its Subsidiaries in, each Subsidiary (other than Foreign Subsidiaries which are inactive, dormant or have only de minimis assets) and identifies each Subsidiary that is a Loan Party as of the Effective Date; provided that inaccuracies in the name and ownership of any Foreign Subsidiary that is not a Material Subsidiary shall be deemed not material for all purposes under this Agreement and the other Loan Documents.
Section 3.14 Solvency. As of the Effective Date, after giving effect to the consummation of the Transactions, the Parent and its Subsidiaries, when taken as a whole, are Solvent.
Section 3.15 Federal Reserve Regulations.
(a) None of the Parent or any Restricted Subsidiary is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock.
(b) Taking into account all of the Transactions, no part of the proceeds of the Loans will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, for any purpose that entails a violation of the provisions of the Regulations of the Board, including Regulation T, U or X.
Section 3.16 [Reserved].
Section 3.17 Use of Proceeds. The proceeds of the Term Loans and the Revolving Loans will be used in accordance with Section 5.10; provided that the proceeds of any Incremental Facility may be used for any purpose agreed to by the lenders thereof.
Section 3.18 Security Documents. The Security Documents, upon execution and delivery by the parties thereto, are effective to create in favor of the Collateral Agent for the benefit of the applicable Secured Parties legal, valid and enforceable (subject to (a) applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors’ rights generally and general principles of equity, regardless of whether considered in a proceeding in equity or at law and other matters which are set out as qualifications or reservations as to matters of law of general application in any legal opinion delivered pursuant to the Loan Documents, (b) any filings, notices and registrations and other perfection requirements necessary to create or perfect the Liens on the Collateral granted by the Loan Parties in favor of the Secured Parties (which filings or recordings shall be made to the extent required by any Security Document) and (c) with respect to enforceability against Foreign Subsidiaries or under non-U.S. laws, the effect of non-U.S. laws, rules and regulations as they relate to pledges, if any, of Equity Interests in Foreign Subsidiaries and intercompany Indebtedness owed by Foreign Subsidiaries and other items of Collateral subject to unique local law perfection requirements) first priority Liens on, and security interests in, the Collateral, subject to Liens permitted pursuant to Section 6.02 and, (i) when all appropriate filings, notices or recordings are made in the appropriate offices, corporate records or with the appropriate Persons as may be required under applicable laws and/or any Security Document (which filings, notices or recordings shall be made to the extent required by any Security Document) and (ii) upon the taking of possession or control by the Collateral Agent of such Collateral with respect to which a security interest may be perfected only by possession or control (which possession or control shall be given to the Collateral Agent to the extent required by any Security Document), such Security Document will constitute perfected Liens on, and security interests in, all right, title and interest of the Loan Parties in such Collateral, subject to Liens permitted pursuant to Section 6.02.
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Section 3.19 OFAC; FCPA; Patriot Act.
(a) On the Effective Date and in connection with the consummation of the Seattle Acquisition, the Borrower will not use the proceeds of the Loans or otherwise knowingly make available such proceeds to any Person, in each case for the purpose of financing the activities of any Person subject to any sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”) or Her Majesty’s Treasury in violation of the OFAC or Her Majesty’s Treasury.
(b) On the Effective Date and in connection with the consummation of the Seattle Acquisition, no part of the proceeds of the Loans will be used by or at the direction of the Parent or any of its Subsidiaries for any payments to any governmental official or employee, political party, official of a political party, candidate for political office, or anyone else acting in an official capacity, in order to obtain, retain or direct business or obtain any improper advantage, in violation of the United States Foreign Corrupt Practices Act of 1977 or the Bribery Act 2010 of the United Kingdom.
(c) On the Effective Date and in connection with the consummation of the Seattle Acquisition, to the extent applicable, no part of the proceeds of the Loans will be used by or at the direction of Parent and the other Loan Parties in violation of the Patriot Act, the Terrorism Act 2000, Anti-Terrorism Crime & Security Act 2001, Proceeds of Crime Act 2002, Money Laundering Regulations 2007, or the Bribery Act 2010 of the United Kingdom.
(d) Except as would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, none of Parent or any of its Subsidiaries has, in the past three years, committed a violation of any Anti-Corruption Laws. Except as would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, none of Parent, any of its Subsidiaries or, to the knowledge of the Borrower, any director, officer or employee thereof is an individual or entity currently the subject of Sanctions, nor is Parent or any of its Subsidiaries located, organized or resident in a country or territory that is the subject of Sanctions.
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Article IV
Conditions
Section 4.01 Effective Date. The effectiveness of this Agreement, the rollover of the Tranche B-2 Term Loans as described in Section 2.01(a)(i), the conversion and deemed issuance of the Tranche B-3 Term Loans as described in Section 2.01(a)(ii) and the conversion and deemed issuance of the Euro Tranche Term Loans as described in Section 2.01(a)(iii) shall become effective upon the satisfaction (or waiver) of the conditions set forth in Section 9 of Amendment No. 3.
Section 4.02 Each Credit Event. The obligation of (i) each Lender to make a Loan on the occasion of any Borrowing of Revolving Loans after the Effective Date and (ii) the Issuing Bank to issue, renew, increase or extend any Letter of Credit after the Effective Date (each event referred to in clause (i) and (ii) above, a “Credit Event”), is subject to receipt of the request therefor in accordance herewith and to the satisfaction (or waiver) of the following express conditions (except as hereinafter indicated, including in connection with any Incremental Loans or Incremental Facility, as provided therein):
(a) Except as expressly set forth herein, the representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all material respects, in each case on and as of the date of such Credit Event (or true and correct in all material respects as of a specified date, if earlier).
(b) Except as expressly set forth herein, at the time of and immediately after giving effect to such Credit Event, no Default or Event of Default shall have occurred and be continuing.
(c) Except as expressly set forth herein, the Administrative Agent shall have received a Borrowing Request meeting the requirements of Section 2.03 (other than in connection with an Incremental Loan).
Except as expressly set forth herein, each Borrowing (provided that a conversion or a continuation of a Borrowing shall not constitute a “Borrowing” for purposes of this Section) and each issuance, renewal, increase or extension of a Letter of Credit (other than any Borrowing or issuance of a Letter of Credit on the Effective Date) shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section.
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Article V
Affirmative Covenants
From and after the Effective Date and until the Termination Date, each of the Parent, Holdco and the Borrower covenant and agree with the Lenders that:
Section 5.01 Financial Statements and Other Information. The Parent will furnish to the Administrative Agent which will furnish to the Lenders:
(a) within 125 days after the end of each fiscal year of the Parent, the audited consolidated statement of financial position and audited consolidated statements of comprehensive income, changes in equity and cash flows as of the end of and for such year for the Parent and its Subsidiaries, and related notes thereto, accompanied by management discussion and analysis, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by any “big four” auditors, other auditors of recognized national standing or other auditors reasonably acceptable to the Administrative Agent, with an unmodified report by such auditors without an emphasis of matter paragraph related to going concern as defined by ISA 570 (or any similar statement under any amended or successor rule as may be adopted by the International Auditing and Assurance Standards Board from time to time) (except to the extent such emphasis paragraph results solely from (i) a current maturity of any Indebtedness or (ii) any inability or potential inability to satisfy the covenant under Section 6.12 or any other financial covenant in any agreement, whether at such time or on a future date or in a future period), to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Parent and its Subsidiaries on a consolidated basis in accordance in all material respects with IFRS (except as otherwise disclosed in such financial statements);
(b) (i) within 92 days, after the end of the second fiscal quarter of the Parent of each fiscal year of the Parent, the unaudited consolidated statement of financial position and unaudited consolidated statements of comprehensive income and cash flows as of the end of and for such six month period of the first two fiscal periods and the then elapsed portion of the fiscal year of the Parent, accompanied by management discussion and analysis, setting forth in comparative form the figures for the corresponding period or periods of (or, in the case of the statement of financial position, as of the end of) the previous fiscal year, all certified by its Financial Officer as presenting fairly in all material respects the financial condition and results of operations of the Parent and its Subsidiaries on a consolidated basis in accordance in all material respects with IFRS (except as otherwise disclosed in such financial statements), subject to normal year-end audit adjustments and the absence of footnotes, and (ii) within 45 days (or in the case of the first two such fiscal quarters to occur after the Effective Date, 60 days) after the end of each of the first and third fiscal quarters of each fiscal year of the Parent, in each case, the unaudited consolidated statement of financial position and unaudited consolidated statements of comprehensive income and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year for the Parent and its Subsidiaries, accompanied by management discussion and analysis, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the statement of financial position, as of the end of) the previous fiscal year, all certified by its Financial Officer as presenting fairly in all material respects the financial condition and results of operations of the Parent and its Subsidiaries on a consolidated basis in accordance in all material respects with IFRS (except as otherwise disclosed in such financial statements), subject to normal year-end audit adjustments and the absence of footnotes, which quarterly financial statements delivered pursuant to this clause (b)(ii) shall be designated “Private Side Information” and shall only be made available to Private Lenders;
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(c) concurrently with the delivery of any financial statements under paragraphs (a) and (b) above, a Compliance Certificate (i) certifying as to whether a Default exists and, if a Default exists, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations (A) during any fiscal quarter during which the covenant contained in Section 6.12 is in effect pursuant to the last sentence of Section 6.12, demonstrating compliance or non-compliance with such covenant (provided that any such calculations set forth in the Compliance Certificate delivered with the financial statements under paragraph (b)(ii) for the first and third fiscal quarters of each fiscal year of the Parent will be designated “Private Side Information” and will only be made available to Private Lenders) and (B) in the case of financial statements delivered under paragraph (a) above, beginning with the financial statements for the fiscal year of the Parent ending October 31, 2019, of Excess Cash Flow for such fiscal year and (iii) stating whether any material change in IFRS or in the application thereof has occurred since the date of the then most recently delivered audited financial statements that would affect the compliance or non-compliance with any financial ratio or requirement in this Agreement and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate;
(d) not later than 120 days after the end of each fiscal year of the Parent (beginning with the fiscal year ending October 31, 2018), a reasonably detailed consolidated budget for the following fiscal year as customarily prepared by management of the Parent for its internal use consistent in scope with the financial statements provided pursuant to Section 5.01(a) setting forth the principal assumptions upon which such budget is based (collectively, the “Projections”), it being understood and agreed that any financial or business projections furnished by any Loan Party (i)(A) are subject to significant uncertainties and contingencies, which may be beyond the control of the Loan Parties, (B) no assurance is given by the Loan Parties that the results or forecast in any such projections will be realized and (C) the actual results may differ from the forecast results set forth in such projections and such differences may be material and (ii) are not a guarantee of performance;
(e) promptly after the same become publicly available, copies of all shareholder circulars and all material periodic and other reports and other materials published by the Parent or any Restricted Subsidiary through a Regulatory Information Service pursuant to the Disclosure and Transparency Rules or filed with the UKLA or with any national securities exchange;
(f) simultaneously with the delivery of each set of consolidated financial statements referred to in Section 5.01(a) or (b) above, the related consolidating financial statements reflecting the adjustments necessary to eliminate the accounts of Unrestricted Subsidiaries (if any) from such consolidated financial statements; and
(g) promptly following any reasonable request therefor, such other information regarding the operations, business affairs and financial condition of the Parent or any Restricted Subsidiary as the Administrative Agent may reasonably request, including information requested on behalf of any Lender to comply with Section 9.14; provided that none of the Parent or any Restricted Subsidiary will be required to disclose or permit the inspection or discussion of, any document, information or other matter (i) that constitutes trade secrets or proprietary information, (ii) in respect of which disclosure to the Administrative Agent or any Lender (or their representatives or contractors) is prohibited by law, fiduciary duty or any binding agreement or (iii) that is subject to attorney client or similar privilege or constitutes attorney work product.
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In the event the Parent changes its fiscal year as permitted pursuant to Section 6.13, notwithstanding anything to the contrary in this Section 5.01, the first accounting period after the Merger for which audited financial statements shall be required shall be for the eighteen (18) month period ending October 31, 2018, and during this extended accounting period, the Parent shall furnish to the Administrative Agent unaudited financial statements of the type described in Section 5.01(b) for the six (6) month period ended October 31, 2017 and for the six (6) month period ended April 30, 2018, and comparative figures for the corresponding period or periods of the previous year shall not be required.
Any financial statement or other document, reports or other materials (to the extent any such financial statement or document, reports or other materials included in materials otherwise published through a Regulatory Information Service pursuant to the Disclosure and Transparency Rules or with the UKLA or with any national securities exchange) required to be delivered pursuant to this Section 5.01 may be satisfied with respect to such financial statements or other documents, reports or other materials by the publishing of the Parent’s interim financial statements required under Section 5.01(b) through a Regulatory Information Service pursuant to the Disclosure and Transparency Rules or with the UKLA or with any national securities exchange. All financial statements and other documents, reports, proxy statements or other materials required to be delivered pursuant to this Section 5.01 or Section 5.02 may be delivered electronically and, if so delivered, shall be deemed to have been delivered on the date (i) such financial statements and/or other documents are published through a Regulatory Information Service pursuant to the Disclosure and Transparency Rules or with the UKLA or with any national securities exchange, (ii) on which the Parent posts such documents, or provide a link thereto, on the Parent’s website or (iii) on which such documents are posted on the Parent’s behalf on an Internet or Intranet website, if any, to which the Administrative Agent and each Lender has access (whether a commercial third-party website or a website sponsored by the Administrative Agent and whether or not any such Lender has elected to be a Public Lender), provided that (A) the Borrower shall, at the request of the Administrative Agent, continue to deliver copies (which delivery may be by electronic transmission (including Adobe pdf copy)) of such documents (other than pursuant to clauses (a) and (b) of this Section 5.01) to the Administrative Agent and (B) the Borrower shall notify (which notification may be by facsimile or electronic transmission (including Adobe pdf copy)) the Administrative Agent of the posting of any such documents on any website. Each Lender shall be solely responsible for timely accessing posted documents or requesting delivery of paper copies of such documents from the Administrative Agent and maintaining its copies of such documents.
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The Borrower hereby acknowledges that (a) the Administrative Agent will make available to the Lenders and the Issuing Bank materials and/or information provided by or on behalf of the Borrower hereunder (collectively, “Borrower Materials”) by posting the Borrower Materials on IntraLinks or another similar electronic system (the “Platform”) and (b) certain of the Lenders (each, a “Public Lender”) may have personnel who do not wish to receive material non-public information with respect to the Parent or any of its Subsidiaries, or any of their respective securities, and who may be engaged in investment and other market-related activities with respect to such Persons’ securities. The Borrower hereby agrees that it will use commercially reasonable efforts to identify that portion of the Borrower Materials that are to be made available to Public Lenders; (x) by marking Borrower Materials “PUBLIC,” the Borrower shall be deemed to have authorized the Administrative Agent, the Lead Arrangers, the Issuing Bank and the Lenders to treat such Borrower Materials as not containing any material non-public information (although it may be sensitive and proprietary) with respect to Parent, Holdco, the Borrower or their respective securities for purposes of applicable securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall remain subject to the provisions of Section 9.12); (y) all Borrower Materials marked “PUBLIC” are permitted to be made available through a portion of the Platform designated “Public Side Information;” and (z) the Administrative Agent shall be entitled to treat the Borrower Materials that are not marked “PUBLIC” as being suitable only for posting on a portion of the Platform not designated “Public Side Information” (it being understood that the Borrower shall be under no obligation to mark any Borrower Materials “PUBLIC”). Notwithstanding the foregoing, to the extent the Borrower has had a reasonable opportunity to review, the following Borrower Materials shall be deemed to be marked “PUBLIC,” unless the Borrower notifies the Administrative Agent promptly that any such document contains material non-public information: (1) the Loan Documents and (2) notification of changes in the terms of the Loans.
Each Public Lender agrees to cause at least one individual at or on behalf of such Public Lender to at all times have selected the “Private Side Information” or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lender’s compliance procedures and applicable law, including foreign, United States Federal and state securities laws, to make reference to Communications that are not made available through the “Public Side Information” portion of the Platform and that may contain material non-public information with respect to Parent, Holdco, the Borrower or any of their respective securities for purposes of foreign, United States Federal or state securities laws.
THE PLATFORM IS PROVIDED “AS IS” AND “AS AVAILABLE.” THE ADMINISTRATIVE AGENT DOES NOT WARRANT THE ACCURACY OR COMPLETENESS OF THE BORROWER MATERIALS OR THE ADEQUACY OF THE PLATFORM, AND EXPRESSLY DISCLAIMS LIABILITY FOR ERRORS IN OR OMISSIONS FROM THE BORROWER MATERIALS. NO WARRANTY OF ANY KIND, EXPRESS, IMPLIED OR STATUTORY, INCLUDING ANY WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT OF THIRD PARTY RIGHTS OR FREEDOM FROM VIRUSES OR OTHER CODE DEFECTS, IS MADE BY THE ADMINISTRATIVE AGENT IN CONNECTION WITH THE BORROWER MATERIALS OR THE PLATFORM.
Section 5.02 Notices of Material Events. The Borrower will furnish to the Administrative Agent (for distribution to each Lender through the Administrative Agent) prompt written notice of a Responsible Officer of the Borrower’s obtaining knowledge of any of the following:
(a) the occurrence of any Default or Event of Default, in each case, except to the extent the Administrative Agent shall have furnished the Borrower written notice thereof;
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(b) the filing or commencement of any action, suit or proceeding by or before any arbitrator or Governmental Authority against or, to the knowledge of a Responsible Officer of the Borrower, threatened in writing against the Parent or any Restricted Subsidiary, that would reasonably be expected to be adversely determined and if adversely determined, would reasonably be expected to result, after giving effect to the coverage and policy limits of applicable insurance policies, in a Material Adverse Effect;
(c) the occurrence of any ERISA Event or similar event with respect to any Foreign Plan that, in either case, would reasonably be expected to result in a Material Adverse Effect; and
(d) any other development (including notice of any claim or condition arising under or relating to any Environmental Law) that results in, or would reasonably be expected to result in, a Material Adverse Effect.
Each notice delivered under this Section shall be accompanied by a written statement of a Responsible Officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. Documents required to be delivered pursuant to this Section 5.02 may be delivered electronically in accordance with Section 5.01.
Section 5.03 Semi-Annual Lender Call. At the reasonable request of the Administrative Agent, but not more than twice in any fiscal year (and no more than once in any two consecutive quarter periods), within a reasonable period of time following delivery of the financial statements pursuant to Section 5.01(a) or Section 5.01(b)(i) and at a mutually agreeable time (which shall be the same time the Parent holds such conference call with the Seattle Lenders), the Borrower will hold a semi-annual conference call with Lenders to review the consolidated financial results of operations of the Parent covered by such financial statements.
Section 5.04 Existence; Conduct of Business. The Parent will, and will cause each Restricted Subsidiary to, do or cause to be done all things reasonably necessary to obtain, preserve, renew and keep in full force and effect (a) its legal existence (except as otherwise permitted hereunder) and (b) the rights, licenses, permits, privileges, franchises, Intellectual Property necessary to conduct its business, except, in the case of clauses (a) (other than with respect to the Borrower) and (b), to the extent that failure to do so would not reasonably be expected to result in a Material Adverse Effect, provided that the foregoing shall not prohibit any transaction otherwise permitted hereunder.
Section 5.05 Payment of Taxes. The Parent will, and will cause each Restricted Subsidiary to, pay all Tax liabilities, before any penalty accrues thereon, except where (a)(i) any such payment is being contested in good faith by appropriate proceedings and (ii) the Parent or such Restricted Subsidiary has set aside on its books adequate reserves or other appropriate provision with respect thereto in accordance with IFRS or (b) the failure to make payment would not reasonably be expected to result in a Material Adverse Effect.
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Section 5.06 Maintenance of Properties. Except if the failure to do so would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect, the Parent will, and will cause each Restricted Subsidiary to, keep and maintain all property material to the conduct of its business (other than any property referenced in Section 5.04) in good working order and condition, ordinary wear and tear excepted and casualty or condemnation excepted, provided that the foregoing shall not prohibit any transaction otherwise permitted hereunder.
Section 5.07 Insurance. The Parent will, and will cause each Restricted Subsidiary to, maintain, with financially sound and reputable insurance companies, (a) insurance in such amounts (after giving effect to any self-insurance reasonable and customary for similarly-situated Persons engaged in the same or similar business) and against such risks as is (i) customarily maintained by companies engaged in the same or similar businesses operating in the same or similar locations as reasonably determined by management of the Parent and (ii) considered adequate by the Parent. The Borrower will furnish to the Administrative Agent, promptly following written request, information in reasonable detail as to the insurance so maintained; provided that so long as no Event of Default has occurred and is continuing, the Borrower shall only be required to provide such information one time in any fiscal year of the Parent. Without limiting the generality of the foregoing, the Borrower will, or will cause each US Loan Party to, maintain or cause to be maintained flood insurance with respect to each Flood Hazard Property that is located in a community that participates in the National Flood Insurance Program, in each case in compliance in all material respects with any applicable regulations of the Board. No later than ninety (90) days (as such period may be extended in the reasonable discretion of the Administrative Agent) after the Effective Date (or the date any such insurance is obtained, renewed or extended in the case of insurance obtained, renewed or extended after the Effective Date), the Borrower will cause all property and casualty insurance policies with respect to Collateral of the US Loan Parties to be endorsed or otherwise amended to include a lender’s loss payable, mortgagee or additional insured, as applicable, endorsement, or otherwise reasonably satisfactory to the Administrative Agent.
Section 5.08 Books and Records; Inspection and Audit Rights. The Parent will, and the Parent will cause each Restricted Subsidiary to, keep proper books of record and account in which full, true and correct entries (in all material respects) are made of all material financial transactions in relation to its business and activities. The Parent will, and will cause each Restricted Subsidiary to, permit any representatives designated by the Administrative Agent, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers, all at such reasonable times and as often as reasonably requested, provided that only the Administrative Agent on behalf of the Lenders may exercise rights under this Section 5.08 and the Administrative Agent shall not exercise such rights more often than one time during any fiscal year absent the existence of an Event of Default and, in any event, only one such time shall be at the Borrower’s expense, and provided, further, that when an Event of Default has occurred and is continuing the Administrative Agent (or any of its designated representatives) may do any of the foregoing at the expense of the Borrower at any time during normal business hours and upon reasonable advance notice. The Administrative Agent shall provide the Borrower the opportunity to participate in any discussions with any such independent accountants. Notwithstanding anything to the contrary in this Section 5.08, neither the Parent nor any Restricted Subsidiary will be required to disclose or permit the inspection or discussion of, any document, information or other matter (i) that constitutes trade secrets or proprietary information, (ii) in respect of which disclosure to the Administrative Agent or any Lender (or their representatives or contractors) is prohibited by law, fiduciary duty or any binding agreement or (iii) that is subject to attorney client or similar privilege or constitutes attorney work product.
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Section 5.09 Compliance with Laws. The Parent will, and will cause each Restricted Subsidiary to, comply with all Requirements of Law (including, without limitation, OFAC, FCPA, the Patriot Act, the Terrorism Act 2000, Anti-Terrorism Crime & Security Act 2001, Proceeds of Crime Act 2002, Money Laundering Regulations 2007, and the Bribery Act 2010 of the United Kingdom (it being understood that any Foreign Subsidiary will only be required to comply with the relevant corresponding local laws)) with respect to it or its property, except where the failure to do so, individually or in the aggregate, would not reasonably be expected to result in a Material Adverse Effect.
Section 5.10 Use of Proceeds.
(a) The proceeds of the Initial Term Loans will be used, directly or indirectly, by the Borrower (i) together with cash on hand, to consummate the Transactions, including the payment of the Transaction Costs and (ii) for general corporate purposes. The proceeds of the Initial Revolving Borrowing will be used on the Effective Date and the Acquisition Closing Date, in an amount not to exceed $100,000,000 to consummate the Transactions, including the payment of Transaction Costs, and for working capital and other general corporate purposes.
(b) The proceeds of the Revolving Loans and any other Loans borrowed after the Effective Date and Letters of Credit will be used for working capital, capital expenditures, general corporate purposes and any other purpose of the Parent and its Subsidiaries not otherwise prohibited under this Agreement (including, without limitation, Restricted Payments, Investments, Acquisitions and to fund Transaction Costs).
(c) No part of the proceeds of any Loan will be used, whether directly or indirectly, for any purpose that entails a violation of any of the Regulations of the Board, including Regulations T, U and X.
Section 5.11 Execution of Subsidiary Guaranty and Security Documents after the Effective Date.
(a) Subject to Section 5.12(b), (c) and (d), in the event that any Person becomes a Domestic Restricted Subsidiary (including any Unrestricted Subsidiary that becomes a Domestic Restricted Subsidiary) after the date hereof (other than any Restricted Subsidiary for so long as it is an Excluded Subsidiary) or any Domestic Restricted Subsidiary (including any Electing Guarantor) ceases to be an Excluded Subsidiary, the Parent, Holdco, the Borrower or other applicable Loan Parties will promptly (and in no event later than 60 days thereafter or such later date as the Administrative Agent may agree in its reasonable discretion) notify Administrative Agent of that fact and cause such Domestic Restricted Subsidiary to execute and deliver to the Administrative Agent counterparts of the Subsidiary Guaranty (or Parent Companies Guaranty, as applicable) and the US Collateral Agreement and each other US Security Document and to take all such further actions and execute all such further documents and instruments as required by the US Collateral Agreement and each other US Security Document to secure the Secured Obligations for the benefit of the Secured Parties (including all actions necessary to cause such Lien to be duly perfected to the extent required by such US Security Document, including the filing of financing statements in such jurisdictions as may be reasonably requested by the Administrative Agent and in all events to exclude Excluded Property). In addition, as and to the extent provided in the US Collateral Agreement or any other Security Document, as applicable, (subject to all applicable exceptions and limitations therein and herein), the applicable US Loan Party shall deliver to the Collateral Agent all certificates, if any, representing Equity Interests of such Domestic Restricted Subsidiary (accompanied by undated stock powers, duly endorsed in blank) as required thereunder. Under no circumstance will any US Loan Party be required to execute any Security Documents governed by the laws of any jurisdiction other than the United States of America, any State thereof or the District of Columbia other than with respect to the pledge of the Equity Interests of a Loan Party under the laws of the United States or the United Kingdom.
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(b) Subject to Section 5.12(b), (c) and (d), in the event that any Person becomes a Domestic Restricted Subsidiary after the date hereof (other than any Domestic Restricted Subsidiary for so long as it is an Excluded Subsidiary), concurrently with the execution and delivery of counterparts to the Subsidiary Guaranty (or Parent Companies Guaranty, as applicable) and US Collateral Agreement pursuant to Section 5.11(a), such Domestic Restricted Subsidiary shall deliver to the Administrative Agent, (i) certified copies of such Domestic Restricted Subsidiary’s Organizational Documents or, if such document is of a type that may not be so certified, certified by the secretary or similar officer of the applicable Domestic Restricted Subsidiary, and (ii) a certificate executed on behalf of such Domestic Restricted Subsidiary by the secretary or similar officer of such Domestic Restricted Subsidiary as to (a) the fact that the attached resolutions of the Governing Body of such Domestic Restricted Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Domestic Restricted Subsidiary executing such Loan Documents.
(c) Subject to Section 5.12(b), (c) and (d), in the event that any Person that is a UK Subsidiary becomes a Restricted Subsidiary of the Parent (including any Unrestricted Subsidiary that becomes a Restricted Subsidiary of the Parent) after the date hereof (other than any Restricted Subsidiary for so long as it is an Excluded Subsidiary) or any UK Subsidiary that is a Restricted Subsidiary of the Parent (including any Electing Guarantor) ceases to be an Excluded Subsidiary, the Borrower or applicable Loan Party will promptly (and in no event later than 60 days thereafter or such later date as the Administrative Agent may agree in its reasonable discretion) notify Administrative Agent of that fact and cause such Restricted Subsidiary to execute and deliver to the Administrative Agent the Subsidiary Guaranty (or Parent Companies Guaranty, as applicable) and all other applicable UK Security Documents and to take such actions to grant Liens in favor of the Collateral Agent to secure the Secured Obligations and for the benefit of the Secured Parties in the assets of such Restricted Subsidiary that constitute Collateral pursuant to the Security Documents, as applicable, or any other collateral and security documents providing, to the extent practicable under relevant law (as reasonably determined by the Administrative Agent and the Borrowers), substantially the equivalent of the Lien contemplated to be provided by grantors under the Security Documents in effect on the Effective Date or to be put into effect in accordance with Section 5.16 (and execute all such further documents and instruments as required by such Security Documents), or otherwise in accordance with customary practice in the applicable jurisdiction as reasonably determined by the Administrative Agent and the Borrower (including limitations necessary to comply with any Requirement of Law), (including all actions necessary to cause such Lien to be duly perfected (or the equivalent under applicable law) to the extent required by such Security Document, including the filing of notices or recordings in such jurisdictions as may be reasonably requested by the Administrative Agent, and in all events to exclude Excluded Property. In addition, as and to the extent provided in the applicable Security Document (subject to all applicable exceptions and limitations therein), the applicable Loan Party shall deliver to the Collateral Agent all certificates, if any, representing Equity Interests issued to such Loan Party (accompanied by undated stock powers, duly endorsed in blank) as required thereunder.
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(d) Subject to Section 5.12(b), (c) and (d), in the event that any Person that is a UK Subsidiary becomes a Restricted Subsidiary of the Parent after the date hereof (other than any Restricted Subsidiary for so long as it is an Excluded Subsidiary), concurrently with the execution and delivery of the agreements, instruments or other documents pursuant to Section 5.11(c), such Restricted Subsidiary shall deliver to the Administrative Agent, (i) certified copies of such Restricted Subsidiary’s Organizational Documents or, if such document is of a type that may not be so certified, certified by the secretary or similar officer of the applicable Restricted Subsidiary, and (ii) a certificate executed on behalf of such Restricted Subsidiary by the secretary or similar officer of such Restricted Subsidiary as to (a) the fact that the attached resolutions of the Governing Body of such Restricted Subsidiary approving and authorizing the execution, delivery and performance of such Loan Documents are in full force and effect and have not been modified or amended and (b) the incumbency and signatures of the officers of such Restricted Subsidiary executing such Loan Documents (or in lieu of the delivery of the items set forth in this Section 5.11(d), such Loan Party shall deliver a customary director’s certificate, including customary attachments thereto including any items that may be reasonably required by any counsel providing a legal opinion in respect of such Loan Party).
(e) If, at any time, (x) (i) a Restricted Subsidiary is designated as an Unrestricted Subsidiary or an Immaterial Subsidiary in accordance with this Agreement or (ii) an Electing Guarantor has been re-designated (at the option, and in the sole discretion, of the Borrower in accordance with Section 5.13(b)) as an Excluded Subsidiary, the Collateral Agent shall release such Subsidiary from any Subsidiary Guaranty and all Security Documents to which it may be a party and to the extent such Subsidiary’s Equity Interests were pledged (or otherwise secured) as Collateral, such pledge (or other security) shall be released and, upon the request of any Loan Party, any certificates in respect thereof shall be promptly returned to the applicable Loan Party or (y) adverse tax consequences could (in the good faith determination of the Borrower in consultation with the Administrative Agent) result to the Borrower, the Parent or any Subsidiary of the Parent (i) from any Security Document executed and delivered by any Subsidiary that is a Foreign Subsidiary of any US Loan Party or any CFC Holding Company, or any other Domestic Subsidiary of the Parent, the Collateral Agent shall release such Restricted Subsidiary from any such Security Document, or (ii) from any Lien granted under any Loan Document in respect of the Equity Interests in any Foreign Subsidiary of any US Loan Party or CFC Holding Company, such Lien shall be released. Notwithstanding the foregoing, in no event shall Equity Interests of any Unrestricted Subsidiary or any of such Unrestricted Subsidiary’s assets constitute Collateral, and the Administrative Agent and Collateral Agent shall take all actions required hereunder and under the other Loan Documents to effect the foregoing.
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(f) Subject to Section 5.12(b), (c) and (d), from and after the Effective Date, in the event that (i) any Loan Party acquires fee simple interest in any Material Real Property (except to the extent constituting Excluded Property or subject to a Lien permitted under Section 6.02 securing Indebtedness permitted by Section 6.01 incurred to acquire such Material Real Property (or refinance such Indebtedness)) or (ii) at the time any Person becomes a Loan Party, such Person owns any Material Real Property (excluding any such Material Real Property constituting Excluded Property or subject to a Lien permitted under Section 6.02 securing Indebtedness permitted by Section 6.01 incurred to acquire such Material Real Property (or refinance such Indebtedness)), such Loan Party shall deliver to the Collateral Agent, within 120 days (or such later date as the Administrative Agent may agree in its reasonable discretion) after such Person acquires such Material Real Property or becomes a Loan Party, as the case may be, the following with respect to each such parcel of Material Real Property (each an “Additional Mortgaged Property”):
(i) A fully executed and, to the extent necessary, notarized Mortgage, in proper form for recording in the applicable jurisdictions required by law to establish and perfect the Mortgage in favor of the Collateral Agent, encumbering the interest of such Loan Party in such Additional Mortgaged Property;
(ii) An opinion of counsel in the state or other jurisdiction in which such Additional Mortgaged Property is located with respect to the enforceability of the form of such Mortgage to be recorded in such state or other jurisdiction and such other customary matters as the Administrative Agent may reasonably request;
(iii) (A) ALTA mortgagee title insurance policy or unconditional commitments therefor (the “Mortgage Policy”) issued by a Title Company with respect to such Additional Mortgaged Property located in the United States, in an amount to be mutually agreed between the Borrower, the Administrative Agent and Collateral Agent, insuring title to such Additional Mortgaged Property vested in such Loan Party, which such Mortgage Policy shall, to the extent available under applicable state law, include an endorsement for mechanics’ Liens, for future advances under this Agreement; and (B) evidence reasonably satisfactory to the Administrative Agent that such Loan Party has (i) delivered to the Title Company all certificates and affidavits required by the Title Company in connection with the issuance of the Mortgage Policy and (ii) paid (or made provision for payment) to the Title Company or to the appropriate Governmental Authorities all expenses and premiums of the Title Company in connection with the issuance of such Mortgage Policy and all taxes and fees, including stamp taxes, mortgage recording taxes and fees and intangible taxes, payable in connection with recording the Mortgage in the appropriate real estate records;
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(iv) A title report issued by the Title Company with respect to such Additional Mortgaged Property located in the United States;
(v) An ALTA survey of the Additional Mortgaged Property located in the United States to the extent already prepared and available;
(vi) To the extent available, copies of all recorded documents listed as exceptions to title or otherwise referred to in the Mortgage Policy or in the title reports delivered pursuant to clause (iv) above; and
(vii) With respect to any Additional Mortgaged Property located in the United States, evidence, which may be in the form of a letter or other written document from an insurance broker or a municipal engineer or other Person reasonably acceptable to the Administrative Agent, as to whether (1) such Additional Mortgaged Property is a Flood Hazard Property and (2) the community in which any such Flood Hazard Property is located is participating in the National Flood Insurance Program, (B) if such Additional Mortgaged Property is a Flood Hazard Property, such Loan Party’s written acknowledgement of receipt of written notification from Administrative Agent (1) that such Additional Mortgaged Property is a Flood Hazard Property and (2) as to whether the community in which each such Flood Hazard Property is located is participating in the National Flood Insurance Program, and (C) in the event such Flood Hazard Property is located in a community that participates in the National Flood Insurance Program, evidence that the applicable Loan Party has obtained flood insurance in respect of such Flood Hazard Property to the extent required under the applicable regulations of the Board.
Section 5.12 Further Assurances.
(a) Subject to Section 5.11 and Section 5.12(b), (c) and (d) and the terms, conditions and provisions of the Security Documents applicable to such Loan Party, the Parent, Holdco and the Borrower shall, and shall cause the other Loan Parties to, promptly upon reasonable request by the Administrative Agent or the Collateral Agent (i) correct any jointly identified material defect or error that may be discovered in the execution, acknowledgment, filing or recordation of any Security Document or other document or instrument relating to any Collateral, and (ii) do, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register any and all such further acts, deeds, certificates, assurances and other instruments as the Administrative Agent or the Collateral Agent may reasonably request from time to time, and in order to carry out more effectively the purposes thereof, in each case, to the extent required by this Agreement and the Security Documents.
(b) Notwithstanding anything in this Agreement or any Security Document to the contrary: (i) neither the Administrative Agent nor the Collateral Agent shall take, and the Loan Parties shall not be required to grant, a security interest in any Excluded Property; (ii) any security interest required to be granted or any action required to be taken, including to perfect such security interest, shall be subject to the same exceptions and limitations as those set forth in the Security Documents; (iii) no Loan Party shall be required, nor shall the Administrative Agent or Collateral Agent be authorized to perfect any pledges, charges, assignments, security interests and mortgages in any Collateral by any means other than (A) filings pursuant to the UCC (or similar filing in the United Kingdom) in the office of the secretary of state (or similar central filing office) of the relevant State(s) other jurisdiction and filings in the applicable real estate records with respect to mortgaged properties or any fixtures relating to Material Real Property, (B) filings in United States or United Kingdom government offices (including registrations with the European Union) with respect to Intellectual Property constituting Collateral as expressly required by the Loan Documents, (C) delivery to the Collateral Agent to be held in its possession of all Collateral consisting of intercompany notes in an amount individually in excess of $15,000,000, stock certificates of the Borrower and its Restricted Subsidiaries and other instruments issued to any Loan Party in an amount individually in excess of $15,000,000, (D) mortgages in respect of Material Real Property and (E) necessary perfection steps with respect to commercial tort claims over $15,000,000 individually, and other than as expressly required by Section 5.11(a) or (b), no US Loan Party shall be required to take any action outside the United States to perfect any security interest in the Collateral (including the execution of any agreement, document or other instrument governed by the law of any jurisdiction other than the United States of America, any State thereof or the District of Columbia) and no UK Loan Party shall be required to take any action outside of the United Kingdom to perfect any security interest in the Collateral (including execution of any agreement, document or other instrument governed by the law of any jurisdiction other than the United Kingdom), other than, in each case, with respect to the pledge of the Equity Interests of a Loan Party under the laws of the United States or the United Kingdom as provided in the Security Documents; (iv) no Loan Party shall have any obligation under any Loan Document to enter into any landlord, bailee or warehousemen waiver, estoppel or consent or any other document of similar effect; (v) in no event shall any Loan Party be required to take any action to perfect the security interest granted under the Security Documents in Collateral consisting of (A) cash or Cash Equivalents, (B) entering into any deposit account control agreement or securities account control agreement with respect to any deposit account or securities account (including securities entitlements and related assets credited thereto) or (C) other assets requiring perfection through the implementation of control agreements or perfection by “control” or notice of such security or acknowledgment of such security (other than possession by the Collateral Agent to the extent set forth in clause (iii) above and as further expressly required under the Security Documents) in each case under this clause (v), except, in each case, to the extent such perfection may be achieved by the filing of a UCC financing statement or similar filing in the United Kingdom; and (vi) no Loan Party shall be required to enter into any source code escrow arrangement (or, except as otherwise expressly set forth in the Security Documents, be obligated to register intellectual property).
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(c) Neither the Administrative Agent nor the Collateral Agent shall obtain or perfect a security interest in any assets of any Loan Party as to which the Borrower in consultation with the Administrative Agent, shall determine that the cost of obtaining or perfecting such security interest is excessive in relation to the benefit to the Lenders of the security afforded thereby (such comparison to be determined in a manner consistent with any such determination made in connection with the Effective Date) or would otherwise violate applicable law.
(d) Notwithstanding anything in this Agreement or any Security Document to the contrary, the Parent shall not form or permit to exist a Subsidiary which is a direct or indirect parent company of the Borrower unless (i) such Subsidiary is organized under the laws of the United States or the United Kingdom and such Subsidiary is party to, or becomes party to in accordance with Section 5.11(a) or Section 5.11(c), as applicable, the Parent Companies Guaranty or the Subsidiary Guaranty, as applicable, or (ii) such Subsidiary is organized under the laws of Luxembourg, Ireland, the Cayman Islands or such other jurisdiction as may be agreed by the Administrative Agent in its sole discretion and provides a guaranty and Security Documents in respect of the Obligations, in each case, in form and substance reasonably satisfactory to the Administrative Agent; provided that if such Subsidiary is organized in the Cayman Islands, it is treated for U.S. tax purposes as disregarded from a corporation organized under the laws of the United States or the United Kingdom.
(e) Notwithstanding anything in this Agreement or any Security Document to the contrary, the Administrative Agent may, in its sole discretion, grant extensions of time for the satisfaction of any of the requirements under Section 5.11 and Section 5.12 in respect of any particular Collateral or any particular Subsidiary if it determines that the satisfaction thereof with respect to such Collateral or such Subsidiary cannot be accomplished without undue expense or unreasonable effort or due to factors beyond the control of the Parent and the Restricted Subsidiaries by the time or times at which it would otherwise be required to be satisfied under this Agreement or any Security Document.
Section 5.13 Designation of Subsidiaries.
(a) The Parent may designate (or re-designate) any Restricted Subsidiary (other than the Borrower or any Subsidiary of the Parent that directly or indirectly owns Equity Interests in the Borrower) as an Unrestricted Subsidiary or any Unrestricted Subsidiary as a Restricted Subsidiary; provided that immediately before and after such designation, no Event of Default shall have occurred and be continuing. The designation of any Subsidiary as an Unrestricted Subsidiary after the Effective Date in accordance with this Section 5.13(a) shall constitute an Investment by the Parent or the relevant Restricted Subsidiary, as applicable, therein at the date of designation in an amount equal to the fair market value (as determined in good faith by the Borrower) of the Investments held by the Parent and/or the applicable Restricted Subsidiaries in such Unrestricted Subsidiary immediately prior to such designation. Upon any such designation (but without duplication of any amount reducing such Investment in such Unrestricted Subsidiary pursuant to the definition of “Investment”), the Parent and/or the applicable Restricted Subsidiaries shall receive a credit against the applicable clause in Section 6.04 that was utilized for the Investment in such Unrestricted Subsidiary for all Returns in respect of such Investment. The designation of any Unrestricted Subsidiary as a Restricted Subsidiary in accordance with this Section 5.13 shall constitute the incurrence by such Restricted Subsidiary at the time of designation of any Indebtedness or Liens of such Restricted Subsidiary outstanding at such time (to the extent assumed).
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(b) The Parent may designate (or re-designate) any Restricted Subsidiary that is an Excluded Subsidiary as an Electing Guarantor. The Parent may designate (or re-designate) any Electing Guarantor as an Excluded Subsidiary; provided that (i) after giving effect to such release, such Restricted Subsidiary shall not be a guarantor of any Credit Agreement Refinancing Indebtedness, any Additional Term Notes, any Unrestricted Additional Term Notes or any Term Loan Exchange Notes, (ii) such redesignation shall constitute an Investment by the Parent or the relevant Restricted Subsidiary, as applicable, therein at the date of designation in an amount equal to the fair market value (as determined in good faith by the Borrower) of the Investments held by the Parent and/or the applicable Restricted Subsidiaries in such Electing Guarantor immediately prior to such re-designation and such Investments shall otherwise be permitted hereunder and (iii) any Indebtedness or Liens of such Restricted Subsidiary (after giving effect to such release) shall be deemed to be incurred at the time of such release by such Electing Guarantor and such incurrence shall otherwise be permitted hereunder.
Section 5.14 Conduct of Business. From and after the Effective Date, the Parent and its Restricted Subsidiaries will engage only in lines of business of the type engaged in by the Parent and its Restricted Subsidiaries on the Effective Date and similar, ancillary, supportive, complementary, synergetic or related businesses or reasonable extensions thereof (and non-core incidental businesses acquired in connection with any Acquisition or permitted Investment or other immaterial businesses).
Section 5.15 Maintenance of Ratings. The Parent will use commercially reasonable efforts to maintain a public corporate credit rating from S&P and a public corporate family rating from Moody’s and a public rating of the Loans by each of S&P and Moody’s (but in each case not any specific rating).
Section 5.16 Post-Closing Covenants. The Borrower agrees to deliver, or cause to be delivered, to the Administrative Agent, in form and substance reasonably satisfactory to the Administrative Agent, the items described on Schedule 5.164 hereof on or before the dates specified with respect to such items, or such later dates as may be agreed to by the Administrative Agent in its reasonable discretion.
Article VI
Negative Covenants
From and after the Effective Date and until the Termination Date, each of the Parent, Holdco and the Borrower covenants and agrees with the Lenders that:
Section 6.01 Indebtedness; Certain Equity Securities.
(a) The Parent will not, and will not permit any Restricted Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except:
(i) Indebtedness created under (A) the Loan Documents or (B) the Seattle Loan Documents and any Permitted Refinancing thereof;
4 | To include requirement to (x) deliver Seattle Guarantors and security within 2 business days in order for the Miami and Seattle Facilities to benefit from identical pari passu guarantors and security and (y) execute the Pari Passu Intercreditor Agreement. |
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(ii) Indebtedness of the Parent or any other Restricted Subsidiary to the Parent or any other Restricted Subsidiary, provided that (A) Indebtedness of any Restricted Subsidiary that is not a Loan Party to any Loan Party shall, in each case, be incurred (x) in the ordinary course of business (which includes pursuant to any Intercompany License Agreement), (y) arising pursuant to a Permitted Tax Restructuring or (z) be otherwise permitted by Section 6.04 (other than due to Section 6.04(aa)) and (B) Indebtedness of any Loan Party to a Restricted Subsidiary that is not a Loan Party shall be subordinated to the Obligations on terms which prohibit the repayment thereof after the acceleration of the Loans or bankruptcy of such Loan Party;
(iii) Guarantees by the Parent or any Restricted Subsidiary of Indebtedness of the Parent or any other Restricted Subsidiary, provided that (A) the Indebtedness so Guaranteed is otherwise permitted by this Section, (B) Guarantees by any Loan Party of Indebtedness of any Restricted Subsidiary that is not a Loan Party shall, in each case, be (x) made in the ordinary course of business or (y) permitted by Section 6.04 (other than due to Section 6.04(aa)) and (C) if Indebtedness being guaranteed is subordinated in right of payment to the Obligations under the Loan Documents, such Guarantees permitted under this clause (iii) shall be subordinated to the applicable Loan Party’s Obligations to the same extent and on the same terms as the Indebtedness so Guaranteed is subordinated to the Obligations;
(iv) (A) Indebtedness incurred to finance the acquisition, development, construction, restoration, replacement, rebuilding, maintenance, upgrade or improvement of any fixed or capital assets, including Capital Lease Obligations, Synthetic Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, provided that such Indebtedness is incurred prior to or within 270 days after such acquisition or the completion of such development, construction, restoration, replacement, rebuilding, maintenance, upgrade or improvement, and (B) extensions, renewals and replacements of any such Indebtedness so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the Indebtedness being extended, renewed or replaced (plus any accrued but unpaid interest (including any portion thereof which is payable in kind in accordance with the terms of such extended, renewed or replaced Indebtedness) and premium payable by the terms of such Indebtedness thereon and fees and expenses associated therewith), provided that the aggregate principal amount of Indebtedness permitted by this clause (iv) at any time shall not exceed the greater of $150,000,000 and 10% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination;
(v) (a) Indebtedness of (1) any Person acquired or assumed in connection with an Acquisition or permitted Investment or any assets acquired in connection therewith and (2) any Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary (it being acknowledged that (x) a Person that becomes a direct or indirect Restricted Subsidiary of the Parent as a result of an Acquisition or permitted Investment may remain liable with respect to Indebtedness existing on the date of such acquisition and (y) an Unrestricted Subsidiary that is redesignated as a Restricted Subsidiary may remain liable with respect to Indebtedness existing on the date of such redesignation); provided that (A) such Indebtedness is not created in anticipation of such acquisition or redesignation and (B) the aggregate principal amount of such Indebtedness incurred under this clause (v) does not exceed at any time (I) the greater of (x) $225,000,000 and (y) 15% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination plus (II) unlimited additional Indebtedness if, for purposes of this clause (II), immediately after giving effect to such Acquisition, permitted Investment or redesignation, as the case may be, and the assumption of such Indebtedness, (X) to the extent such Indebtedness is secured on a pari passu basis with the Obligations, the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is either (1) not greater than 3.50:1.00 or (2) not greater than such First Lien Leverage Ratio immediately prior to the consummation of such Acquisition, Investment or redesignation and the assumption of such Indebtedness, or (Y) to the extent such Indebtedness is unsecured or secured on a junior basis with the Obligations, the Total Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is either (1) not greater than 3.50:1.00 or (2) not greater than such Total Leverage Ratio immediately prior to the consummation of such Acquisition, Investment or redesignation and the assumption of such Indebtedness (it being understood and agreed that unless notified by Borrower, (A) the Borrower shall be deemed to have used capacity under this clause (II) (to the extent compliant therewith) prior to utilization of amounts of the type described in clause (I) above, (B) Indebtedness may be incurred in respect of both this clause (II) and clause (I) above, and the proceeds from any such incurrence in respect of both clauses may be utilized in a single transaction by first calculating the incurrence in respect of this clause (II) and then calculating the incurrence in respect of clause (I) above and (C) the Borrower may re-designate any such Indebtedness originally incurred in respect of clause (I) as incurred in respect of clause (II) if, at the time of such re-designation, the Borrower would be permitted to incur such Indebtedness under clause (II) the aggregate principal amount of Indebtedness being so re-designated (for purposes of clarity, with any such re-designation having the effect of increasing the Borrower’s ability to incur Indebtedness in respect of clause (I) as of the date of such re-designation by the amount of such Indebtedness so re-designated); and (b) in the case of clause (II) to the proviso in clause (a) above, any Permitted Refinancing thereof;
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(vi) other Indebtedness in an aggregate principal amount outstanding at any time not exceeding the greater of (x) $300,000,000 and (y) 20% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination;
(vii) Indebtedness owed to any Person (including obligations in respect of letters of credit for the benefit of such Person) providing workers’ compensation, health, disability or other employee benefits or property, casualty, liability insurance, self-insurance, pursuant to reimbursement or indemnification obligations to such Person, in each case incurred in the ordinary course of business or consistent with past practice;
(viii) Indebtedness in respect of or guarantee of performance bonds, bid bonds, appeal bonds, surety bonds, performance and completion guarantees, workers’ compensation claims, letters of credit, bank guarantees and banker’s acceptances, warehouse receipts or similar instruments and similar obligations (other than in respect of other Indebtedness for borrowed money) including, without limitation, those incurred to secure health, safety and environmental obligations, in each case provided in the ordinary course of business or consistent with past practice;
(ix) Indebtedness in respect of Swap Agreements not entered into for speculative purposes;
(x) [Reserved];
(xi) Indebtedness of any Restricted Subsidiary that is not a Loan Party; provided that the aggregate amount of Indebtedness outstanding at any time pursuant to this clause (xi) shall not exceed the greater of $150,000,000 and 10% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination;
(xii) Indebtedness with respect to financial accommodations of the nature described in the definition of “Cash Management Obligations,” and other Indebtedness in respect of treasury, depositary, cash management and netting services, automatic clearinghouse arrangements, overdraft protections and similar arrangements or otherwise in connection with securities accounts and deposit accounts, in each case, in the ordinary course of business;
(xiii) Indebtedness consisting of (a) the financing of insurance premiums or (b) take or pay obligations contained in supply arrangements, in each case, in the ordinary course of business or consistent with past practice;
(xiv) Indebtedness arising from agreements providing for indemnification, adjustment of purchase price adjustments (including earn-outs) or similar obligations, in each case incurred or assumed in connection with the Transactions or any other acquisition or disposition of any business or assets permitted under this Agreement;
(xv) Indebtedness to the seller of any business or assets permitted to be acquired by the Parent or any Restricted Subsidiary under this Agreement; provided that the aggregate amount of Indebtedness permitted under this clause (xv) shall not exceed the greater of $75,000,000 and 5% of Consolidated EBITDA outstanding at any time;
(xvi) [Reserved];
(xvii) [Reserved];
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(xviii) (A) Credit Agreement Refinancing Indebtedness issued, incurred or otherwise obtained in exchange for or to refinance Term Loans and/or Revolving Loan and Commitments so long as the requirements of Section 2.11(e) are complied with, (B) Seattle Credit Agreement Refinancing Indebtedness issued, incurred or otherwise obtained in exchange for or to the refinance the Seattle Term Loans and (C) any Permitted Refinancing of any thereof pursuant to clause (A) or (B);
(xix) Indebtedness described on Schedule 6.01(a) annexed hereto, including any unused commitment and any Permitted Refinancing thereof;
(xx) endorsement of instruments or other payment items for deposit in the ordinary course of business;
(xxi) [Reserved];
(xxii) [Reserved];
(xxiii) [Reserved];
(xxiv) to the extent constituting Indebtedness, Guarantees in the ordinary course of business of the obligations of suppliers, customers, franchisees and licensees of the Parent and its Subsidiaries;
(xxv) performance Guarantees of the Parent and its Restricted Subsidiaries primarily guaranteeing performance of contractual obligations of the Parent or Restricted Subsidiaries to a third party and not primarily for the purpose of guaranteeing payment of Indebtedness;
(xxvi) Indebtedness (other than Indebtedness for borrowed money) supported by any Letter of Credit, in each case, in an amount not to exceed the face amount of such Letter of Credit;
(xxvii) obligations in respect of letters of support, guarantees or similar obligations issued, made or incurred for the benefit of any Subsidiary of the Parent to the extent required by law or in connection with any statutory filing or the delivery of audit opinions performed in jurisdictions other than within the United States;
(xxviii) Indebtedness incurred in connection with Permitted Sale Leaseback transactions in an aggregate principal amount not to exceed the greater of $150,000,000 and 10% of Consolidated EBITDA at any time;
(xxix) Indebtedness of (a) any Securitization Subsidiary arising under any Securitization Facility or (b) the Parent or any Restricted Subsidiary arising under any Receivables Facility, in an aggregate principal amount under this clause (xxix) not to exceed the greater of $75,000,000 and 5% of Consolidated EBITDA at any time;
(xxx) (a) Additional Term Notes, Unrestricted Additional Term Notes, Refinancing Notes and Term Loan Exchange Notes, (b) Seattle Additional Term Notes, Seattle Unrestricted Additional Term Notes, Seattle Refinancing Notes and Seattle Term Loan Exchange Notes and (c) Permitted Refinancings of any of the foregoing under clause (a) or (b);
(xxxi) [Reserved];
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(xxxii) (a) Additional Debt in an aggregate amount not to exceed (1) $750,000,000 outstanding at any time (minus, to the extent incurred prior to such incurrence of Additional Debt, any Unrestricted Incremental First Lien Indebtedness of the type described in clause (x) of such definition), and Seattle Unrestricted Incremental First Lien Indebtedness of the type described in clause (x) of such definition under the Seattle Credit Agreement and Seattle Unrestricted Additional Debt (“Unrestricted Additional Debt”), plus (2) the amount of any voluntary prepayments (or repurchases) of the Term Loans and voluntary permanent reductions of the Revolving Commitments effected after the Effective Date and the amount of any voluntary prepayments (or repurchases) of the Seattle Term Loans, First Lien Senior Secured Notes or any other Indebtedness secured by the Collateral on a pari passu basis with the Liens securing the Obligations (minus, to the extent incurred prior to such incurrence of Additional Debt, any Unrestricted Incremental First Lien Indebtedness of the type described in clause (y) of such definition and any Seattle Unrestricted Incremental First Lien Indebtedness of the type described in clause (y) of such definition under the Seattle Credit Agreement) (in each case, other than to the extent financed with the proceeds of long-term Indebtedness (other than revolving Indebtedness)), plus (3) unlimited Additional Debt if, for purposes of this clause (3) immediately before and after giving effect to each such incurrence and the application of the proceeds therefrom, (A) to the extent such Indebtedness is secured on a pari passu basis with the Obligations, the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is not greater than 3.50:1.00 or (B) to the extent such Indebtedness is unsecured or secured on a junior basis with the Obligations, the Total Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is not greater than 3.50:1.00 (it being understood and agreed that unless notified by the Borrower, (I) the Borrower shall be deemed to have used capacity under this clause (3) (to the extent compliant therewith) prior to utilization of amounts of the type described in clauses (1) and (2) above, (II) Indebtedness may be incurred in respect of both this clause (3) and clauses (1) and/or (2) above, and the proceeds from any such incurrence in respect of all clauses may be utilized in a single transaction by first calculating the incurrence in respect of this clause (3) and then calculating the incurrence in respect of clauses (1) and (2) above and (3) the Borrower may re-designate any such Indebtedness originally incurred in respect of clause (1) or (2) as incurred in respect of clause (3) if, at the time of such re-designation, the Borrower would be permitted to incur such Indebtedness under clause (3) the aggregate principal amount of Indebtedness being so re-designated (for purposes of clarity, with any such re-designation having the effect of increasing the Borrower’s ability to incur Indebtedness in respect of clause (1) and/or (2) as of the date of such re-designation by the amount of such Indebtedness so re-designated); provided that if such Additional Debt is incurred in connection with an acquisition or investment, (x) to the extent such Indebtedness is secured on a pari passu basis with the Obligations, the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is either (I) not greater than 3.50:1.00 or (II) not greater than such First Lien Leverage Ratio immediately prior to the consummation of such acquisition or investment and the incurrence of such Indebtedness, or (y) to the extent such Indebtedness is unsecured or secured on a junior basis with the Obligations, the Total Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is either (I) not greater than 3.50:1.00 or (II) not greater than such Total Leverage Ratio immediately prior to the consummation of such acquisition or investment and the incurrence of such Indebtedness; providedfurther that the maximum aggregate principal amount of such Additional Debt that may be incurred pursuant to this clause (xxxii) by a Restricted Subsidiary that is not a Loan Party shall not exceed at any one time outstanding the greater of (x) $150,000,000 and (y) 10% of Consolidated EBITDA calculated on a Pro Forma Basis as of the Applicable Date of Determination and (b) in the case of clause (a)(3) above, any Permitted Refinancing thereof; provided solely in the event that the Yield for any term loan incurred as Additional Debt pursuant to this Section 6.01(a)(xxxii) which is secured on a paripassu basis with the Initial Term Loans (other than such Additional Debt incurred in reliance on clause (2) of this Section 6.01(a)(xxxii)(a) (except if the capacity under clause (2) of this Section 6.01(a)(xxxii)(a) results from prepayments made with the proceeds of Indebtedness which is secured on a paripassu basis with the Initial Term Loans (other than Revolving Loans)) is higher than the Yield for the Initial Term Loans by more than 50 basis points, then the Initial Term Loans shall be subject to the adjustment (if applicable) set forth in clause (G) to the proviso in Section 2.20(b)(ii) as if such Additional Debt were an Incremental Term Loan incurred hereunder; and
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(xxxiii) Indebtedness in an amount equal to 100% of the aggregate Net Proceeds received by the Parent after the Closing Date from the issue or sale of Qualified Equity Interests plus cash contributed to the Parent that has not increased the Available Amount or the Cure Amount; and
For purposes of determining compliance with this Section 6.01, in the event that an item of Indebtedness (or any portion thereof) at any time meets the criteria of more than one of the categories described above in this paragraph (a) or is entitled to be incurred pursuant to clauses (iv), (v), (vi), (xi), (xv), (xviii), (xix), (xxviii), (xxix), (xxxi), (xxxii), or (xxxiii) of this paragraph (a), the Borrower, in its sole discretion, may classify or reclassify (or later divide, classify or reclassify) such item of Indebtedness (or any portion thereof) and shall only be required to include the amount and type of such Indebtedness in one of the above clauses. Accrual of interest or dividends, the accretion of accreted value, the accretion or amortization of original issue discount and the payment of interest, premium, fees or expenses, in the form of additional Indebtedness, Disqualified Equity Interests or preferred stock shall not be deemed to be an incurrence of Indebtedness for purposes of this Section 6.01.
For purposes of determining compliance with any restriction on the incurrence of Indebtedness, the principal amount of Indebtedness denominated in a foreign currency shall be calculated based on the relevant currency exchange rate in effect on the date such Indebtedness was incurred, in the case of term debt, or first committed, in the case of revolving credit debt; provided that if such Indebtedness is incurred to extend, replace, refund, refinance, renew or defease other Indebtedness denominated in a foreign currency, and such extension, replacement, refunding, refinancing, renewal or defeasance would cause the applicable restriction to be exceeded if calculated at the relevant currency exchange rate in effect on the date of such extension, replacement, refunding, refinancing, renewal or defeasance, such restriction shall be deemed not to have been exceeded so long as the principal amount of such refinancing Indebtedness does not exceed the principal amount of such Indebtedness being extended, replaced, refunded, refinanced, renewed or defeased, plus the amount of any premium paid, and fees and expenses incurred, in connection with such extension, replacement, refunding refinancing, renewal or defeasance (including any fees and original issue discount incurred in respect of such resulting Indebtedness).
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(b) The Parent will not, and will not permit any Restricted Subsidiary to, issue any Disqualified Equity Interests, except to the extent that any such Disqualified Equity Interest qualifies as Indebtedness that is permitted to be incurred under Section 6.01.
Section 6.02 Liens. The Parent will not, and will not permit any Restricted Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, except:
(a) Liens pursuant to any Loan Document or the Seattle Loan Documents;
(b) Permitted Encumbrances;
(c) any Lien on any property or asset of the Parent or any Restricted Subsidiary existing on the Effective Date; provided that any Lien securing obligations in excess of (x) $4,500,000 individually or (y) $45,000,000 in the aggregate (when taken together with all other Liens securing obligations outstanding in reliance on this clause (c) that are not listed on Schedule 6.02) shall only be permitted to the extent such Lien is permitted by another clause in this Section 6.02; provided that (i) such Lien shall not apply to any other property or asset of the Parent or any Restricted Subsidiary (other than any replacements of such property or assets and additions and accessions thereto, after-acquired property subject to a Lien securing Indebtedness and other obligations incurred prior to such time and which Indebtedness and other obligations are permitted hereunder that require, pursuant to their terms at such time, a pledge of after-acquired property, it being understood that such requirement shall not be permitted to apply to any property to which such requirement would not have applied but for such acquisition, or asset of the Parent or any Restricted Subsidiary and the proceeds and the products thereof and customary security deposits in respect thereof and in the case of multiple financings of equipment provided by any lender, other equipment financed by such lender) and (ii) such Lien shall secure only those obligations and unused commitment that it secures on the date hereof and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest (including any portion thereof which is payable in kind in accordance with the terms of such extended, renewed or replaced Indebtedness) and premium payable by the terms of such obligations thereon and reasonable fees and expenses associated therewith);
(d) any Lien existing on any property or asset prior to the acquisition thereof by the Parent or any Restricted Subsidiary or existing on any property or asset of any Person that became or becomes a Restricted Subsidiary (including as a result of any Unrestricted Subsidiary being redesignated as a Restricted Subsidiary) after the Closing Date prior to the time such Person became or becomes a Restricted Subsidiary; provided that (i) such Lien is not created in contemplation of such acquisition or such Person becoming a Restricted Subsidiary, as the case may be, and (ii) such Lien shall not apply to any other property or asset of the Parent or any Restricted Subsidiary (other than any replacements of such property or assets and additions and accessions thereto, after-acquired property subject to a Lien securing Indebtedness and other obligations incurred prior to such time and which Indebtedness and other obligations are permitted hereunder that require, pursuant to their terms at such time, a pledge of after-acquired property, and the proceeds and the products thereof and customary security deposits in respect thereof and in the case of multiple financings of equipment provided by any lender, other equipment financed by such lender) and (iii) such Lien shall secure only those obligations and unused commitments (and to the extent such obligations and commitments constitute Indebtedness, such Indebtedness is permitted hereunder) that it secures on the date of such acquisition or the date such Person becomes a Restricted Subsidiary, as the case may be, and extensions, renewals and replacements thereof so long as the principal amount of such extensions, renewals and replacements does not exceed the principal amount of the obligations being extended, renewed or replaced (plus any accrued but unpaid interest (including any portion thereof which is payable in kind in accordance with the terms of such extended, renewed or replaced Indebtedness) and premium payable by the terms of such obligations thereon and fees and expenses associated therewith);
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(e) Liens on fixed or capital assets acquired, developed, constructed, restored, replaced, rebuilt, maintained, upgraded or improved (including any such assets made the subject of a Capital Lease Obligation or Synthetic Lease Obligation incurred) by the Parent or any Restricted Subsidiary; provided that (i) such Liens secure Indebtedness incurred to finance such acquisition, development, construction, restoration, replacement, rebuilding, maintenance, upgrade or improvement and that is permitted by Section 6.01(a)(iv), or to extend, renew or replace such Indebtedness and that is permitted by Section 6.01(a)(v), (ii) such Liens and the Indebtedness secured thereby are incurred prior to or within 270 days after such acquisition or the completion of such development, construction, restoration, replacement, rebuilding, maintenance, upgrade or improvement (provided that this clause (ii) shall not apply to any Indebtedness permitted by Section 6.01(a)(v) or any Lien securing such Indebtedness) and (iii) such Liens shall not apply to any other property or assets of the Parent or any Restricted Subsidiary (other than any replacements of such property or assets and additions and accessions thereto and the proceeds and the products thereof and customary security deposits in respect thereof and in the case of multiple financings of equipment provided by any lender, other equipment financed by such lender);
(f) Liens (i) of a collecting bank arising in the ordinary course of business under Section 4-208 of the UCC in effect in the relevant jurisdiction covering only the items being collected upon, (ii) in favor of a banking or other financial institution arising as a matter of law or contract encumbering deposits or other funds maintained with a financial institution (including netting arrangements or the right of set off) and which are within the general parameters customary in the banking industry or (iii) encumbering reasonable customary initial deposits and margin deposits and similar Liens attaching to commodity trading accounts or other brokerage accounts incurred in the ordinary course of business and not for speculative purposes;
(g) Liens representing (i) any interest or title of a licensor, lessor or sublicensor or sublessor under any lease or license permitted by this Agreement, (ii) any Lien or restriction that the interest or title of such lessor, licensor, sublessor or sublicensor may be subject to, or (iii) the interest of a licensee, lessee, sublicensee or sublessee arising by virtue of being granted a license or lease permitted by this Agreement;
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(h) Liens arising out of conditional sale, title retention, consignment or similar arrangements for the sale of goods;
(i) the filing of UCC or PPSA (or equivalent) financing statements solely as a precautionary measure or required notice in connection with operating leases or consignment of goods;
(j) Liens not otherwise permitted by this Section to the extent that the aggregate outstanding amount (or in the case of Indebtedness, the principal amount) of the obligations secured thereby at any time does not exceed the greater of (i) $300,000,000 and (ii) 20% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination;
(k) Liens granted by a Restricted Subsidiary that is not a Loan Party in favor of any Loan Party in respect of Indebtedness or other obligations owed by such Restricted Subsidiary to such Loan Party;
(l) Liens (i) attaching solely to cash advances and cash earnest money deposits in connection with Investments permitted under Section 6.04 or (ii) consisting of an agreement to Dispose of any property in a Disposition permitted hereunder;
(m) any Lien resulting from the rules and regulations of any clearing system or stock exchange over shares and/or other securities held in that clearing system or stock exchange;
(n) Liens consisting of customary rights of set-off or banker’s Liens on amounts on deposit, to the extent arising by operation of law and incurred in the ordinary course of business;
(o) Liens securing reimbursement obligations permitted by Section 6.01 in respect of documentary letters of credit or bankers’ acceptances; provided that such Liens attach only to the documents, goods covered thereby and proceeds thereto;
(p) Liens on insurance policies and the proceeds thereof granted to secure the financing of insurance premiums with respect thereto;
(q) Liens encumbering deposits made to secure obligations arising from contractual or warranty requirements;
(r) Liens on Collateral securing obligations of any of the Loan Parties in respect of Indebtedness and related obligations permitted by Section 6.01(a)(xviii) and/or Section 6.01(a)(xxx);
(s) Liens granted pursuant to a security agreement between the Parent or any Restricted Subsidiary and a licensee of intellectual property to secure the damages, if any, of such licensee resulting from the rejection of the licensee of such licensee in a bankruptcy, reorganization or similar proceeding with respect to the Parent or such Restricted Subsidiary;
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(t) Liens securing obligations referred to in Section 6.01(a)(xii) or on assets subject of any Permitted Sale Leaseback under Section 6.01(a)(xxviii);
(u) Liens on (i) the Securitization Assets arising in connection with a Qualified Securitization Financing or (ii) the Receivables Assets arising in connection with a Receivables Facility;
(v) licenses or sublicenses (with respect to intellectual property and other property), leases or subleases granted to third parties not interfering in any material respect with the ordinary conduct of the business of the Parent and its Restricted Subsidiaries, taken as a whole;
(w) Liens in favor of customs and revenue authorities to secure payment of customs duties in connection with the importation of goods;
(x) Liens of bailees in the ordinary course of business;
(y) Liens securing obligations (other than obligations representing Indebtedness for borrowed money) under operating, reciprocal easement or similar agreements entered into in the ordinary course of business of the Parent and its Subsidiaries;
(z) utility and similar deposits in the ordinary course of business;
(aa) purchase options, call and similar rights of, and restrictions for the benefit of, a third party with respect to Equity Interests held by the Parent or any Restricted Subsidiary in Joint Ventures;
(bb) Liens disclosed as exceptions to coverage in the final title policies and endorsements issued to the Collateral Agent with respect to any Mortgaged Properties;
(cc) Liens that are contractual rights of set-off (i) relating to the establishment of depository relations with banks or other financial institutions not given in connection with the incurrence of Indebtedness for borrowed money, (ii) relating to pooled deposit or sweep accounts of the Parent or any Restricted Subsidiary to permit satisfaction of overdraft or similar obligations incurred in the ordinary course of business of the Parent or its Restricted Subsidiaries or (iii) relating to purchase orders and other agreements entered into by the Parent or any Restricted Subsidiary in the ordinary course of business;
(dd) the modification, replacement, renewal or extension of any Lien permitted by Section 6.02(c), (d) and (e);provided that (i) the Lien does not extend to any additional property other than (A) after-acquired property that is affixed or incorporated into the property covered by such Lien or financed by Indebtedness permitted under Section 6.01, and (B) proceeds and products thereof; and (ii) the renewal, extension or refinancing of the obligations secured or benefited by such Liens is not prohibited by Section 6.01;
(ee) Liens arising in connection with Intercompany License Agreements;
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(ff) Liens securing any Swap Agreement so long as the fair market value of the Collateral securing such Swap Agreement does not exceed $75,000,000 at any time;
(gg) Liens on securities which are the subject of repurchase agreements incurred in the ordinary course of business;
(hh) Liens arising in connection with rights of dissenting stockholders pursuant to applicable law in respect of the Seattle Acquisition or Permitted Acquisition;
(ii) Liens on assets of any Restricted Subsidiary that is not a Loan Party (x) securing working capital lines in foreign jurisdictions and/or (y) securing other obligations or Indebtedness permitted by Section 6.01 (other than to secure Indebtedness of any Loan Party for borrowed money);
(jj) Liens securing Indebtedness incurred pursuant to Section 6.01(a)(xxxii); provided if (x) the Liens are secured by Collateral on a paripassu basis with the Obligations, the Senior Representative for such Indebtedness shall enter into the Pari Passu Intercreditor Agreement or other customary intercreditor agreement and (y) if the Liens are secured on a junior basis to the Obligations, the Senior Representative for such Indebtedness shall enter into a Second Lien Intercreditor Agreement or other customary intercreditor agreement, in each case with the Administrative Agent and/or Collateral Agent substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations); and
(kk) Liens on Escrowed Proceeds for the benefit of the related holders of debt securities or other Indebtedness (or the underwriters or arrangers thereof) or on cash set aside at the time of the incurrence of any Indebtedness or government securities purchased with such cash, in either case to the extent such cash or government securities prefund the payment of interest and fees on such Indebtedness and are held in an escrow account or similar arrangement to be applied for such purpose.
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Section 6.03 Fundamental Changes.
(a) The Parent will not, and will not permit any Restricted Subsidiary to, merge into or consolidate or amalgamate with any other Person, or permit any other Person to merge into or consolidate or amalgamate with it, except that: (i) any Subsidiary (other than Holdco and the Borrower) may merge into or consolidate or amalgamate with the Parent or the Borrower as long as the Parent or the Borrower, as the case may be, is the surviving entity or such surviving Person shall assume the obligations of the Parent or the Borrower hereunder (and if such Subsidiary is an Unrestricted Subsidiary, any Indebtedness of or Lien granted on the assets of such Subsidiary is permitted by Section 6.01 or 6.02), (ii) any Subsidiary (other than Holdco and the Borrower) may merge into or consolidate or amalgamate with any Loan Party (as long as (A) such Loan Party is the surviving entity, (B) such surviving entity becomes a Loan Party substantially concurrently with the consummation of such transaction and complies with Section 5.11 and Section 5.12, (C) if such Subsidiary is an Unrestricted Subsidiary, and Indebtedness of or Lien granted on the assets of such Subsidiary is permitted by Section 6.01 or 6.02 and (D) the disposition of such Loan Party would otherwise be permitted under Section 6.05 (other than Section 6.05(l)) or such Loan Party would otherwise be permitted to be to redesignated as an Excluded Subsidiary immediately prior to such transaction (and shall be deemed to be so disposed or redesignated), (iii) any Restricted Subsidiary that is not a Loan Party may merge into or consolidate or amalgamate with (A) any other Restricted Subsidiary that is not a Loan Party or (B) any Loan Party, (iv) the Parent or any Restricted Subsidiary may consummate any Investment permitted by Section 6.04 (other than Section 6.04(aa)) (whether through a merger, consolidation, amalgamation or otherwise), provided that (A) the surviving entity shall be subject to the requirements of Section 5.11 and Section 5.12 (to the extent applicable) and (B) if the Parent, Holdco or the Borrower is a party to such transaction, the Parent, Holdco or the Borrower, as the case may be, shall be the surviving entity or such surviving Person shall assume the obligations of the Parent, Holdco or the Borrower, as the case may be, hereunder, (v) any Restricted Subsidiary (other than Holdco or the Borrower) may consummate any sale, transfer or other disposition permitted pursuant to Section 6.05 (other than Section 6.05(l)) (whether through a merger, consolidation, amalgamation or otherwise), provided that the surviving entity shall be subject to the requirements of Section 5.11 and Section 5.12 (to the extent applicable), (vi) the Parent and the Restricted Subsidiaries may effect the Permitted Tax Restructuring; provided that the Borrower shall remain an entity organized or existing under the laws of the United States, any state thereof, the District of Columbia or any territory thereof, (vii) any Person may merge into, consolidate or amalgamate with the Company, the Borrower or any of their Subsidiaries in connection with the Transactions and (viii) in each of the preceding clauses (i), (ii) or (iv) of this Section 6.03(a), in the case of any merger, consolidation or amalgamation involving the Parent, Holdco or the Borrower, if the Person surviving such merger, consolidation or amalgamation is not the Parent, Holdco or the Borrower (any such Person, the “Successor Company”), no Default and Event of Default shall have occurred and be continuing and (A) in the case of a merger, consolidation or amalgamation involving the Borrower, the Successor Company shall be an entity organized or existing under the laws of the United States, any state thereof, the District of Columbia or any territory thereof, (B) in the case of a merger, consolidation or amalgamation involving the Parent or Holdco, the Successor Company shall be an entity organized or existing under the laws of the United States or the United Kingdom (unless otherwise agreed to by the Administrative Agent) and the security interests of the Collateral Agent in the Collateral shall not be materially impaired, (C) the Successor Company shall expressly assume all the obligations of the Parent, Holdco or the Borrower, as applicable, under this Agreement and the other Loan Documents to which the Parent, Holdco or the Borrower is a party, (D) each Guarantor of the Obligations of the Borrower, unless it is the other party to such merger, consolidation or amalgamation, shall have confirmed that its Guaranty shall apply to the Successor Company’s obligations under the Loan Documents, (E) each Guarantor of the Obligations of the Borrower, unless it is the other party to such merger, consolidation or amalgamation, shall have by a supplement to applicable Security Documents confirmed that its obligations thereunder shall apply to the Successor Company’s obligations under the Loan Documents, (F) each mortgagor of a Mortgaged Property, unless it is the other party to such merger or consolidation, shall have affirmed that its obligations under the applicable Mortgage shall apply to its Guaranty as reaffirmed pursuant to clause (C) and (F) the Successor Company shall have delivered to the Administrative Agent an officer’s certificate stating that such merger or consolidation and such supplements preserve the enforceability of the Guarantee and the perfection and priority of the Liens under the applicable Security Documents; provided, that if the foregoing are satisfied, the Successor Company will succeed to, and be substituted for, the Parent, Holdco or the Borrower, as the case may be, under this Agreement.
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(b) The Parent will not, nor will the Parent permit any Restricted Subsidiary to, liquidate or dissolve, except that: (i) any Subsidiary (other than the Borrower) may transfer all or any portion of its assets (upon liquidation, dissolution, winding-up or any similar transaction) to any other Loan Party, (ii) any Restricted Subsidiary that is not a Loan Party may transfer all or any portion of its assets (upon liquidation, dissolution, winding-up or any similar transaction) to the Parent or any Restricted Subsidiary, (iii) any Loan Party (other than the Parent or the Borrower) may transfer all or any portion of its assets (upon liquidation, dissolution, winding-up or any similar transaction) to any Loan Party, (iv) the Parent or any Restricted Subsidiary may change its legal form, (v) the Parent and the Restricted Subsidiaries may effect the Permitted Tax Restructuring and (vi) any Restricted Subsidiary (other than the Borrower) may transfer all or any portion of its assets (upon liquidation, dissolution, winding-up or any similar transaction) to any Person in order to effect an Investment permitted pursuant to Section 6.04 (other than Section 6.04(aa)) or a sale, transfer or other disposition permitted pursuant to Section 6.05 (other than Section 6.05(l)).
Section 6.04 Investments. The Parent will not, and will not permit any Restricted Subsidiary to, make any Investments, except:
(a) Investments in cash and Cash Equivalents and assets that were Cash Equivalents when such Investment was made;
(b) (i) the Transactions or Investments otherwise made in accordance with or as contemplated by the Merger Agreement and (ii) Permitted Acquisitions; provided that Acquisitions of Persons acquired by Loan Parties pursuant to this clause (b)(ii) that do not or have not become Guarantors in accordance with Section 5.11 or Section 5.12 (it being understood that an Acquisition of a Person and its subsidiaries shall be deemed an acquisition of Persons that become Guarantors for this purpose if the Persons so acquired that do become Guarantors constitute more than 50% of the Consolidated EBITDA of such Person and its subsidiaries) after the consummation of such Acquisition that are made in reliance on this clause (b)(ii) shall not exceed the greater of $225,000,000 and 15% of Consolidated EBITDA computed on a Pro Forma Basis as of the Applicable Date of Determination;
(c) (i) Investments existing on the Effective Date, (ii) Investments contemplated on the Effective Date and set forth on Schedule 6.04(c), and (ii) Investments consisting of any modification, replacement, renewal, reinvestment or extension of any such Investment; provided that the amount of any Investment permitted pursuant to this Section 6.04(c) is not increased from the amount of such Investment on the Effective Date except pursuant to the terms of such Investment (including in respect of any unused commitment), plus any accrued but unpaid interest (including any portion thereof which is payable in kind in accordance with the terms of such modified, extended, renewed or replaced Investment) and premium payable by the terms of such Indebtedness thereon and fees and expenses associated therewith as of the Effective Date or as otherwise permitted by this Section 6.04;
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(d) (i) Investments between and among any of the Loan Parties; and (ii) Investments by any Loan Party to any Restricted Subsidiary that is not a Loan Party provided that such Investments made after the Effective Date pursuant to this clause (d)(ii) shall (x) constitute loans and advances made in the ordinary course of business or (y) constitute other Investments that do not at any one time exceed the greater of (A) $225,000,000 and (B) 15% of Consolidated EBITDA, as of the Applicable Date of Determination after giving effect on a Pro Forma Basis to the proposed Investment (it being understood that for purposes of calculating amounts outstanding pursuant to this clause (d)(ii), such amount shall be calculated on a net basis (without duplication of the reduction of the amount of any such Investment in respect of Returns on such Investment pursuant to the definition of “Investment”) giving effect to all Investments (I) in the Loan Parties by and Returns to the Loan Parties from Restricted Subsidiaries that are not Loan Parties and (II) in the Loan Parties by Joint Ventures and Unrestricted Subsidiaries); provided, further, that to the extent that any such Investments under this clause (d) constitute loans or advances made to any Loan Party, such loans or advances shall be subordinated in right of payment to the Obligations upon the occurrence of an Event of Default pursuant to Section 7.01(h) or (i) or upon the acceleration of the Obligations pursuant to Section 7.01 after the occurrence of any other Event of Default;
(e) Investments made by the Parent or any Restricted Subsidiary in any Joint Venture or any Unrestricted Subsidiary in an aggregate amount not to exceed at any one time outstanding the greater of (A) $150,000,000 and (B) 10% of Consolidated EBITDA as of the Applicable Date of Determination after giving effect on a Pro Forma Basis to each proposed Investment (it being understood that for purposes of calculating amounts outstanding pursuant to this clause (e), such amount shall be calculated on a net basis (without duplication of the reduction of the amount of any such Investment in respect of Returns on such Investment pursuant to the definition of “Investment”) giving effect to all Investments (I) in the Loan Parties by and Returns to the Loan Parties from Restricted Subsidiaries that are not Loan Parties and in the Loan Parties by Joint Ventures and Unrestricted Subsidiaries);
(f) Investments made by any Restricted Subsidiary that is not a Loan Party in the Parent or any Restricted Subsidiary; provided that to the extent that any such Investments constitute loans or advances made to any Loan Party, such loans or advances shall be subordinated in right of payment to the Obligations upon the occurrence of an Event of Default pursuant to Section 7.01(h) or (i) or upon the acceleration of the Obligations pursuant to Section 7.01 after the occurrence of any other Event of Default;
(g) [Reserved];
(h) Investments received in connection with the bankruptcy or reorganization of, or settlement of delinquent accounts and disputes with, customers and suppliers, or upon the foreclosure with respect to any secured Investment or other transfer of title with respect to any secured Investment;
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(i) Investments in respect of Swap Agreements not entered into for speculative purposes, Cash Management Agreements and Cash Management Services;
(j) Investments of any Person existing at the time such Person becomes a Restricted Subsidiary or consolidates, amalgamates or merges with the Parent or any Restricted Subsidiary (including in connection with an Acquisition or other Investment permitted hereunder); provided that such Investment was not made in contemplation of such Person becoming a Restricted Subsidiary or such consolidation or merger;
(k) Investments resulting from pledges or deposits described in clause (c) or (d) of the definition of the term “Permitted Encumbrance”;
(l) Investments received in connection with the disposition of any asset in accordance with and to the extent permitted by Section 6.05 (other than Section 6.05(d));
(m) receivables or other trade payables owing to the Parent or any Restricted Subsidiary if created or acquired in the ordinary course of business and payable or dischargeable in accordance with customary trade terms, provided that such trade terms may include such concessionary trade terms as the Parent or such Restricted Subsidiary deems reasonable under the circumstances;
(n) Investments resulting from Liens permitted under Section 6.02;
(o) Investments in deposit accounts and securities accounts opened in the ordinary course of business;
(p) Investments in connection with Intercompany License Agreements;
(q) other Investments (including those of the type otherwise described herein) made after the Effective Date in an aggregate amount at any time outstanding not to exceed the greater of (x) $225,000,000 and (y) 15% of Consolidated EBITDA as of the Applicable Date of Determination after giving effect on a Pro Forma Basis to each such proposed Investment pursuant to this clause (q);
(r) Investments consisting of cash earnest money deposits in connection with a Permitted Acquisition or other Investment permitted hereunder;
(s) Investments solely to the extent such Investments reflect an increase in the value of Investments otherwise permitted under this Section 6.04;
(t) the acquisition of additional Equity Interests of Restricted Subsidiaries from minority shareholders (it being understood that to the extent that any Restricted Subsidiary that is not a Loan Party is acquiring Equity Interests from minority shareholders then this clause (t) shall not in and of itself create, or increase the capacity under, any basket for Investments by Loan Parties in any Restricted Subsidiary that is not a Loan Party);
(u) Investments consisting of endorsements for collection or deposit in the ordinary course of business;
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(v) (a) Investments in any Receivables Facility or any Securitization Subsidiary in order to effectuate a Qualified Securitization Financing, including the ownership of Equity Interests in such Securitization Subsidiary and (b) distributions or payments of Securitization Fees and purchases of Securitization Assets or Receivables Assets pursuant to a Securitization Repurchase Obligation in connection with a Qualified Securitization Financing or a Receivables Facility;
(w) Investments in Equity Interests in any Subsidiary resulting from any sale, transfer or other disposition by the Parent or any Subsidiary permitted by Section 6.05, including as a result of any contribution from any parent or distribution to any Subsidiary of such Equity Interests;
(x) contributions to a “rabbi” trust for the benefit of employees or other grantor trust subject to claims of creditors in the case of a bankruptcy of the Borrower;
(y) loans or advances to officers, partners, directors, consultants and employees of the Parent or any Restricted Subsidiary for (A) relocation, entertainment, travel expenses, drawing accounts and similar expenditures and (B) for other purposes in the aggregate amount not to exceed $15,000,000 at any time outstanding;
(z) other Investments (including those of the type otherwise referred to herein) in an aggregate amount not to exceed the Available Amount;
(aa) Investments consisting of or resulting from Indebtedness, Liens, Restricted Payments, fundamental changes and dispositions permitted under Section 6.01 (other than Section 6.01(a)(ii) and (a)(iii)), Section 6.02, Section 6.03 (other than Section 6.03(a)(vi) and (b)(viii)), Section 6.05 (other than Section 6.05(b)) and Section 6.08 (other than Section 6.08(xi)), respectively;
(bb) Loans repurchased by the Parent or a Restricted Subsidiary pursuant to and in accordance with Section 2.11(i) or Section 9.04, so long as such Loans are immediately cancelled;
(cc) cash or property distributed from any Restricted Subsidiary that is not a Loan Party (i) may be contributed to other Restricted Subsidiaries that are not Loan Parties, and (ii) may pass through the Parent and/or any intermediate Restricted Subsidiaries, so long as all part of a series of related transactions and such transaction steps are not unreasonably delayed and are otherwise permitted hereunder;
(dd) Investments to the extent that payment for such Investments is made solely with Equity Interests (other than any Disqualified Equity Interests) of the Parent, or proceeds of an equity contribution initially made to the Parent, in each case, that have not increased the Available Amount or the Cure Amount;
(ee) Guarantee obligations of the Parent or any Restricted Subsidiary in respect of letters of support, guarantees or similar obligations issued, made or incurred for the benefit of any Restricted Subsidiary to the extent required by law or in connection with any statutory filing or the delivery of audit opinions performed in jurisdictions other than within the United States;
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(ff) (i) loans and advances to Parent or any Parent Entity in lieu of, and not in excess of the amount of (after giving effect to any other such loans or advances or Restricted Payments in respect thereof), Restricted Payments to the extent permitted to be made in accordance with Section 6.08 (other than Section 6.08(a)(xi)) or (ii)other Investments in lieu of and not in excess of the amount of (after giving effect to any other such Investments or payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness pursuant to Section 6.08(b)(ix)), Restricted Payments to the extent permitted to be made in accordance with Section 6.08(a)(xiv);
(gg) Investments by the Parent or a Restricted Subsidiary in any Restricted Subsidiary pursuant to the Permitted Tax Restructuring;
(hh) asset purchases (including purchases of inventory, supplies and materials) and the licensing or contribution of intellectual property pursuant to joint marketing arrangements with other Persons, in each case in the ordinary course of business;
(ii) Guarantees by the Parent or any Restricted Subsidiary of leases (other than Capital Lease Obligations), contracts, or of other obligations that do not constitute Indebtedness, in each case entered into in the ordinary course of business; and
(jj) other Investments; provided that at the time of making such Investment no Event of Default has occurred and is continuing and the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is less than 3.50:1.00.
For the avoidance of doubt, if an Investment would be permitted under any provision of this Section 6.04 (other than Section 6.04(b)(ii)) and as a Permitted Acquisition, such Investment need not satisfy the requirements otherwise applicable to Permitted Acquisitions unless such Investments are consummated in reliance on Section 6.04(b)(ii). In addition, to the extent an Investment is permitted to be made by Parent or a Restricted Subsidiary directly in any Restricted Subsidiary or any other Person who is not a Loan Party (each such person, a “Target Person”) under any provision of this Section 6.04, such Investment may be made by advance, contribution or distribution directly or indirectly to the Parent and further advanced or contributed by the Parent to a Loan Party or other Restricted Subsidiary for purposes of ultimately making the relevant Investment in the Target Person without constituting an Investment for purposes of Section 6.04 (it being understood that such Investment must satisfy the requirements of, and shall count toward any thresholds or baskets in, the applicable clause under Section 6.04 as if made by the applicable Restricted Subsidiary directly to the Target Person).
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Section 6.05 Asset Sales. The Parent will not, and will not permit any Restricted Subsidiary to, sell, transfer, lease or otherwise dispose of any asset, including any Equity Interests owned by it nor will the Parent permit any Restricted Subsidiary to issue any additional Equity Interests in such Restricted Subsidiary (other than (i) any Restricted Subsidiary issuing directors’ qualifying shares and (ii) any other Restricted Subsidiary issuing Equity Interests to the Parent or any other Restricted Subsidiary), except:
(a) sales, transfers, leases and other dispositions of (i) inventory or services or of immaterial assets in the ordinary course of business, (ii) obsolete, worn-out, uneconomic, negligible, damaged or surplus property or property that is no longer economically practical or commercially desirable to maintain or used or useful in its business, whether now or hereafter owned or leased or acquired in connection with an Acquisition, (iii) cash, Cash Equivalents and other investment securities in the ordinary course of business, (iv) accounts in the ordinary course of business for purposes of collection, and (v) assets to the extent that the aggregate value of such assets sold in any single transaction or related series of transactions is equal to $30,000,000 or less and the aggregate value of such assets sold during any fiscal year of the Parent is equal to $60,000,000 or less;
(b) sales, transfers, leases and other dispositions to the Parent or any Restricted Subsidiary (including by contribution, disposition, dividend or otherwise); provided that if the transferor of such property is a Loan Party, then (i) the transferee thereof must be a Loan Party or (ii) to the extent constituting a Disposition to a Restricted Subsidiary that is not a Loan Party, such Disposition (w) is in the ordinary course of business, (x) is for fair value and any promissory note or other non-cash consideration received in respect thereof is a permitted Investment in a Restricted Subsidiary that is not a Loan Party in accordance with Section 6.04, (y) to the extent constituting an Investment, such Investment must be a permitted Investment in a Restricted Subsidiary that is not a Loan Party in accordance with Section 6.04 or (z) does not exceed the greater of $75,000,000 and 5% of Consolidated EBITDA as of the Applicable Date of Determination;
(c) sales, transfers and other dispositions of trade or accounts receivable (including write-offs, discounts and compromises) in connection with the compromise, settlement or collection thereof;
(d) sales, transfers, leases and other dispositions of property to the extent that such property constitutes an Investment permitted by Section 6.04 (other than Section 6.04(l) and (aa)) hereunder or another asset received as consideration for the disposition of any asset permitted by this Section (in each case, other than Equity Interests in a Restricted Subsidiary, unless all Equity Interests in such Restricted Subsidiary are sold);
(e) leases or licenses or subleases or sublicenses entered into in the ordinary course of business, to the extent that they do not materially interfere with the business of the Parent and the Restricted Subsidiaries taken as a whole;
(f) conveyances, sales, transfers, licenses or sublicenses or other dispositions of intellectual property or Software in the ordinary course of business or pursuant to a research or development agreement in which the counterparty to such agreement receives a license to intellectual property or Software that result from such agreement;
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(g) dispositions resulting from any casualty or insured damage to, or any taking under power of eminent domain or by condemnation or similar proceeding of, any property or asset of the Parent or any Restricted Subsidiary;
(h) the abandonment or other disposition of intellectual property, whether now or hereafter owned or leased or acquired in connection with an Acquisition or other permitted Investment that is, in the reasonable good faith judgment of Borrower, no longer economically practicable or commercially desirable to maintain or used or useful in the business of the Parent and the Restricted Subsidiaries;
(i) the disposition of any assets that are set forth on Schedule 6.05;
(j) dispositions from and after the Effective Date of non-core or obsolete assets acquired in connection with any Acquisition or other permitted Investments;
(k) sales, transfers and other dispositions by the Parent or any Restricted Subsidiary of assets since the Effective Date so long as (A) such disposition is for fair market value (as determined in good faith by the Parent or such Restricted Subsidiary), (B) if at the time of execution of a binding agreement in respect of such sale, transfer or other disposition, no Event of Default has occurred and is continuing or would result therefrom, (C) if the assets sold, transferred or otherwise disposed of have a fair market value in excess of $45,000,000, at least 75% of the consideration (other than (A) the assumption by the transferee of Indebtedness or other liabilities contingent or otherwise of the Parent or any of its Restricted Subsidiaries and the valid release of the Parent or such Restricted Subsidiary, by all applicable creditors in writing, from all liability on such Indebtedness or other liability in connection with such Disposition, (B) securities, notes or other obligations received by the Parent or any of its Restricted Subsidiaries from the transferee that are converted by the Borrower or any of its Restricted Subsidiaries into cash or Cash Equivalents within 180 days following the closing of such Disposition, (C) Indebtedness of any Restricted Subsidiary that is no longer a Restricted Subsidiary as a result of such Disposition, to the extent that the Parent and each other Restricted Subsidiary are released from any Guarantee of payment of such Indebtedness in connection with such Disposition, (D) consideration consisting of Indebtedness of the Parent (other than Subordinated Indebtedness) received after the Effective Date from Persons who are not the Parent or any Restricted Subsidiary and (E) in connection with an asset swap, all of which shall be deemed “cash”) received is cash or Cash Equivalents or Designated Non-Cash Consideration to the extent that all Designated Non-Cash Consideration at such time does not exceed the greater of (x) $150,000,000 and (y) 10% of Consolidated EBITDA as of the Applicable Date of Determination (with the fair market value of each item of Designated Non-Cash Consideration being measured at the time received and without giving effect to subsequent changes in value) and all of the consideration received is at least equal to the fair market value of the assets sold, transferred or otherwise disposed of and (D) the Net Proceeds thereof shall be subject to Section 2.11(c);
(l) sales, transfers and other dispositions permitted by Section 6.03 (other than Section 6.03(a)(v) or (b)(vi));
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(m) the sale or exchange of specific items of property, so long as the purpose of each such sale or exchange is to acquire (and results within 365 days of such sale or exchange in the acquisition of) replacement items of property that are the functional equivalent of the item of property so sold or exchanged;
(n) the incurrence of Liens permitted hereunder;
(o) [Reserved];
(p) sales, transfers, leases and other dispositions made in order to effect the Transactions or a Permitted Tax Restructuring;
(q) sales or dispositions of Equity Interests of any Subsidiary (other than the Borrower) in order to qualify members of the Governing Body of such Subsidiary if required by applicable law;
(r) samples, including time-limited evaluation software, provided to customers or prospective customers;
(s) de minimis amounts of equipment provided to employees;
(t) sales, transfers, leases and other dispositions of (i) any Equity Interests in Unrestricted Subsidiaries or their assets or (ii) other Excluded Property, provided that for the purposes of clause (ii), (A) the First Lien Leverage Ratio as of the Applicable Date of Determination after giving effect on a Pro Forma Basis to such Disposition, shall be shall be no greater than 3.50 to 1.00 or (B) the fair market value of such Dispositions that do not meet the requirements of subclause (A) shall not exceed the greater of $75,000,000 and 5% of Consolidated EBITDA as of the Applicable Date of Determination in the aggregate;
(u) Restricted Payments made pursuant to Section 6.08;
(v) Permitted Sale Leasebacks in an aggregate principal amount not to exceed the greater of $150,000,000 and 10% of Consolidated EBITDA as of the Applicable Date of Determination in the aggregate;
(w) the unwinding of any Cash Management Agreement or Swap Agreement pursuant to its terms;
(x) sales, transfers or other dispositions of Investments in Joint Ventures or any Subsidiary that is not a wholly-owned Restricted Subsidiary to the extent required by, or made pursuant to customary buy/sell arrangements between, the parties set forth in Joint Venture arrangements and similar binding agreements;
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(y) the Parent and any Restricted Subsidiary may (i) terminate or otherwise collapse its cost sharing agreements with the Parent or any Subsidiary and settle any crossing payments in connection therewith, (ii) convert any intercompany Indebtedness to Equity Interests, (iii) transfer any intercompany Indebtedness to the Parent or any Restricted Subsidiary, (iv) settle, discount, write off, forgive or cancel any intercompany Indebtedness or other obligation owing by the Parent or any Restricted Subsidiary, (v) settle, discount, write off, forgive or cancel any Indebtedness owing by any present or former consultants, directors, officers or employees, the Parent or any Subsidiary or any of their successors or assigns or (vi) surrender or waive contractual rights and settle or waive contractual or litigation claims;
(z) any Disposition of Securitization Assets or Receivables Assets, or participations therein, in connection with any Qualified Securitization Financing or Receivables Facility, or the Disposition of a trade or account receivable in connection with the collection or compromise thereof in the ordinary course of business or consistent with past practice;
(aa) sales, transfers, leases or other dispositions pursuant to Intercompany License Agreements;
(bb) other Dispositions (including those of the type otherwise described herein) made after the Effective Date in an aggregate amount not to exceed the greater of (x) $150,000,000 and (y) Consolidated EBITDA generated by or attributable to all such property Disposed of shall not exceed 10% of Consolidated EBITDA as of the Applicable Date of Determination; and
(cc) any swap of assets in exchange for services or other assets in the ordinary course of business of comparable or greater fair market value of usefulness to the business of the Borrower and its Restricted Subsidiaries as a whole, as determined in good faith by the Borrower; provided that any swap of assets constituting Collateral that are exchanged for other assets not constituting Collateral outside of the ordinary course of business shall not exceed the greater of (x) $75,000,000 and (y) 5% of Consolidated EBITDA as of the Applicable Date of Determination.
Section 6.06 [Reserved].
Section 6.07 [Reserved].
Section 6.08 Restricted Payments; Certain Payments of Indebtedness.
(a) The Parent will not, and will not permit any Restricted Subsidiary to, declare or make any Restricted Payment, except that:
(i) (A) the Restricted Subsidiaries may declare and make Restricted Payments ratably with respect to their Equity Interests and (B) any Restricted Subsidiary may make a Restricted Payment to the Parent or any Restricted Subsidiary (so long as, in the case of this clause (B), if the Restricted Subsidiary making the Restricted Payment is not wholly owned (directly or indirectly) by the Parent, such Restricted Payment is made ratably among the holders of its Equity Interests);
(ii) the Parent and the Restricted Subsidiaries may declare and make Restricted Payments with respect to its Equity Interests payable solely in shares of Qualified Equity Interests (so long as, in the case of this clause (ii), if the Restricted Subsidiary making the Restricted Payment is not wholly owned (directly or indirectly) by the Parent, such Restricted Payment is made ratably among the holders of its Equity Interests);
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(iii) the Parent and the Restricted Subsidiaries may make Restricted Payments at such times and in such amounts (A) as shall be necessary to permit any Parent Entity to discharge their respective general corporate and overhead or other expenses (including franchise and similar taxes required to maintain its corporate existence, customary salary, bonus and other benefits payable to officers and employees of the Parent, Holdco and directors fees and director and officer indemnification obligations) incurred in the ordinary course and (B) for any Related Taxes;
(iv) the Parent may make payments (or may make Restricted Payments to any Parent Entity, the proceeds of which will be used to make payments) at such times and in such amounts as are necessary to make payments of or on account of (1) monitoring or management or similar fees or transaction fees and (2) reimbursement of out-of-pocket costs, expenses and indemnities, in each case to any Equity Investor or any of its Affiliates, in each case to the extent permitted by Section 6.09;
(v) [Reserved];
(vi) the Restricted Subsidiaries may make a Restricted Payment in connection with the acquisition of additional Equity Interests in any Restricted Subsidiary from minority shareholders;
(vii) the Parent or any Restricted Subsidiary may make repurchases of Equity Interests deemed to occur upon the cashless exercise of stock options when such Equity Interests represents a portion of the exercise price thereof;
(viii) [Reserved];
(ix) the Parent and its Restricted Subsidiaries may make Restricted Payments pursuant to the Intercompany License Agreements;
(x) Restricted Payments made (A) (i) in connection with the Transactions (including, for the avoidance of doubt, the Return of Value Payment and the Seattle Payment), (ii) in respect of working capital adjustments or purchase price adjustments pursuant to any Permitted Acquisition or other permitted Investments (other than pursuant to Section 6.04(aa)), and (iii) to satisfy indemnity and other obligations under the Merger Agreement and in respect of Permitted Acquisitions or other permitted Investments, and (B) to the Parent or any Restricted Subsidiary effectuate a Permitted Tax Restructuring;
(xi) Restricted Payments necessary to consummate transactions permitted pursuant to Section 6.03 and to make Investments permitted pursuant to Section 6.04 (other than pursuant to Section 6.04(aa));
(xii) [Reserved];
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(xiii) [Reserved];
(xiv) the Parent or any Restricted Subsidiary may make additional Restricted Payments in an amount that shall not exceed $250,000,000;
(xv) the Parent or any Restricted Subsidiary may make additional Restricted Payments to the extent that such Restricted Payments are made with net proceeds received by the Parent after the Closing Date from the issuance or sale of Qualified Equity Interests of the Parent or proceeds of an equity contribution made to the Parent (other than any Cure Amount) (which such equity proceeds so utilized shall not also increase the Available Amount);
(xvi) distributions or payments of Securitization Fees, sales contributions and other transfers of Securitization Assets or Receivables Assets and purchases of Securitization Assets or Receivables Assets pursuant to a Securitization Repurchase Obligations, in each case in connection with a Qualified Securitization Financing or a Receivables Facility;
(xvii) the Parent may make Restricted Payments to any Parent Entity the proceeds of which shall be used to pay customary costs, fees and expenses related to any unsuccessful equity or debt offering permitted by this Agreement, so long as the proceeds of such offering were intended to be contributed to the Parent or such offering was otherwise related to the business of the Parent;.
(xviii) the Parent and the Restricted Subsidiaries may make Restricted Payments to (a) pay cash in lieu of fractional Equity Interests in connection with any dividend, split or combination thereof or any Acquisition, Investment or other transaction otherwise permitted hereunder and (b) honor any conversion request by a holder of convertible Indebtedness (to the extent such conversion request is paid solely in shares of Qualified Equity Interests of the Parent) and make cash payments in lieu of fractional shares in connection with any such conversion and may make payments on convertible Indebtedness in accordance with its terms;
(xix) other Restricted Payments; provided that at the time of declaration of such Restricted Payment, no Event of Default has occurred and is continuing and the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is less than 3.00:1.00;
(xx) the Parent and the Restricted Subsidiaries may make Restricted Payments in an aggregate amount not to exceed the Available Amount; providedhowever that at the time of declaration of such Restricted Payment utilizing amounts pursuant to clause (b) of the definition of “Available Amount”, no Event of Default shall have occurred and be continuing;
(xxi) the Parent may make Restricted Payments consisting of Equity Interests in any Unrestricted Subsidiary, whether pursuant to a distribution, dividend or any other transaction not prohibited hereunder;
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(xxii) [Reserved];
(xxiii) the making of any Restricted Payment within 60 days after the date of declaration thereof, if at the date of such declaration such Restricted Payment would have complied with another provision of this Section 6.08(a); provided that the making of such Restricted Payment will reduce capacity for Restricted Payments pursuant to such other provision when so made;
(b) the Parent will not, and will not permit any Restricted Subsidiary to (A) make any voluntary payment or other distribution (whether in cash, securities or other property), of or in respect of principal or interest, or such payment by way of the purchase, redemption, retirement, acquisition, cancellation or termination, in each case prior to the final scheduled maturity thereof, of any Material Indebtedness that is contractually subordinated in right of payment to any of the Obligations (it being understood that Indebtedness shall not be deemed to be subordinated in right of payment to the Obligations merely because such Indebtedness is secured by a Lien that is junior to the Liens securing the applicable portion of the Obligations) or (B) solely to the extent that Indebtedness has a Lien on substantially all of the Collateral securing Obligations that is junior to the Lien on the Collateral securing the Obligations, make any voluntary prepayment of the principal of such Indebtedness outstanding under Section 6.01(a)(xviii), Section 6.01(a)(xxx) or Section 6.01(a)(xxxii) except:
(i) payment of regularly scheduled interest and principal payments (and fees, indemnities and expenses payable) as, and when due in respect of any such Indebtedness to the extent permitted by any subordination or intercreditor provisions in respect thereof;
(ii) refinancings, replacements, substitutions, extensions, restructurings, exchanges and renewals of any such Indebtedness to the extent such refinancing, replacement, exchange or renewed Indebtedness is permitted by Section 6.01 and any fees and expenses in connection therewith;
(iii) payments of intercompany Indebtedness permitted under Section 6.01 to the extent permitted by any subordination provisions in respect thereof;
(iv) convert, exchange, redeem, repay or prepay such Indebtedness into or for Equity Interests of the Parent (other than Disqualified Equity Interests of the Parent, except to the extent permitted under Section 6.01(b));
(v) AHYDO Catch-Up Payments relating to Indebtedness of the Parent and its Restricted Subsidiaries so long as no Event of Default under Section 7.01(a), 7.01(b), 7.01(h) or 7.01(i) has occurred and is continuing;
(vi) any such other payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness or other distributions in an amount not to exceed (A) the greater of $75,000,000 and 5% of Consolidated EBITDA plus (B) the Available Amount; providedhowever that in the case of payments or distributions made pursuant to this clause (vi)(B), at the time of making such payment or distribution with amounts pursuant to clause (b) of the definition of “Available Amount”, no Event of Default shall have occurred and be continuing;
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(vii) any such other payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness or other distributions made with net proceeds received by the Parent after the Closing Date from the issuance or sale of Qualified Equity Interests of the Parent or proceeds of an equity contribution initially made to the Parent (other than any Cure Amount) (which such equity proceeds so utilized shall not also increase the Available Amount);
(viii) the payment, redemption, repurchase, retirement, termination or cancellation of Indebtedness within 60 days of the date of the Redemption Notice if, at the date of any payment, redemption, repurchase, retirement, termination or cancellation notice in respect thereof (the “Redemption Notice”), such payment, redemption, repurchase, retirement termination or cancellation would have complied with another provision of this Section 6.08(b); provided that such payment, redemption, repurchase, retirement termination or cancellation shall reduce capacity under such other provision;
(ix) other payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness in lieu of and not in excess of the amount of (after giving effect to any other such payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness or Investments pursuant to Section 6.04(ff)), Restricted Payments to the extent permitted to be made in accordance with Section 6.08(xiv); and
(x) any such other payments, redemptions, repurchases, retirements, terminations or cancellations of Indebtedness or other distributions; provided that at the time of making such payment or distribution no Event of Default has occurred and is continuing and the First Lien Leverage Ratio computed on a Pro Forma Basis as of the Applicable Date of Determination is less than 3.00:1.00.
Section 6.09 Transactions with Affiliates. The Parent will not, and will not permit any Restricted Subsidiary to, sell, lease or otherwise transfer any property or assets to, or purchase, lease or otherwise acquire any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, with a fair market value in excess of the greater of $30,000,000 and 2.5% of Consolidated EBITDA except (a) transactions at prices and on terms and conditions (taken as a whole) not materially less favorable to the Parent or such Restricted Subsidiary than could reasonably be expected to be obtained on an arm’s-length basis from unrelated third parties (as determined in good faith by the Borrower); (b) transactions between or among the Parent and the Restricted Subsidiaries (or any entity that becomes a Restricted Subsidiary as a result of such transaction) not involving any other Affiliate; (c) loans or advances to employees, officers and directors permitted under Section 6.04; (d) payroll, travel and similar advances to cover matters permitted under Section 6.04; (e) the payment of reasonable fees and reimbursement of out-of-pocket expenses to directors of the Parent or any Restricted Subsidiary; (f) compensation (including bonuses) and employee benefit arrangements paid to, indemnities provided for the benefit of, and employment and severance arrangements entered into with, directors, officers, managers, consultants or employees of the Parent or the Subsidiaries in the ordinary course of business, including in connection with the Transactions and any other transaction permitted hereunder; (g) any issuances of securities or other payments, awards or grants in cash, securities or otherwise pursuant to, or the funding of, employment agreements, stock options and stock ownership plans; (h) any payments to any Equity Investor or its Affiliates for reimbursement of out-of-pocket costs and expenses and indemnities in connection therewith; (i) payment of fees and expenses pursuant to the Transactions, and other fees payable to any of its Affiliates by the Parent and any Restricted Subsidiaries, which payments are approved by a majority of the disinterested members of the board of directors of the Parent in good faith; (j) any Restricted Payment and payments on Indebtedness not prohibited by Section 6.08; (k) [Reserved]; (l) transactions between and among the Parent and its Subsidiaries which are in the ordinary course of business and transactions between Parent and its direct or indirect shareholders in the ordinary course of business with respect to the Equity Interests in the Parent, such as shareholder agreements, registration agreements and including providing expense reimbursement and indemnities in respect thereof; (m) the Transactions (including payment of Transaction Costs); (n) transactions pursuant to the Transition Services Agreement; (o) the existence and performance of agreements and transactions with any Unrestricted Subsidiary that were entered into prior to the designation of a Restricted Subsidiary as such Unrestricted Subsidiary to the extent that the transaction was permitted at the time that it was entered into with such Restricted Subsidiary and transactions entered into by an Unrestricted Subsidiary with an Affiliate prior to the redesignation of any such Unrestricted Subsidiary as a Restricted Subsidiary; (p) Affiliate repurchases of the Loans or Commitments to the extent permitted hereunder and the holding of such Loans or Commitments and the payments and other transactions contemplated herein in respect thereof; (q) transactions set forth on Schedule 6.09, as these agreements and instruments may be amended, modified, supplemented, extended, renewed or refinanced from time to time in accordance with the other terms of this covenant or to the extent not more disadvantageous to the Secured Parties in any material respect (taken as a whole); (r) any customary transaction with a Receivables Facility or a Securitization Subsidiary effected as part of a Qualified Securitization Financing; (s) any Intercompany License Agreements; (t) payments to or from, and transactions with, joint ventures (to the extent any such joint venture is only an Affiliate as a result of Investments by the Parent and the Restricted Subsidiaries in such joint venture) in the ordinary course of business; (u) transactions by the Parent and its Restricted Subsidiaries with customers, clients, joint venture partners, suppliers or purchasers or sellers of goods or services, in each case in the ordinary course of business and otherwise in compliance with the terms of this Agreement that are fair to the Parent and the Restricted Subsidiaries, as determined in good faith by the board of directors or the senior management of the relevant Person, or are on terms at least as favorable as might reasonably have been obtained at such time from an unaffiliated party; (v) any transaction between or among the Parent or any Restricted Subsidiary and any Affiliate of the Parent or a Joint Venture or similar entity that would constitute an Affiliate transaction solely because the Parent or a Restricted Subsidiary owns an equity interest in or otherwise controls such Affiliate, Joint Venture or similar entity; (w) loans and advances to any Parent Entity permitted under Section 6.4(ff) and (x) transactions in which the Parent or any Restricted Subsidiary, as the case may be, delivers to the Administrative Agent a letter from an independent financial advisor stating that such transaction is fair to the Parent or such Restricted Subsidiary from a financial point of view or meets the requirements of clause (a) of this Section 6.09.
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Section 6.10 Restrictive Agreements. The Parent will not, and will not permit any Restricted Subsidiary to, enter into any agreement, instrument, deed or lease that prohibits, restricts or imposes any condition upon (a) the ability of any Loan Party to create, incur or permit to exist any Lien in favor of the Secured Parties (excluding Lender Counterparties) upon any of its Collateral or (b) the ability of any Restricted Subsidiary to make Restricted Payments to or make or repay loans or advances to any Loan Party, provided that the foregoing shall not apply to (i) restrictions and conditions imposed by (A) law, (B) any Loan Document, any agreements evidencing secured Indebtedness permitted by this Agreement or any documents governing the Term Loan Exchange Notes, the Additional Term Notes, the Unrestricted Additional Term Notes, the Credit Agreement Refinancing Indebtedness, the Refinancing Notes, any Additional Debt, and any Seattle Loan Document, any Seattle Additional Debt, any documents governing the Seattle Term Loan Exchange Notes, the Seattle Additional Term Notes, the Seattle Unrestricted Additional Term Notes, the Seattle Credit Agreement Refinancing Indebtedness, the Seattle Refinancing Notes and any Seattle Additional Debt, and, in each case, any documentation providing for any Permitted Refinancing thereof or (C) other agreements evidencing Indebtedness permitted by Section 6.01, provided that in each case under this clause (i) such restrictions or conditions (x) apply solely to a Restricted Subsidiary that is not a Loan Party, (y) are not materially more restrictive (taken as a whole) (as determined in good faith by the Borrower) than the restrictions or conditions set forth in the Loan Documents, or (z) do not materially impair the Borrower’s ability to pay its obligations under the Loan Documents as and when due (as determined in good faith by the Borrower); (ii) restrictions and conditions existing on the Effective Date or to any extension, renewal, amendment, modification or replacement thereof, except to the extent any such amendment, modification or replacement materially expands the scope of any such restriction or condition (as determined in good faith by the Borrower); (iii) restrictions and conditions contained in agreements relating to the sale of a Subsidiary or any assets pending such sale, provided that such restrictions and conditions apply only to the Subsidiary or assets that is or are to be sold and such sale is permitted hereunder; (iv) the foregoing shall not apply to customary provisions in leases, licenses and other contracts restricting the assignment, subletting or transfer thereof or other assets subject thereto; (v)(A) any restrictions with respect to a Subsidiary imposed pursuant to an agreement that has been entered into in connection with the sale, transfer or other disposition of all or substantially all of the Equity Interests or assets of such Subsidiary or (B) restrictions on transfers of assets subject to Liens permitted by Section 6.02 (but, with respect to any such Lien, only to the extent that such transfer restrictions apply solely to the assets that are the subject of such Lien); (vi) restrictions created in connection with any Qualified Securitization Financing; (vii) restrictions or conditions set forth in any agreement in effect at any time any Person becomes a Restricted Subsidiary, provided that such agreement was not entered into in contemplation of such Person becoming a Restricted Subsidiary and the restriction or condition set forth in such agreement does not apply to the Parent or any other Restricted Subsidiary; (viii) customary provisions in shareholders agreements, joint venture agreements, organizational or constitutive documents or similar binding agreements relating to any Joint Venture or non-wholly-owned Restricted Subsidiary and other similar agreements applicable to Joint Ventures and non-wholly-owned Restricted Subsidiaries and applicable solely to such Joint Venture or non-wholly-owned Restricted Subsidiary and the Equity Interests issued thereby; (ix) any restrictions on cash or other deposits imposed by agreements entered into in the ordinary course of business; (x) any restrictions regarding licensing or sublicensing by the Parent and its Restricted Subsidiaries of intellectual property in the ordinary course of business; (xi) any restrictions that arise in connection with cash or other deposits permitted under Section 6.02 and Section 6.04; (xii) any restrictions on cash or other deposits or net worth imposed by customers under contracts entered into in the ordinary course of business, (xiii) restrictions and conditions imposed by agreements relating to the Transactions and (xiv) comprise restrictions imposed by any agreement governing Indebtedness entered into on or after the Closing Date and permitted under Section 6.01 if the restrictions contained in any such agreement taken as a whole (a) are not materially less favorable to the Secured Parties than the encumbrances and restrictions contained in the Loan Documents (as determined by the Borrower) or (b) either (I) the Borrower determines at the time of entry into such agreement or instrument that such encumbrances or restrictions will not adversely affect, in any material respect, the Borrower’s ability to make principal or interest payments required hereunder or (II) such encumbrance or restriction applies only during the continuance of a default relating to such agreement or instrument.
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Section 6.11 Amendment of Material Documents. The Parent will not, and will not permit any other Loan Party to, amend or otherwise modify (i) any of its Organizational Documents in a manner that would reasonably be expected to cause a Material Adverse Effect or (ii) any term or condition of any Material Indebtedness required to be subordinated in right of payment to the Obligations except (x) in accordance with the terms of the applicable intercreditor or subordination terms or agreement or (y) as permitted pursuant to or reasonably necessary to effect a Permitted Refinancing thereof.
Section 6.12 First Lien Leverage Ratio. Except with the written consent of the Required Revolving Lenders, the Parent will not permit the First Lien Leverage Ratio, calculated as of the last day of the most recent fiscal quarter of the Parent for which financial statements were required to have been furnished to the Administrative Agent pursuant to Section 5.01 (commencing with the first full fiscal quarter ending after the Effective Date), to exceed the ratio set forth below opposite the period during which such last day occurs:
Date of Fiscal Quarter End | Ratio |
[__] through [__]5 | 4.85 to 1.00 |
[__] through [__]6 | 4.35 to 1.00 |
[__] and thereafter | 3.85 to 1.00 |
Notwithstanding the foregoing, this Section 6.12 shall be in effect (and shall only be in effect) when the sum of the Dollar Equivalent of the aggregate principal amount of Revolving Loans, Swingline Loans and Letters of Credit (other than Cash Collateralized Letters of Credit and additional Letters of Credit in an aggregate amount not greater than $25,000,000) in each case, outstanding as of the last day of the most recent fiscal quarter of the Parent for which financial statements were required to have been furnished to the Administrative Agent pursuant to Section 5.01, is greater than 35% of the Revolving Commitments at such time.
5 | End of first fiscal quarter of Parent following second anniversary of the Effective Date. |
6 | End of first fiscal quarter of Borrower following third anniversary of the Effective Date. |
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Section 6.13 Changes in Fiscal Year. The Parent will not permit its fiscal year for financial reporting purposes to end on a day other than April 30; provided, however, that the Parent may (i) upon completion of the Merger, change such fiscal year to October 31 to align financial year ends with the Seattle Business, (ii) upon written notice to the Administrative Agent, change such fiscal year (and the fiscal year of the Restricted Subsidiaries) to any other fiscal year reasonably acceptable to the Administrative Agent and (iii) conform the fiscal year of the Restricted Subsidiaries to the fiscal year of the Parent. The Borrower and the Administrative Agent will, and are hereby authorized by the Lenders to, make any adjustments to this Agreement and to the covenants contained herein that are that are reasonably necessary in order to reflect such change.
Article VII
Events of Default
Section 7.01 Events of Default. If any of the following events (any such event, an “Event of Default”) shall occur:
(a) the Borrower shall fail to pay any principal of any Loan or any reimbursement obligation in respect of any LC Disbursement when and as the same shall become due and payable;
(b) the Borrower shall fail to pay (x) any interest on any Loan, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of five (5) Business Days or (y) or any fee payable hereunder or any other amount due under this Agreement or any other Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of fifteen (15) Business Days;
(c) (i) on the Effective Date, any Specified Representation shall be false or incorrect in any material respect as of the Effective Date and (ii) after the Effective Date, any representation, warranty or certification, when taken as a whole, made or deemed made by any Loan Party in any Loan Document shall be false or incorrect in any material respect as of the date made or deemed made and, in each case, to the extent capable of being cured (as determined by the Borrower in good faith), such incorrect representation, warranty or certification shall remain incorrect for a period of 30 days after receipt by the Borrower of written notice thereof from the Administrative Agent or the Required Lenders.
(d) Either the Parent, Holdco or the Borrower shall default in the performance or compliance of Section 5.02(a) (provided that the delivery of a notice of Default or Event of Default at any time will cure an Event of Default under Section 5.02(a) arising from the failure of the Borrower to timely deliver such notice of Default or Event of Default), Section 5.04 (solely with respect to the existence of the Borrower in its jurisdiction of organization or incorporation, if applicable) or in Article VI; provided that an Event of Default under Section 6.12 is subject to the Cure Right set forth in Section 7.03; providedfurther that an Event of Default under Section 6.12 shall not constitute an Event of Default (or trigger a Default) for purposes of any Term Loan, unless and until the Administrative Agent (with the consent, or at the request, of the Required Revolving Lenders) has actually terminated the Revolving Commitments and declared all outstanding Revolving Loans to be immediately due and payable in accordance with this Agreement and such declaration has not been rescinded on or before such date;
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(e) Any Loan Party shall default in the performance or compliance of any term contained in any Loan Document (other than those specified in paragraph (a), (b) or (d) of this Section 7.01), and such default shall continue unremedied and unwaived for a period of 30 days after receipt by the Borrower of written notice thereof from the Administrative Agent or the Required Lenders;
(f) the Parent or any Restricted Subsidiary shall fail to make any payment beyond all applicable grace periods (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable after giving effect to any applicable grace periods provided in the applicable instrument or agreement under which such Material Indebtedness was created, provided that this paragraph (f) shall not apply to any such failure that (x) is remedied by the Parent or applicable Restricted Subsidiary or (y) waived (including in the form of amendment) by the requisite holders of the applicable item of Material Indebtedness, in either case, prior to the acceleration of all the Loans pursuant to this Section 7.01;
(g) (i) any breach or default (after all applicable grace periods having expired and all required notices having been given) by the Parent or any Restricted Subsidiary of any Material Indebtedness if the effect of such breach or default is to cause such Material Indebtedness to become due prior to its scheduled maturity or that enables or permits (with all applicable grace periods having expired and all required notices having been given) the holder or holders of such Material Indebtedness, or any trustee or agent on its or their behalf, to cause such Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity, provided that this paragraph (g) shall not apply to (A) secured Indebtedness that becomes due as a result of the sale, transfer or other disposition (including as a result of a casualty or condemnation event) of the property or assets securing such Indebtedness (to the extent such sale, transfer or other disposition is not prohibited under this Agreement), (B) Indebtedness which is convertible into Equity Interest and converts to Equity Interests in accordance with its terms or (C) any breach or default that (x) is remedied by the Parent or the applicable Restricted Subsidiary or (y) waived (including in the form of amendment) by the requisite holders of the applicable item of Material Indebtedness, in either case, prior to the acceleration of all the Loans pursuant to this Section 7.01 or (ii) if an involuntary “early termination event” or other similar event (which event shall extend beyond any applicable cure periods or grace periods) shall have occurred in respect of obligations owing under any Swap Agreement of the Parent or any Restricted Subsidiary, and the amount of such obligations, either individually or in the aggregate for all such Swap Agreements at such time, is in excess of $125,000,000; provided that, in respect of obligations owing under any such Swap Agreement owed to the applicable counterparty at such time, the amount for purposes of this paragraph (g)(ii) shall be the amount payable on a net basis by the Parent or such Restricted Subsidiary to such counterparty (after giving effect to all netting arrangements) if such Swap Agreement were terminated at such time); provided that this paragraph (g)(ii) shall not apply to any such event that (x) is remedied by the Parent or the applicable Restricted Subsidiary or (y) waived (including in the form of amendment) by the applicable counterparty, in either case, prior to the acceleration of all the Loans pursuant to this Section 7.01;
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(h) subject to Section 7.02, (i) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking liquidation, reorganization, administration or other relief in respect of the Parent or any Restricted Subsidiary, or of all or a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the involuntary appointment of a receiver, trustee, custodian, sequestrator, conservator, administrator or similar official for the Parent or any Restricted Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding shall continue undismissed and unstayed for 60 consecutive days without having been dismissed, bonded or discharged or an order of relief is entered in any such proceeding;
(i) subject to Section 7.02, the Parent or any Restricted Subsidiary shall (i) voluntarily commence any proceeding seeking liquidation, reorganization, administration or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of any proceeding or petition described in paragraph (h) of this Section 7.01, (iii) consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator, administrator or similar official for the Parent or any Restricted Subsidiary or for all or a substantial part of its assets or (iv) make a general assignment for the benefit of creditors;
(j) any final, non-appealable judgment(s) for the payment of money in an aggregate amount in excess of $125,000,000 (to the extent not covered by insurance or indemnities as to which the applicable insurance company or third party has not denied coverage) shall be rendered against the Parent or any Restricted Subsidiary or any combination thereof and the same shall remain undischarged, unvacated, unbounded and unstayed for a period of 60 consecutive days;
(k) an ERISA Event or similar event with respect to any Foreign Plan shall have occurred that would reasonably be expected to result in a Material Adverse Effect;
(l) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by any Loan Party not to be (other than in an informational notice to the Administrative Agent), a valid and perfected (if and to the extent required to be perfected under the applicable Security Document) Lien on any Collateral with a fair value in excess of $125,000,000 at any time, with the priority required by the applicable Security Document (subject to Liens permitted under Section 6.02), except (i) as a result of the release of a Loan Party or the sale, transfer or other disposition of the applicable Collateral (including as a result of the designation of a Restricted Subsidiary as an Unrestricted Subsidiary) in a transaction permitted under the Loan Documents or the occurrence of the Termination Date or (ii) as a result of any action of the Administrative Agent, Collateral Agent or any Lender or the failure of the Administrative Agent, Collateral Agent, or any Lender to take any action that is within its control;
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(m) at any time after the execution and delivery thereof, any material portion of the Guarantee of the Obligations under the Guarantees shall for any reason other than the occurrence of the Termination Date or as expressly permitted hereunder or thereunder (including or as a result of a transaction permitted hereunder) cease to be in full force and effect, or any Loan Party shall contest the validity or enforceability in writing or repudiate, rescind or deny in writing that it has any further liability or obligation under any Loan Document other than as a result of the occurrence of the Termination Date, the sale or transfer of such Loan Party (including the designation as an Unrestricted Subsidiary) or as a result of a transaction permitted hereunder or thereunder; or
(n) a Change in Control shall have occurred;
then, and in every such event (I) (other than (x) an event described in paragraph (d) of this Section 7.01 in respect of a default of performance or compliance with the covenant under Section 6.12 or (y) an event with respect to the Borrower described in paragraph (h) or (i) of this Section 7.01;provided that in the case of clause (x), the actions hereinafter described will be permitted to occur only (A) following the expiration of the ability to effectuate the Cure Right if such Cure Right has not been so exercised and (B) if the express conditions of the last proviso contained in Section 7.01(d) have been satisfied), and at any time thereafter during the continuance of such event, the Administrative Agent with the consent of the Required Lenders may, and at the request of the Required Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times (except in the case of an event under paragraph (d) of this Section 7.01 in respect of a failure to observe or perform the covenant under Section 6.12, the following actions may not be taken until (A) the ability to exercise the Cure Right under Section 7.03 has expired (but may be taken as soon as the ability to exercise the Cure Right has expired and it has not been so exercised) and (B) the express conditions in the last proviso contained in Section 7.01(d) have been satisfied): (i) terminate the Commitments, and thereupon the Commitments shall terminate immediately; and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter, during the continuance of such event, be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and (II) in the case of an event under paragraph (d) of this Section 7.01 in respect of a failure to observe or perform the covenant under Section 6.12, (provided that the actions hereinafter described will be permitted to occur only following the expiration of the ability to effectuate the Cure Right if such Cure Right has not been so exercised), and at any time thereafter during the continuance of such event, the Administrative Agent with the consent of the Required Revolving Lenders may, and at the request of the Required Revolving Lenders shall, by notice to the Borrower, take either or both of the following actions, at the same or different times (except the following actions may not be taken until the ability to exercise the Cure Right under Section 7.03 has expired (but may be taken as soon as the ability to exercise the Cure Right has expired and it has not been so exercised)): (i) terminate the Revolving Commitments, and thereupon the Revolving Commitments shall terminate immediately, and (ii) declare the Revolving Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter, during the continuance of such event, be declared to be due and payable), and thereupon the principal of the Revolving Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower (to the extent permitted by applicable law); and in the case of any event with respect to the Borrower described in paragraph (h) or (i) of this Section 7.01, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued hereunder, shall automatically become due and payable by the Borrower, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower.
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Section 7.02 Exclusion of Immaterial Subsidiaries. Solely for the purposes of determining whether a Default or an Event of Default has occurred under paragraph (h), (i) or (j) of Section 7.01, any reference in any such paragraph to any Restricted Subsidiary shall be deemed not to include any Restricted Subsidiary affected by any event or circumstance referred to in such paragraph that did not, as of the last day of the fiscal quarter of the Parent most recently ended, have assets with a value equal to or greater than 5.0% of Consolidated Total Assets of the Parent and its Restricted Subsidiaries as of such date, based on the consolidated statement of financial position of the Parent and its Restricted Subsidiaries as of such date, provided that if it is necessary to exclude more than one Restricted Subsidiary from paragraph (h), (i) or (j) of Section 7.01 pursuant to this paragraph in order to avoid a Default or an Event of Default, the aggregate value of the assets of all such excluded Restricted Subsidiaries as of such last day may not exceed 10.0% of Consolidated Total Assets of the Parent and its Restricted Subsidiaries as of such date, based on the consolidated statement of financial position of the Parent and its Restricted Subsidiaries as of such date.
Section 7.03 Right to Cure. (a) Notwithstanding anything to the contrary contained in Section 7.01, in the event that the Parent fails to comply with the requirements of the covenant under Section 6.12 at the end of any fiscal quarter, until the expiration of the twelfth (12th) Business Day subsequent to the date the Compliance Certificate is required to be delivered pursuant to Section 5.01(c), in respect of the period ending on the last day of such quarter, any net cash proceeds of any common equity contribution made, directly or indirectly to the Parent, or any net cash proceeds of any issuance of Qualified Equity Interests of the Parent, in each case during such fiscal quarter then ended for which the Parent has failed to comply with Section 6.12 and/or following the end of such fiscal quarter and on or prior to such 12th Business Day, in each case in an aggregate amount equal to the amount necessary to cure the relevant failure to comply with such covenant may, at the election of the Borrower be included in the calculation of Consolidated EBITDA for purposes of determining compliance with such covenant (the “Cure Right”), and upon the earlier of (x) the delivery by the Borrower of written notice to the Administrative Agent that it intends to exercise the Cure Right hereunder (it being understood that to the extent such notice is provided in advance of delivery of a Compliance Certificate for the applicable period, the amount of such net cash proceeds that are received as the Cure Amount may be lower than specified in such notice to the extent that the amount necessary to cure any Event of Default under Section 6.12 is less than the full amount of any originally designated amount) and (y) receipt by the Parent of such cash proceeds (the “Cure Amount”), such covenant shall be recalculated giving effect to the following pro forma statements:
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(i) solely for purpose of determining the existence of an Event of Default under Section 6.12, Consolidated EBITDA for the fiscal quarter of the Parent for which such certificate is required to be delivered shall be increased by an amount equal to the Cure Amount, and such increase shall be effective for all periods that include the fiscal quarter of the Parent for which such Cure Right was exercised and not for any other purpose under this Agreement; and
(ii) if, after giving effect to the foregoing recalculations (but not giving effect to any payment of Indebtedness made with such Cure Amount when calculating compliance with Section 6.12 at the end of such (but no other) fiscal quarter), the Parent shall then be in compliance with the requirements of the covenant under Section 6.12 at the end of such fiscal quarter, the Parent shall be deemed to have satisfied the requirements of the covenant under Section 6.12 as of the last day of such fiscal quarter with the same effect as though there had been no failure to comply therewith at such date, and the applicable breach or Default or Event of Default of the covenant under Section 6.12 that had occurred shall be deemed cured for this purpose under this Agreement and the other Loan Documents (other than for purposes of Section 4.02(b)) if the Borrower has delivered written notice pursuant to clause (x) above); provided that if the Cure Amount is not received by the Parent prior to such 12th Business Day, such Default or Event of Default shall be deemed reinstated.
(b) Notwithstanding anything herein to the contrary, (i) in each four-fiscal-quarter period of the Parent there shall be at least two (2) fiscal quarters in which the Cure Right is not exercised, (ii) the Cure Right shall not be exercised more than five (5) times prior to the Revolving Maturity Date, (iii) the Cure Amount shall not exceed the amount required to cause the Parent to be in compliance with the covenant under Section 6.12; and (iv) neither the Administrative Agent nor any Lender or Secured Party shall exercise any remedy (including acceleration) under the Loan Documents or applicable law on the basis of an Event of Default caused by the failure to comply with Section 6.12 until after the Parent’s ability to cure has lapsed and the Parent has not exercised the Cure Right.
Section 7.04 Application of Proceeds.
(a) Upon the occurrence and during the continuation of an Event of Default, if requested by Required Lenders, or upon acceleration of all the Obligations pursuant to Section 7.01, all proceeds received by the Administrative Agent or the Collateral Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral under any Loan Document shall, subject to the Pari Passu Intercreditor Agreement and any other applicable intercreditor or subordination agreement entered into by the Collateral Agent in accordance with the terms hereof, be applied by the Administrative Agent as follows:
(i) First, to payment of that portion of the Secured Obligations constituting fees, indemnities, expenses and other amounts (other than principal and interest) payable to each Agent in its capacity as such;
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(ii) Second, to payment of that portion of the Secured Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders, ratably among them in proportion to the amounts described in this clause Second payable to them;
(iii) Third, to payment of that portion of the Secured Obligations constituting accrued and unpaid interest (including, but not limited to, post-petition interest), ratably among the Lenders in proportion to the respective amounts described in this clause Third payable to them;
(iv) Fourth, to payment of that portion of the Secured Obligations constituting unpaid principal, unreimbursed LC Disbursements or face amounts of the Loans, and Swap Termination Value under Secured Swap Agreements and Secured Cash Management Obligations and for the account of the Issuing Bank, to Cash Collateralize that portion of Obligations comprised of the aggregate undrawn amount of Letters of Credit, ratably among the Secured Parties in proportion to the respective amounts described in this clause Fourth held by them;
(v) Fifth, to the payment of all other Secured Obligations of the Loan Parties that are due and payable to the Administrative Agent and the other Secured Parties on such date, ratably based upon the respective aggregate amounts of all such Secured Obligations owing to the Administrative Agent and the other Secured Parties on such date; and
(vi) Last, the balance, if any, after all of the Secured Obligations have been paid in full, to the Borrower or as otherwise required by law.
Subject to Section 2.05(c), amounts used to Cash Collateralize the aggregate undrawn amount of Letters of Credit pursuant to clause Fourth above shall be applied to satisfy drawings under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral after all Letters of Credit have either been fully drawn or expired, such remaining amount shall be applied to the other Obligations, if any, in the order set forth above and, if no Obligations remain outstanding, to the Borrower.
Notwithstanding the foregoing, (a) amounts received from any Guarantor that is not a “Eligible Contract Participant” (as defined in the Commodity Exchange Act) shall not be applied to the obligations that are Excluded Swap Obligations and (b) Secured Cash Management Obligations shall be excluded from the application described above if the Administrative Agent has not received written notice thereof, together with such supporting documentation as the Administrative Agent may request, from the applicable Lender Counterparty. Each Lender Counterparty not a party to this Agreement that has given the notice contemplated by the preceding sentence shall, by such notice, be deemed to have acknowledged and accepted the appointment of the Administrative Agent pursuant to the terms of Article VIII hereof for itself and its Affiliates as if a “Lender” party hereto.
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Article VIII
The Administrative Agent
Section 8.01 Appointment of Agents. Each of the Lenders and the Issuing Bank hereby irrevocably appoints JPMorgan Chase Bank, N.A. to act on its behalf as the Administrative Agent and Collateral Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent and Collateral Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent and Collateral Agent by the terms of the Loan Documents, together with such actions and powers as are reasonably incidental thereto. Unless otherwise specifically set forth herein, the Collateral Agent shall have all the rights and benefits of the Administrative Agent set forth in this Article.
The Collateral Agent shall act as the “collateral agent” under the Loan Documents, and each of the Lenders (including in its capacities as a Lender Counterparty or potential Lender Counterparty) and the Issuing Bank hereby irrevocably appoints and authorizes the Collateral Agent to act as the agent (and, if applicable, in the case of any UK Security Documents, as trustee of the Liens constituted thereby) of such Lender and the Issuing Bank for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Loan Parties pursuant to the Security Documents to secure any of the Obligations, together with such powers and discretion as are reasonably incidental thereto. In this connection, the Collateral Agent, as “collateral agent” and any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant to Section 8.05 for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at the direction of the Administrative Agent, shall be entitled to the benefits of all provisions of this Article VIII and Section 9.03 (as though such co-agents, subagents and attorneys-in-fact were the “collateral agent” under the Loan Documents) as if set forth in full herein with respect thereto. The Lenders acknowledge and agree (and each Lender Counterparty shall be deemed to hereby acknowledge and agree) that Collateral Agent may also act as the collateral agent for lenders under the Seattle Credit Agreement, Other Term Loans, the Other Revolving Commitments, the Term Loan Exchange Notes, the Additional Term Notes, the Unrestricted Additional Term Notes, Credit Agreement Refinancing Indebtedness, the Refinancing Notes, Seattle Term Loans, the Seattle Revolving Commitments, the Seattle Term Loan Exchange Notes, the Seattle Additional Term Notes, the Seattle Unrestricted Additional Term Notes, Seattle Credit Agreement Refinancing Indebtedness and the Seattle Refinancing Notes.
The Administrative Agent and the Collateral Agent shall at all times be the same Person that is the “administrative agent” and the “collateral agent” under the Seattle Credit Agreement. Written notice of resignation by the JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent pursuant to Section 8.06 of the Seattle Credit Agreement shall also constitute notice of resignation as the Administrative Agent and the Collateral Agent under this Agreement; removal of JPMorgan Chase Bank, N.A. as the administrative agent and collateral agent pursuant to Section 8.06 of the Seattle Credit Agreement shall also constitute removal under this Agreement; and appointment of an administrative agent and collateral agent pursuant to Section 8.06 of the Seattle Credit Agreement shall also constitute appointment of a successor Administrative Agent and Collateral Agent under this Agreement.
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Section 8.02 Rights of Lender. The bank serving as the Administrative Agent and Collateral Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and Collateral Agent, and with respect to any of its Loans or Commitments hereunder, the term “Lender” or “Lenders” shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent and Collateral Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Parent or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent and Collateral Agent hereunder and without any duty to account therefor to the Lenders.
Section 8.03 Exculpatory Provisions. The Administrative Agent and Collateral Agent shall not have any duties or obligations except those expressly set forth herein or in the other Loan Documents. Without limiting the generality of the foregoing the Administrative Agent and Collateral Agent, (a) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent or Collateral Agent is required to exercise in writing as directed by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or applicable law and (c) shall not except as expressly set forth herein or in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Parent or any Subsidiary that is communicated to or obtained by the bank serving as Administrative Agent, Collateral Agent or any of their respective Affiliates in any capacity. The Administrative Agent and Collateral Agent shall not be liable for any action taken or not taken by it with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary or as the Administrative Agent shall believe in good faith shall be necessary under the circumstances as provided in Section 9.02) or in the absence of its own gross negligence or willful misconduct. The Administrative Agent and Collateral Agent shall be deemed not to have knowledge of any Default unless and until written notice thereof is given to the Administrative Agent by the Parent, or the Borrower, a Lender or the Issuing Bank, and the Administrative Agent and Collateral Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or express conditions set forth in any Loan Document or the occurrence of any Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement or any other Loan Document or any other agreement, instrument or document or the creation, perfection or priority of any Lien purported to be created by the Security Documents or that the Liens granted to the Collateral Agent pursuant to any Security Document have been properly or sufficiently or lawfully created, perfected, protected or enforced or are entitled to any particular priority, (v) the value or the sufficiency of any Collateral or (vi) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to such Agent. The Administrative Agent shall have no obligation to monitor whether any amendment or waiver to any Loan Document has properly become effective or is permitted hereunder or thereunder except to the extent expressly agreed to by the Administrative Agent in such amendment or waiver.
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Section 8.04 Reliance by Administrative Agent and Collateral Agent. Each of the Administrative Agent and Collateral Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it in good faith to be genuine and to have been signed or sent or otherwise authenticated by the proper Person. Each of the Administrative Agent and Collateral Agent also may rely upon any statement made to it orally or by telephone and believed by it in good faith to be made by the proper Person, and shall not incur any liability for relying thereon. Each of the Administrative Agent and Collateral Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts. In determining compliance with any condition hereunder to the making of a Loan, or the issuance of a Letter of Credit, that by its terms must be fulfilled to the satisfaction of a Lender or the Issuing Bank, the Administrative Agent may presume that such condition is satisfactory to such Lender or the Issuing Bank unless the Administrative Agent shall have received notice to the contrary from such Lender or the Issuing Bank prior to the making of such Loan or the issuance of such Letter of Credit.
Section 8.05 Delegation of Duties. Each of the Administrative Agent and Collateral Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Documents by or through any one or more sub-agents appointed by the Administrative Agent, including without limitation, J.P. Morgan Europe Limited. Each of the Administrative Agent and Collateral Agent and any such sub-agent may perform any and all its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities as Administrative Agent or Collateral Agent.
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Section 8.06 Resignation of Agents; Successor, Administrative Agent, Collateral Agent and Issuing Bank. The Administrative Agent and Collateral Agent may at any time resign by giving 30 days’ prior written notice of its resignation to the Lenders, the Issuing Bank and the Borrower. If the Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition of “Defaulting Lender” either the Required Lenders or the Borrower may upon 10 days’ prior notice remove the Administrative Agent or Collateral Agent, as the case may be. Upon receipt of any such notice of resignation or delivery of such removal notice, the Required Lenders shall have the right, with the consent of the Borrower (provided that such consent shall not be unreasonably withheld or delayed and that such consent shall not be required at any time that an Event of Default under Section 7.01(a), (h) or (i) shall have occurred and be continuing), to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent or Collateral Agent, as applicable, gives notice of its resignation or the delivery of such removal notice, then (a) in the case of a retirement, the retiring Administrative Agent may on behalf of the Lenders and the Issuing Bank, appoint a successor Administrative Agent or Collateral Agent, as applicable, meeting the qualifications set forth above (including the consent of the Borrower) or (b) in the case of a removal, the Borrower may, after consulting with the Required Lenders, appoint a successor Administrative Agent or Collateral Agent, as applicable, meeting the qualifications set forth above; provided that (x) in the case of a retirement, if such Administrative Agent shall notify the Borrower and the Lenders that no qualifying Person has accepted such appointment or (y) in the case of a removal, the Required Lenders notify the Borrower that no qualifying Person has accepted such appointment, then, in each case, such resignation or removal shall nonetheless become effective in accordance with such notice and (i) the retiring or removed Administrative Agent or Collateral Agent, as applicable, shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent or Collateral Agent, as applicable, on behalf of the Lenders or the Issuing Bank under any of the Loan Documents, the retiring or removed Administrative Agent or Collateral Agent, as applicable, shall continue to hold such collateral security, as bailee, until such time as a successor Administrative Agent or Collateral Agent, as applicable, is appointed), (ii) all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and the Issuing Bank directly (and each Lender and Issuing Bank will cooperate with the Borrower to enable the Borrower to take such actions), until such time as the Required Lenders or the Borrower, as applicable, appoint a successor Administrative Agent, as provided for above in this Section 8.06 and (iii) the Borrower and the Lenders agree that in no event shall the retiring Administrative Agent and Collateral Agent or any of their respective Affiliates or any of their respective officers, directors, employees, agents advisors or representatives have any liability to the Loan Parties, any Lender or any other Person or entity for damages of any kind, including, without limitation, direct or indirect, special, incidental or consequential damages, losses or expenses (whether in tort, contract or otherwise) arising out of the failure of a successor Administrative Agent or Collateral Agent to be appointed and to accept such appointment. Upon the acceptance of a successor’s appointment as Administrative Agent or Collateral Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring (or retired) Administrative Agent or Collateral Agent, as applicable, and the retiring Administrative Agent or Collateral Agent, as applicable, shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents (if not already discharged therefrom as provided above in this Article). The fees payable by the Borrower to a successor Administrative Agent or Collateral Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring Administrative Agent’s resignation hereunder and under the other Loan Documents, the provisions of this Article VIII and Section 9.03 shall continue in effect for the benefit of such retiring Administrative Agent or Collateral Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring Administrative Agent or Collateral Agent was acting as Administrative Agent or Collateral Agent.
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Any resignation or removal of JPMorgan Chase Bank, N.A. or its successor as Administrative Agent pursuant to this Section 8.06 shall also constitute the resignation or removal of JPMorgan Chase Bank, N.A. or its successor as an Issuing Bank and, after such resignation or removal, JPMorgan Chase Bank, N.A. and its successor shall not have any obligation hereunder to issue any new Letter of Credit or to extend or amend any then existing Letter of Credit issued by it.
Notwithstanding anything to the contrary contained herein, any Issuing Bank may, upon thirty (30) days’ notice to the Borrower, the Administrative Agent and the Lenders, resign as an Issuing Bank and any Issuing Bank may be removed at any time by the Borrower in accordance with Section 2.05(k); provided that on or prior to the expiration of such 30-day period with respect to such resignation, the relevant Issuing Bank shall have identified a successor Issuing Bank reasonably acceptable to the Borrower willing to accept its appointment as successor Issuing Bank. In the event of any such resignation or removal of an Issuing Bank, the Borrower shall be entitled to appoint from among the Lenders willing to accept such appointment a successor Issuing Bank; provided that no failure by the Borrower to appoint any such successor shall affect the resignation or removal of the relevant Issuing Bank, except as expressly provided above. If an Issuing Bank resigns or is removed as an Issuing Bank, it shall retain all the rights and obligations of an Issuing Bank hereunder with respect to all Letters of Credit outstanding as of the effective date of its resignation or removal as an Issuing Bank and all Obligations with respect thereto. If any Issuing Bank resigns or is removed as an Issuing Bank, after such resignation or removal, such Issuing Bank shall not have any obligation hereunder to issue any new Letter of Credit or to extend or amend any then existing Letter of Credit issued by it.
Section 8.07 Non-Reliance on Agents and Other Lenders. Each Lender and the Issuing Bank acknowledges that it has, independently and without reliance upon the Administrative Agent, the Collateral Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and the Issuing Bank also acknowledges that it will, independently and without reliance upon the Administrative Agent, the Collateral Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon any Loan Document or any related agreement or any document furnished thereunder.
Section 8.08 No Other Duties. Notwithstanding anything herein to the contrary, none of the Agents or Lead Arrangers listed on the cover page hereof shall have any powers, duties or responsibilities under any Loan Document, except in its capacity, as applicable, as the Administrative Agent, Collateral Agent, a Lender or an Issuing Bank hereunder.
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Section 8.09 Collateral and Guaranty Matters. Each Lender (including in its capacities as Lender Counterparties) hereby agrees, and each holder of any Note by the acceptance thereof will be deemed to agree, that, except as otherwise set forth herein, any action taken by the Required Lenders in accordance with the provisions of this Agreement or the Security Documents, and the exercise by the Required Lenders of the powers set forth herein or therein, together with such other powers as are reasonably incidental thereto, shall be authorized and binding upon all of the Lenders. Each of the Lenders, the Lender Counterparties and the Issuing Bank irrevocably authorize each of the Administrative Agent and the Collateral Agent,
(a) to release any Lien on any property granted to or held by the Administrative Agent or the Collateral Agent (or any sub-agent thereof) under any Loan Document (i) upon the Termination Date, (ii) that is sold or to be sold or transferred as part of or in connection with any sale or other transfer permitted hereunder or under any other Loan Document to a Person that is not a Loan Party or in connection with the designation of any Restricted Subsidiary as an Unrestricted Subsidiary, (iii) that constitutes Excluded Property, (iv) if the property subject to such Lien is owned by a Loan Party, upon the release of such Loan Party from its Guaranty otherwise in accordance with the Loan Documents, (v) as to the extent, if any, provided in the Security Documents, (vi) to the extent such Collateral is comprised of property leased to a Loan Party or (vii) if approved, authorized or ratified in writing in accordance with Section 9.02;
(b) to release any Guarantor from its obligations under the Guaranty if such Person ceases to be a Restricted Subsidiary (or becomes an Excluded Subsidiary) as a result of a transaction or designation permitted hereunder;
(c) to subordinate any Lien on any property granted to or held by the Administrative Agent or the Collateral Agent under any Loan Document to the holder of any Lien on such property that is permitted under Section 6.02(c), Section 6.02(d), Section 6.02(e) and Section 6.02(t);
(d) enter into subordination or intercreditor agreements with respect to Indebtedness to the extent the Administrative Agent or Collateral Agent is otherwise contemplated herein as being a party to such intercreditor or subordination agreement, in each case to the extent such agreements are substantially consistent with the terms set forth on (i) Exhibit K-1 or K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations); and
(e) to enter into and sign for and on behalf of the Lenders as Secured Parties the Security Documents for the benefit of the Lenders and the other Secured Parties.
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Upon request by the Administrative Agent or the Collateral Agent at any time, the Required Lenders (or such greater or fewer number of Lenders as may be required pursuant to Section 9.02(b)(v) or (vi)) will confirm in writing the Administrative Agent’s or the Collateral Agent’s, as the case may be, authority to release or subordinate its interest in particular types or items of property, or to release any Loan Party from its obligations under the Guaranty pursuant to this Section 8.09. In each case as specified in this Section 8.09, the Administrative Agent and the Collateral Agent will (and each Lender hereby authorizes the Administrative Agent and the Collateral Agent to), at the Borrower’s expense, execute and deliver to the applicable Loan Party such documents as such Loan Party may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Security Documents or to subordinate its interest in such item, or to release such Loan Party from its obligations under the Guaranty, in each case in accordance with the terms of the Loan Documents and this Section 8.09.
Section 8.10 Secured Swap Agents and Secured Cash Management Agents. No Lender Counterparty that obtains the benefits of Section 16 of the US Collateral Agreement, the Guaranty or any Collateral by virtue of the provisions hereof or of the Guaranty or any Security Document shall have any right to notice of any action or to consent to, direct or object to any action hereunder or under any other Loan Document or otherwise in respect of the Collateral (including the release or impairment of any Collateral) other than in its capacity as a Lender and, in such case, only to the extent expressly provided in the Loan Documents. Notwithstanding any other provision of this Article VIII to the contrary, neither the Administrative Agent nor the Collateral Agent shall be required to verify the payment of, or that other satisfactory arrangements have been made with respect to, Secured Swap Obligations or Secured Cash Management Obligations arising under Secured Swap Agreements or Secured Cash Management Agreements with Lender Counterparties unless the Administrative Agent has received written notice of such Secured Obligations, together with such supporting documentation as the Administrative Agent may reasonably request, from the applicable Lender Counterparty.
Section 8.11 Withholding Tax. To the extent required by any applicable law (as determined in good faith by the Administrative Agent), the Administrative Agent may withhold from any payment to any Lender under any Loan Document an amount equivalent to any applicable withholding tax. If the IRS or any other Governmental Authority of any jurisdiction asserts a claim that the Administrative Agent did not properly withhold Tax from amounts paid to or for the account of any Lender for any reason (including because the appropriate form was not delivered, was not properly executed or because such Lender failed to notify the Administrative Agent of a change in circumstances that rendered the exemption from, or reduction of, withholding Tax ineffective), such Lender shall indemnify the Administrative Agent (to the extent that the Administrative Agent has not already been reimbursed by the Borrower and without limiting the obligation of the Borrower to do so) fully for, and shall make payable in respect thereof within 30 days after demand therefor, all amounts paid, directly or indirectly, by the Administrative Agent as Tax or otherwise, including penalties and interest, together with all expenses incurred, including legal expenses, allocated staff costs and any out of pocket expenses. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under this Agreement or any other Loan Document against any amount due the Administrative Agent under this Section 8.11. The agreements in this Section 8.11 shall survive the resignation and/or replacement of the Administrative Agent, any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all other Obligations. For purposes of this Section 8.11, the term “Lender” includes any Issuing Bank and the Swingline Lender.
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Section 8.12 Administrative Agent and Collateral Agent May File Proofs of Claim. In case of the pendency of any receivership, insolvency, liquidation, bankruptcy, reorganization, arrangement, adjustment or composition under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the Administrative Agent and Collateral Agent (irrespective of whether the principal of any Loan or LC Exposure shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent or Collateral Agent shall have made any demand on the Borrower) shall be entitled and empowered, by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the amount of the principal and interest owing and unpaid in respect of the Loans, LC Exposures and all other Obligations, in each case, that are owing and unpaid by such Loan Party and to file such other documents as may be necessary or advisable in order to have such claims of the Lenders, the Issuing Bank, the Administrative Agent and Collateral Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the Issuing Bank, the Administrative Agent and Collateral Agent and their respective agents and counsel and all other amounts due the Lenders, the Issuing Bank, the Administrative Agent and Collateral Agent under Section 2.12 and Section 9.03 which are payable by such Loan Party) allowed in such judicial proceeding;
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same; and
(c) any custodian, receiver, assignee, trustee, liquidator, sequestrator, examiner or other similar official in any such judicial proceeding is hereby authorized by each Lender and the Issuing Bank to make such payments to the Administrative Agent and, if the Administrative Agent shall consent, to the making of such payments directly to the Lenders and the Issuing Bank, to pay to the Administrative Agent (and Lenders and Issuing Bank, as applicable) any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Section 2.12 and Section 9.03 in each case reimbursable or payable by such Loan Party.
Nothing contained herein shall be deemed to authorize the Administrative Agent or Collateral Agent to authorize or consent to or accept or adopt on behalf of any Lender or the Issuing Bank any plan of reorganization, arrangement, adjustment or composition affecting the Obligations or the rights of any Lender or the Issuing Bank to authorize the Administrative Agent and Collateral Agent to vote in respect of the claim of any Lender or the Issuing Bank or in any such proceeding, in each case subject to Section 14(d) of the US Collateral Agreement. The Secured Parties hereby irrevocably authorize the Administrative Agent, at the direction of the Required Lenders, to credit bid all or any portion of the Obligations (including accepting some or all of the Collateral in satisfaction of some or all of the Secured Obligations pursuant to a deed in lieu of foreclosure or otherwise) and in such manner purchase all or any portion of the Collateral (a) at any sale thereof conducted under the provisions of the Bankruptcy Code, including under Sections 363, 1123 or 1129 of the Bankruptcy Code, or any similar laws in any other jurisdictions to which a Loan Party is subject, (b) at any other sale or foreclosure or acceptance of collateral in lieu of debt conducted by (or with the consent or at the direction of) the Administrative Agent (whether by judicial action or otherwise) in accordance with applicable law. In connection with any such credit bid and purchase, the Obligations owed to the Secured Parties shall be entitled to be, and shall be, credit bid on a ratable basis (with Obligations with respect to contingent or unliquidated claims receiving contingent interests in the acquired assets on a ratable basis that would vest upon the liquidation of such claims in an amount proportional to the liquidated portion of the contingent claim amount used in allocating the contingent interests) in the asset or assets so purchased.
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Article IX
Miscellaneous
Section 9.01 Notices. Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile, as follows:
(a) if to the Parent, the Borrower or any other Loan Party, Micro Focus, The Lawn, 22-30 Old Bath Road, Newbury, Berkshire, RG14 1QN, Attention: Mike Phillips (Chief Financial Officer), E-mail: mike.phillips@microfocus.com, and a copy to Kirkland & Ellis LLP, 300 North LaSalle, Chicago, Illinois 60654, Attention: Christopher Butler, P.C., Fax: (312) 862-2200;
(b) if to the Administrative Agent or the Collateral Agent, to the address, telecopier number, electronic mail address or telephone number specified for such Person on Schedule 9.01;
(c) if to an Issuing Bank or Swingline Lender other than the Administrative Agent, to it at the address or facsimile number set forth separately in writing and delivered to the Borrower and the Administrative Agent; and
(d) if to any other Lender, to it at its address (or facsimile number) set forth in its Administrative Questionnaire.
Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto. Subject to Section 9.15, notices and other communications to the Lenders and the Issuing Bank hereunder may also be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or the Issuing Bank pursuant to Article II if such Lender or the Issuing Bank, as applicable, has notified the Administrative Agent that it is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.
Section 9.02 Waivers; Amendments.(a) (a) No failure or delay by the Administrative Agent, the Issuing Bank or any Lender in exercising any right or power under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent, the Issuing Bank and the Lenders hereunder and under the other Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by any Loan Party therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan or the issuance, amendment, renewal or extension of a Letter of Credit shall not be construed as a waiver of any Default, regardless of whether the Administrative Agent, any Lender or the Issuing Bank may have had notice or knowledge of such Default at the time. No notice or demand on the Parent, Holdco or the Borrower in any case shall entitle the Parent, Holdco or the Borrower to any other or further notice or demand in similar or other circumstances.
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(b) Except as provided in Section 2.20 with respect to any Incremental Facility Amendment, in Section 2.21, with respect to any Refinancing Amendment, in Section 2.24 with respect to an Extension Offer, with respect to the Term Loan Exchange Notes in Section 2.25, in Section 9.02(d) with respect to any amendment in respect of Replacement Term Loans and in Section 9.02(h), in Section 9.16 or as otherwise specifically provided below or otherwise provided herein or in a Loan Document, neither any Loan Document nor any provision thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrower and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or agreements in writing entered into by the Administrative Agent and the Loan Party or Loan Parties that are parties thereto (except as otherwise expressly provided therein), in each case with the consent of the Required Lenders (other than with respect to any amendment, modification or waiver contemplated in clauses (i) through (x) in the following proviso, which shall only require the consent of the Lenders expressly set forth therein and not the Required Lenders), provided that no such agreement shall (i) increase the Commitment of any Lender without the written consent of such Lender (it being understood that a waiver of any condition precedent in Section 9 of Amendment No. 3 or Section 4.02. of this Agreement or the waiver of any covenant, Default, Event of Default or mandatory prepayment or mandatory reductions of the Commitments shall not constitute an increase of any Commitment of a Lender), (ii) reduce or forgive the principal amount of any Loan or LC Disbursement owed to a Lender or reduce the rate of interest thereon owed to such Lender, or reduce any fees payable hereunder owed to such Lender, without the written consent of such Lender directly and adversely affected thereby, provided that any waiver of Default or Event of Default or default interest, waiver of a mandatory prepayment or any modification, waiver or amendment to the financial covenant definitions or financial ratios or any component thereof in this Agreement shall not constitute a reduction or forgiveness in the interest rates or the fees for purposes of this clause (ii), (iii) except as otherwise provided hereunder, including without limitation pursuant to Refinancing Amendments pursuant to Section 2.21 or Extensions pursuant to Section 2.24, postpone the scheduled final maturity of any Loan, or any date for the payment of any interest or fees payable hereunder, or reduce or forgive the amount of, waive or excuse any such repayment (but not prepayment), or postpone the scheduled date of expiration of any Commitment, without the written consent of each Lender directly and adversely affected thereby (it being understood that no amendment, modification or waiver of, or consent to departure from, any condition precedent, covenant, Default, Event of Default, waiver of default interest, mandatory prepayment or mandatory reduction of the Commitments shall constitute a postponement of any date scheduled for the payment of principal or interest or an extension of the final maturity of any Loan or the scheduled termination date of any Commitment), (iv) modify the order of payments set forth in Section 7.04 without the written consent of each Lender directly and adversely affected thereby, (v) change any of the provisions of this Section 9.02(b) or reduce the percentage set forth in the definition of the term “Required Lenders”, “Required Revolving Lenders” or reduce the percentage in any other provision of any Loan Document specifying the number or percentage of Lenders (or Lenders of any Class) required to waive, amend or modify any rights thereunder or make any determination or grant any consent thereunder, without the written consent of each Lender or each Revolving Lender, as the case may be (or each Lender of such Class, as the case may be) (it being understood that, other than as specifically provided in this Agreement, including pursuant to (v) the Term Loan Exchange Notes in Section 2.25, (w) Section 9.02(d) with respect to Replacement Term Loans, (x) any Incremental Facility Amendment (the consent requirements for which are set forth in Section 2.20), (y) a Refinancing Amendment (the consent requirements for which are set forth in Section 2.21) and (z) an Extension Offer pursuant to Section 2.24, with the consent of the Required Lenders, additional extensions of credit pursuant to this Agreement may be included in the determination of the Required Lenders or a particular Class of Lenders on substantially the same basis as the Term Loans and Revolving Commitments on the Effective Date), (vi) release all or substantially all of the Guarantors under the Guaranties (except as provided herein or in the applicable Loan Document), without the written consent of each Lender, (vii) release all or substantially all the Collateral from the Liens of the Security Documents (except as provided herein or in the applicable Loan Document), without the written consent of each Lender (it being understood that any subordination of a Lien permitted hereunder shall not constitute a release of a Lien under this section and the granting of any pari passu Liens in connection with the incurrence of Indebtedness or the granting of Liens otherwise permitted hereunder from time to time (including pursuant to amendments) shall not constitute a release of Liens), (viii) modify the provisions of Section 9.04(e) in a manner that directly and adversely affects the protections afforded to an SPV pursuant to the provisions of Section 9.04(e), without the written consent of each Granting Lender all or any part of whose Loans are being funded by an SPV at the time of such amendment, modification or waiver, (ix) amend, waive or otherwise modify any term or provision of Section 6.12, Section 7.01 (solely as it relates to Section 6.12), Section 7.03 or the definition of “First Lien Leverage Ratio” (or any of its component definitions (as used in such Section but not as used in other Sections of this Agreement)) without the written consent of the Required Revolving Lenders and (x) in connection with an amendment that addresses solely a re-pricing transaction in which any Class of Term Loans or Revolving Commitments (and the Revolving Loans in respect hereof) is refinanced with a replacement Class of term loans or revolving commitments (and the revolving loans in respect hereof) bearing (or is modified in such a manner such that the resulting term loans or revolving commitments (and the revolving loans in respect hereof bear) a lower Yield, only the consent of the Lenders holding Term Loans or Revolving Commitments (and the Revolving Loans in respect hereof) subject to such permitted repricing transaction that will continue as a Lender in respect of the repriced tranche of Term Loans or Revolving Commitments (and the Revolving Loans in respect hereof) or modified Term Loans or Revolving Commitments (and the Revolving Loans in respect hereof); provided, further, that no such agreement shall directly and adversely amend or modify the rights or duties of the Administrative Agent, the Collateral Agent or the Issuing Bank without the prior written consent of the Administrative Agent, the Collateral Agent or the Issuing Bank, as the case may be. In the event an amendment to this Agreement or any other Loan Document is effected without the consent of the Administrative Agent or Collateral Agent (to the extent permitted hereunder) and to which the Administrative Agent or Collateral Agent is not a party, the Borrower shall furnish a copy of such amendment to the Administrative Agent. Notwithstanding the foregoing, no Lender or Issuing Bank consent is required to effect any amendment, modification or supplement to any intercreditor agreement or arrangement permitted under this Agreement or in any document pertaining to any Indebtedness permitted hereby that is permitted to be secured by the Collateral, including any Seattle Term Loan, Incremental Term Loan or Incremental Revolving Loan, any Other Term Loan, Other Revolving Loan or Other Revolving Commitments, Extended Term Loans, Extended Revolving Loans, any Refinancing Notes, or any Additional Term Notes, Unrestricted Additional Term Notes, Refinancing Notes, Term Loan Exchange Notes and Permitted First Priority Replacement Debt or Permitted Second Priority Replacement Debt or Additional Debt, for the purpose of adding the holders of such Indebtedness (or their senior representative) as a party thereto and otherwise causing such Indebtedness to be subject thereto, to give effect hereto or otherwise carry out the purposes thereof, in each case as contemplated by the terms of such intercreditor agreement or arrangement permitted under this Agreement, as applicable, together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may be secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations).
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(c) In connection with any proposed amendment, modification, waiver or termination (a “Proposed Change”) requiring the consent of all Lenders or all directly and adversely affected Lenders, if the consent of the Required Lenders (or, to the extent any Proposed Change requires the consent of Lenders holding Loans of any Class pursuant to clause (iv) of paragraph (b) of this Section 9.02, the consent of a majority in interest of the outstanding Loans and unused Commitments of such Class) (or, in the case of a consent, waiver or amendment involving directly and adversely affected Lenders, at least 50.1% of such directly and adversely affected Lenders) to such Proposed Change is obtained, but the consent to such Proposed Change of other Lenders whose consent is required is not obtained or if a Lender rejects (or is deemed to reject) an Extension under Section 2.24, a Refinancing Amendment pursuant to Section 2.21 or Replacement Term Loans pursuant to Section 9.02(d), (any such Lender whose consent is not obtained as described in paragraph (b) of this Section 9.02 or has rejected (or is deemed to have rejected) such Extension Offer, Refinancing Amendment or Replacement Term Loans being referred to as a “Non-Consenting Lender”), then, the Borrower may, at its sole expense and effort, upon notice to such Non-Consenting Lender and the Administrative Agent, (i) require such Non-Consenting Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 9.04), all its interests, rights and obligations under this Agreement to an assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment), provided that (a) such Non-Consenting Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in LC Disbursements and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts), plus, if the Non-Consenting Lender is a Lender with Term Loans being required to assign Term Loans under this Section 9.02(c) due solely to its failure to waive, postpone or reduce the prepayment premium set forth in Section 2.11(a) in connection with a Repricing Transaction, the payment by the assignee of such prepayment premium as if such Term Loans subject to such assignment were subject to a Repricing Transaction, (b) the Borrower or such assignee shall have paid to the Administrative Agent the processing and recordation fee specified in clause (b)(ii) of Section 9.04 and (c) such assignee shall have consented to the Proposed Change or (ii) terminate the Commitment of such Lender or Issuing Bank, as the case may be, and (1) in the case of a Lender (other than an Issuing Bank), repay all Obligations of the Borrower due and owing to such Lender relating to the Loans and participations held by such Lender as of such termination date and (2) in the case of an Issuing Bank, repay all Obligations of the Borrower owing to such Issuing Bank relating to the Loans and participations held by the Issuing Bank as of such termination date and cancel or backstop on terms reasonably satisfactory to such Issuing Bank any Letters of Credit issued by it; provided that in the case of any such termination of a Non-Consenting Lender such termination shall be sufficient (together with all other consenting Lenders and terminated Lenders after giving effect hereto) to cause the adoption of the applicable amendment, modification, waiver or termination of the applicable Loan Documents.
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(d) Notwithstanding the foregoing, this Agreement may be amended (or amended and restated) solely with the written consent of the Administrative Agent, the Parent, Holdco, the Borrower and the Lenders providing the relevant Replacement Term Loans (as such term is defined below) to permit the refinancing of all or any portion of any Class of Term Loans outstanding as of the applicable date of determination (the “Refinanced Term Loans”) with a replacement term loan tranche hereunder (the “Replacement Term Loans”), provided that (i) the aggregate principal amount of such Replacement Term Loans shall not exceed the aggregate principal amount of such Refinanced Term Loans plus other Indebtedness that could otherwise be incurred hereunder, subject to a dollar-for-dollar usage of any basket (other than any basket that provides for Replacement Term Loans) set forth in Section 6.01, plus premiums, accrued interest, fees and expenses in connection therewith, (ii) the Weighted Average Life to Maturity and final maturity of such Replacement Term Loans shall not be shorter than the Weighted Average Life to Maturity and final maturity of such Refinanced Term Loans at the time of such refinancing (without giving effect to amortization for periods where amortization has been eliminated as a result of a prepayment of the applicable Refinanced Term Loans), (iv) the mandatory prepayment and optional prepayment provisions of the Replacement Term Loans shall not require more than pro rata payments and may permit optional prepayments and mandatory prepayments to be paid in respect of the Term Loans not constituting Refinanced Term Loans, and (v) (A) the obligations in respect thereof shall not be secured by Liens on the assets of the Parent and its Restricted Subsidiaries, other than assets constituting Collateral and (B) no Restricted Subsidiary is a borrower or a guarantor with respect to such Indebtedness unless such Restricted Subsidiary is a Loan Party which shall have previously or substantially concurrently guaranteed or borrowed, as applicable, the Obligations and (vi) the covenants and events of default (other than maturity, fees, discounts, interest rate, redemption terms and redemption premiums, which shall be determined in good faith by the Borrower) shall be on market terms at the time of issuance (as determined in good faith by the Borrower) of such Replacement Term Loans; provided that such Indebtedness (other than Indebtedness consisting of revolving commitments and revolving loans) shall not have the benefit of any financial maintenance covenant unless (x) the Initial Term Loans have the benefit of such financial maintenance covenant on the same terms or (y) the Initial Term Loans have in the future been provided with the benefit of a financial maintenance covenant, in which case such Indebtedness issued after such future date may be provided with the benefit of the same financial maintenance covenant on the same terms.
(e) The Lenders and the Issuing Bank, and all other Secured Parties hereby irrevocably agree that the Liens granted to the Collateral Agent by the Loan Parties on any Collateral shall, at the sole cost and expense of the Borrower, be automatically released (i) upon the occurrence of the Termination Date of this Agreement, (ii) upon the sale or other disposition of such Collateral (as part of or in connection with any other sale or other disposition permitted hereunder) to any Person other than another Loan Party or in connection with the designation of any Restricted Subsidiary as an Unrestricted Subsidiary, to the extent such sale or other disposition is made in compliance with the terms of this Agreement, (iii) to the extent such Collateral is comprised of property leased to a Loan Party, (iv) if the release of such Lien is approved, authorized or ratified in writing by the Required Lenders (or such other percentage of the Lenders whose consent may be required in accordance with this Section 9.02), (v) to the extent such property constitutes Excluded Property, (vi) to the extent the property constituting such Collateral is owned by any Guarantor, upon the release of such Guarantor from its obligations under the applicable Guaranty (in accordance with the following sentence) to the extent such release of a Guarantor is made in compliance with the terms of this Agreement and (vii) as required to effect any sale or other disposition of Collateral in connection with any exercise of remedies of the Collateral Agent pursuant to the Loan Documents. Any such release shall not in any manner discharge, affect, or impair the Obligations or any Liens (other than those being released) upon (or obligations (other than those being released) of the Loan Parties in respect of all interests retained by the Loan Parties, including the proceeds of any sale, all of which shall continue to constitute part of the Collateral except to the extent comprised of Excluded Property or otherwise released in accordance with the provisions of the Loan Documents. Additionally, the Lenders, Issuing Bank, and all other Secured Parties, hereby irrevocably agree that each Subsidiary Loan Party shall be released from the Guarantees upon consummation of any transaction permitted hereunder resulting in such Subsidiary ceasing to constitute a Restricted Subsidiary (or becoming an Excluded Subsidiary). The Lenders, Issuing Bank, and all other Secured Parties, hereby authorize the Administrative Agent and the Collateral Agent, as applicable, to execute and deliver any instruments, documents, and agreements necessary or desirable to evidence and confirm the release of any Loan Party’s Guaranty or Collateral pursuant to the foregoing provisions of this paragraph, all without the further consent or joinder of any Lender, Issuing Bank or other Secured Party.
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(f) No Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder (and any amendment, waiver or consent which by its terms requires the consent of all Lenders or each affected Lender may be effected with the consent of the applicable Lenders other than Defaulting Lenders), except that (x) the Commitment of any Defaulting Lender may not be increased or extended without the consent of such Lender and (y) any waiver, amendment or modification requiring the consent of all Lenders pursuant to Sections 9.02(b)(v) or 9.02(b)(vi) or each directly and adversely affected Lender pursuant to Sections 9.02(b)(ii) or 9.02(b)(iii) that, by its terms, directly and adversely affects any Defaulting Lender disproportionately in relation to other affected Lenders shall require the consent of such Defaulting Lender.
(g) This Agreement may be amended (or amended and restated) solely with the written consent of the Required Lenders and the Borrower (a) to add one or more additional credit facilities to this Agreement and to permit the extensions of credit from time to time outstanding thereunder and the accrued interest and fees in respect thereof to share ratably in the benefits of this Agreement and the other Loan Documents with the Term Loans and the Revolving Loans and the accrued interest and fees in respect thereof and (b) to include appropriately the Lenders holding such credit facilities in any determination of the Required Lenders. Further, (x) the LC Sublimit may be increased with the consent of the Required Revolving Lenders, each Issuing Bank and the Administrative Agent and (y) the Swingline Sublimit may be increased with the consent of the Required Revolving Lenders, the Swingline Lender and the Administrative Agent.
(h) Notwithstanding the foregoing, this Agreement and any other Loan Document may be amended solely with the consent of the Administrative Agent and the Borrower without the need to obtain the consent of any other Lender if such amendment is delivered in order to correct or cure (x) ambiguities, errors, omissions, defects, (y) to effect administrative changes of a technical or immaterial nature or (z) incorrect cross references or similar inaccuracies in this Agreement or the applicable Loan Document, in each case and the same is not objected to in writing by the Required Lenders within five Business Days following receipt of notice thereof. Guarantees, collateral documents, security documents, intercreditor agreements, and related documents executed in connection with this Agreement may be in a form reasonably determined by the Administrative Agent or Collateral Agent, as applicable, and may be amended, modified, terminated or waived, and consent to any departure therefrom may be given, without the consent of any Lender if such amendment, modification, waiver or consent is given in order to (x) comply with local law or advice of counsel or (y) cause such guarantee, collateral document, security document or related document to be consistent with or to give effect to or to carry out the purpose of this Agreement and the other Loan Documents. The Borrower and the Administrative Agent may, without the consent of any other Lender, effect amendments to this Agreement and the other Loan Documents as may be necessary in the reasonable opinion of the Borrower and the Administrative Agent to effect the provisions of Sections 2.20, Section2.21, Section 2.24, Section 2.25 and Section 9.02(d) or (g).
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Section 9.03 Expenses; Indemnity; Damage Waiver(a) . (a) The Borrower shall pay within 30 days after receipt of reasonably detailed documentation therefor, (i) all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent, including the reasonable and documented fees, charges and disbursements of a single counsel for the Agents (in addition to one local counsel in each relevant material jurisdiction to the extent reasonably necessary in connection with due diligence performed in connection with the arrangement of the credit facilities provided for herein, the syndication of the credit facilities provided for herein, the preparation and administration of the Loan Documents and not paid on the Effective Date or any amendments, modifications or waivers of the provisions thereof (whether or not the transactions contemplated thereby shall be consummated), (ii) all reasonable and documented out-of-pocket expenses incurred by the Issuing Bank in connection with the issuance, amendment, renewal or extension of any Letter of Credit and (iii) all reasonable and documented out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent, including the reasonable fees, charges and disbursements of a single counsel for the Administrative Agent, the Collateral Agent, the Issuing Bank, the Lenders, and other Secured Parties (in addition to a single local counsel in each relevant material jurisdiction to the extent reasonably necessary, in connection with the enforcement of any rights under this Agreement or any other Loan Documents, including rights under this Section, or in connection with the Loans made or Letters of Credit issued hereunder; provided, the Borrower shall not be obligated to pay for any third party advisors or consultants (in addition to those set forth in the immediately preceding clause (iii)), except following an Event of Default with respect to which the Required Lenders have accelerated the Loans or are pursing remedies, in which case the Borrower shall pay the reasonable and documented out-of-pocket expenses of one additional advisor to the extent the Borrower has provided its prior written consent (in its sole discretion).
(b) Without duplication of the expense reimbursement obligations pursuant to paragraph (a) above, the Borrower shall indemnify the Administrative Agent, the Collateral Agent, the other Agents, the Lead Arrangers, the Issuing Bank, and each Lender, and each Related Party of any of the foregoing Persons (each such Person being called an “Indemnitee”), against, and hold each Indemnitee harmless from, any and all reasonable and documented out-of-pocket costs, actual losses, claims, damages, liabilities and related expenses, excluding in any event lost profits, but (x) including the reasonable and documented fees, charges and disbursements of a single counsel for the Indemnitees (in addition to one local counsel in each relevant material jurisdiction to the extent reasonably necessary and, in the event a conflict of interest arises, one additional counsel for the conflicted Indemnitees (taken as a whole)) and (y) excluding (i) any allocated costs of in-house counsel and (ii) any third party advisors or consultants (in addition to those set forth in the immediately preceding clause (x)), except in the case of this clause (y)(ii) following an Event of Default with respect to which the Required Lenders have accelerated the Loans or are pursing remedies, in which case the Borrower shall pay the reasonable and documented out-of-pocket expenses of one additional advisor to the extent the Borrower has provided its prior written consent (in its sole discretion), incurred by or asserted against any Indemnitee by any third party or by the Parent or any Restricted Subsidiary arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any other agreement or instrument contemplated thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the use of proceeds therefrom and (ii) any actual or alleged presence or Release of Hazardous Materials involving or attributable to the Parent or any of its Restricted Subsidiaries, whether or not any such Indemnitee shall be designated as a party or a potential party thereto and whether or not such matter is initiated by the Parent or any of its respective Affiliates or shareholders, and any fees or expenses incurred by Indemnitees in enforcing this indemnity, in each case, regardless of whether any such Indemnitee is a party thereto or whether such claim, litigation or other proceeding is brought by a third party or by the Borrower or any of its Affiliates (collectively, the “Indemnified Liabilities”), provided that, no Indemnitee will be indemnified (a) for its (or any of its Related Parties,) willful misconduct, bad faith, fraud or gross negligence (to the extent determined in a final non-appealable order of a court of competent jurisdiction), (b) for its (or any of its affiliate’s or any of its officers’, directors’, employees’, agents’, representative’s and controlling persons’) material breach of its or any of its Related Parties’ obligations under the Loan Documents (to the extent determined in a final non-appealable order of a court of competent jurisdiction), (c) for any dispute among Indemnitees that does not involve an act or omission by the Parent or any Subsidiary (other than any claims against an Agent or a Lead Arranger in their capacity as such and subject to clause (a) above), (d) in its capacity as a financial advisor of the Company, the Parent or any of their subsidiaries in connection with the Seattle Acquisition or any other potential acquisition or as a co-investor in the Transactions or any potential acquisition or (e) any settlement effected without Borrower’s prior written consent, but if settled with the Borrower’s prior written consent (not to be unreasonably withheld or delayed) or if there is a final judgment against an Indemnitee in any such proceedings, the Borrower will indemnify and hold harmless each Indemnitee from and against any and all actual losses, claims, damages, liabilities and expenses by reason of such settlement or judgment in accordance with this Section; providedfurther that (1) Borrower shall not have any obligation to any Indemnitee under this Section 9.03 that is a Defaulting Lender or that is an Indemnitee by virtue of being a Related Party of a Defaulting Lender for any Indemnified Liabilities arising from such Defaulting Lender’s failure to fund its Commitment and (2) to the extent of any amounts paid to an Indemnitee in respect of this Section 9.03 for Indemnified Liabilities, such Indemnitee, by its acceptance of the benefits hereof, agrees to refund and return any and all amounts paid by the Borrower to it if, pursuant to operation of any of the foregoing clauses (a) through (e), such Indemnitee was not entitled to receipt of such amount.
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(c) To the extent that the Borrower fails to pay any amount required to be paid by it to the Administrative Agent, the Collateral Agent or the Issuing Bank under paragraph (a) or (b) of this Section, and without limiting the Borrower’s obligation to do so, each Lender severally agrees to pay to the Administrative Agent, the Collateral Agent or the Issuing Bank, as the case may be, such Lender’s pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought) of such unpaid amount, provided that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent, the Collateral Agent or the Issuing Bank in its capacity as such. For purposes hereof, a Lender’s “pro rata share” shall be determined based upon (i) in the case of unpaid amounts owing to the Administrative Agent, its share of the aggregate Revolving Exposures, outstanding Term Loans and unused Commitments at the time and (ii) in the case of unpaid amounts owing to the Issuing Bank, its share of the aggregate Revolving Exposure and unused Revolving Commitments at such time. The obligations of the Lenders under this paragraph (c) are subject to the last sentence of Section 2.02(a) (which shall apply mutatismutandis to the Lenders’ obligations under this paragraph (c)).
(d) To the extent permitted by applicable law, none of the Parent, Holdco, the Borrower, any Agent, any Lender, the Issuing Bank, any other party hereto or any Indemnitee shall assert, and each such Person hereby waives and releases, any claim against any other such Person, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) (whether or not the claim therefor is based on contract, tort or duty imposed by any applicable legal requirement) arising out of, in connection with, arising out of, as a result of, or in any way related to, this Agreement or any or any agreement or instrument contemplated hereby or referred to herein, the transactions contemplated hereby or thereby, or any act or omission or event occurring in connection therewith, and each such Person further agrees not to sue upon any such claim or any such damages, whether or not accrued and whether or not known or suspected to exist in its favor; provided that the foregoing shall in no event limit the Borrower’s indemnification obligations under clause (b) above to the extent such special, indirect, consequential or punitive damages are included in any third-party claim in connection with which such Indemnitee is otherwise entitled to indemnification hereunder.
(e) In case any proceeding is instituted involving any Indemnitee for which indemnification is to be sought hereunder by such Indemnitee, then such Indemnitee will promptly notify the Borrower of the commencement of any proceeding; provided,however, that the failure to do so will not relieve the Borrower from any liability that it may have to such Indemnitee hereunder, except to the extent that the Borrower is materially prejudiced by such failure. Notwithstanding the above, following such notification, the Borrower may elect in writing to assume the defense of such proceeding, and, upon such election, the Borrower will not be liable for any legal costs subsequently incurred by such Indemnitee (other than reasonable costs of investigation and providing evidence) in connection therewith, unless (i) the Borrower has failed to provide counsel reasonably satisfactory to such Indemnitee in a timely manner, (ii) counsel provided by the Borrower reasonably determines its representation of such Indemnitee would present it with a conflict of interest or (iii) the Indemnitee reasonably determines that there are actual conflicts of interest between the Borrower and the Indemnitee, including situations in which there may be legal defenses available to the Indemnitee which are different from or in addition to those available to the Borrower.
(f) Notwithstanding anything to the contrary in this Agreement, no party hereto or any Indemnitee shall be liable for any damages arising from the use by others of information or other materials obtained through electronic, telecommunications or other information transmission systems (including IntraLinks or SyndTrak Online), in each case, except to the extent any such damages are found in a final non-appealable judgment of a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of, or material breach of this Agreement or the other Loan Documents by, such Indemnitee (or its officers, directors, employees, Related Parties or Affiliates).
(g) Except to the extent otherwise expressly provided herein, all amounts due under this Section shall be payable within 30 days after receipt of reasonably detailed documentation therefor.
(h) This Section 9.03 shall not apply to Taxes, except for Taxes which represent costs, losses, claims, etc. with respect to a non-Tax claim.
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Section 9.04 Successors and Assigns.
(a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), except that (i) except as otherwise permitted herein, the Borrower may not assign or otherwise transfer any of their rights or obligations hereunder without the prior written consent of each Lender (and any such attempted assignment or transfer by the Borrower without such consent shall be null and void) and (ii) no Lender may assign or otherwise transfer its rights or obligations hereunder except in accordance with this Section (and any attempted assignment or transfer by such Lender otherwise shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby (including any Affiliate of the Issuing Bank that issues any Letter of Credit), Participants (solely to the extent provided in paragraph (c) of this Section) and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent, the Issuing Bank and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) (i) Subject to the express conditions set forth in paragraph (b)(ii) below, any Lender may assign to one or more Eligible Assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it) with the prior written consent (such consent not to be unreasonably withheld or delayed) of (A) the Borrower, provided that no consent of the Borrower shall be required for an assignment of all or any portion of a Loan or Commitment to (I) (A) in the case of a Revolving Loan or a Revolving Commitment, to a Revolving Lender, an Affiliate of a Revolving Lender or an Approved Fund of a Revolving Lender and (B) in the case of a Term Loan or Term Commitment only, to a Lender, an Affiliate of a Lender or an Approved Fund of a Lender (as defined below) or (II) if an Event of Default under Sections 7.01(a), 7.01(b), 7.01(h) or 7.01(i) with respect to the Borrower or a Guarantor has occurred and is continuing; provided that the Borrower shall be deemed to have consented to any such assignment unless the Borrower shall object thereto by written notice to the Administrative Agent within ten (10) Business Days after a Responsible Officer having received written notice thereof, (B) the Administrative Agent, provided that no consent of the Administrative Agent shall be required for an assignment of all or any portion of a Loan or Commitment to a Lender, an Affiliate of a Lender or an Approved Fund or pursuant to Section 2.11(i) and (C) in the case of any assignment of a Revolving Commitment, the Swingline Lender and the Issuing Bank, provided that no consent of the Swingline Lender or such Issuing Bank shall be required for any assignment of a Term Loan or any assignment to any then existing Revolving Lender or to the Parent or any Subsidiary pursuant to Section 2.11(i).
(ii) Assignments shall be subject to the following additional express conditions: (A) except in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, or pursuant to Section 2.11(i), an assignment of the entire remaining amount of the assigning Lender’s Commitment or Loans of any Class, the amount of the Commitment or Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 (or, in the case of Commitments or Loans denominated in Euros, €5,000,000) or, in the case of a Term Commitment or a Term Loan, $1,000,000 (or, in the case of Term Commitments or Term Loans denominated in Euros, €1,000,000) (it being understood and agreed that such minimum amount shall be aggregated for two or more simultaneous assignments by or to two or more Approved Funds), unless the Borrower and the Administrative Agent otherwise consent (such consent not to be unreasonably withheld or delayed), provided that no such consent of Borrower shall be required if an Event of Default under Section 7.01(a), 7.01(b), 7.01(h) or 7.01(i) with respect to the Borrower or a Guarantor has occurred and is continuing, (B) each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lender’s rights and obligations under this Agreement, provided that this clause (B) shall not be construed to prohibit assignment of a proportionate part of all the assigning Lender’s rights and obligations in respect of one Class of Commitments or Loans, (C) the parties to each assignment shall (1) execute and deliver to the Administrative Agent an Assignment and Assumption, via an electronic settlement system acceptable to the Administrative Agent or (2) if previously agreed with the Administrative Agent, manually execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 (which fee may be waived or reduced in the sole discretion of the Administrative Agent); provided that such processing and recordation fee shall not be payable in the case of assignments by any Arranger or any Affiliate thereof, provided that assignments made pursuant to Section 2.19 or Section 9.02(c) shall not require the signature of the assigning Lender to become effective and (D) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire (in which the assignee designates one or more credit contacts to whom all syndicate-level information (which may contain material non-public information about the Loan Parties and their Related Parties or their respective securities) will be made available and who may receive such information in accordance with the assignee’s compliance procedures and applicable laws, including Federal, state and foreign securities laws) and any tax forms required by Section 2.17(e).
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For purposes of paragraph (b) of this Section, the terms “Approved Fund” and “CLO” have the following meanings:
“Approved Fund” means (a) a CLO and (b) with respect to any Lender that is a fund that invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor.
“CLO” means an entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course and is administered or managed by a Lender or an Affiliate of such Lender.
(iii) Subject to acceptance and recording thereof pursuant to paragraph (b)(v) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lender’s rights and obligations under this Agreement, such Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Section 2.15, Section 2.16, Section 2.17 and Section 9.03 and to any fees payable hereunder that have accrued for such Lender’s account but have not yet been paid).
(iv) The Administrative Agent, acting for this purpose as an agent of the Borrower, shall maintain at one of its offices a copy of each Assignment and Assumption delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal and related interest amounts of the Loans and LC Disbursements owing to, each Lender pursuant to the terms hereof from time to time (the “Register”). The entries in the Register shall be conclusive absent manifest error, and the Parent, Holdco, the Borrower, the Administrative Agent, the Issuing Bank and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement, notwithstanding notice to the contrary. The Register shall be available for inspection by the Borrower, the Issuing Bank and, with respect to its own interests only, any Lender, at any reasonable time and from time to time upon reasonable prior notice. This Section 9.04(b)(iv) shall be construed so that the Loans and unreimbursed LC Disbursements are at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code.
(v) Upon its receipt of a duly completed Assignment and Assumption executed by an assigning Lender and an assignee, the assignee’s completed Administrative Questionnaire and any tax forms required by Section 2.17(e), as applicable (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) of this Section (to the extent required) and any written consent to such assignment required by paragraph (b) of this Section, the Administrative Agent shall accept such Assignment and Assumption and record the information contained therein in the Register. No assignment shall be effective for purposes of this Agreement unless it has been recorded in the Register as provided in this paragraph.
(vi) The words “execution,” “signed,” “signature” and words of like import in or related to any document to be signed in connection with this Agreement and the transaction contemplated hereby (including, without limitation, any Assignment and Assumption, amendments or other Borrowing Requests, Swingline Loan Notices, waivers and consents) shall be deemed to include electronic signatures, the electronic matching of assignment terms and contract formations on electronic platforms approved by the Administrative Agent or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as an original executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any applicable law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act or any other similar state laws based on the Uniform Electronic Transactions Act.
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(c) Any Lender may, without the consent of the Borrower, the Administrative Agent or the Issuing Bank, sell participations to any Person (other than a natural person, any Defaulting Lender, any Direct Competitor or Disqualified Lender to the extent the lists thereof have been made available to the Lenders) (a “Participant”) in all or a portion of such Lender’s rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it), provided that (A) such Lender’s obligations under this Agreement shall remain unchanged, (B) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations, (C) Holdco, the Borrower, the Administrative Agent, the Issuing Bank and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lender’s rights and obligations under this Agreement and (D) such Person shall not be entitled to exercise any rights of a Lender under the Loan Documents.
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of the Loan Documents, provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in clause (ii), (iii), (v) or (vi) of the first proviso to Section 9.02(b) that directly and adversely affects such Participant. Subject to the paragraph below, the Borrower agrees that each Participant shall be entitled to the benefits of Section 2.15 and Section 2.17 (subject to the limitations and requirements of such Sections, including Section 2.17(e) and Section 2.19) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each participant’s interest in the Loans or other obligations under this Agreement (the “Participant Register”); provided that no Lender shall have the obligation to disclose all or a portion of the Participant Register (including the identity of the Participant or any information relating to a Participant’s interest in any Loans or other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary in connection with a Tax audit or other proceeding to establish that any loans are in registered form for U.S. federal income tax purposes. The entries in the Participant Register shall be conclusive absent manifest error, and the Borrower and such Lender shall treat each person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. This Section shall be construed so that the Loan Documents are at all times maintained in “registered form” within the meaning of Sections 163(f), 871(h)(2) and 881(c)(2) of the Code.
A Participant shall not be entitled to receive any greater payment under Section 2.15 or Section 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, except to the extent the right to a greater payment results from a Change in Law after the Participant becomes a Participant or the sale of the participation to such Participant is made with the Borrower’s prior written consent.
(d) Any Lender may, without the consent of the Borrower or the Administrative Agent, at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank and including any pledge or assignment to any holders of obligations owed, or securities issued, by such Lender (including to any trustee for, or any other representative of, such holders), and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release a Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
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(e) Notwithstanding anything to the contrary contained herein, any Lender (a “Granting Lender”) may grant to a special purpose funding vehicle organized and administered by such Granting Lender (an “SPV”), identified as such in writing from time to time by the Granting Lender to the Administrative Agent and the Borrower, the option to provide to the Borrower all or any part of any Loan that such Granting Lender would otherwise be obligated to make to the Borrower pursuant to this Agreement, provided that (i) nothing herein shall constitute a commitment by any SPV to make any Loan and (ii) if an SPV elects not to exercise such option or otherwise fails to provide all or any part of such Loan, the Granting Lender shall be obligated to make such Loan pursuant to the terms hereof. The making of a Loan by an SPV hereunder shall utilize the Commitment of the Granting Lender to the same extent, and as if, such Loan were made by such Granting Lender. Each party hereto hereby agrees that no SPV shall be liable for any indemnity or similar payment obligation under this Agreement (all liability for which shall remain with the Granting Lender). In furtherance of the foregoing, each party hereto hereby agrees (which agreement shall survive the termination of this Agreement) that, prior to the date that is one year and one day after the payment in full of all outstanding commercial paper or other senior indebtedness of any SPV, such party will not institute against, or join any other person in instituting against, such SPV any bankruptcy, reorganization, arrangement, insolvency or liquidation proceedings under the laws of the United States or any State thereof, provided that each Lender designating any SPV hereby agrees to indemnify and hold harmless each other party hereto for any loss, cost, damage or expense arising out of its inability to institute such a proceeding against such SPV during such period of forbearance. In addition, notwithstanding anything to the contrary contained in this Section 9.04, any SPV may (i) with notice to, but without the prior written consent of, the Borrower and the Administrative Agent and without paying any processing fee therefor, assign all or a portion of its interests in any Loans to the Granting Lender or to any financial institutions (consented to by the Borrower and Administrative Agent) other than Disqualified Lenders providing liquidity or credit support to or for the account of such SPV to support the funding or maintenance of Loans and (ii) subject to Section 9.13, disclose on a confidential basis any non-public information relating to its Loans to any rating agency, commercial paper dealer or provider of any surety, guarantee or credit or liquidity enhancement to such SPV other than any Disqualified Lender. The Borrower agrees that each SPV shall be entitled to the benefits of Section 2.15 and Section 2.17 (subject to the limitations and requirements of such Sections, including Section 2.17(e), and Section 2.19) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. An SPV shall not be entitled to receive any greater payment under Section 2.15 or Section 2.17 than the applicable Granting Lender would have been entitled to receive with respect to the interest granted to such SPV, except to the extent the grant to such SPV is made with the Borrower’s prior written consent.
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(f) No such assignment shall be made (A) to any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (A), or (B) to a natural person.
(g) In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other express conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of Loans previously requested but not funded by the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (x) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent or any Lender hereunder (and interest accrued thereon) and (y) except with respect to the assignment of Revolving Loans or Revolving Commitments to Parent and its Subsidiaries, acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swingline Loans in accordance with its Applicable Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under applicable law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
(h) Disqualified Lenders and Direct Competitors. The Parent, on behalf of itself and its Affiliates, the Borrower and the Lenders, expressly acknowledge that the Administrative Agent (in its capacity as such or as an arranger, bookrunner or other agent hereunder) shall not have any obligation to monitor, ascertain or inquire whether assignments or participations are made to Disqualified Lenders, Direct Competitors or Excluded Affiliates or enforce provisions with respect thereto or (y) have any liability with respect to or arising out of any assignment or participation of Loans, or disclosure of confidential information, to any Disqualified Lender, Direct Competitor or Excluded Affiliate.
Section 9.05 Survival. All representations and warranties made by the Loan Parties in the other Loan Documents and in the certificates or other instruments delivered in connection with or pursuant to any Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of the Loan Documents and the making of any Loans and issuance of any Letters of Credit, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Administrative Agent, the Issuing Bank or any Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder.
Section 9.06 Counterparts; Integration. This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof, and there are no promises, undertakings, representations or warranties by the Parent, Holdco or the Borrower, the Administrative Agent, nor any Lender relative to the subject matter hereof not expressly set forth or referred to herein or in the other Loan Documents. Delivery of an executed counterpart of a signature page of this Agreement by telecopy or electronic transmission (including Adobe pdf file) shall be effective as delivery of a manually executed counterpart of this Agreement.
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Section 9.07 Severability. Any provision of this Agreement held to be invalid, illegal or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity, illegality or unenforceability without affecting the validity, legality and enforceability of the remaining provisions hereof; and the invalidity of a particular provision in a particular jurisdiction shall not invalidate such provision in any other jurisdiction. Without limiting the foregoing provisions of this Section 9.07, if and to the extent that the enforceability of any provisions in this Agreement relating to Defaulting Lenders shall be limited by Debtor Relief Laws, as determined in good faith by the Administrative Agent or the Issuing Bank, as applicable, then such provisions shall be deemed to be in effect only to the extent not so limited.
Section 9.08 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender and Issuing Bank is hereby authorized at any time and from time to time, after obtaining the prior written consent of the Administrative Agent and the Required Lenders, to set off and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency, but not any tax accounts, trust accounts, withholding or payroll accounts) at any time held and other obligations (in whatever currency) at any time owing by such Lender or an Issuing Bank to or for the credit or the account of the Borrower against any and all of the Obligations of the Borrower now or hereafter existing under this Agreement held by such Lender or the Issuing Bank, but only to the extent then due and payable; provided that in the event that any Defaulting Lender shall exercise any such right of setoff, (i) all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section 2.22 and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent and the Lenders and (ii) the Defaulting Lender shall provide promptly to the Administrative Agent a statement describing in reasonable detail the Obligations owing to such Defaulting Lender as to which it exercised such right of setoff. The rights of each Lender and the Issuing Bank under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender or Issuing Bank may have. Each Lender and the Issuing Bank agree promptly to notify the Borrower and the Administrative Agent of such setoff and application made by such Lender, provided that any failure to give or any delay in giving such notice shall not affect the validity of any such setoff and application under this Section.
Section 9.09 Governing Law; Jurisdiction; Consent to Service of Process.
(a) This Agreement shall be construed in accordance with and governed by the law of the State of New York.
(b) Each of the parties hereto hereby irrevocably and unconditionally submits, for itself and its property, to the exclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding shall be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Notwithstanding the foregoing, nothing in any Loan Document shall affect any right that the Administrative Agent, the Collateral Agent or any Lender may otherwise have to bring any action or proceeding relating to any Loan Document against the Parent, Holdco, the Borrower or their respective properties in the courts of any jurisdiction.
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(c) Each of the parties hereto hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to any Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in any Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law. Each of the Parent and Holdco agrees that service of process in any action or proceeding brought in the State of New York may be made upon the Borrower, and each of the Parent and Holdco confirms and agrees that the Borrower has been duly and irrevocably appointed as its agent and true and lawful attorney-in-fact in its name, place and stead to accept such service. Nothing herein shall in any way be deemed to limit the ability of any Agent to serve any such process in any other manner permitted by applicable law or to obtain jurisdiction over each of the Parent and Holdco in such other jurisdictions, and in such manner, as may be permitted by applicable law.
Section 9.10 WAIVER OF JURY TRIAL. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO ANY LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
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Section 9.11 Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement.
Section 9.12 Confidentiality. Each of the Administrative Agent, the other Agents, the Issuing Bank and the Lenders agrees to keep confidential, and not to publish, disclose or otherwise divulge, the Information (as defined below), except that Information may be disclosed (a) to its and its Affiliates’ directors, officers, employees and agents, including accountants, legal counsel and other advisors on a “need to know” basis (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential, provided that the relevant Lender shall be responsible for such compliance and non-compliance), (b) to the extent requested by any bank regulatory authority having jurisdiction over the Administrative Agent, any other Agent, the Issuing Bank, the Swingline Lender and/or the Lenders, as applicable, provided that, other than in connection with any audit or examination conducted by bank accountants or any governmental, regulatory or self-regulatory authority exercising examination or regulatory authority, prior notice shall have been given to the Borrower, to the extent permitted by applicable laws or regulations, (c) to the extent required by (i) any order of any court or administrative agency having jurisdiction over the Administrative Agent, any other Agent, the Issuing Bank and/or the Lenders, as applicable, (ii) any pending legal judicial or administrative proceeding with the power to bind the Administrative Agent, any other Agent, the Issuing Bank and/or the Lenders, as applicable, and (iii) applicable laws or regulations or by any compulsory legal process, provided that, other than in connection with any audit or examination conducted by bank accountants or any governmental, regulatory or self-regulatory authority exercising examination or regulatory authority, the Administrative Agent, any other Agent, the Issuing Bank and/or the Lenders, as applicable, shall use commercially reasonable efforts to give prior notice to the Borrower, to the extent permitted by applicable laws or regulations, (d) to any other party to this Agreement, (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to any Loan Document or the enforcement of rights thereunder, including establishing any defense under applicable securities laws, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights or obligations under this Agreement, in each case, except to any Direct Competitor or Disqualified Lender to the extent that a list thereof is made available to the Lenders, or (ii) any actual or prospective Lender Counterparty to any Secured Swap Agreement relating to any Loan Party and its obligations under the Loan Documents, in each case, except to any Direct Competitor or Disqualified Lender, (g) with the written consent of the Borrower, (h) to the extent such Information (I) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, any other Agent, an Issuing Bank or any Lender on a nonconfidential basis from a source other than the Parent, Holdco or the Borrower (provided that the source is not actually known (after due inquiry) by such disclosing party to be bound by an agreement containing provisions substantially the same as those contained in this confidentiality provision), (i) on a confidential basis in consultation with the Borrower (x) to the extent the Borrower has failed to comply with Section 5.15, to any rating agency in connection with rating the Parent, Holdco or the Borrower or the facilities hereunder or (y) to the CUSIP Service Bureau, Clearpar or Loanserv or any similar agency, solely to the extent such information is necessary in connection with the issuance and monitoring of CUSIP numbers, settlement of assignments or other general administrative functions with respect to the facilities or (j) to the extent independently developed by such the Administrative Agent, other Agent, Issuing Bank, Swingline Lender and/or Lender, as applicable, without reliance on confidential information or any other information available as a result of a breach of confidentiality obligations.. For the purposes of this Section the term “Information” means all information received from or on behalf of the Parent, Holdco or the Borrower or any of their Subsidiaries relating to the Parent, Holdco or the Borrower or any of their Subsidiaries or any of their respective businesses, other than any such information that is available to the Administrative Agent, any other Agent, the Issuing Bank or any Lender on a nonconfidential basis prior to disclosure by, and from a source other than, the Parent, Holdco or the Borrower or any of their Subsidiaries that to the disclosing party’s knowledge (after due inquiry) is not in violation of any confidentiality obligation owed to the Parent, Holdco or the Borrower or any of their Subsidiaries.
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Each Lender acknowledges that Information furnished to it pursuant to this Agreement may include material non-public information concerning the Loan Parties and their respective Related Parties or their respective securities, and confirms that it has developed compliance procedures regarding the use of material non-public information and that it will handle such material non-public information in accordance with those procedures and applicable law, including Federal and state securities laws.
All Information, including requests for waivers and amendments, furnished by the Borrower or the Administrative Agent pursuant to, or in the course of administering, this Agreement will be syndicate-level Information, which may contain material non-public information about the Loan Parties and their respective Related Parties or their respective securities. Accordingly, each Lender represents to the Borrower and the Administrative Agent that it has identified in its Administrative Questionnaire a credit contact who may receive Information that may contain material non-public information in accordance with its compliance procedures and applicable law.
Section 9.13 Interest Rate Limitation. Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan or participation in any LC Disbursement, together with all fees, charges and other amounts that are treated as interest on such Loan or LC Disbursement or participation therein under applicable law (collectively, the “Charges”), shall exceed the maximum lawful rate (the “Maximum Rate”) that may be contracted for, charged, taken, received or reserved by the Lender holding such Loan or LC Disbursement or participation therein in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all Charges payable in respect thereof, shall be limited to the Maximum Rate and, to the extent lawful, the interest and Charges that would have been payable in respect of such Loan or LC Disbursement or participation therein but were not payable as a result of the operation of this Section shall be cumulated and the interest and Charges payable to such Lender in respect of other Loans or LC Disbursement or participation therein or periods shall be increased (but not above the Maximum Rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Effective Rate to the date of repayment, shall have been received by such Lender.
Section 9.14 USA Patriot Act. Each Lender and Issuing Bank that is subject to the Patriot Act (as hereinafter defined) and the Administrative Agent (for itself and not on behalf of any Lender) hereby notifies the Loan Parties that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)) (the “Patriot Act”), it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of the Loan Parties and other information that will allow such Lender, such Issuing Bank or the Administrative Agent, as applicable, to identify the Loan Parties in accordance with the Patriot Act.
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Section 9.15 Direct Website Communication. Each of the Parent and the Borrower may, at its option, provide to the Administrative Agent any information, documents and other materials that it is obligated to furnish to the Administrative Agent pursuant to the Loan Documents, including, without limitation, all notices, requests, financial statements, financial and other reports, certificates and other information materials (all such communications being referred to herein collectively as “Communications”), by (i) posting such documents, or providing a link thereto, on the Parent’s or the Borrower’s website, (ii) such documents being posted on the Parent’s and/or the Borrower’s behalf on an Internet or Intranet website, if any, to which the Administrative Agent has access (whether a commercial third-party website or a website sponsored by the Administrative Agent) or (iii) by transmitting the Communications in an electronic/soft medium to the Administrative Agent at an email address provided by the Administrative Agent from time to time; provided that (i) promptly following written request by the Administrative Agent, the Borrower shall continue to deliver paper copies of such documents to the Administrative Agent for further distribution to each Lender until a written request to cease delivering paper copies is given by the Administrative Agent and (ii) the Borrower shall notify (which may be by facsimile or electronic mail) the Administrative Agent of the posting of any such documents. Each Lender shall be solely responsible for timely accessing posted documents or requesting delivery of paper copies of such documents from the Administrative Agent and maintaining its copies of such documents. Nothing in this Section 9.15 shall prejudice the right of the Parent, Holdco, the Borrower, the Administrative Agent, any other Agent or any Lender to give any notice or other communication pursuant to any Loan Document in any other manner specified in such Loan Document.
The Administrative Agent agrees that the receipt of the Communications by the Administrative Agent at its e-mail address in Section 9.01 shall constitute effective delivery of the Communications to the Administrative Agent for purposes of the Loan Documents. Each Lender agrees that notice to it (as provided in the next sentence) specifying that the Communications have been posted to the Platform shall constitute effective delivery of the Communications to such Lender for purposes of the Loan Documents. Each Lender agrees (A) to notify the Administrative Agent in writing (including by electronic communication) from time to time of such Lender’s e-mail address to which the foregoing notice may be sent by electronic transmission and (B) that the foregoing notice may be sent to such e-mail address. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the sender’s receipt of an acknowledgement from the intended recipient (such as by the “return receipt requested” function, as available, return e-mail or other written acknowledgement), provided that if such notice or other communication is not sent during the normal business hours of the recipient, such notice or communication shall be deemed to have been sent at the opening of business on the next Business Day for the recipient, and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor.
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Each of the Parent, Holdco, the Borrower, the Administrative Agent and the Issuing Bank and the Swingline Lender may change its address, electronic email address, telecopier or telephone number for notices and other communications hereunder by notice to the other parties hereto. Each other Lender may change its address, electronic email address, telecopier or telephone number for notices and other communications hereunder by notice to the Borrower, the Administrative Agent and the Issuing Bank and the Swingline Lender. In addition, each Lender agrees to notify the Administrative Agent from time to time to ensure that the Administrative Agent has on record (i) an effective address, contact name, telephone number, telecopier number and electronic mail address to which notices and other communications may be sent and (ii) accurate wire instructions for such Lender.
Section 9.16 Intercreditor Agreement Governs. Each Lender and Agent (a) hereby agrees that it will be bound by and will take no actions contrary to the provisions of the Pari Passu Intercreditor Agreement any other intercreditor agreement or subordination agreement entered into pursuant to the terms hereof, (b) hereby authorizes and instructs the Administrative Agent and the Collateral Agent to enter into the Pari Passu Intercreditor Agreement and each other intercreditor agreement or subordination agreement and any other intercreditor agreement or subordination agreement entered into pursuant to the terms hereof and to subject the Liens securing the Secured Obligations to the provisions thereof and (c) hereby authorizes and instructs the Administrative Agent and the Collateral Agent to enter into the Pari Passu Intercreditor Agreement and any other intercreditor agreement or subordination agreement that includes, or to amend the Pari Passu Intercreditor Agreement any then existing intercreditor agreement or subordination agreement to provide for, the terms described in the definition of the terms “Permitted First Priority Replacement Debt” or “Permitted Second Priority Replacement Debt” or other “First Lien Senior Secured Note” or the Collateral Agent, as applicable or as otherwise provided for by the terms of this Agreement; provided that in each case, such intercreditor agreement is substantially consistent with the terms set forth on Exhibit K-1 or K-2 annexed hereto together with (A) any immaterial changes and (B) changes implementing additional extensions of credit permitted under this Agreement, in each case in form and substance reasonably satisfactory to the Administrative Agent and/or Collateral Agent (it being understood that junior Liens are not required to be pari passu with other junior Liens, and that Indebtedness secured by junior Liens may secured by Liens that are pari passu with, or junior in priority to, other Liens that are junior to the Liens securing the Obligations).
Section 9.17 Judgment Currency. If, for the purposes of obtaining judgment in any court, it is necessary to convert a sum due hereunder or under any other Loan Document in one currency into another currency, the rate of exchange used shall be that at which in accordance with normal banking procedures the Administrative Agent could purchase the first currency with such other currency on the Business Day preceding that on which final judgment is given. The obligation of the Borrower in respect of any such sum due from it to the Administrative Agent or the Lenders hereunder or under the other Loan Documents shall, notwithstanding any judgment in a currency (the “Judgment Currency”) other than that in which such sum is denominated in accordance with the applicable provisions of this Agreement (the “Agreement Currency”), be discharged only to the extent that on the Business Day following receipt by the Administrative Agent or the relevant Lender of any sum adjudged to be so due in the Judgment Currency, the Administrative Agent or the relevant Lender may in accordance with normal banking procedures purchase the Agreement Currency with the Judgment Currency. If the amount of the Agreement Currency so purchased is less than the sum originally due to the Administrative Agent or such Lender from the Borrower in the Agreement Currency, the Borrower agrees, as a separate obligation and notwithstanding any such judgment, to indemnify the Administrative Agent, or the Person to whom such obligation was owing against such loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the Administrative Agent or such Lender in such currency, the Administrative Agent or such Lender agrees to return the amount of any excess to the Borrower (or to any other Person who may be entitled thereto under applicable law).
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Section 9.18 No Advisory or Fiduciary Responsibility. In connection with all aspects of each transaction contemplated hereby (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document), each of the Borrower and the Parent acknowledges and agrees, and acknowledges its Affiliates’ understanding, that: (i) (A) the arranging and other services regarding this Agreement provided by the Administrative Agent, the other Agents and the Lead Arrangers and the making of the Loans and Commitments by the Lenders are arm’s-length commercial transactions between the Borrower, the Parent and their respective Affiliates, on the one hand, and the Administrative Agent, the other Agents and the Lead Arrangers, on the other hand, (B) each of the Borrower and the Parent has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate, and (C) each of the Borrower and the Parent is capable of evaluating, and understands and accepts, the terms, risks and express conditions of the transactions contemplated hereby and by the other Loan Documents; (ii) (A) the Administrative Agent, each other Agent, each Lead Arranger, and each Lender is and has been acting solely as a principal and, except as expressly agreed in writing by the relevant parties, has not been, is not, and will not be acting as an advisor, agent or fiduciary for the Borrower, the Parent or any of their respective Affiliates, or any other Person and (B) none of the Administrative Agent, any other Agent, any Lead Arranger or any Lender has any obligation to the Borrower, the Parent or any of their respective Affiliates with respect to the transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents; and (iii) the Administrative Agent, the other Agents, the Lead Arrangers and the Lenders their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from those of the Borrower, the Parent and their respective Affiliates, and none of the Administrative Agent, any other Agent, any Lead Arrangers or any Lender has any obligation to disclose any of such interests to the Borrower, the Parent or any of their respective Affiliates. To the fullest extent permitted by law, the Borrower and the Parent each hereby waive and release any claims that it may have against the Administrative Agent, the other Agents, the Lead Arrangers and the Lenders with respect to any breach or alleged breach of agency or fiduciary duty in connection with any aspect of any transaction contemplated hereby.
Section 9.19 [Reserved].
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Section 9.20 Acknowledgment and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any Lender that is an EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
(a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any Lender party hereto that is an EEA Financial Institution; and
(b) the effects of any Bail-In Action on any such liability, including, if applicable:
(i) a reduction in full or in part or cancellation of any such liability;
(ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or
(iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.
[Remainder of Page Intentionally Blank]
213 |
Name
|
Country of Incorporation
|
Attachmate Corporation
|
USA
|
Attachmate Group Australia Pty Limited
|
Australia
|
Attachmate Group Austria GmbH
|
Austria
|
Attachmate Group Belgium N.V.
|
Belgium
|
Attachmate Group Denmark A/S
|
Denmark
|
Attachmate Group France SARL
|
France
|
Attachmate Group Germany GmbH
|
Germany
|
Attachmate Group Hong Kong Limited
|
Hong Kong
|
Attachmate Group Italy Srl
|
Italy
|
Attachmate Group Netherlands BV
|
Netherlands
|
Attachmate Group Schweiz AG
|
Switzerland
|
Attachmate Group Singapore Pte Ltd
|
Singapore
|
Attachmate Group South Africa Proprietary Limited
|
South Africa
|
Attachmate Group Spain S.L.
|
Spain
|
Attachmate Group Sweden AB
|
Sweden
|
Attachmate Hong Kong
|
Hong Kong
|
Attachmate India Private Ltd.
|
India
|
Attachmate Ireland Limited
|
Ireland
|
Attachmate Middle East LLC
|
Egypt
|
Attachmate Sales Argentina SRL
|
Argentina
|
Attachmate Sales UK Limited
|
UK
|
Attachmate Teknoloji Satis ve Pazarlama Limited Sti.
|
Turkey
|
Authasas Advanced Authentication B.V.
|
Netherlands
|
Authasas B.V.
|
Netherlands
|
Borland (H.K.) Limited
|
Hong Kong
|
Borland (Holding) UK Ltd
|
UK
|
Borland (UK) Limited
|
UK
|
Borland (Singapore) Pte Ltd
|
Singapore
|
Borland Australia Pty Ltd
|
Australia
|
Borland B.V.
|
Netherlands
|
Borland Canada
|
Canada
|
Borland Co. Limited
|
Japan
|
Borland Corporation
|
USA
|
Borland Entwicklung GmbH
|
Austria
|
Borland France Sarl
|
France
|
Borland GmbH
|
Germany
|
Borland Latin America Ltda
|
Brazil
|
Borland Software (India) Private Limited
|
India
|
Borland Magyarorszag KFT
|
Hungary
|
Borland Software Corporation
|
USA
|
Borland Technology Corporation
|
USA
|
Cambridge Technology Partners (Mexico) SA de CV
|
Mexico
|
Cambridge Technology Partners do Brasil sc Ltda
|
Brazil
|
Cambridge Technology Partners India Private Limited
|
India
|
CJDNLD LLC
|
USA
|
CTP Services SA de CV
|
Mexico
|
GWAVA EMEA GmbH
|
Germany
|
GWAVA Technologies Inc.
|
USA
|
GWAVA, Inc.
|
Canada
|
M A Finance Co LLC
|
USA
|
Merant Holdings
|
UK
|
Miami Escrow Borrower LLC
|
USA
|
Micro Focus (Canada) Limited/ Espace Micro Focus (Canada) Ltd
|
Canada
|
Micro Focus (IP) Holdings Limited
|
UK
|
Micro Focus (IP) Ireland Limited
|
Ireland
|
Micro Focus (IP) Limited
|
UK
|
Micro Focus (US) Group Inc
|
USA
|
Micro Focus (US) Holdings
|
UK
|
Micro Focus (US) Inc
|
USA
|
Micro Focus (US) International Holdings Inc.
|
USA
|
Micro Focus AG
|
Switzerland
|
Micro Focus APM Solutions Limited
|
UK
|
Micro Focus APM Solutions Limited (EOOD)
|
Bulgaria
|
Micro Focus AS
|
Norway
|
Micro Focus AS, Filial I Finland (Branch)
|
Finland
|
Micro Focus AS, Norge, filial I Sverige (Branch)
|
Sweden
|
Micro Focus CHC Limited
|
UK
|
Micro Focus Denmark, filial af Micro Focus AS, Norge
|
Denmark
|
Micro Focus Finance Ireland Ltd
|
Ireland
|
Micro Focus Finance Sarl
|
Luxembourg
|
Micro Focus GmbH
|
Germany
|
Micro Focus Group Holdings Unlimited Company
|
Ireland
|
Micro Focus Group Limited
|
UK
|
Micro Focus Holdings Limited
|
UK
|
Micro Focus India Private Limited
|
India
|
Micro Focus International Holdings Ltd
|
Ireland
|
Micro Focus International Limited
|
Cayman Islands
|
Micro Focus IP Development Limited
|
UK
|
Micro Focus IP Limited
|
Cayman Islands
|
Micro Focus Ireland Limited
|
Ireland
|
Micro Focus Israel Limited
|
Israel
|
Micro Focus KK
|
Japan
|
Micro Focus Korea Limited
|
South Korea
|
Micro Focus Limited
|
UK
|
Micro Focus Limited Hong Kong (Branch)
|
Hong Kong
|
Micro Focus Limited Mexico (Branch)
|
Mexico
|
Micro Focus MHC Limited
|
UK
|
Micro Focus Midco Limited
|
UK
|
Micro Focus Middle East FZ-LLC
|
Dubai
|
Micro Focus NV
|
Netherlands
|
Micro Focus Progamação De Computadores Ltda
|
Brazil
|
Micro Focus Pte Limited
|
Singapore
|
Micro Focus Pty Limited
|
Australia
|
Micro Focus S.L. – Sucursal Em Portugal (Branch)
|
Portugal
|
Micro Focus SA/NV
|
Belgium
|
Micro Focus SAS
|
France
|
Micro Focus SLU
|
Spain
|
Micro Focus Software (Ireland) Limited
|
Ireland
|
Micro Focus Software (Canada) Inc.
|
Canada
|
Micro Focus Software Inc.
|
USA
|
Micro Focus Software Indian Private Limited
|
India
|
Micro Focus South Africa (PTY) Ltd
|
South Africa
|
Micro Focus Srl
|
Italy
|
Micro Focus UK Limited
|
UK
|
Minerva Finance Sarl
|
Luxembourg
|
N.Y. NetManagement (Yerushalayim) Ltd.
|
Israel
|
Net IQ Asia Ltd
|
Hong Kong
|
NetIQ Corporation
|
USA
|
NetIQ Europe Limited
|
Ireland
|
NetIQ Ireland Limited
|
Ireland
|
NetIQ KK
|
Japan
|
NetIQ Limited
|
UK
|
NetIQ Software International Limited
|
Cyprus
|
NetManage Canada Inc.
|
Canada
|
Novell (Taiwan) Co. Ltd
|
Taiwan
|
Novell Cayman Software Unlimited Company
|
Ireland
|
Novell Cayman Software International Unlimited Company
|
Ireland
|
Novell Corporation (Malaysia) Sdn Bhd
|
Malaysia
|
Novell do Brasil Software Ltd.
|
Brazil
|
Novell Holding Deutschland GmbH
|
Germany
|
Novell Holdings Inc
|
USA
|
Novell India Pvt Ltd
|
India
|
Novell International Holdings Inc
|
USA
|
Novell Ireland Real Estate Limited
|
Ireland
|
Novell Israel Software Limited
|
Israel
|
Novell Japan Ltd
|
Japan
|
Novell Korea Co. Limited
|
Korea
|
Novell New Zealand Limited
|
New Zealand
|
Novell Portugal Informatica Lda.
|
Portugal
|
Novell Software (Beijing) Limited
|
China
|
Novell Software (Beijing) Ltd. Shanghai Branch
|
China
|
Novell Software (Beijing) Ltd. Shenzhen Branch
|
China
|
Novell Software International Limited
|
Ireland
|
Novell UK Software Limited
|
UK
|
Novell U.K. Limited
|
UK
|
NOVL Czech s.r.o.
|
Czech Republic
|
Relativity Technologies Private Limited
|
India
|
Ryan McFarland Limited
|
UK
|
Seattle Holdings, Inc
|
USA
|
Seattle MergerSub, Inc
|
USA
|
Serena Holdings
|
UK
|
Serena Software Benelux BVBA
|
Belgium
|
Serena Software Do Brasil Ltda
|
Brazil
|
Serena Software Europe Limited
|
UK
|
Serena Software Europe Ltd (India Branch)
|
India
|
Serena Software Europe Ltd (Italy Branch)
|
Italy
|
Serena Software Europe Limited (Korea Branch)
|
Korea
|
Serena Software GmbH
|
Germany
|
Serena Software Inc.
|
USA
|
Serena Software GmbH
|
Switzerland
|
Serena Software Japan KK
|
Japan
|
Serena Software Nordic AB
|
Sweden
|
Serena Software Pte. Ltd.
|
Singapore
|
Serena Software Pty Limited
|
Australia
|
Serena Software SA
|
Spain
|
Serena Software SAS
|
France
|
Serena Software Ukraine LLC
|
Ukraine
|
Singapore Micro Focus Pte. Ltd.
|
Singapore
|
Spartacus Acquisition Corp.
|
USA
|
Spartacus Acquisition Holdings Corp.
|
USA
|
SUSE Linux GmbH
|
Germany
|
SUSE Linux Holdings Limited (SLH)
|
Ireland
|
SUSE Linux Ireland Ltd
|
Ireland
|
SUSE Linux s.r.o.
|
Czech Republic
|
SUSE LLC
|
USA
|
The Attachmate Group Inc
|
USA
|
UK Micro Focus Limited Beijing Representative Office
|
China
|
XDB (UK) Limited
|
UK
|
HPE Software subsidiaries
|
|
ArcSight, LLC
|
United States
|
Autonomy Australia Pty Limited
|
Australia
|
Autonomy Belgium BVBA
|
Belgium
|
Autonomy Digital Limited
|
United Kingdom
|
Autonomy HoldCo BV
|
Netherlands
|
Autonomy Italy Srl
|
Italy
|
Autonomy Netherlands BV
|
Netherlands
|
Autonomy Software Asia Private Limited
|
India
|
Autonomy Systems (Beijing) Limited Company
|
China
|
Autonomy Systems (Canada) Ltd.
|
Canada
|
Autonomy Systems Australia Pty Limited
|
Australia
|
Autonomy Systems Limited
|
United Kingdom
|
Autonomy Systems Singapore Pte Ltd
|
Singapore
|
Autonomy Systems Software South Africa
|
South Africa
|
Entco Andromeda LLC
|
United States
|
Entco Australia Pty Ltd
|
Australia
|
Entco Belgium BVBA
|
Belgium
|
Entco Brasil Servicos de Tecnologia Ltda.
|
Brazil
|
Entco Brazil Holdings LLC
|
United States
|
Entco Bulgaria EOOD
|
Bulgaria
|
Entco Capital Co
|
Cayman Islands
|
Entco Caribe B.V.
|
Netherlands
|
Entco Caribe B.V. LLC (Branch)
|
Puerto Rico
|
Entco CentroAmerica CAC, Ltda.
|
Costa Rica
|
Entco Costa Rica Ltda.
|
Costa Rica
|
Entco Delaware LLC
|
United States
|
Entco Denmark ApS
|
Denmark
|
Entco Deutschland GmbH
|
Germany
|
Entco Draco BV
|
Netherlands
|
Entco Eastern Holding B.V.
|
Netherlands
|
Entco Eastern Holding II B.V.
|
Netherlands
|
Entco Enterprise B.V.
|
Netherlands
|
Entco Enterprise B.V., Amstelveen, Meyrin Branch
|
Switzerland
|
Entco Field Delivery Spain S.L.U.
|
Spain
|
Entco Foreign HoldCo Ltd.
|
United Kingdom
|
Entco France SAS
|
France
|
Entco Gatriam Holding B.V.
|
Netherlands
|
Entco Government Software LLC
|
United States
|
EntCo HoldCo BV
|
Netherlands
|
Entco HoldCo I B.V.
|
Netherlands
|
Entco HoldCo II B.V.
|
Netherlands
|
Entco HoldCo III B.V.
|
Netherlands
|
Entco HoldCo IV B.V.
|
Netherlands
|
Entco Holding Berlin B.V.
|
Netherlands
|
Entco Holding Finance B.V.
|
Netherlands
|
Entco Holding Hague B.V.
|
Netherlands
|
Entco Holding Hague II BV
|
Netherlands
|
Entco Holdings L.P.
|
Bermuda
|
Entco Holdings, Inc.
|
United States
|
Entco Interactive (Israel) Ltd
|
Israel
|
Entco International Sàrl
|
Switzerland
|
Entco International Sarl, Jebel Ali Free Zone Branch
|
United Arab Emirates
|
Entco International Sarl, Abu Dhabi Branch
|
United Arab Emirates
|
Entco International Trade, B.V.
|
Netherlands
|
Entco Investment Co
|
Cayman Islands
|
Entco IT Services Private Limited
|
India
|
Entco Italiana S.r.l.
|
Italy
|
Entco Japan, Ltd.
|
Japan
|
Entco Luxembourg S.a.r.l.
|
Luxembourg
|
Entco Marigalante Ltd.
|
Cayman Islands
|
Entco Mexico, S. de R.L. de C.V.
|
Mexico
|
Entco MS, Inc.
|
United States
|
Entco Nederland B.V.
|
Netherlands
|
Entco Polska sp. z o.o.
|
Poland
|
Entco Puerto Rico B.V. ***
|
Netherlands
|
Entco Puerto Rico B.V. LLC (Branch)
|
Puerto Rico
|
Entco Schweiz GmbH
|
Switzerland
|
Entco Singapore (Sales) Pte. Ltd.
|
Singapore
|
Entco Sinope Holding B.V.
|
Netherlands
|
Entco Situla Holding Ltd
|
United Kingdom
|
Entco Software Canada Co. Logiciels Entco Canada Cie
|
Canada
|
Entco Software India Pvt Ltd
|
India
|
Entco Software Malaysia Sdn. Bhd.
|
Malaysia
|
Entco Software México, S. de R.L. de C.V.
|
Mexico
|
Entco Software Romania SRL
|
Romania
|
Entco Software Services Middle East, FZ LLC
|
United Arab Emirates
|
EntCo Software Spain S.L.U.
|
Spain
|
Entco Sverige AB
|
Sweden
|
Entco Technologies, Inc.
|
United States
|
Entco Turkey Teknoloji Çözümleri Limited Şirketi
|
Turkey
|
Entco, LLC
|
United States
|
Entcorp Canada, Inc
|
Canada
|
Entcorp Czechia, s.r.o.
|
Czech Republic
|
Entcorp Marigalante UK Ltd.
|
United Kingdom
|
Entcorp Nederlands B.V.
|
Netherlands
|
Entcorp Philippines, Inc
|
Philippines
|
Entcorp Software Israel Ltd.
|
Israel
|
Entcorp Software México, S. de R.L. de C.V.
|
Mexico
|
Entcorp UK Ltd.
|
United Kingdom
|
Enterprise Corp Italiana S.r.l.
|
Italy
|
EntIT Software LLC
|
United States
|
Entsoft Galway Limited
|
Ireland
|
Ensoft Holding Ireland Unlimited Company
|
Ireland
|
Entsoft Ireland Limited
|
Ireland
|
Interwoven Australia Pty Limited
|
Australia
|
Interwoven BV
|
Netherlands
|
Interwoven Canada, Inc.
|
Canada
|
Interwoven Hong Kong Ltd
|
Hong Kong
|
Interwoven Inc. - India Branch
|
India
|
Interwoven UK Ltd.
|
United Kingdom
|
Interwoven Inc., Taiwan Branch
|
Taiwan
|
Entcorp Japan KK
|
Japan
|
Limited Liability Company Entco
|
Russian Federation
|
Longsand Limited
|
United Kingdom
|
Mercury Interactive (Singapore) Pte. Ltd.
|
Singapore
|
Meridio Limited
|
United Kingdom
|
MicroLink LLC
|
United States
|
Peregrine Systems do Brazil Limitada
|
Brazil
|
Seattle BLP17
|
Bermuda
|
Seattle Escrow Borrower LLC
|
United States
|
Seattle SpinCo, Inc.
|
United States
|
Shanghai Entco Software Technology Co., Ltd.
|
China
|
Shanghai Entco Software Technology Co., Ltd., Beijing Branch
|
China
|
Shanghai Entco Software Technology Co., Ltd., Chongqing Branch
|
China
|
Shanghai Entco Software Technology Co., Ltd., Shenzhen Branch
|
China
|
Stratify, Inc.
|
United States
|
Trilead GmbH
|
Switzerland
|
Verity Benelux B.V.
|
Netherlands
|
Verity GB Limited
|
United Kingdom
|
Verity Italia S.r.l.
|
Italy
|
Verity Luxembourg S.à r.l.
|
Luxembourg
|
Verity Worldwide Ltd
|
British Virgin Islands
|
Vertica Systems, Inc.
|
United States
|
Voltage Security International, Inc.
|
United States
|
Voltage Security Limited
|
United Kingdom
|
Zantaz UK Limited
|
United Kingdom
|
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