UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
Commission File Number: 001-36061
Benefitfocus, Inc.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
46-2346314
(I.R.S. Employer
Identification No.)
100 Benefitfocus Way
Charleston, South Carolina 29492
(Address of principal executive offices and zip code)
(843) 849-7476
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 Par Value
Name of each exchange of which registered
Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit
such files). Yes No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.:
Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No
The aggregate market value of the registrant's common stock held by non-affiliates of the registrant on June 30, 2018 (based on the closing sale
price of $33.60 on June 29, the last business date of the registrant’s most recently completed second fiscal quarter), was approximately $547,962,879.
Common stock held by each officer and director and by each person known to the registrant who owned 10% or more of the outstanding common stock
have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive
determination for other purposes.
The number of shares of the registrant’s common stock outstanding as of February 22, 2019 was 32,040,894.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s definitive Proxy Statement for its 2019 Annual Meeting of Stockholders currently scheduled to be held on May 31,
2019 are incorporated by reference into Part III hereof.
Benefitfocus, Inc.
Form 10-K
For Year Ended December 31, 2018
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosures
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
PART I
This Annual Report on Form 10-K contains “forward-looking statements” that involve risks and
uncertainties, as well as assumptions that, if they never materialize or prove incorrect, could cause our
results to differ materially from those expressed or implied by such forward-looking statements. The
statements contained in this Annual Report on Form 10-K that are not purely historical are forward-
looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange
Act”). Such forward-looking statements include any expectation of earnings, revenue or other financial
items; any statements of the plans, strategies and objectives of management for future operations; risks
associated with acquisitions; factors that may affect our operating results; statements about our ability to
establish and maintain intellectual property rights; statements about our ability to retain and hire
necessary associates and appropriately staff our operations; statements related to future capital
expenditures; statements related to future economic conditions or performance; statements as to industry
trends; and other matters that do not relate strictly to historical facts or statements of assumptions
underlying any of the foregoing. Forward-looking statements are often identified by the use of words such
as, but not limited to, “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,”
“might,” “will,” “plan,” “project,” “seek,” “should,” “target,” “would,” and similar expressions or variations
intended to identify forward-looking statements. These statements are based on the beliefs and
assumptions of our management based on information currently available to management. Such forward-
looking statements are subject to risks, uncertainties and other important factors that could cause actual
results and the timing of certain events to differ materially from future results expressed or implied by
such forward-looking statements. Factors that could cause or contribute to such differences include, but
are not limited to, those discussed in the section titled “Risk Factors” included in Item 1A of Part I of this
Annual Report on Form 10-K, and the risks discussed in our other SEC filings. Furthermore, such
forward-looking statements speak only as of the date of this report. Except as required by law, we
undertake no obligation to update any forward-looking statements to reflect events or circumstances after
the date of such statements.
As used in this report, the terms “Benefitfocus, Inc.,” “Benefitfocus,” “Company,” “company,” “we,”
“us,” and “our” mean Benefitfocus, Inc. and its subsidiaries unless the context indicates otherwise.
Item 1. Business.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, suppliers and brokers. The Benefitfocus Platform simplifies how
organizations and individuals transact benefits. Our employer, carrier and supplier customers rely on our
platform to manage, scale and exchange benefits data seamlessly. Our solutions drive value for all
participants in our benefits ecosystem.
The Benefitfocus multi-tenant platform has a user-friendly interface designed for consumers to
access all of their benefits in one place. Our comprehensive solutions support medical benefit plans and
non-medical benefits, such as, dental, life, disability insurance, income protection, digital health and
financial wellness. As the number of employer benefits plans has increased, with each plan subject to
many different business rules and requirements, demand for the Benefitfocus Platform is growing.
Brokers use our platform to manage employer portfolios. This includes delivering strategic insights
that improve their employer clients’ benefit experience and demonstrating greater value through access to
a larger set of relevant products for employers, which should bring higher broker commissions and profits.
Employers use our solutions to streamline benefits processes and control costs, keep up with
challenging and ever-changing regulatory requirements, and offer a greater variety of benefit options to
attract, retain and motivate employees. The Benefitfocus Platform enables our employer customers to
simplify the management of complex benefits processes, from sales and enrollment to implementation
and ongoing administration. It provides their employees with an engaging, highly intuitive and
personalized user interface for selecting and managing all of their benefits via a desktop or mobile device.
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Insurance carriers and suppliers use our solutions to more effectively market offerings to
consumers, simplify billing, and improve the enrollment process. We also provide a network of
approximately 2,200 benefit provider data exchange connections, which facilitates the otherwise highly
fragmented interaction among employees, employers, brokers and carriers.
Since our initial public offering, we have described our target market as comprising two separate but
related market segments – the employer segment and the insurance carrier segment. Within the employer
segment, we sell our technology solutions on an annually recurring or multi-year subscription basis to large
employers, which we define as those with more than 1,000 employees. Similarly, in our other market
segment, we sell our solutions on a subscription basis to insurance carriers, enabling us to expand our
overall footprint in the benefits marketplace by aggregating many key constituents, including consumers,
employers, and brokers. We believe our presence in both the employer and insurance carrier segments
gives us a strong position at the center of the benefits ecosystem. As of December 31, 2018, we served
1,024 large employer customers, an increase from 141 in 2010, and 57 carrier customers, an increase from
29 in 2010.
In 2018, we expanded our economic model to include a transaction-oriented, marketplace solution,
known as BenefitsPlace, that aligns employers, brokers, carriers and suppliers around the needs of
consumers on our platform from our employer, carrier and broker connections. In this model, our
BenefitsPlace partners sell their voluntary benefit offerings through a holistic, multidimensional marketplace.
This marketplace is designed to increase the economic value of the consumer lives on our platform by
aligning platform products to consumer needs. In exchange for Benefitfocus delivering consumer access,
data-driven analysis and operational efficiencies, BenefitsPlace partners pay us a percentage of the
transaction value that is transacted on our platform. BenefitsPlace carrier agreements have terms of two to
four years and are typically cancellable upon breach of contract or insolvency. BenefitsPlace supplier
contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to
cure, bankruptcy and termination for convenience.
Our hybrid software-as-a-service, or SaaS, and repeatable transaction-based model provides us
significant visibility into our future operating results, which enhances our ability to manage our business.
Our company was founded in 2000, and we currently employ approximately 1,450 associates, or
employees.
Industry Background
The administration and distribution of benefits to employees is a mainstay of the U.S. economy.
Providing these benefits is costly and complex and requires the exchange of information, application of
rules, and transfer of funds among a wide variety of constituents, including consumers, employers,
insurance carriers, suppliers, brokers, benefits outsourcers, payroll processors, and financial institutions.
The size of the HR benefits administration market and the value of benefits transacted are large.
According to IBISWorld calculations, in 2017, the market for HR benefits administration in the
United States is expected to grow to over $54 billion. Eastbridge Consulting Group estimates the U.S. in-
force premiums were $42 billion in 2017 for employee-paid life, health and disability products sold at the
worksite with premiums paid through payroll.
The variety and complexity of medical and non-medical benefits plans continues to grow. The
Benefitfocus 2017 annual market research report, The State of Employee Benefits 2018, indicates that a
higher proportion of benefits offerings are shifting to high-deductible health plans coupled with health
savings accounts. This added complexity places greater potential cost burden on employees and creates
a greater need for employers to educate employees on becoming more informed healthcare consumers.
To help employees cover added cost burdens, employers are increasingly offering a wider range of non-
medical benefits plans, such as critical illness, supplemental income, and financial wellness programs, as
well as traditional insurance offerings like dental, life and disability. Current point and legacy systems are
inadequate to efficiently manage the complexity, regulation, and the involvement of multiple parties. They
are also incapable or inadequate in enabling the purchase of non-medical benefits. These factors are
driving the need for an enterprise benefits management system to improve operational efficiency along
the entire benefits value chain.
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Employer Market
Currently, we believe there are over 18,000 entities that employ more than 1,000 individuals in the
United States. A significant and growing portion of employers’ costs is non-salary benefits, such as health
insurance, that they provide to their employees. With healthcare and other premiums increasing, senior
executives are prioritizing benefits administration in their organizations and searching for ways to contain
costs without sacrificing benefits. In addition, the expense burden continues to shift to employees.
Employees’ contributions to premiums for health insurance have grown from approximately $318 per
employee in 1999 to approximately $1,186 per employee in 2018. Employers recognize the importance of
offering a greater variety of non-medical benefits as a means to attract, motivate, and retain employees.
They must maintain relationships with multiple insurance carriers and many other benefits providers,
placing a substantial administrative burden on their organizations.
Employers’ distribution, management, and administration of employee benefits has historically
consisted of error-prone, paper-based processes, and a patchwork of customized software tools, which
are costly to maintain, often lack necessary functionality, and fail to address the increasing complexity of
the benefits marketplace. As benefits offerings become more complex and employees bear more of the
cost of those benefits, HR software solutions that streamline information, simplify choices, and engage
employees are increasingly in demand. Employees desire tailored, dynamic, and interactive
communication of critical benefits information as they become accustomed to receiving personalized
content through various consumer applications on a range of devices.
Legacy HR systems were generally designed as extensions of enterprise resource planning, or
ERP, systems, built for back-office responsibilities like finance and accounting. As a result, these systems
lack functionality and ease-of-use for employees. Many legacy HR systems were not designed to
integrate with the broader benefits ecosystem, including brokers, carriers, and wellness providers, or
have the ability to transact non-medical benefits. This results in expensive, error-prone, and incomplete
experiences for employers and employees. Benefits outsourcers have attempted to compensate for the
shortcomings of legacy HR systems, but they have generally lacked adequate technology solutions
necessary to keep up with the rapidly evolving benefits landscape. As a result, employees are often not
provided with the appropriate functionality and information required to select and manage their benefits
effectively.
Modern technology, changing communication patterns, and a constantly evolving benefits
ecosystem have impacted the employee-employer relationship. HR executives continue to search for
effective strategies to increase efficiency and contain costs, while increasing employee engagement and
being an employer of choice. Employers are increasingly interested in SaaS solutions that can help
capture and analyze benefits data and provide more choice for their employees to improve productivity
and satisfaction. In order to manage the distribution and administration of benefits effectively, employers
need an integrated platform, capable of handling all benefits in one place and providing a highly
personalized experience for employees.
Insurance Carrier Market
The employee benefits market consists of a myriad of medical insurance carriers and products.
According to the U.S. Bureau of Labor Statistics, the single largest benefit provided to employees in the
United States is healthcare insurance, often encompassing more than 90% of all insurance benefits
spending by employers.
Large, national insurance carriers also offer numerous individual health plans of different types,
including health maintenance organizations, preferred provider organizations, point-of-service plans, and
high deductible health plans, across the 50 states, as well as life and ancillary benefits plans. Each carrier
offers a complex variety of medical insurance and non-medical benefits, encompassing life and ancillary
plans, with each plan requiring multiple decisions to address the specific needs of employers and their
individual employees. Despite widespread carrier consolidation, numerous disparate systems remain in
place, with many large carriers operating on multiple IT systems. Carriers often rely on manual processes
and siloed software applications to bridge gaps in legacy administration systems. Even as carriers
attempt to modernize and keep up with evolving industry practices and a changing regulatory landscape,
they have difficulty connecting with the broader healthcare system.
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The effective delivery and management of employee benefits depends on the timely, continuous
exchange of accurate data among carriers, their employer customers, and individual members. Legacy
benefits management systems often lack important functionality such as web and mobile self-service
capabilities and real-time data exchange. Critical carrier processes, including member enrollment, billing,
communications, and retail marketing have often been under-optimized or neglected by legacy systems,
and carriers have devoted significant internal resources to cover technology gaps. In addition, healthcare
reform mandates and the rise of exchanges have increased focus on carriers’ retail distribution
capabilities, which require additional investment.
Governmental oversight, punctuated with the Patient Protection and Affordable Care Act, or
PPACA, has led to an increasingly dynamic regulatory framework under which health benefits are
delivered, accessed and maintained. Despite uncertainty regarding the long-term viability of PPACA, we
expect digital transformation of healthcare benefits to continue in the form of public and private
exchanges – online marketplaces that allow insurance carriers to compete directly for new members. We
expect private exchanges will be less rigid, promoting both health and non-health benefits, with
substantially fewer rules around the types of benefits offered. As medical insurance carriers continue to
bolster their retail distribution capabilities, we believe they will require consolidation of technology
solutions to improve operational efficiency and attract additional members through private exchanges.
The Benefitfocus Solutions
We provide a multi-tenant cloud-based benefits management platform for consumers, employers,
insurance carriers, suppliers and brokers. The Benefitfocus Platform simplifies how organizations and
individuals transact benefits.
We believe our solutions help employers and clients of brokers in the following important ways:
Simplify Benefits Enrollment. Our solutions reduce the complexity of benefits enrollment by
integrating all plan information in one place and presenting it to employees in an organized and easy-to-
understand manner. Employees shop and enroll using a highly intuitive and engaging consumer-oriented
interface.
Purchase non-medical benefits. Our platform includes a holistic, multidimensional marketplace
whereby carriers and suppliers sell non-medical products to consumers.
Reduce Cost and Increase ROI. Our solutions automate the benefits management process and
reduce the cost associated with clerical errors and covering ineligible employees and dependents. Our
solutions also include advanced analytics that enable employers and employees to quickly gather, report,
and forecast benefit costs.
Attract, Retain, and Motivate Employees. Our solutions help employers attract, retain, and
motivate top talent by delivering benefits information through a highly intuitive and engaging user
interface. We believe that when employees understand the value of their benefits, they are more likely to
be satisfied with and engaged in their jobs.
Streamline HR Processes. Our solutions eliminate the time-consuming and labor-intensive, often
paper-based, processes associated with managing employee benefits plans, making HR professionals
more efficient. Employers and HR professionals can efficiently enroll users or update information, and
communicate or make changes to plans in real-time.
Integrate Seamlessly with Related Systems. Our solutions can be easily and securely integrated
with a variety of related systems, including carrier membership and billing, payroll and HR, banking, and
other third-party administration. We provide a network of approximately 2,200 benefit provider data
exchange connections through industry standards interfaces that are configurable to accommodate a
variety of needs. Our open architecture further extends our functionality by allowing third parties to
develop and offer apps and services on our platform.
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We believe our solutions help insurance carriers and suppliers in the following important ways:
Bolster Retail Distribution Capabilities Through Marketplaces. Our solutions help carriers and
suppliers respond to an evolving marketplace in which retail distribution capabilities are increasingly
important to attracting and retaining new members. Our platform offers carriers a lower cost direct sales
channel to employer groups and individuals. We offer the ability to sell both healthcare and non-
healthcare benefit products in an online shopping environment that serves as an alternative to
government-sponsored public exchanges.
Attract and Maintain Membership. Our solutions allow carriers to maximize sales capacity and
efficiency by communicating directly with their employer customers and individual members.
Reduce Administrative Costs. The Benefitfocus Platform allows carriers to consolidate IT systems,
automate and simplify various aspects of the benefits administration process, such as enrollment, plan
changes, eligibility updates, and billing, from one centralized location.
Facilitate Real-Time Data Exchange. Our solutions simplify interactions and data exchange, and
foster collaboration among carriers, suppliers, brokers employers and consumers. This allows carriers to
rapidly tailor and offer new benefits packages.
Our Growth Strategy
We believe BenefitsPlace can transform how employers, brokers and carriers deliver value for
employees and their families. With more than 40 industry-leading products offered by the industry’s
marquee brands, employers can now seamlessly package a rich benefits offering that addresses health,
wealth and lifestyle needs.
We intend to strengthen our position as a leading cloud-based benefits management platform for
buyers and sellers, working closely with brokers as partner in the ecosystem. Key elements of our growth
strategy include the following:
Expand our Customer Base. We believe that our current customer base represents a small
fraction of our targeted users that could benefit from our subscription solutions. In order to reach new
customers in our existing markets, we are aggressively investing in our sales and marketing resources
and our channel marketing strategy, including in ways intended to expand existing relationships and
foster organic growth opportunities through brokers.
Further Develop our Partner Ecosystem. We believe we have a large opportunity to efficiently
grow our customer base through our partners. To increase the number of consumers on our platform, we
have established strong relationships with key participants in the benefits market, including Mercer Health
& Benefits, LLC (“Mercer”), SAP and SuccessFactors. We have also eliminated previous friction and
improved our outreach to key constituents within the benefits industry, like brokers. One such example is
the introduction of our Premier Broker program in 2018.
Deepen our Relationships with our Existing Customer Base. We are deepening our employer
relationships by continuing to provide a unified platform with a growing list of additional solutions to manage
increasingly complex benefits processes and simplify the distribution and administration of employee
benefits. We are expanding our carrier relationships through both the upsell of additional software products,
increased adoption across our carriers’ member populations and providing access to our multidimensional
marketplace.
Extend our Suite of Applications and Continue our Technology Leadership. We are extending the
number, range, and functionality of our benefits solutions. We have also extended the functionality of our
products through mobile solutions. We intend to continue our collaboration with customers and partners,
so we can respond quickly to evolving market needs with innovative capabilities that support our
leadership position.
Facilitate the purchase of non-medical benefits. We believe that our current BenefitsPlace portfolio
of products represents a fraction of the number and variety of products that we expect will be offered on
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our multidimensional marketplace. We also believe we have a significant opportunity to drive higher
employer placement of BenefitsPlace products and increase consumer engagement in purchasing
BenefitsPlace products throughout an entire calendar year.
Target New Markets. We believe substantial demand for our solutions exists in markets and
geographies beyond our current focus. We intend to leverage opportunities we believe will arise from the
complexities of changing government regulation and increased enrollment impacting both Medicare and
Medicaid. We also plan to grow our sales capability internationally by expanding our direct sales force
and collaborating with strategic partners in new, international locations.
Selectively Pursue Strategic Acquisitions and Investments. We might pursue acquisitions of, or
investments in, complementary businesses and technologies that align with our overall growth strategy.
We believe that a selective acquisition and investment strategy could enable us to gain new customers,
accelerate our expansion into new markets, and enhance our product capabilities.
The Benefitfocus Portfolio of Products
BenefitsPlace is our transaction-oriented, marketplace solution, connecting employers, brokers,
insurance carriers, suppliers and consumers on a single platform. BenefitsPlace includes access to a
variety of leading voluntary benefit products that support income protection, digital health, and financial
well-being. BenefitsPlace partners provide products that fit into three distinct categories:
• Health. Products in the health category improve access to affordable, high-quality care and may
act as a supplement to the traditional employer-funded health and welfare benefits. Partner-
provided products in this category include consumer-directed healthcare accounts, long-term care
insurance, prescription drug discount programs, services to help population health and wellness
services and enrollment, and guidance services for free state health insurance plans.
• Wealth. Products in the wealth category provide options for consumers to protect their income in
case of a medical emergency, manage their finances and decrease risk to financial debt. Partner
products provided in this category include accident, hospital indemnity and critical illness insurance,
short-term and long-term disability, financial wellness services, student loan services, and
retirement and savings accounts such as IRA, 401(k), 529 and personal loan services.
•
Lifestyle. Products in the lifestyle category provide options that address the individual needs of
consumers to improve the quality of their day-to-day life. Partner products provided in this category
include identity theft protection, virtual college counseling assistance, pet insurance and savings
plans, and same-day delivery services for grocery and household items.
BenefitsPlace adds value to all participants that participate on the platform.
•
•
•
Insurance carriers and specialty providers join BenefitsPlace as BenefitsPlace sellers. Sellers
must meet a standard set of integration, quality, security, and financial standards to participate in
BenefitsPlace. This ensures products are composed of marquee, industry-leading products.
Sellers can expand their distribution channels and grow their reach to consumers.
Brokers work with BenefitsPlace advisors to understand the types of products available through
the Benefitfocus Marketplace. With the use of data-driven insights, brokers have greater visibility
into the status of their customers and participation levels of BenefitsPlace products, thereby
helping activate their customers' benefits strategy.
Employers can design a strategic benefits portfolio, without the traditional constraints of
administration and integration inefficiencies. BenefitsPlace products include pre-built
integrations, seller-provided content and communication materials, and a consistent set of system
configurations and settings within Benefitfocus Marketplace.
• Consumers gain access to BenefitsPlace products through our carrier and employer subscription-
based enrollment products, eEnrollment and Benefitfocus Marketplace. With an insight-driven,
guided consumer retail experience that includes decision-support tools, educational information,
and mobile access, consumers can select the best products for their individual needs all year
long.
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Products for Insurance Carriers
•
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•
•
eEnrollment provides a single, privately labeled platform for carriers to automate enrollment
across all segments of their commercial group business. It includes benefits administration tools
for brokers employers, supports complex business rules, such as eligibility and rating criteria and
provides operational efficiency by transmitting eligibility and enrollment data to carrier
membership systems. eEnrollment also offers consumers a retail-like benefit enrollment
experience with decision support tools, educational videos and content libraries that help
consumers make informed benefit elections year round.
eBilling is an electronic invoice presentment and payment solution, or EIPP, privately labeled for
carriers. It consolidates invoices from multiple insurance products so employers and individuals
receive one invoice that can be viewed and paid electronically. eBilling automates the
synchronization of billing and membership data to improve the accuracy of billing processes and
provides options to simplify bill payment, such as scheduled one-time and/or recurring payments.
eExchange is a solution that bridges the integration gap between carrier and employer systems,
allowing a seamless exchange of data between the two. Our customers use eExchange to
consume eligibility and enrollment data from multiple, third-party systems, convert data from one
format to another, and manage the flow of employee data between carriers and employers.
eSales gives carriers and brokers tools to organize and proactively manage accounts, track
leads, generate quotes, and create proposals for multiple products. eSales allows carriers to
define their own market segments and configure them with unique workflows and business rules.
It also enables greater data accuracy by automatically incorporating updated products, options
and pricing for the most current rates and quotes. Carriers purchase eSales to increase
productivity in their sales force.
• Core & Advanced Analytics is our data analytics solution for use by carriers and their self-insured
employer customers. Core & Advanced Analytics is a privately-labeled analytics solution that
helps carriers and their self-insured employers identify cost drivers, recognize trends, and predict
future risks and costs. Additional analytical capabilities help create “what-if” scenarios to model
different variables, such as co-pay, deductibles, benefits, inflation, and member populations.
Products for Employers
•
Benefitfocus Marketplace is a cloud-based benefits management portal that streamlines online
enrollment, employee communication, and benefits administration. Benefitfocus Marketplace
presents employees with all of the plans their employers offer with access to animated videos,
educational benefits information and live chat sessions as they explore their benefit options. As
employees shop for the plans that best fit their individual needs, a virtual shopping cart keeps a
running tally of the employees’ out-of-pocket costs. The Benefitfocus Marketplace is available on
a desktop, tablet or mobile phone.
• Core & Advanced Analytics is our data analytics solution that helps employers make more
informed, data-driven decisions about their benefits offerings. This product aggregates benefit
cost and claims data from relevant sources and allows customers to analyze, forecast, and
monitor costs. Core & Advanced Analytics enables employers and their advisors to identify cost
drivers, recognize trends, and predict future risks and costs. Additional analytical capabilities
create “what-if” scenarios to model different variables, such as co-pays, deductibles, benefits,
inflation, and member populations.
•
ACA Management & Reporting is our solution that helps employers manage ACA compliance by
consolidating and automating IRS reporting. Additionally, Benefitfocus is an approved transmitter,
allowing us to electronically file required ACA compliance documents with the Internal Revenue
Service on behalf of our customers.
• Consolidated Billing & Payment is a comprehensive application that synchronizes enrollment and
billing information to streamline the monthly billing process, automate adjustments and increase
accuracy of payments. Consolidated Billing & Payment gives employers the ability to automate or
schedule single-invoice payments to all of their benefit providers. Employers can drill down by
employee to see coverage level and plan, or focus in by vendor, benefit type or internal cost
control center to gain more insight into cost drivers.
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• Consumer-Directed Healthcare Accounts is our solution designed to provide employers and their
employees with a seamless enrollment and account management experience for their health
savings accounts, or HSAs, or similar medical payment products within Benefitfocus Marketplace.
• COBRA Administration is our solution for employers that simplifies management of COBRA, or
the Consolidated Omnibus Budget Reconciliation Act, benefits. COBRA Administration
automates required communication, enrollment, fulfillment and payment processing within
Benefitfocus Marketplace.
Products for Brokers
Brokers use the Benefitfocus Platform to manage the portfolios of their employer clients. This
includes delivering strategic insights that improve their employer clients’ benefit experience and
demonstrating greater value through access to a larger set of relevant products for employers.
•
•
•
Advanced Analytics aggregates benefit cost and claims data from relevant sources, identifies cost
drivers, recognizes trends, and predicts future risks and costs. Additional analytical capabilities
create “what-if” scenarios to model different variables, such as co-pays, deductibles, benefits,
inflation, and member populations. Brokers purchase Advanced Analytics to facilitate the design
of better informed, data-driven benefit strategies for their customers.
BenefitsPlace includes consultative support for brokers through BenefitsPlace advisors. This
helps brokers understand the types of products available and optimize their customers’
Benefitfocus Marketplace experience. With the use of data-driven insights, brokers have greater
visibility into the status of their customers and participation levels of BenefitsPlace product
participation, thereby helping activate their customers' benefits strategy.
Premier Broker Program is designed to foster a collaborative, mutually beneficial partnership with
the broker community to accelerate their growth and deliver world-class support to our mutual
customers. Premier brokers can take advantage of sales and marketing support, discounts for
new clients and exclusive rewards such as:
o High-touch sales and marketing support with a collaborative team of sales and technology
advisors, as well as priority access to marketing materials including Benefitfocus' State of
Employee Benefits research, thought leadership content and product promotions;
o On-demand client success metrics through our One Place 365 Broker Support Portal, an
interactive dashboard that provides comprehensive insight into implementations, renewals
and ongoing projects for all broker clients using Benefitfocus technology; and
o Networking opportunities and local Benefitfocus Community events. Brokers receive
discounted attendance to One Place, our annual user conference, and are invited to our
platform sellers conference.
Professional Services and Customer Support
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Implementation Services. We provide implementation services to our customers in order to help
ensure seamless deployment and effective utilization of our solutions. Our carrier and employer
implementation teams and third-party system integrators in our Benefitfocus Implementation
Program follow an end-to-end approach from project planning to customer training and technical
support.
Benefits Service Center. We provide employers with expanded support services where our
benefits specialists help customers’ employees understand benefit offerings, navigate the
enrollment process, and find answers to frequently asked HR questions. Our Benefits Service
Center acts as an extension of our customers’ benefits team and provides employees with
personalized, guided support. Additional services, such as fulfillment, dependent verification, and
HR administration, are available to meet unique organizational needs.
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Customers
Our customers include employers of all sizes across a variety of industries and some of the nation’s
largest insurance carriers and aggregators. The following is a list of some of our significant employer and
carrier customers.
Carrier Customers
American Family Life Assurance Company of Columbus
American Heritage Life Insurance Company
BlueChoice HealthPlan of South Carolina, Inc.
Blue Cross of Idaho Health Service, Inc.
Blue Cross and Blue Shield of Kansas City
Employer Customers
American Eagle Outfitters Inc.
Amerigas Propane, Inc.
Brookdale Senior Living Inc.
California Institute of Technology
Carolinas HealthCare System
Fender Musical Instruments Corporation Blue Cross and Blue Shield of South Carolina, Inc.
Hard Rock Café International (USA), Inc. CIGNA
Rush University Medical Center
SAP America Inc.
University of Alabama – Birmingham
Zions Bancorporation
Transamerica Corporation
Wellmark, Inc.
BenefitsPlace sellers include some the nation’s leading insurance carriers and suppliers to help
protect consumers health, wealth and lifestyle. The following is a list of some of our significant carrier and
supplier sellers.
Aetna
Aflac
Allstate Benefits
BrightDime
CIGNA
InfoArmor
MetLife
SoFi
The Hartford
Transamerica Corporation
During the years ended December 31, 2018, 2017 and 2016, one customer accounted for 13%,
11% and 12% of total revenue. No other customer accounted for more than 10% of our total revenue.
Sales and Marketing
We sell our software solutions through our direct sales organization. Our direct sales team
comprises employer-focused and carrier-focused field sales professionals who are organized primarily by
geography and account size.
We generate customer leads, accelerate sales opportunities and build brand awareness through our
marketing programs and strategic relationships. Our marketing programs target HR, benefits, and finance
executives, technology professionals, key brokers, and senior business leaders. Our principal marketing
programs include:
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use of our website to provide application and company information, as well as learning
opportunities for potential customers;
sales development representatives who respond to incoming leads through digital and advertising
programs and convert them into new sales opportunities;
participation in, and sponsorship of, user conferences, executive events, trade shows and
industry events, including our annual user and partner conference, One Place, and our annual
platform sellers conference;
integrated marketing campaigns, including direct email, online web advertising, blogs, webinars
and industry reports, including State of Employee Benefits; and
public relations, analyst relations and social media initiatives.
We also sell our software solutions through strategic partners including Mercer and SAP SE.
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Technology Infrastructure and Operations
As an enterprise cloud software vendor, we have always deployed our solutions using a SaaS
model. Our customers access our software via application integrations, web browsers, and/or mobile
devices, rather than by installing software on their premises. Through our multi-tenant architecture, our
customers access a single software instance with multiple possible configurations enabled by our
metadata-driven framework. The multi-tenant approach provides significant operating economies through
aligned, shared computational services and processes as it helps us to reduce our fixed cost base and
minimize unused capacity on our hardware. In addition, our software architecture gives us an advantage
over legacy system vendors, who may be using a less flexible architecture that would require significant
time and labor expense to address varied capability needs.
We host our applications and serve all of our customers from two redundant, co-located, private
cloud data centers in separate locations. We rely on third-party vendors to operate these data centers,
which are designed to host mission-critical computer systems and have industry-standard measures in
place to minimize service interruptions. Our technical operations staff manages the technology stacks
supporting the Benefitfocus Platform and uses automated monitoring tools throughout our system to
detect unusual events or malfunctions that could interfere with our customers’ or partners’ use of the
Benefitfocus Platform. We monitor application health by verifying that all applications, interfaces and
supporting middleware are operational. If our monitoring detects anomalous situations, our dedicated
network operations staff respond immediately to diagnose the situation, communicate status, and resolve
the matter. We take the security of our data, systems and operations very seriously, and minimize risk at
every level of technology selection through software architecture, systems administration, and operational
controls and procedures.
Compliance and Certifications
We obtain third-party examinations of our controls relating to security and data privacy. Certain
examinations are conducted under Statement on Standards for Attestation Engagements, or SSAE,
No. 16 (Reporting on Controls at a Service Organization). In particular, we obtain Service Organization
Controls, or SOC, reports known as SOC 1 Type II and SOC 2 Type II audits that test the design and
operating effectiveness of controls over a period of time. An independent auditor conducts these
examinations annually and addresses, among other areas, our physical and environmental safeguards for
production data centers, data availability and procedures covering integrity, change management, and
logical security.
On an annual basis, we complete an internal audit of compliance against the Payment Card Industry
Data Security Standards, or PCI-DSS, applicable to Level 1 service providers. These standards focus on
application and network security controls for companies that transmit and store credit card data on behalf
of clients. Benefitfocus meets PCI compliance requirements as a Level 1 service provider and submits its
Report on Compliance and Attestation of Compliance documenting this assessment to the four major
credit card brands annually.
In addition to PCI-DDS, Benefitfocus meets all applicable security requirements required by the
National Automated Clearinghouse Association, or NACHA, for third-party service providers, as well as all
requirements for Covered Entities as required by HIPAA. We validate both NACHA and HIPAA
compliance annually through internal audits.
Competition
While we do not believe any single competitor offers similarly expansive benefits administration
solutions, we face competition from various sources, many of which have greater resources than us. We
have historically described our competition in our two market segments, carrier and employer. In 2018,
we made a strategic shift to include a transaction-based model with the introduction of BenefitsPlace. We
believe that sources of competition are similar to those that we faced prior to the shift, which include:
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ERP software companies, including Oracle (PeopleSoft), Infor (Lawson) and Workday each
offering a cloud-based benefits administration software solution;
• HR outsourcing companies, such as Willis Towers Watson;
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payroll service providers, such as ADP who expanded their core payroll services to include some
form of cloud-based benefits administration services; and
insurance carriers that have invested in internally developed benefit management solutions;
• member services companies, including those providing web-based subscriber enrollment and
claims adjudication services, such as Trizetto (acquired by Cognizant) and DST Health Solutions;
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brokers and consultants who have influence over benefits offerings; and
various niche software vendors.
We believe that competition for benefits administration solutions is based primarily on the following
factors:
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capability for customization through configuration, integration, security, scalability, and reliability
of applications;
competitive and understandable pricing;
breadth and depth of application functionality;
access to broad offering of non-medical benefits;
size of customer base and level of user adoption;
extensive data exchange network;
cloud-based delivery model;
dynamic communication capabilities with contextual media, animation, and acknowledgement
tools;
ability to integrate with legacy enterprise infrastructures and third-party applications;
domain expertise in benefits and healthcare consumerism;
extensive base of rules and event-driven benefit eligibility and enrollment;
accessible on any browser or mobile device;
• modern and adaptive technology platform;
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clearly defined implementation timeline;
customer-branding and styling;
data exchange standardization; and
ability to innovate and respond to customer and legislative needs rapidly.
We believe that we compete effectively based upon all of these criteria, and that we are likely to
continue to retain a high percentage of our customers from year to year. Nonetheless, we believe that the
increasing acceptance of automated solutions in the healthcare marketplace and the adoption of more
sophisticated technology and continuing legislative reform will result in increased competition, including
potentially from large software companies with greater resources than ours. Other companies might
develop superior or more economical service offerings that our customers could find more attractive than
our offerings. Moreover, the regulatory landscape might shift in a direction that is more strategically
advantageous to competitors.
Research and Development
Our ability to compete depends, in large part, on our continuous commitment to rapidly introduce
new applications, technologies, features, and functionality. We deliver multiple software releases per
year, updating the Benefitfocus Platform to leverage advances in cloud computing, mobile applications,
and data management. Our research and development team is responsible for the design and
development of our applications. We follow state-of-the-art practices in software development using
modern programming languages, data storage systems, and other tools. We use both commercial and
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open source products, following a “best tool for the job” philosophy in product selection. Our software has
a multi-tiered architecture that ensures flexibility to add or modify features quickly in response to changing
market dynamics, customer needs, or regulatory requirements.
Our research and development expenses were $47.9 million, $49.5 million and $56.6 million for the
years December 31, 2018, 2017 and 2016, respectively.
Intellectual Property
We rely on a combination of patent, trade secret, copyright, and trademark laws, license
agreements, confidentiality procedures, confidentiality and nondisclosure agreements, and technical
measures to protect the intellectual property used in our business. We generally enter into confidentiality
and nondisclosure agreements with our associates, consultants, vendors, and customers. We also seek
to control access to and distribution of our software, documentation, and other proprietary information.
We use numerous trademarks for our products and services, and “Benefitfocus”, “HR InTouch”, “HR
InTouch Marketplace”, “All Your Benefits. One Place.”, and “All Your Benefits. In Your Pocket.” are
registered marks of Benefitfocus in the United States. Through claimed common law trademark
protection, we also protect other Benefitfocus marks which identify our services, such as Benefitfocus
eEnrollment, Benefitfocus eBilling, Benefitfocus eExchange, and Benefitfocus eSales, and we have
reserved numerous domain names, including “benefitfocus.com”. We also have registered trademarks
and pending trademark applications in foreign jurisdictions such as Australia, Canada, India, Israel,
Ireland, New Zealand, South Africa, and the United Kingdom.
We have been granted eight U.S. patents (utility patents) and have two U.S. patent applications (all
for utility patents) pending. Our patents provide protections up to 2034. We also have three Chinese, two
Japanese, Australian, Taiwanese, and Hong Kong, and one Canadian patents and a number of pending
patent applications.
We also rely on certain intellectual property rights that we license from third parties. Although we
believe that alternative technologies are generally available to replace such licenses, these third-party
technologies may not continue to be available to us on commercially reasonable terms.
Although we rely on intellectual property rights, including trade secrets, patents, copyrights, and
trademarks, as well as contractual protections to establish and protect our proprietary rights, we believe
that factors such as the technological and creative skills of our personnel, creation of new modules,
features and functionality, and frequent enhancements to our applications are more essential to
establishing and maintaining our technology leadership position.
The steps we have taken to protect our copyrights, trademarks, and other intellectual property may
not be adequate, and the potential exists that third parties could infringe, misappropriate, or misuse our
intellectual property. If this were to occur, it could harm our reputation and adversely affect our
competitive position or operations. In addition, laws of other jurisdictions may not protect our intellectual
property and proprietary rights from unauthorized use or disclosure in the same manner as the United
States. The risk of unauthorized use of our proprietary and intellectual property rights may increase as
our company expands outside of the United States.
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Government Regulation
Introduction
The employee benefits industry is required to comply with extensive and complex U.S. laws and
regulations at the federal and state levels. Although many regulatory and governmental requirements do
not directly apply to our business, our customers are required to comply with a variety of U.S. laws, and
we may be impacted by these laws as a result of our contractual obligations. For many of these laws,
there is little history of regulatory or judicial interpretation upon which to rely.
Requirements of PPACA
Our business could be affected by changes in healthcare spending. PPACA and subsequent laws
and regulations regarding the market for healthcare services have changed how healthcare services are
covered, delivered, and reimbursed. PPACA, as enacted, expanded coverage of uninsured individuals by
requiring states to expand Medicaid coverage significantly and to establish health insurance exchanges to
facilitate the purchase of health insurance policies by individuals and small employers. The law also
provided subsidies to states to create non-Medicaid plans for certain low-income residents. The
requirement for states to expand Medicaid was subsequently repealed, and insurers have experienced
mixed results providing services through the exchanges, leading many to exit this market. Increased
volatility following the repeal of the individual mandate in late 2017 has led to additional uncertainty in the
insurance market.
A significant goal of PPACA and subsequent reform efforts has been to move away from fee for
service payments and toward capitated payments to make providers more accountable for the cost and
quality of care provided. While many of the provisions of PPACA will not be directly applicable to us,
PPACA, as currently implemented, might affect the business of many of our customers. Carriers and
large employers might experience changes in the numbers of individuals they insure as a result of
Medicaid expansion and the creation of state and national exchanges, though it is unclear how many
states will decline to implement the Medicaid expansion or adopt state-specific exchanges.
Following the creation of the Medicare Shared Savings Program, Medicare and many commercial
third party payors began implementing accountable care models in which groups of providers known as
Accountable Care Organizations ("ACO") assume some amount of risk for the cost of care provided to
groups of individuals. Also, CMS continues to test demonstration programs to bundle acute care and
post–acute care reimbursement to hold providers accountable for costs across a broader continuum of
care. These reimbursement methodologies and similar programs are likely to continue and expand, both
in public and commercial health plans, and will likely impact the business of our customers.
As has been the case since 2010, the long-term viability of PPACA remains in doubt, and we expect
that the current Congress and White House will continue to seek ways to modify, repeal, or otherwise
invalidate all, or certain provisions of PPACA. For instance, on January 20, 2017, President Trump
issued an executive order stating that the U.S. federal government’s policy is to seek the prompt repeal of
PPACA, and directing the heads of all executive departments and agencies to minimize the economic
and regulatory burdens of PPACA to the maximum extent permitted by law. Also, the December 2017
revisions to the tax code eliminated PPACA’s individual mandate, which could serve as a basis for
continued challenges to the constitutionality of the law and cause further disruption to the insurance
markets. Should Congress or the courts modify, repeal, or otherwise invalidate PPACA or any parts of its
provisions, the business of our customers could be substantially affected.
Requirements Regarding the Confidentiality, Privacy and Security of Personal Information
HIPAA and Other Privacy and Security Requirements. Numerous U.S. federal and state laws and
regulations apply to the privacy and security of personal health information. In particular, regulations
promulgated pursuant to the Health Insurance Portability and Accountability Act of 1996, or HIPAA,
establish privacy and security standards that limit the use and disclosure of protected health information
and require the implementation of administrative, physical and technical safeguards to ensure the
confidentiality, integrity, availability, and privacy of protected health information. Health plans, healthcare
clearinghouses and most healthcare providers are considered "Covered Entities" subject to HIPAA.
With respect to our operations as a healthcare clearinghouse, we are directly subject to the Privacy
Rule and the Security Rule. In addition, our carrier customers, or payors, are considered to be Covered
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Entities and are required to enter into written agreements with us, known as Business Associate
Agreements, under which we are considered to be a Business Associate and that require us to safeguard
protected health information and restrict how we may use and disclose such information. The Privacy
Rule extensively regulates the use and disclosure of protected health information by Covered Entities and
their Business Associates. For example, the Privacy Rule permits Covered Entities and their Business
Associates to use and disclose protected health information for treatment and to process claims for
payment, but other uses and disclosures, such as marketing communications, require written
authorization from the individual or must meet an exception specified under the Privacy Rule. The Privacy
Rule also provides patients with rights related to understanding and controlling how their health
information is used and disclosed. To the extent permitted by the Privacy Rule and our contracts with our
customers, we may use and disclose protected health information to perform our services and for other
limited purposes, such as creating de-identified information. Determining whether data has been
sufficiently de-identified to comply with the Privacy Rule and our contractual obligations may require
complex factual and statistical analyses and may be subject to interpretation. The Security Rule requires
Covered Entities and their Business Associates to implement and maintain administrative, physical and
technical safeguards to protect the security of protected health information that is electronically
transmitted or electronically stored.
If we are unable to properly protect the privacy and security of health information entrusted to us, we
could be found to have breached our contracts with our customers. Further, if we fail to comply with the
Privacy Rule, Security Rule, or Breach Notification Rule while acting as a Covered Entity or Business
Associate, we could face civil penalties of up to $57,051 per violation and a maximum civil penalty of
$1,711,533 in a calendar year for violations of the same requirement, in addition to criminal penalties.
Recently, the U.S. Department of Health and Human Services Office for Civil Rights, which enforces
HIPAA, appears to have increased its enforcement activities. Additionally, state attorneys general may
bring civil actions seeking either injunctions or damages in response to violations of HIPAA that threaten
the privacy of state residents.
There are additional privacy and data security legal regimes at the federal and state level. For
example, the Federal Trade Commission, or FTC, regularly brings privacy and data enforcement actions
under Section 5 of the Federal Trade Commission Act, alleging that certain activities constitute unfair or
deceptive trade practices. The states have similar laws that prohibit unfair or deceptive trade practices.
There are also state data security laws and state laws that regulate the use and disclosure of health
information, among others. Further, by regulation, the FTC’s Red Flags Rule requires some financial
institutions and creditors, which may include some of our customers, to implement identity theft
prevention programs to detect, prevent and mitigate identity theft in connection with customer accounts.
We may be required to apply additional resources to our existing processes to assist our affected
customers in complying with this rule.
We have implemented and maintain physical, technical and administrative safeguards, including
written policies and procedures, intended to protect all personal data, including protected health
information, and have processes in place to assist us in complying with all applicable laws and
regulations regarding the protection of this data and properly responding to any data breaches or
incidents.
Data Breach Notification Laws. There are numerous federal and state laws that generally require
notice to affected individuals, regulators, and sometimes the media or credit reporting agencies in the
event of a data breach impacting personal information. For example, at the federal level, the HIPAA
Breach Notification Rule mandates notification of breaches affecting protected health information to
affected individuals and regulators under conditions set forth in the Rule. Covered Entities must report
breaches of unsecured protected health information to affected individuals without unreasonable delay,
but not to exceed 60 days of discovery of the breach by a Covered Entity or its agents. Notification must
also be made to HHS and, in certain circumstances involving large breaches, to the media. Business
Associates must report breaches of unsecured protected health information to Covered Entities within 60
days of discovery of the breach by the Business Associate or its agents. All states, the District of
Columbia, Guam, Puerto Rico, and the Virgin Islands have enacted data breach notification laws. While
some of these breach notification laws contain an exception for entities subject to HIPAA, other laws do
not, and may impose notification obligations in addition to, or inconsistent with, the HIPAA Breach
Notification Rule when a data breach implicates protected health information.
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HIPAA Administrative Simplification
HIPAA also mandated a package of interlocking administrative simplification rules to establish
standards and requirements for the electronic transmission of certain healthcare claims and payment
transactions. These regulations are intended to encourage electronic commerce in the healthcare
industry and apply directly to Covered Entities. Some of our businesses, including our healthcare
clearinghouse operations, are considered Covered Entities under HIPAA and its implementing
regulations.
Transaction Standards. The standard transaction regulations established under HIPAA, or
Transaction Standards, mandate certain format and data content standards for the most common
electronic healthcare transactions, using technical standards promulgated by recognized standards
publishing organizations. These transactions include healthcare claims, enrollment, payment and
eligibility. The Transaction Standards are applicable to that portion of our business involving the
processing of healthcare transactions among payors, providers, patients and other healthcare industry
constituents. Failure to comply with the Transaction Standards may subject us to civil and potentially
criminal penalties and breach of contract claims. The Centers for Medicare and Medicaid Services, or
CMS, is responsible for enforcing the Transaction Standards.
Payors who are unable to exchange data in the required standard formats can achieve Transaction
Standards compliance by contracting with a clearinghouse to translate between standard and non-
standard formats. As a result, use of a clearinghouse has allowed numerous payors to establish
compliance with the Transaction Standards independently and at different times, reducing transition costs
and risks. In addition, the standardization of formats and data standards envisioned by the Transaction
Standards has only partially occurred. However, PPACA requires HHS to establish operating rules to
promote uniformity in the implementation of each standardized electronic transaction. We cannot provide
assurance regarding how the CMS will enforce the Transaction Standards. We have modified our
systems and processes to implement the Transaction Standards and we continue to work with payors,
healthcare information system vendors and other healthcare constituents to maintain our implementation
of the Transaction Standards.
Health Plan and Other Entity Identifiers. HHS has promulgated regulations implementing the
establishment of a unique health plan identifier, or HPID. Similar to a provider’s national provider
identifier, the HPID provides an identification system for health plans to use for electronic transactions.
HHS has also promulgated regulations implementing another entity identifier, or OEID, that serves as an
identifier for entities that are not health plans, health care providers or individuals. These other entities,
which include third-party administrators, transaction vendors, and clearinghouses, are not required to
obtain an OEID, but they could obtain and use one if they needed to be identified in standardized
transactions. The implementation of the enforcement of the HPID and OEID process has been indefinitely
delayed by HHS, and if implemented its impact on our business is unclear at this time.
Financial Services Related Laws and Rules
Financial services and electronic payment processing services are subject to numerous laws,
regulations and industry standards, some of which might impact our operations and subject us, our
vendors and our customers to liability as a result of the payment distribution and processing solutions we
offer. Although we do not act as a bank, we offer solutions that involve banks, or vendors who contract
with banks and other regulated providers of financial services. As a result, we might be impacted by
banking and financial services industry laws, regulations and industry standards, such as licensing
requirements, solvency standards, requirements to maintain the privacy and security of nonpublic
personal financial information and Federal Deposit Insurance Corporation deposit insurance limits. In
addition, our patient billing and payment distribution and processing solutions might be impacted by
payment card association operating rules, certification requirements and rules governing electronic funds
transfers. If we fail to comply with applicable payment processing rules or requirements, we might be
subject to fines and changes in transaction fees and may lose our ability to process credit and debit card
transactions or facilitate other types of billing and payment solutions. Moreover, payment transactions
processed using the Automated Clearing House Network, or ACH, are subject to network operating rules
promulgated by the National Automated Clearing House Association and to various federal laws
regarding such operations, including laws pertaining to electronic funds transfers, and these rules and
laws might impact our billing and payment solutions. Further, our solutions might impact the ability of our
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payor customers to comply with state prompt payment laws. These laws require payors to pay healthcare
claims meeting the statutory or regulatory definition of a “clean claim” within a specified time frame.
Banking Regulation
The Goldman Sachs Group, affiliates of which owned approximately 11.8% of the voting and
economic interest in our business as of December 31, 2018, is regulated as a bank holding company and
a financial holding company under the Bank Holding Company Act of 1956, as amended, or the BHC Act.
Due to the size of its voting and economic interest, we are deemed to be controlled by The Goldman
Sachs Group and are therefore considered to be a non-bank “subsidiary” of The Goldman Sachs Group
under the BHC Act. As a result, although we do not engage in banking operations, we are subject to
regulation, supervision, examination and potential enforcement action by the Board of Governors of the
Federal Reserve System, or the Federal Reserve, and to most banking laws, regulations and orders that
apply to The Goldman Sachs Group. In addition, certain restrictions applicable to Goldman Sachs under
the BHC Act apply to the Company as well, and we may be subject to regulatory oversight and
examination because we are a technology service provider to regulated financial institutions. The bank
regulatory framework is intended primarily to protect the safety and soundness of depository institutions,
the federal deposit insurance system, and depositors rather than our stockholders. Because of The
Goldman Sachs Group’s status as a bank holding company and a financial holding company, we have
agreed to certain covenants for the benefit of The Goldman Sachs Group that are intended to facilitate its
compliance with the BHC Act.
In addition, the Volcker Rule, which was part of the Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010, or the Dodd-Frank Act, in relevant part, restricts banking entities from proprietary
trading (subject to certain exemptions) and from acquiring or retaining any equity, partnership or other
interests in, or sponsoring, a private equity fund, subject to satisfying certain conditions, and from
engaging in certain transactions with funds. In 2017, President Trump issued an executive order directing
the review of existing financial regulations. In May 2018, Congress passed the Economic Growth,
Regulatory Relief and Consumer Protection Act. This legislation provides regulatory relief for certain
financial institutions. These and other legislative and regulatory initiatives could change the regulation or
operations of the financial services industry.
Under the current legislation, we will continue to be deemed to be controlled by The Goldman Sachs
Group for purposes of the BHC Act and, therefore, we will continue to be subject to regulation by the
Federal Reserve and to the BHC Act, as well as certain other banking laws, regulations and orders that
apply to The Goldman Sachs Group. We will remain subject to this regulatory regime until The Goldman
Sachs Group is no longer deemed to control us for bank regulatory purposes, which we do not generally
have the ability to control and which will not occur until The Goldman Sachs Group has significantly
reduced its voting and economic interest in us. We cannot predict the ownership level at which the
Federal Reserve would consider us no longer controlled by The Goldman Sachs Group, but it could be
less than 10%.
The Goldman Sachs Group and its subsidiaries, including Benefitfocus, generally may conduct only
activities that are authorized for a bank holding company or a “financial holding company” under the BHC
Act. The scope of services we may provide to our customers is limited under the BHC Act to those which
are (i) financial in nature or incidental to financial activities (including data processing services such as
those that we provide with our software solutions) or (ii) complementary to a financial activity and which
do not pose a substantial risk to the safety and soundness of depository institutions or the financial
system generally. We believe that our current and anticipated business activities are permitted under the
BHC Act.
Any failure of The Goldman Sachs Group to maintain its status as a financial holding company could
result in substantial limitations on our activities and our growth. In particular, our permissible activities
could be further restricted to only those that constitute banking or activities closely related to banking. The
Goldman Sachs Group’s loss of its financial holding company status could be caused by several factors,
including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently capitalized,
by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or by any
failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating under the
Community Reinvestment Act. In addition, The Goldman Sachs Group is required to remain “well
capitalized” and “well managed” to maintain its status as a financial holding company. We have no ability
to prevent such occurrences from happening.
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The Federal Reserve has broad enforcement authority over us, including the power to prohibit us
from conducting any activity that, in the Federal Reserve’s opinion, is unauthorized or constitutes an
unsafe or unsound practice in conducting our business. The Federal Reserve may approve, deny or
refuse to act upon applications or notices for The Goldman Sachs Group and its subsidiaries to conduct
new activities, acquire or divest businesses or assets, or reconfigure existing operations. The Federal
Reserve may also impose substantial fines and other penalties for violations of applicable banking laws,
regulations and orders. We do not believe that any of our current or anticipated business activities will
require Federal Reserve approval.
There are limits on the ability of The Goldman Sachs Group’s bank subsidiaries to extend credit to
or conduct other transactions with us. In general, any loans to us from a bank subsidiary of The Goldman
Sachs Group must be on market terms and secured by designated amounts of specified collateral and
are limited to 10% of the lending bank’s capital stock and surplus. The Dodd-Frank Act places certain
additional restrictions on transactions between us and The Goldman Sachs Group, which we do not
believe are material to us.
Corporate Information
We were incorporated in June 2000 as Benefitfocus.com, Inc., a South Carolina corporation. In
September 2013, we reincorporated in Delaware as Benefitfocus, Inc. Our principal executive offices are
located at 100 Benefitfocus Way, Charleston, South Carolina 29492, and our phone number is (843) 849-
7476. Our website address is www.benefitfocus.com. The information on, or that can be accessed
through, our website is not part of this report. We currently employ approximately 1,450 associates.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act,
are available free of charge on our website at www.benefitfocus.com as soon as reasonably practicable
after electronically filing or furnishing such material to the Securities and Exchange Commission. The
Securities and Exchange Commission maintains a website (www.sec.gov) that includes our reports, proxy
statements and other information.
Executive Officers
The following table sets forth information concerning our executive officers as of February 26, 2019:
Name
Raymond A. August
Mason R. Holland, Jr.
Jonathon E. Dussault
James P. Restivo
Age Position
57 President and Chief Executive Officer
54 Executive Chairman, Director
45 Chief Financial Officer, Treasurer
58 Chief Technology Officer
Raymond A. August—President and Chief Executive Officer
Ray August has been our President and Chief Executive Officer since January 2018 and a director
since April 2018. Prior to that, Mr. August served as our Chief Operating Officer since August 2014 and
was promoted to the title of President and Chief Operating Officer in March 2015. Prior to joining
Benefitfocus, Mr. August served as the General Manager of the Financial Services Group of Computer
Sciences Corp. (now DXC Technology Co. (NYSE: DXC)), or CSC, since October 2012. From March
2008 to September 2012, he served as President of CSC Financial Services Group. Since July 2013 he
has served as a member of the Executive Advisory council for Arthur Ventures Private Equity Fund. Mr.
August earned a B.S. in Accounting and Management Science from the University of South Carolina and
is a Certified Public Accountant.
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Mason R. Holland, Jr.—Executive Chairman of the Board
Mason Holland, one of our founders, has been our Executive Chairman and a member of the board
of directors since our founding in June 2000. Mr. Holland is responsible for the coordination of strategic
partnerships with industry leaders and client relations. Mr. Holland founded American Pensions, Inc. in
1988, serving as its Chairman and President from 1988 to 2003. Mr. Holland also has established and
operated a number of other business entities throughout his 30 plus year career, including a real estate
development firm established in 1989 and still operational and a jet aircraft manufacturer for which he
served as lead investor, chief executive officer and board chairman from 2009 to 2014. Mr. Holland
attended Old Dominion University in Norfolk, Virginia.
Jonathon E. Dussault—Chief Financial Officer
Jonathon Dussault has been our Chief Financial Officer since August 2017. He also serves as our
Treasurer. Prior to that, since July 2014, Mr. Dussault served as Senior Vice President and Senior
Finance Officer of WEX Health, Inc. (formerly Evolution1, Inc.), a leading provider of health savings
account cloud-based technology and payment solutions for the healthcare industry and a subsidiary of
global payments processing company, WEX Inc. (NYSE: WEX). Prior to that, beginning in April 2003, Mr.
Dussault served in multiple roles at Evolution1, most recently as Chief Financial Officer, from December
2011 until its acquisition by WEX. From April 2003 to July 2010, Mr. Dussault also was Vice President of
Corporate Development at Women’s Health USA, Inc. and, prior to that, was responsible for financial
planning and analysis at Open Solutions, Inc. Mr. Dussault began his career at Arthur Andersen LLP. He
holds a B.S. in accounting from Babson College and earned his CPA certification in Massachusetts.
James P. Restivo—Chief Technology Officer
James Restivo has been our Chief Technology Officer since January 2016. Prior to joining
Benefitfocus, Mr. Restivo served as Vice President, Chief Technology Officer of Dodge Data & Analytics
LLC beginning in February 2015. From December 2012 to September 2014, Mr. Restivo served as Vice
President, Chief Technology Officer of Smarter Workforce at International Business Machines
Corporation, or IBM (NYSE: IBM). Prior to that, beginning in October 2006, Mr. Restivo served as Chief
Technology Officer of Kenexa Corporation where he managed global public Human Capital Management
R&D, SaaS operations and information security before the company was purchased by IBM. Mr. Restivo
received a B.S. in computer science, applied mathematics and statistics from Stony Brook University and
an M.S. from the Massachusetts Institute of Technology in computer science.
As of December 31, 2018, we had approximately 1,450 full-time associates. None of our associates
is represented by a labor union, and we consider our current relations with our associates to be good.
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Item 1A. RISK FACTORS.
Investing in our common stock involves a high degree of risk. You should consider carefully the
risks and uncertainties described below, together with all of the other information in this Annual Report on
Form 10-K, including the consolidated financial statements and the related notes, before deciding to
invest in shares of our common stock. If any of the following risks were to materialize, our business,
financial condition, results of operations, and future growth prospects could be materially and adversely
affected. In that event, the market price of our common stock could decline and you could lose part or all
of your investment in our common stock.
Risks Related to Our Business
We have had a history of losses, and we might not be able to achieve or sustain profitability.
We experienced net losses of $52.6 million, $50.3 million, and $40.3 million, for the years ended
December 31, 2018, 2017, and 2016, respectively. We cannot predict if we will achieve sustained
profitability in the near future or at all. We expect to make significant future expenditures to develop and
expand our business. In addition, as a public company, we incur significant legal, accounting, and other
expenses that we would not incur as a private company. These expenditures make it harder for us to
achieve and maintain future profitability. Our recent growth in revenue and number of customers might
not be sustainable, and we might not achieve sufficient revenue to achieve or maintain profitability. We
could incur significant losses in the future for a number of reasons, including the other risks described in
this Annual Report on Form 10-K, and we may encounter unforeseen expenses, difficulties, complications
and delays and other unknown events. Accordingly, we might not be able to achieve or maintain
profitability and we may incur significant losses for the foreseeable future.
Our quarterly operating results have fluctuated in the past and might continue to fluctuate,
causing the value of our common stock to decline substantially.
Our quarterly operating results might fluctuate due to a variety of factors, many of which are outside
of our control. As a result, comparing our operating results on a period-to-period basis might not be
meaningful. You should not rely on our past results as indicative of our future performance. Moreover, our
stock price might be based on expectations of future performance that are unrealistic or that we might not
meet and, if our revenue or operating results fall below the expectations of investors or securities
analysts, the price of our common stock could decline substantially. For example, on August 4, 2017, the
first trading day after we publicly announced our operating results for the second quarter ended June 30,
2017, our stock price dropped $7.10 per share, or approximately 20.5%, to $27.50.
Our operating results have varied in the past. In addition to other risk factors listed in this section,
some of the important factors that may cause fluctuations in our quarterly operating results include:
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•
our ability to hire and retain qualified personnel, including the rate of expansion of our sales
force;
the extent to which our products and services achieve or maintain market acceptance,
including through brokers;
changes in the regulatory environment related to benefits and healthcare;
our ability to introduce new products and services and enhancements to our existing products
and services on a timely basis;
new competitors and the introduction of enhanced products and services from competitors;
the financial condition of our current and potential customers;
changes in customer budgets and procurement policies;
the amount and timing of our investment in research and development activities;
technical difficulties with our products or interruptions in our services;
regulatory compliance costs;
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•
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the timing, size, and integration success of potential future acquisitions; and
unforeseen legal expenses, including litigation and settlement costs.
In addition, a significant portion of our operating expense is relatively fixed in nature, and planned
expenditures are based in part on expectations regarding future revenue. Accordingly, unexpected
revenue shortfalls might decrease our gross margins and could cause significant changes in our
operating results from quarter to quarter. If this occurs, the trading price of our common stock could fall
substantially, either suddenly or over time.
Changes in and interpretations of accounting principles regarding revenue recognition and
accounting for leases and their implementation could have an adverse impact on our reported
financial results.
We prepare our financial statements in accordance with GAAP. These rules are subject to
interpretation by the SEC and various bodies formed to interpret and create appropriate accounting
principles. Changes in these rules or their interpretation could have a negative impact on our reported
financial results and may retroactively affect previously reported transactions. For example, in May 2014,
FASB, issued an accounting standards update on revenue recognition, which supersedes nearly all
existing revenue recognition guidance under GAAP. The new standard was effective for us beginning
January 1, 2018. Compared to amounts previously reported, the adoption of the new revenue recognition
guidance decreased our revenue and increased our net loss in 2017 and, for 2016, increased revenue
and increased our net loss. The effects of the new accounting standard are described in Note 2 to our
consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
In addition, in February 2016, FASB issued an accounting standards update on leases, requiring
lessees, among other things, to recognize lease assets and lease liabilities on the balance sheet for those
leases classified as operating leases under previous authoritative guidance. This update, which will be
effective beginning January 1, 2019, also introduces new disclosure requirements for leasing
arrangements. We are continuing to evaluate the effect of adoption of this update on our consolidated
financial statements, however we expect operating expenses to increase and interest expense to
decrease as the result of changes to the accounting treatment of our build-to-suit lease.
Implementation of these new standards, and any future accounting pronouncements,
implementation guidelines, or interpretations, could have an adverse impact on our reported financial
results, require that we make significant changes to our systems, processes and controls, or the way we
conduct our business. In addition, we are expending considerable effort and resources implementing both
of these accounting updates, which in and of itself could have negative impact on our results of
operations.
Because we recognize revenue and expense relating to monthly subscriptions and professional
services over varying periods, downturns or upturns in sales are not immediately reflected in full
in our operating results.
As a SaaS company, under Topic 606, we recognize our subscription revenue monthly for the term
of our contracts and therefore a shortfall in demand for our software solutions and professional services
or a decline in new or renewed contracts in any one quarter might not significantly reduce our revenue for
that quarter, but could negatively affect our revenue in future quarters. Accordingly, the effect of
significant downturns in new or renewed sales of our products and services might not be reflected in full
in our results of operations until future periods.
Our revenue recognition model also makes it difficult for us to rapidly increase our revenue through
additional sales in any period, because revenue from new customers has to be recognized over the
applicable term of the contracts or the estimated expected life of the customer relationship period.
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We depend on our senior management team, and the loss of one or more key associates or an
inability to attract and retain highly skilled associates could adversely affect our business.
Our success depends largely upon the continued services of our key executive officers and other
associates. We also rely on our leadership team in the areas of research and development, marketing,
services, finance, and general and administrative functions, and on mission-critical individual contributors
in sales and research and development. From time to time, there may be changes in our executive
management team resulting from the hiring or departure of executives, which could disrupt our business.
For example: in 2017, we hired a new Chief Financial Officer and an Executive Vice President of Global
Sales; effective January 1, 2018, our Chief Executive Officer became Senior Advisor for Innovation, but
remained on our Board of Directors, and our Chief Operating Officer became our Chief Executive Officer;
in March 2018, our Senior Advisor for Innovation resigned from employment and our Board, effective April
1, 2018, for personal reasons; and in July 2018, we hired an Executive Vice President, Global
Operations. The loss of one or more of our executive officers or key associates could have a serious
adverse effect on our business.
To continue to execute our growth strategy, we also must attract and retain highly skilled personnel.
Competition is intense for sales people and for engineers with high levels of experience in designing and
developing software and Internet-related services. We might not be successful in maintaining our unique
culture and continuing to attract and retain qualified personnel. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty in hiring and retaining highly
skilled personnel with appropriate qualifications. The pool of qualified personnel with SaaS experience
and/or experience working with the benefits market is limited overall and specifically in Charleston, South
Carolina, where our principal office is located. In addition, many of the companies with which we compete
for experienced personnel have greater resources than we have and are located in geographic areas, like
Silicon Valley, that may attract more qualified technology workers.
In addition, in making employment decisions, particularly in the Internet and high-technology
industries, job candidates often consider the value of the equity awards they are to receive in connection
with their employment. Volatility in the price of our stock might, therefore, adversely affect our ability to
attract or retain highly skilled personnel. Furthermore, the requirement to expense certain stock awards
might discourage us from granting the size or type of stock awards that job candidates require to join our
company. If we fail to attract new personnel or fail to retain and motivate our current personnel, our
business and future growth prospects could be severely harmed.
We operate in a highly competitive industry, and if we are not able to compete effectively, our
business and operating results will be harmed.
The benefits management software market is highly competitive and is likely to attract increased
competition, which could make it hard for us to succeed. Small, specialized providers continue to become
more sophisticated and effective. In addition, large, well-financed, and technologically sophisticated
software companies might focus more on our market. The size and financial strength of these entities is
increasing as a result of continued consolidation in both the IT and healthcare industries. We expect large
integrated software companies to become more active in our market, both through acquisitions and
internal investment. In addition, insurance carriers may seek to bring certain of their benefits software
solutions in-house, whether through acquisitions or internal investment. For example, Aetna, a customer
of ours, owns bswift, a provider of insurance exchange technology solutions and benefits administration
technology solutions and services. If Aetna were to decide to use bswift’s solution in place of any portion
of the solutions we currently provide to them, then our business and operating results could be materially
and adversely affected. As costs fall and technology improves, increased market saturation might change
the competitive landscape in favor of our competitors.
Some of our current large competitors have greater name recognition, longer operating histories,
and significantly greater resources than we do. As a result, our competitors might be able to respond
more quickly and effectively than we can to new or changing opportunities, technologies, standards, or
22
customer requirements. In addition, current and potential competitors have established, and might in the
future establish, cooperative relationships with vendors of complementary products, technologies, or
services to increase the availability of their products in the marketplace. Accordingly, new competitors or
alliances might emerge that have greater market share, a larger customer base, more widely adopted
proprietary technologies, greater marketing expertise, greater financial resources, and larger sales forces
than we have, which could put us at a competitive disadvantage. Further, in light of these advantages,
even if our products and services are more effective than those of our competitors, current or potential
customers might accept competitive offerings in lieu of purchasing our offerings. Increased competition is
likely to result in pricing pressures, which could negatively impact our sales, profitability, or market share.
In addition to new niche vendors, who offer standalone products and services, we face competition from
existing enterprise vendors, including those currently focused on software solutions that have information
systems in place with potential customers in our target market. These existing enterprise vendors might
promise products or services that offer ease of integration with existing systems and which leverage
existing vendor relationships. In addition, large insurance carriers often have internal technology staffs
and proprietary software for benefits management, making them less likely to buy our solutions.
The market for our products and services is immature and volatile, and if it does not develop or if
it develops more slowly than we expect, the growth of our business will be harmed.
The cloud-based benefits management software market is relatively new and unproven, and it is
uncertain whether it will achieve and sustain high levels of demand and market acceptance. Our success
will depend to a substantial extent on the willingness of employers, carriers, consumers and brokers to
increase their use of benefits management software. Many employers and carriers have invested
substantial personnel and financial resources to integrate internally developed solutions or traditional
enterprise software into their businesses for benefits management, and therefore might be reluctant or
unwilling to migrate to our cloud-based solutions, including BenefitsPlace. Furthermore, some businesses
might be reluctant to use cloud-based solutions because they have concerns about the security of their
data and the reliability of the technology delivery model associated with these solutions. If employers,
carriers, consumers and brokers do not perceive the benefits of our solutions, then our market might not
develop at all, or it might develop more slowly than we expect, either of which could significantly
adversely affect our operating results. In addition, we might make errors in predicting and reacting to
relevant business trends, which could harm our business. If any of these risks occur, it could materially
adversely affect our business, financial condition or results of operations.
The SaaS pricing model is evolving and our failure to manage its evolution and demand could
lead to lower than expected revenue and profit.
We derive most of our revenue growth from subscription offerings and, specifically, SaaS offerings.
This business model depends heavily on achieving economies of scale because the initial upfront
investment is costly and the associated revenue is recognized on a ratable basis. If we fail to achieve
appropriate economies of scale or if we fail to manage or anticipate the evolution and demand of the
SaaS pricing model, then our business and operating results could be adversely affected.
If we do not continue to innovate and provide products and services that are useful to consumers,
employers, insurance carriers, and brokers and provide high quality support services, we might
not remain competitive, and our revenue and operating results could suffer.
Our success depends in part on providing products and services that consumers, employers,
insurance carriers, and brokers will use to manage benefits. We must continue to invest significant
resources in research and development in order to enhance our existing products and services and
introduce new high quality products and services that customers will want. If we are unable to predict user
preferences or industry changes, or if we are unable to modify our products and services on a timely
basis, we might lose customers. Our operating results would also suffer if our innovations are not
responsive to the needs of our customers, are not appropriately timed with market opportunity, or are not
effectively brought to market. As technology continues to develop, our competitors might be able to offer
23
results that are, or that are perceived to be, substantially similar to or better than those generated by us.
This would force us to compete on additional product and service attributes and to expend significant
resources in order to remain competitive.
In addition, we may experience difficulties with software development, industry standards, design, or
marketing that could delay or prevent our development, introduction, or implementation of new solutions
and enhancements. The introduction of new solutions by competitors, the emergence of new industry
standards, or the development of entirely new technologies to replace existing offerings could render our
existing or future solutions obsolete.
Our success also depends on providing high quality support services to resolve any issues related
to our products and services. High quality education and customer support is important for the successful
marketing and sale of our products and services and for the renewal of existing customers. If we do not
help our customers quickly resolve issues and provide effective ongoing support, our ability to sell
additional products and services to existing customers would suffer and our reputation with existing or
potential customers would be harmed.
If we are unable to retain our existing customers, our revenue and results of operations would be
adversely affected.
We sell our products and services pursuant to agreements that are generally one year for
employers and three to five years for carriers. While our employer contracts generally automatically renew
on an annual basis, our carrier customers have no obligation to renew their contracts after their contract
period expires, and these contracts might not be renewed on the same or on more profitable terms if at
all. Additionally, some of our carrier customers are able to terminate their respective contracts without
cause or for convenience, although generally our carrier contracts are only cancellable by the carrier in an
instance of our uncured breach. As a result, our ability to grow depends in part on the continuance and
renewal of our carrier contracts. We may not be able to accurately predict future trends in customer
renewals, and our customers’ renewal rates may decline or fluctuate because of several factors, including
their level of satisfaction or dissatisfaction with our services, the cost of our services, the cost of services
offered by our competitors, consolidations or reductions in our customers’ spending levels. If our carrier
customers terminate or do not renew their contracts for our services, renew on less favorable terms, or do
not purchase additional functionality or products, our revenue may grow more slowly than expected or
decline, and our profitability and gross margins may be harmed.
A significant amount of our revenue is derived from our largest customers, and any reduction in
revenue from any of these customers would reduce our revenue and net income.
Our ten largest customers by revenue accounted for approximately 42%, 42% and 43% of our
consolidated revenue in each of 2018, 2017 and 2016, respectively. Our largest customer by revenue
accounted for approximately 13%, 11% and 12% of our revenue in 2018, 2017 and 2016, respectively. In
addition, one customer represented 12% of our accounts receivable at December 31, 2017. If any of our
large customers or strategic partners decides not to renew its contracts with us, or to renew on less
favorable terms, our business, revenues, reputation, and our ability to obtain new customers could be
materially and adversely affected.
Failure to adequately and effectively expand our direct sales force will impede our growth.
We believe that our future growth will depend on the development of our direct sales force and its
ability to obtain new customers and to manage our existing customer base. Identifying and recruiting
qualified personnel and training them in the use of our software requires significant time, expense, and
attention. It can take six months or longer before a new sales representative is fully trained and
productive. Our business may be adversely affected if our efforts to expand and train our direct sales
force do not generate a corresponding increase in revenues. For example, reduction of our sales force in
2016 negatively impacted sales, and as a result, revenue going forward. In particular, if we are unable to
hire and develop sufficient numbers of productive direct sales personnel or if new direct sales personnel
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are unable to achieve desired productivity levels in a reasonable period of time, sales of our products and
services will suffer and our growth will be impeded.
Our growth depends in part on the success of our strategic relationships with third parties,
including brokers.
In order to grow our business, we anticipate that we will continue to depend on our relationships
with third parties including resellers such as Mercer Health and Benefits LLC, or Mercer, and SAP SE,
and other referral sources such as brokers, consultants, specialty benefits providers, insurance carriers,
technology and content providers, and third-party system integrators. Identifying partners, negotiating and
documenting relationships with them, and developing referral sources requires significant time and
resources. Our expanded relationship with and February 2015 sale of stock to Mercer increases our
reliance on it and related risks, including Mercer’s competitors being less likely to do business with us.
Our competitors might be effective in providing incentives to third parties to favor their products or
services or to prevent or reduce subscriptions to our products and services. In addition, acquisitions of
our partners by our competitors could result in a decrease in the number of our current and potential
customers, as our partners may no longer facilitate the adoption of our applications by potential
customers. If we are unsuccessful in establishing or maintaining our relationships with third parties, our
ability to compete in the marketplace or to grow our revenue could be impaired and our operating results
may suffer. Even if we are successful, we cannot assure you that these relationships will result in
increased customer use of our applications or increased revenue.
If the number of individuals covered by our employer and carrier customers decreases or the
number of products or services to which our employer and carrier customers subscribe or their
employees purchase decreases, our revenue will decrease.
Under most of our customer contracts, we base our fees on the number of individuals to whom our
customers provide benefits and the number of products or services subscribed to by our customers or
purchased by their employees. Many factors may lead to a decrease in the number of individuals covered
by our customers and the number of products or services subscribed to by our customers, including:
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failure of our customers to adopt or maintain effective business practices;
changes in the nature or operations of our customers;
government regulations; and
increased competition or other changes in the benefits marketplace.
If the number of individuals covered by our customers or the number of products or services
subscribed to by our customers decreases for any reason, our revenue will likely decrease.
Failure to manage our continued growth effectively could increase our expenses, decrease our
revenue, and prevent us from implementing our business strategy.
We have been experiencing continued growth, which could put a strain on our business. To manage
this and our anticipated future growth effectively, we must continue to maintain and enhance our IT
infrastructure, financial and accounting systems, and controls. We also must attract, train, and retain a
significant number of qualified sales and marketing personnel, customer support personnel, professional
services personnel, software engineers, technical personnel, and management personnel. Failure to
effectively manage our growth could lead us to over-invest or under-invest in development and
operations, result in weaknesses in our infrastructure, systems, or controls, give rise to operational
mistakes, losses, loss of productivity or business opportunities, and result in loss of employees and
reduced productivity of remaining employees. Our growth could require significant capital expenditures
and might divert financial resources from other projects such as the development of new products and
services. If our management is unable to effectively manage our growth, our expenses might increase
more than expected, our revenue could decline or might grow more slowly than expected, and we might
25
be unable to implement our business strategy. The quality of our products and services might suffer,
which could negatively affect our reputation and harm our ability to retain and attract customers.
Economic uncertainties or downturns in the general economy or the industries in which our
customers operate could disproportionately affect the demand for our solutions and negatively
impact our results of operations.
General worldwide economic conditions have experienced significant downturns in the past, and
market volatility and uncertainty remain widespread, including as a result of statements and actions of the
current U.S. presidential administration. All of this makes it extremely difficult for our customers and us to
accurately forecast and plan future business activities. In addition, these conditions could cause our
customers or prospective customers to decrease headcount, benefits, or HR budgets, which could
decrease corporate spending on our products and services, resulting in delayed and lengthened sales
cycles, a decrease in new customer acquisition, and/or loss of customers. Furthermore, during
challenging economic times, our customers may have difficulty gaining timely access to sufficient credit or
obtaining credit on reasonable terms, which could impair their ability to make timely payments to us and
adversely affect our revenue. If that were to occur, our financial results could be harmed. Further,
challenging economic conditions might impair the ability of our customers to pay for the products and
services they already have purchased from us and, as a result, our write-offs of accounts receivable could
increase. We cannot predict the timing, strength, or duration of any economic slowdown or recovery. If
the condition of the general economy or markets in which we operate worsens, our business could be
harmed.
If we fail to maintain awareness of our brand cost-effectively, our business might suffer.
We believe that maintaining awareness of our brand in a cost-effective manner is critical to
continuing the widespread acceptance of our existing solutions and is an important element in attracting
new customers. Furthermore, we believe that the importance of brand recognition will increase as
competition in our market increases. Successful promotion of our brand will depend largely on the
effectiveness of our marketing efforts and on our ability to provide reliable and useful services at
competitive prices. Our efforts to build, maintain and market changes to our brand nationally have
involved significant expenses. Brand promotion activities may not yield increased revenue, and even if
they do, any increased revenue may not offset the expenses we incur in maintaining our brand. If we fail
to successfully maintain our brand, or incur substantial expenses in an unsuccessful attempt to maintain
our brand, we may fail to attract enough new customers or retain our existing customers to the extent
necessary to realize a sufficient return on our brand-building efforts, and our business could suffer.
We might not be able to utilize a significant portion of our net operating loss or other tax credit
carryforwards, which could adversely affect our profitability.
As of December 31, 2018, we had federal and state net operating loss carryforwards due to prior
period losses, which if not utilized will begin to expire in 2019 for federal and state purposes. We also
have South Carolina jobs tax credit and headquarters tax credit carryforwards, which if not utilized will
begin to expire in 2020. These tax credit carryforwards could expire unused and be unavailable to offset
future income tax liabilities, which could adversely affect our profitability.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, or the Code, our
ability to utilize net operating loss carryforwards or other tax attributes in any taxable year may be limited
if we experience an “ownership change”. A Section 382 “ownership change” generally occurs if one or
more stockholders or groups of stockholders who own at least 5% of our stock increase their ownership
by more than 50 percentage points over their lowest ownership percentage within a rolling three-year
period. Similar rules might apply under state tax laws. Future issuances of our stock could cause an
“ownership change”. It is possible that an ownership change, or any future ownership change, could have
a material effect on the use of our net operating loss carryforwards or other tax attributes, which could
adversely affect our profitability.
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We might be unable to adequately protect, and we might incur significant costs in enforcing, our
intellectual property and other proprietary rights.
Our success depends in part on our ability to enforce our intellectual property and other proprietary
rights. We rely on a combination of trademark, trade secret, copyright, patent, and unfair competition
laws, as well as license and access agreements and other contractual provisions, to protect our
intellectual property and other proprietary rights. In addition, we attempt to protect our intellectual property
and proprietary information by requiring employees and consultants to enter into confidentiality,
noncompetition, and assignment of inventions agreements. Our attempts to protect our intellectual
property might be challenged by others or invalidated through administrative process or litigation. While
we have a number of patents granted in the United States. and other jurisdictions including China, Japan,
Australia, Taiwan, Hong Kong and Canada, as well as a number of applications pending, we might not be
able to obtain meaningful patent protection for our software. In addition, if any patents are issued in the
future, they might not provide us with any competitive advantages, or might be successfully challenged by
third parties. Agreement terms that address non-competition are difficult to enforce in many jurisdictions
and might not be enforceable in certain cases. To the extent that our intellectual property and other
proprietary rights are not adequately protected, third parties might gain access to our proprietary
information, develop and market products or services similar to ours, or use trademarks similar to ours,
each of which could materially harm our business. Existing U.S. federal and state intellectual property
laws offer only limited protection. Moreover, the laws of other countries in which we might in the future
conduct operations or contract for services might afford little or no effective protection of our intellectual
property. The failure to adequately protect our intellectual property and other proprietary rights could
materially harm our business.
In addition, if we resort to legal proceedings to enforce our intellectual property rights or to
determine the validity and scope of the intellectual property or other proprietary rights of others, the
proceedings could be burdensome and expensive, even if we were to prevail. Any litigation that is
necessary in the future could result in substantial costs and diversion of resources and could have a
material adverse effect on our business, operating results or financial condition.
We might be sued by third parties for alleged infringement of their proprietary rights.
The software and Internet industries are characterized by the existence of a large number of
patents, trademarks, and copyrights and by frequent litigation based on allegations of infringement or
other violations of intellectual property rights. We have received in the past, and might receive in the
future, communications from third parties claiming that we have infringed the intellectual property rights of
others. Our technologies might not be able to withstand any third-party claims or rights against their use.
Any intellectual property claims, with or without merit, could be time-consuming and expensive to resolve,
divert management attention from executing our business plan, and require us to pay monetary damages
or enter into royalty or licensing agreements. In addition, many of our contracts contain warranties with
respect to intellectual property rights, and most require us to indemnify our clients for third-party
intellectual property infringement claims, which would increase the cost to us of an adverse ruling on such
a claim.
Moreover, any settlement or adverse judgment resulting from such a claim could require us to pay
substantial amounts of money or obtain a license to continue to use the software or information that is the
subject of the claim, or otherwise restrict or prohibit our use of it. We might not be able to obtain a license
on commercially reasonable terms, if at all, from third parties asserting an infringement claim; we might
not be able to develop alternative technology on a timely basis, if at all; and we might not be able to
obtain a license to use a suitable alternative technology to permit us to continue offering, and our clients
to continue using, our affected services. Accordingly, an adverse determination could prevent us from
offering our services to others.
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Any future litigation against us could be costly and time-consuming to defend.
We may become subject, from time to time, to legal proceedings and claims that arise in the
ordinary course of business such as claims brought by our clients in connection with commercial disputes,
employment claims made by our current or former associates, or purported securities class actions.
Litigation might result in substantial costs and may divert management’s attention and resources, which
might seriously harm our business, overall financial condition, and operating results. Insurance might not
cover such claims, might not provide sufficient payments to cover all the costs to resolve one or more
such claims, and might not continue to be available on terms acceptable to us. A claim brought against us
that is uninsured or underinsured could result in unanticipated costs, thereby reducing our operating
results and leading analysts or potential investors to reduce their expectations of our performance, which
could reduce the trading price of our stock.
Acquisitions could prove difficult to integrate, disrupt our business, dilute stockholder value, and
adversely affect our operating results and the value of our common stock.
As part of our business strategy, we might acquire, enter into joint ventures with, or make
investments in complementary companies, services, and technologies in the future. For example, in
February 2019, we acquired certain assets of Connecture, Inc. We spent considerable time, effort, and
money pursuing this acquisition, our first in years, and need now to successfully integrate it into our
business. Acquisitions and investments involve numerous risks, including:
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difficulties in identifying and acquiring products, technologies or businesses that will help our
business;
difficulties in integrating operations, technologies, services and personnel;
diversion of financial and managerial resources from existing operations;
risk of entering new markets in which we have little to no experience; and
delays in customer purchases due to uncertainty and the inability to maintain relationships with
customers of the acquired businesses.
If we fail to properly evaluate acquisitions or investments, we might not achieve the anticipated
benefits of any such acquisitions, we might incur costs in excess of what we anticipate, and management
resources and attention might be diverted from other necessary or valuable activities.
Future sales to customers outside the United States or with international operations might expose
us to risks inherent in international sales which, if realized, could adversely affect our business.
An element of our growth strategy is to expand internationally. Operating in international markets
requires significant resources and management attention and will subject us to regulatory, economic, and
political risks that are different from those in the United States. Because of our limited experience with
international operations, our international expansion efforts might not be successful in creating demand
for our products and services outside of the United States or in effectively selling our solutions in the
international markets we enter. In addition, we will face risks in doing business internationally that could
adversely affect our business, including:
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unstable regional political and economic conditions, such as those caused by statements and
actions by the current U.S. presidential administration and the U.K. exit from the European
Union;
the need to localize and adapt our solutions for specific countries, including translation into
foreign languages and associated expenses;
data privacy laws which require that customer data be stored and processed in a designated
territory;
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difficulties in staffing and managing foreign operations;
different pricing environments, longer sales cycles and longer accounts receivable payment
cycles and collections issues;
new and different sources of competition;
weaker protection for intellectual property and other legal rights than in the United States and
practical difficulties in enforcing intellectual property and other rights outside of the United
States;
laws and business practices favoring local competitors;
compliance challenges related to the complexity of multiple, conflicting and changing
governmental laws and regulations, including employment, tax, privacy, and data protection
laws and regulations;
increased financial accounting and reporting burdens and complexities;
restrictions on the transfer of funds; and
adverse tax consequences.
If we denominate our international contracts in local currencies, fluctuations in the value of the U.S.
dollar and foreign currencies might impact our operating results when translated into U.S. dollars.
If we are required to collect sales and use taxes in additional jurisdictions, we might be subject to
liability for past sales and our future sales may decrease.
We might lose sales or incur significant expenses if states successfully impose broader guidelines
on state sales and use taxes. A successful assertion by one or more states requiring us to collect sales or
other taxes on the licensing of our software or sale of our services could result in substantial tax liabilities
for past transactions and otherwise harm our business. In addition, each state has different rules and
regulations governing sales and use taxes, and these rules and regulations are subject to varying
interpretations that change over time. We review these rules and regulations periodically and, when we
believe we are subject to sales and use taxes in a particular state, voluntarily engage state tax authorities
in order to determine how to comply with their rules and regulations. We cannot assure you that we will
not be subject to sales and use taxes or related penalties for past sales in states where we currently
believe no such taxes are required.
Vendors of services, like us, are typically held responsible by taxing authorities for the collection and
payment of any applicable sales and similar taxes. If one or more taxing authorities determines that taxes
should have, but have not, been paid with respect to our services, we might be liable for past taxes in
addition to taxes going forward. Liability for past taxes might also include substantial interest and penalty
charges. Our customer contracts typically provide that our customers must pay all applicable sales and
similar taxes. Nevertheless, our customers might be reluctant to pay back taxes and might refuse
responsibility for interest or penalties associated with those taxes. If we are required to collect and pay
back taxes and the associated interest and penalties, and if our clients fail or refuse to reimburse us for all
or a portion of these amounts, we will incur unplanned expenses that may be substantial. Moreover,
imposition of such taxes on us going forward will effectively increase the cost of our software and services
to our customers and might adversely affect our ability to retain existing customers or to gain new
customers in the areas in which such taxes are imposed.
Risks Related to Our Products and Services Offerings
If our security measures are breached or fail, and unauthorized persons gain access to
customers’ and consumers’ data, our products and services might be perceived as not being
secure, customers and consumers might curtail or stop using our products and services, and we
might incur significant liabilities.
Our products and services involve the storage and transmission of customers’ and consumers’
confidential information, which may include sensitive individually identifiable information that is subject to
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stringent legal and regulatory obligations. Because of the sensitivity of this information, security features
of our software are very important. If our security measures are breached or fail and/or are bypassed as a
result of third-party action, inadvertent disclosures through technological or human error (including
employee error), malfeasance, hacking, ransomware, social engineering (including phishing schemes),
computer viruses, malware, or otherwise, someone might be able to acquire or obtain unauthorized
access to our customers’ confidential information and/or patient data or other personal information. As a
result, our reputation could be damaged, our business might suffer, information might be lost, and we
could face damages for contract breach, penalties for violation of applicable laws or regulations, costly
litigation or government investigations, and significant costs for remediation and remediation efforts to
prevent future occurrences.
In addition, we rely on various third parties, including employers’ HR departments, carriers, and
other third-party service providers and consumers themselves, as users of our system for key activities to
protect and promote the security of our systems and the data and information accessible within them,
such as administration of enrollment, consumer status changes, claims, and billing. Our customers might
authorize or enable third parties to access their information and data that is stored on our systems.
Because we do not control such access, we cannot ensure the complete integrity or security of such data
in our systems. On occasion, people have failed to adhere to appropriate data security practices. For
example, employers sometimes have failed to terminate the login/password of former employees, or
permitted current employees to share login/passwords. When we become aware of such security
incidents, we work with employers to terminate inappropriate access and provide additional instruction in
order to avoid the reoccurrence of such problems. Although to date these security incidents have not
resulted in claims against us or in material harm to our business, failures to perform these activities might
result in claims against us, which could expose us to significant expense, legal liability, and harm to our
reputation, which might result in loss of business.
Because techniques used to obtain unauthorized access or to sabotage systems change frequently
and often are not recognized until launched against a target, we might not be able to anticipate these
techniques or to implement adequate preventive measures. If an actual or perceived breach of our
security, or the security of third parties that we rely on, occurs, the market perception of the effectiveness
of our security measures could be harmed and we could lose sales and customers. Any significant
violations of data privacy or security laws could result in the loss of business, litigation and regulatory
investigations and penalties or settlements that could damage our reputation and adversely impact our
results of operations and financial condition. In addition, our customers might authorize or enable third
parties to access their information and data that is stored on our systems. Because we do not control
such access, we cannot ensure the complete integrity or security of such data in our systems.
Failure by our customers to obtain proper permissions and waivers might result in claims against
us or may limit or prevent our use of data, which could harm our business.
We require our customers to provide necessary notices and to obtain necessary permissions and
waivers for use and disclosure of information on the Benefitfocus Platform, and we require contractual
assurances from them that they have done so and will do so. If, however, despite these requirements and
contractual obligations, our customers do not obtain necessary permissions and waivers, then our use
and disclosure of information that we receive from them or on their behalf might be limited or prohibited
by state or federal privacy laws or other laws. This could impair our functions, processes and databases
that reflect, contain, or are based upon such data and might prevent use of such data. In addition, this
could interfere with, or prevent creation or use of, rules, analyses, or other data-driven activities that
benefit us and our business. Moreover, we might be subject to claims or liability for use or disclosure of
information by reason of lack of valid notices, agreements, permissions or waivers. These claims or
liabilities could subject us to unexpected costs and adversely affect our operating results.
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Our proprietary software might not operate properly, which could damage our reputation, give rise
to claims against us, or divert application of our resources from other purposes, any of which
could harm our business and operating results.
Proprietary software development is time-consuming, expensive, and complex. Unforeseen
difficulties can arise. We might encounter technical obstacles, and it is possible that we discover problems
that prevent our proprietary applications from operating properly. If they do not function reliably or fail to
achieve customer expectations in terms of performance, customers could assert liability claims against us
and/or attempt to cancel their contracts with us. This could damage our reputation and impair our ability to
attract or maintain customers.
Moreover, benefits management software as complex as ours has in the past contained, and may in
the future contain, or develop, undetected defects or errors. Material performance problems or defects in
our products and services might arise in the future. Errors might result from the interface of our services
with legacy systems and data, which we did not develop and the function of which is outside of our
control. Defects or errors might arise in our existing or new software or service processes. Because
changes in employer, carrier, and legal requirements and practices relating to benefits are frequent, we
are continuously discovering defects and errors in our software and service processes compared against
these requirements and practices. Undiscovered vulnerabilities could expose our software to
unscrupulous third parties who develop and deploy software programs that could attack our software or
result in unauthorized access to, acquisition of, or disclosure of customer data. Defects and errors and
any failure by us to identify and address them could result in loss of revenue or market share, liability to
customers or others, failure to achieve market acceptance or expansion, diversion of development and
other resources, injury to our reputation, and increased service and maintenance costs. Defects or errors
in our product or service processes might discourage existing or potential customers from purchasing
services from us. Correction of defects or errors could prove to be impossible or impracticable. The costs
incurred in correcting any defects or errors or in responding to resulting claims or liability might be
substantial and could adversely affect our operating results.
In addition, customers that rely on our products and services to collect, manage, and report benefits
data might have a greater sensitivity to service errors and security vulnerabilities than customers of
software products in general. We market and sell services that, among other things, provide information
to assist care providers in tracking and treating ill patients. Any operational delay in or failure of our
software service processes might result in the disruption of patient care and could cause harm to our
business and operating results.
Our customers might assert claims against us in the future alleging that they suffered damages due
to a defect, error, or other failure of our product or service processes. A product liability claim or errors or
omissions claim could subject us to significant legal defense costs and adverse publicity regardless of the
merits or eventual outcome of such a claim.
Various events could interrupt customers’ access to the Benefitfocus Platform, exposing us to
significant costs.
The ability to access the Benefitfocus Platform is critical to our customers. Our operations and
facilities are vulnerable to interruption and/or damage from a number of sources, many of which are
beyond our control, including, without limitation: (i) power loss and telecommunications failures, (ii) fire,
flood, hurricane, and other natural disasters, (iii) software and hardware errors, failures or crashes in our
own systems or in other systems, (iv) computer viruses, denial-of-service attacks, hacking and similar
disruptive problems in our own systems and in other systems, and (v) civil unrest, war, and/or terrorism.
We have implemented various measures to protect against interruptions of customers’ access to our
platform. If customers’ access is interrupted because of problems in the operation of our facilities, we
could be exposed to significant claims by customers, particularly if the access interruption is associated
with problems in the timely delivery of funds due to customers or medical information relevant to patient
care. Our plans for disaster recovery and business continuity rely on third-party providers of related
services. If those vendors fail us at a time when our systems are not operating correctly, we could incur a
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loss of revenue and liability for failure to fulfill our obligations. Any significant instances of system
downtime could negatively affect our reputation and ability to retain customers and sell our services,
which would adversely impact our revenue.
In addition, retention and availability of patient care and physician reimbursement data are subject
to federal and state laws governing record retention, accuracy, and access. Some laws impose
obligations on our customers and on us to produce information for third parties and to amend or expunge
data at their direction. Our failure to meet these obligations might result in liability, which could increase
our costs and reduce our operating results.
We rely on data center providers, Internet infrastructure, bandwidth providers, third-party
computer hardware and software, other third parties, and our own systems for providing services
to our customers, and any failure or interruption in the services provided by these third parties or
our own systems could expose us to litigation and negatively impact our relationships with
customers, adversely affecting our brand and our business.
We serve all our customers from two data centers, one located in Raleigh, North Carolina and the
other located in Charlotte, North Carolina. While we control and have access to our servers, we do not
control the operation of these facilities. The owners of our data center facilities have no obligation to
renew their agreements with us on commercially reasonable terms, or at all. If we are unable to renew
these agreements on commercially reasonable terms, or if one of our data center operators is acquired,
we may be required to transfer our servers and other infrastructure to new data center facilities, and we
may incur significant costs and possible service interruption in connection with doing so. Problems faced
by our third-party data center locations, with the telecommunications network providers with whom we or
they contract, or with the systems by which our telecommunications providers allocate capacity among
their customers, including us, could adversely affect the experience of our customers. Our third-party data
centers operators could decide to close their facilities without adequate notice. In addition, any financial
difficulties, such as bankruptcy faced by our third-party data centers operators or any of the service
providers with whom we or they contract may have negative effects on our business, the nature and
extent of which are difficult to predict.
In addition, our ability to deliver our web-based services depends on the development and
maintenance of the infrastructure of the Internet by third parties. This includes maintenance of a reliable
network backbone with the necessary speed, data capacity, bandwidth capacity, and security. Our
services are designed to operate without interruption in accordance with our service level commitments.
However, we have experienced and expect that we will experience future interruptions and delays in
services and availability from time to time. In the event of a catastrophic event with respect to one or more
of our systems, we may experience an extended period of system unavailability, which could negatively
impact our relationship with customers. To operate without interruption, both we and our service providers
must guard against:
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damage from fire, power loss, natural disasters and other force majeure events outside our
control;
communications failures;
software and hardware errors, failures, and crashes;
security breaches, computer viruses, hacking, denial-of-service attacks, and similar disruptive
problems; and
other potential interruptions.
We also rely on computer hardware purchased or leased and software licensed from third parties in
order to offer our services, including software from Oracle Corporation and Microsoft Corporation, and
routers and network equipment from Cisco, Dell and Hewlett-Packard Company. This hardware and
software is generally commercially available on varying terms. However, it is possible that this hardware
and software might not continue to be available on commercially reasonable terms, or at all. Any loss of
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the right to use any of this hardware or software could result in delays in the provisioning of our services
until equivalent technology is either developed by us, or, if available, is identified, obtained and integrated.
We exercise limited control over third-party vendors, which increases our vulnerability to problems
with technology and information services they provide. Interruptions in our network access and services
might in connection with third-party technology and information services reduce our revenue, cause us to
issue refunds to customers for prepaid and unused subscription services, subject us to potential liability,
or adversely affect our renewal rates. Although we maintain insurance for our business, the coverage
under our policies might not be adequate to compensate us for all losses that may occur. In addition, we
might not be able to continue to obtain adequate insurance coverage at an acceptable cost, if at all.
The use of open source software in our products and solutions may expose us to additional risks
and harm our intellectual property rights.
Some of our products and solutions use or incorporate software that is subject to one or more open
source licenses. Open source software is typically freely accessible, usable, and modifiable. Certain open
source software licenses require a user who intends to distribute the open source software as a
component of the user’s software to disclose publicly part or all of the source code to the user’s software.
In addition, certain open source software licenses require the user of such software to make any
derivative works of the open source code available to others on potentially unfavorable terms or at no
cost.
The terms of many open source licenses to which we are subject have not been interpreted by U.S.
or foreign courts. Accordingly, there is a risk that those licenses could be construed in a manner that
imposes unanticipated conditions or restrictions on our ability to commercialize our solutions. In that
event, we could be required to seek licenses from third parties in order to continue offering our products
or solutions, to re-develop our products or solutions, to discontinue sales of our products or solutions, or
to release our proprietary software code under the terms of an open source license, any of which could
harm our business. Further, given the nature of open source software, it may be more likely that third
parties might assert copyright and other intellectual property infringement claims against us based on our
use of these open source software programs.
While we monitor the use of all open source software in our products, solutions, processes, and
technology and try to ensure that no open source software is used in such a way as to require us to
disclose the source code to the related product or solution when we do not wish to do so, it is possible
that such use may have inadvertently occurred in deploying our proprietary solutions. In addition, if a
third-party software provider has incorporated certain types of open source software into software we
license from such third party for our products and solutions without our knowledge, we could, under
certain circumstances, be required to disclose the source code to our products and solutions. This could
harm our intellectual property position and our business, results of operations, and financial condition.
Risks Related to Regulation
Government regulation of the areas in which we operate creates risks and challenges with respect
to our compliance efforts and our business strategies.
The employee benefits industry is highly regulated and is subject to changing political, legislative,
regulatory, and other influences. Deregulatory efforts following the 2016 election cycle are ongoing and
are likely to continue to impact the regulatory environment in our industry. Existing and new laws and
regulations affecting the employee benefits industry could create unexpected liabilities for us, cause us to
incur additional costs and restrict our operations. These laws and regulations are complex and their
application to specific services and relationships are not clear. In particular, many existing laws and
regulations affecting employee benefits, when enacted, did not anticipate the services that we provide,
and these laws and regulations might be applied to our services in ways that we do not anticipate. Our
failure to accurately anticipate the application of these laws and regulations, or our failure to comply,
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could create liability for us, result in adverse publicity, and negatively affect our business. Some of the
risks we face from the regulation of employee benefits are as follows:
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PPACA. Health benefits are obtained, delivered, accessed, and maintained under an
increasingly intricate and uncertain statutory and regulatory framework. In particular, ongoing
efforts to repeal part or all of the Patient Protection and Affordable Care Act (“PPACA”) have
created uncertainty in the healthcare industry broadly. Although many of the provisions of
PPACA do not directly apply to us, PPACA and continued efforts to repeal or modify the law
may affect the business of many of our customers. For instance, carriers and large employers
might experience changes in the numbers of individuals they insure as a result of the
elimination of the penalty associated with PPACA’s individual mandate, possible repeal of
guaranteed issue, and flux in the state and national exchanges under PPACA. Although we
are unable to predict with any reasonable certainty or otherwise quantify the likely impact of
PPACA and related repeal efforts and deregulatory initiatives on our business model, financial
condition, or results of operations, changes in the business of our customers and the number
of individuals they insure may negatively impact our business.
False Claims Act and Related Laws. There are numerous federal and state laws that forbid
submission of false information or the failure to disclose certain information in connection with
submission and payment of claims for reimbursement from the government. In some cases,
these laws also forbid abuse of existing systems for such submission and payment. In
addition, federal and state laws prohibit kickbacks in association with the provision of
healthcare services. Many of these state laws pertain to all payors, not just items or services
paid for by the federal government. Although our business operations are generally not subject
to these laws and regulations, any contract we have with a government entity requires us to
comply with these laws and regulations. Any failure of our services to comply with these laws
and regulations could result in substantial liability, including but not limited to criminal liability,
could adversely affect demand for our services, and could force us to expend significant
capital, research and development, and other resources to address the failure. Any
determination by a court or regulatory agency that our services with government clients violate
these laws and regulations could subject us to civil or criminal penalties, invalidate all or
portions of some of our government client contracts, require us to change or terminate some
portions of our business, require us to refund portions of our services fees, cause us to be
disqualified from serving not only government clients but also all clients doing business with
government payers, and have an adverse effect on our business.
HIPAA and Other Privacy and Security Requirements. There are numerous U.S. federal and
state laws and regulations related to the privacy and security of personal health information. In
particular, regulations promulgated pursuant to the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, established privacy and security standards that limit the
use and disclosure of protected health information, and require the implementation of
administrative, physical, and technological safeguards to ensure the confidentiality, integrity,
availability, and privacy of protected health information. Health plans, healthcare
clearinghouses, and most providers are “Covered Entities” subject to HIPAA. With respect to
our operations as a healthcare clearinghouse, we are directly subject to the privacy regulations
established under HIPAA, or the Privacy Rule, and the security regulations established under
HIPAA, or the Security Rule. In addition, our carrier customers, or payors, are considered to
be Covered Entities and are required to enter into written agreements with us, known as
Business Associate Agreements, under which we are considered to be a “Business Associate”
and that require us to safeguard protected health information and restrict how we may use and
disclose such information. Both Covered Entities and Business Associates are subject to direct
oversight and audit by the Department of Health and Human Services.
Violations of HIPAA might result in civil fines of up to $57,051 per violation and a maximum
civil penalty of $1,711,533 in a calendar year for violations of the same requirement, as well as
criminal penalties. The U.S. Department of Health and Human Services’ Office for Civil Rights
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(“OCR”), which enforces HIPAA, appears to have increased its enforcement activities. OCR
also operates a formal HIPAA audit program. The audits are intended to assess compliance
with HIPAA by both Covered Entities and Business Associates and are conducted by OCR
with assistance from third-party vendors. Issues identified during the audits may result in
agency-imposed corrective action plans or civil monetary penalties. Additionally, state
attorneys general may bring civil actions seeking either injunctions or damages in response to
violations of HIPAA that threaten the privacy of state residents.
We might not be able to adequately address the business risks created by HIPAA
implementation and enforcement. Furthermore, we are unable to predict what changes to
HIPAA or other laws or regulations might be made in the future or how those changes could
affect our business or the costs of compliance. Noncompliance may result in litigation and
high-dollar fines or settlements.
Some payors and clearinghouses interpret HIPAA transaction requirements differently than we
do. Where payors or clearinghouses require conformity with their interpretations as a condition
of a successful transaction, we seek to comply with their interpretations.
In addition to the Privacy Rule and Security Rule, most states have enacted patient
confidentiality laws that protect against the disclosure of confidential medical and/or health
information, and many states have adopted or are considering further legislation in this area,
including privacy safeguards, security standards, and data security breach notification
requirements. Such state laws, if more stringent than HIPAA requirements, are not preempted
by the federal requirements, and we are required to comply with them. Failure by us to comply
with any state standards regarding patient privacy may subject us to penalties, including civil
monetary penalties and, in some circumstances, criminal penalties. Such failure may injure our
reputation and adversely affect our ability to retain customers and attract new customers.
Personal Privacy and Consumer Protection. There are numerous U.S. federal and state laws
and regulations that have been adopted or are being considered regarding the collection,
retention, use, and disclosure of personal information. In addition to HIPAA, we might be
subject to various laws, rules and regulations related to privacy and information security such
as those promulgated under the Gramm-Leach-Bliley Act and various state laws regulating the
use and security of personal information. Those laws, rules, and regulations include
requirements such as reasonable and appropriate safeguards to protect personal information,
or providing appropriate notice to consumers about how their personal information will be used
or disclosed. In addition, U.S. state legislatures have been actively enacting new laws
addressing data security, security breach notification, and privacy, including the California
Consumer Privacy Act of 2018. These areas may present implementation challenges and
could be an enforcement priority for the state regulators generating increased lawsuits by
consumers and other individuals. Our management believes that we are currently operating in
compliance with these regulations. However, continued compliance with these evolving laws,
rules and regulations regarding the privacy, security and protection of our customers’ data, or
the implementation of any additional privacy rules and regulations, could result in higher
compliance and technology costs for us.
Medicare and Medicaid Regulatory Requirements. We have contracts with insurance carriers
who offer Medicare Managed Care (also known as Medicare Advantage or Medicare Part C)
and Medicaid Managed Care benefits plans. We also have contracts with insurance carriers
who offer Medicare prescription drug benefits (also known as Medicare Part D) plans. The
activities of the Medicare plans are regulated by the Centers for Medicare & Medicaid
Services, or CMS, the federal agency that provides oversight of the Medicare and Medicaid
programs. The Medicaid Managed Care plans are regulated by both CMS and the individual
states where the plans are offered. Some of the activities that we might perform, such as the
enrollment of beneficiaries, may be subject to CMS and/or state regulation, and such
regulations may force us to change the way we do business or otherwise restrict our ability to
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provide services to such plans. Moreover, the regulatory environment with respect to these
programs has become, and will likely continue to become, increasingly complex.
Financial Services-Related Laws and Rules. Financial services and electronic payment
processing services are subject to numerous laws, regulations and industry standards, some
of which might impact our operations and subject us, our vendors, and our customers to
liability as a result of the payment distribution and processing solutions we offer. Although we
do not act as a bank, we offer solutions that involve banks, or vendors who contract with banks
and other regulated providers of financial services. As a result, we might be impacted by
banking and financial services industry laws, regulations, and industry standards, such as
licensing requirements, solvency standards, requirements to maintain the privacy and security
of nonpublic personal financial information, and Federal Deposit Insurance Corporation
deposit insurance limits. In addition, our patient billing and payment distribution and
processing solutions might be impacted by payment card association operating rules,
certification requirements, and rules governing electronic funds transfers. If we fail to comply
with applicable payment processing rules or requirements, we might be subject to fines and
changes in transaction fees and may lose our ability to process credit and debit card
transactions or facilitate other types of billing and payment solutions. Moreover, payment
transactions processed using the Automated Clearing House are subject to network operating
rules promulgated by the National Automated Clearing House Association and to various
federal laws regarding such operations, including laws pertaining to electronic funds transfers,
and these rules and laws might impact our billing and payment solutions. Further, our solutions
might impact the ability of our payor customers to comply with state prompt payment laws.
These laws require payors to pay healthcare claims meeting the statutory or regulatory
definition of a “clean claim” within a specified time frame.
Insurance Broker Laws. Insurance laws in the United States are often complex, and states
have broad authority to adopt regulations regarding brokerage activities. Our business's
regulatory oversight generally also includes activity governing the selection and payment of
insurance products and the licensing of insurance brokers and our wholly owned subsidiary,
BenefitStore, Inc., is an insurance agency. Our continuing ability to provide insurance
brokerage related services in the jurisdictions in which we operate depends on our compliance
with the rules and regulations promulgated from time to time by the regulatory authorities in
each of these jurisdictions.
ERISA. The Employee Retirement Income Security Act of 1974, as amended, or ERISA,
regulates how employee benefits are provided to or through certain types of employer-
sponsored health benefits plans. ERISA is a set of laws and regulations that is subject to
periodic interpretation by the U.S. Department of Labor as well as the federal courts. In some
circumstances, and under certain customer contracts, we might be deemed to have assumed
duties that make us an ERISA fiduciary, and thus be required to carry out our operations in a
manner that complies with ERISA in all material respects. We believe that our current
operations do not render us subject to ERISA fiduciary obligations, and therefore that we are
in material compliance with ERISA and that any such compliance does not currently have a
material adverse effect on our operations. However, there can be no assurance that continuing
ERISA compliance efforts or any future changes to ERISA will not have a material adverse
effect on us.
Third-Party Administrator Laws. Numerous states in which we do business have adopted
regulations governing entities engaged in third-party administrator, or TPA, activities. TPA
regulations typically impose requirements regarding enrollment into benefits plans, claims
processing and payments, and the handling of customer funds. Although we do not believe we
are currently acting as a TPA, changes in state regulations could result in us being obligated to
comply with such regulations, which might require us to obtain licenses to provide TPA
services in such states.
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We are subject to banking regulations that may limit our business activities.
The Goldman Sachs Group, affiliates of which owned approximately 11.8% of the voting and
economic interest in our business at December 31, 2018, is regulated as a bank holding company and a
financial holding company under the Bank Holding Company Act of 1956, as amended, or BHC Act. The
BHC Act imposes regulations and requirements on The Goldman Sachs Group and on any company that
is deemed to be controlled by The Goldman Sachs Group under the BHC Act and the regulations of the
Board of Governors of the Federal Reserve System, or the Federal Reserve. Due to the size of its voting
and economic interest, we might still be deemed to be controlled by The Goldman Sachs Group and are
therefore considered to be a non-bank “subsidiary” of The Goldman Sachs Group under the BHC Act. We
will remain subject to this regulatory regime until The Goldman Sachs Group is no longer deemed to
control us for purposes of the BHC Act, which we do not generally have the ability to control and which
will not occur until The Goldman Sachs Group has significantly reduced its voting and economic interest
in us.
As a controlled non-bank subsidiary of The Goldman Sachs Group, we are restricted from engaging
in activities that are not permissible under the BHC Act, or the rules and regulations promulgated
thereunder. Permitted activities for a bank holding company or any controlled non-bank subsidiary
generally include activities that the Federal Reserve has previously determined to be closely related to
banking, financial in nature or incidental or complementary to financial activities, including data
processing services such as those that we provide with our software solutions. Restrictions placed on The
Goldman Sachs Group as a result of supervisory or enforcement actions under the BHC Act or otherwise
may restrict us or our activities in certain circumstances, even if these actions are unrelated to our
conduct or business. Further, as a result of being subject to regulation and supervision by the Federal
Reserve, we may be required to obtain the prior approval of the Federal Reserve before engaging in
certain new activities or businesses, whether organically or by acquisition. The Federal Reserve could
exercise its power to restrict us from engaging in any activity that, in the Federal Reserve’s opinion, is
unauthorized or constitutes an unsafe or unsound business practice. To the extent that these regulations
impose limitations on our business, we could be at a competitive disadvantage because some of our
competitors are not subject to these limitations.
Additionally, any failure of The Goldman Sachs Group to maintain its status as a financial holding
company could result in further limitations on our activities and our growth. In particular, our permissible
activities could be restricted to only those that constitute banking or activities closely related to banking.
The Goldman Sachs Group’s loss of its financial holding company status could be caused by several
factors, including any failure by The Goldman Sachs Group’s bank subsidiaries to remain sufficiently
capitalized, by any examination downgrade of one of The Goldman Sachs Group’s bank subsidiaries, or
by any failure of one of The Goldman Sachs Group’s bank subsidiaries to maintain a satisfactory rating
under the Community Reinvestment Act. In addition, The Goldman Sachs Group is required to remain
“well capitalized” and “well managed” in order to maintain its status as a financial holding company. We
have no ability to prevent such occurrences from happening.
As a non-bank subsidiary of a bank holding company, we are subject to examination by the Federal
Reserve and required to provide information and reports for use by the Federal Reserve under the BHC
Act. In addition, we may be subject to regulatory oversight and examination because we are a technology
service provider to regulated financial institutions. The Federal Reserve may also impose substantial fines
and other penalties for violations of applicable banking laws, regulations and orders. Further, The Dodd-
Frank Act, including the Volcker Rule, and related financial regulatory reform has resulted in the issuance
of numerous regulations designed to increase and strengthen the regulation of bank holding companies,
including The Goldman Sachs Group and its affiliates. The Volker Rule, in relevant part, restricts banking
entities from proprietary trading (subject to certain exemptions) and from acquiring or retaining any equity,
partnership or other interests in, or sponsoring, a private equity fund, subject to satisfying certain
conditions, and from engaging in certain transactions with funds.
We have agreed to certain covenants that are intended to facilitate The Goldman Sachs Group’s
compliance with the BHC Act, but that may impose certain obligations on our company. In particular, The
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Goldman Sachs Group has rights to conduct audits on, and access certain information of, our company
and certain rights to review the policies and procedures that we implement to comply with the laws and
regulations that relate to our activities. In addition, we are obligated to provide The Goldman Sachs Group
with notice of certain events and business activities and cooperate with The Goldman Sachs Group to
mitigate potential adverse consequences resulting therefrom.
Potential regulatory requirements placed on our software, services, and content could impose
increased costs on us, delay or prevent our introduction of new service types, and impair the
function or value of our existing service types.
Our products and services are and are likely to continue to be subject to increasing regulatory
requirements in a number of ways. As these requirements proliferate, we must change or adapt our
products and services to comply. Changing regulatory requirements might render our services obsolete or
might block us from accomplishing our work or from developing new services. This might in turn impose
additional costs upon us to comply or to further develop our products and services. It might also make
introduction of new product or service types more costly or more time-consuming than we currently
anticipate. It might even prevent introduction by us of new products or services or cause the continuation
of our existing products or services to become unprofitable or impossible.
Potential government subsidy of services similar to ours, or creation of a single payor system,
might reduce customer demand.
Recently, entities including brokers and U.S. federal and state governments have offered to
subsidize adoption of online benefits platforms or clearinghouses. In addition, federal regulations have
been changed to permit such subsidy from additional sources subject to certain limitations. To the extent
that we do not qualify or participate in such subsidy programs, demand for our services might be reduced,
which may decrease our revenue. In addition, prior proposals regarding healthcare reform have included
the concept of creation of a single payor for healthcare insurance. This kind of consolidation of critical
benefits activity could negatively impact the demand for our services.
Our services present the potential for embezzlement, identity theft, or other similar illegal
behavior by our associates with respect to third parties.
Among other things, certain services offered by us involve collecting payment information from
individuals, and this frequently includes check and credit card information. Even though we do not handle
direct payments, our services also involve the use and disclosure of personal and business information
that could be used to impersonate third parties, commit identity theft, or otherwise gain access to their
data or funds. If any of our associates take, convert, or misuse such funds, documents, or data, we could
be liable for damages, and our business reputation could be damaged or destroyed. Moreover, if we fail
to adequately prevent third parties from accessing personal and/or business information and using that
information to commit identity theft, we might face legal liabilities and other losses than can have a
negative impact on our business.
Risks Related to Our Indebtedness
We recently incurred substantial indebtedness that may decrease our business flexibility, access
to capital and/or increase our borrowing costs, and we may still incur substantially more debt,
which may adversely affect our operations and financial results.
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In December 2018, we issued $240 million aggregate principal of 1.25% convertible senior notes
(the “Notes”) due December 15, 2023, unless earlier repurchased by us or converted by the holder
pursuant to their terms. The Notes may limit our ability to borrow additional funds for working capital,
capital expenditures, acquisitions or other general business purposes; limit our ability to use our cash flow
or obtain additional financing for future working capital, capital expenditures, acquisitions or other general
business purposes; require us to use a substantial portion of our cash flow from operations to make debt
service payments; limit our flexibility to plan for or react to, changes in our business and industry; place us
at a competitive disadvantage compared to our less leveraged competitors; and increase our vulnerability
to the impact of adverse economic and industry conditions. Further, the indenture governing the Notes
does not restrict our ability to incur additional indebtedness and we and our subsidiaries may incur
substantial additional indebtedness in the future, subject to the restrictions contained in any future debt
instruments existing at the time, some of which may be secured indebtedness.
Servicing our debt requires a significant amount of cash, and we might not have or be able to
obtain sufficient cash to pay our substantial debt.
As of December 31, 2018, we had $240 million aggregate principle of Notes outstanding. We also
had the ability to borrow an aggregate of $77.3 million under our current credit facility, all of which would
be secured debt. Our ability to make scheduled payments of the principal of, to pay interest on or to
refinance our indebtedness, depends on our future performance, which is subject to economic, financial,
competitive and other factors beyond our control. Our business might not continue to generate cash flow
from operations in the future sufficient to service our debt timely. In addition, our ability to repurchase or
to pay cash upon conversion of the Notes may be limited by law, regulatory authority or agreements
governing our future indebtedness. If we are unable to generate sufficient cash to service our debt, we
may be required to adopt one or more alternatives, such as selling assets, restructuring debt or obtaining
additional equity capital on terms that may be onerous or highly dilutive. In addition, our ability to
refinance our indebtedness will depend on the capital markets and our financial condition at such time.
We might not be able to engage in any of these activities or engage in these activities on desirable terms,
which could result in a default and acceleration of our debt obligations.
The conditional conversion feature of the Notes, if triggered, and any required repurchase of the
Notes may adversely affect our financial condition and operating results.
In the event any conditional conversion feature of the Notes is triggered, holders of the Notes will be
entitled to convert the Notes at any time during specified periods at their option. In addition, holders of the
Notes have the right to require us to repurchase their Notes upon the occurrence of a fundamental
change. If one or more holders elect to convert their Notes (and unless we elect to satisfy our conversion
obligation by delivering solely shares of our common stock, other than paying cash in lieu of delivering
any fractional share), or if we are required to repurchase the Notes due to a fundamental change, we
would be required to settle a portion or all of our conversion obligation through the payment of cash or
repurchase the Notes with cash, both of which could adversely affect our liquidity. In addition, even if
holders do not elect to convert their Notes upon a conditional conversion feature being triggered, we
could be required under applicable accounting rules to reclassify all or a portion of the outstanding
principal of the Notes as a current rather than long-term liability, which would result in a material reduction
of our net working capital.
The Notes are effectively subordinated to our secured debt and any liabilities of our subsidiaries.
The Notes rank senior in right of payment to any of our indebtedness that is expressly subordinated
in right of payment to the Notes; equal in right of payment to any of our liabilities that are not so
subordinated; effectively junior in right of payment to any of our senior, secured indebtedness to the
extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness
and other liabilities (including trade payables) of our subsidiaries. In the event of our bankruptcy,
liquidation, reorganization or other winding up, our assets that secure debt ranking senior or equal in right
of payment to the Notes will be available to pay obligations on the Notes only after the senior, secured
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debt has been repaid in full from these assets. There might not be sufficient assets remaining to pay
amounts due on any or all of the Notes then outstanding. The indenture governing the Notes does not
prohibit us from incurring additional senior debt or secured debt, nor does it prohibit any of our
subsidiaries from incurring additional liabilities. All or indebtedness, including the Notes, must be repaid
before our stockholders would receive anything in a liquidation.
If we fail to meet our current credit facility’s financial covenants, our business and financial
condition could be adversely affected.
Our current credit facility contains financial covenants, including covenants related to financial
liquidity and EBITDA. If at any point we fail to comply with the financial covenants, the lenders can
demand immediate repayment of our outstanding balance and deny future borrowings under the credit
facility. This could have a negative impact on our liquidity, thereby reducing the availability of cash flow for
other purposes and adversely affecting our business.
We may still incur substantially more debt or take other actions that would diminish our ability to
make payments on the Notes when due.
We and our subsidiaries may incur substantial additional debt in the future, some of which may
be secured debt. We are not restricted under the terms of the indenture governing the Notes from
incurring additional debt, securing existing or future debt, recapitalizing our debt or taking a number of
other actions that could have the effect of diminishing our ability to make payments on the Notes when
due. Furthermore, the indenture prohibits us from engaging in certain mergers or acquisitions unless,
among other things, the surviving entity assumes our obligations under the Notes and the indenture.
These and other provisions in the indenture could deter or prevent a third party from acquiring us even
when the acquisition may be favorable to holders of the Notes.
The conversion of the Notes will dilute the ownership interest of existing stockholders, including
holders who had previously converted their Notes, or may otherwise depress the price of our
common stock.
The conversion of some or all of the Notes will dilute the ownership interests of existing
stockholders to the extent we deliver shares of our common stock upon conversion of the Notes. The
Notes may become in the future convertible at the option of the holders of the Notes prior to December
15, 2023 under certain circumstances as provided in the indenture governing the Notes. Any sales in the
public market of the common stock issuable upon such conversion could adversely affect prevailing
market prices of our common stock. In addition, the existence of the Notes may encourage short selling
by market participants because the conversion of the Notes could be used to satisfy short positions, or
anticipated conversion of the Notes into shares of our common stock could depress the price of our
common stock.
The capped call transactions we entered into in connection with the issuance of the Notes might
not turn out to be effective in reducing dilution, and might adversely affect the value of our
common stock.
In connection with the Notes, we paid approximately $33 million to enter into capped call
transactions with certain purchasers or their affiliates (the “Option Counterparties”). The capped call
transactions are expected generally to reduce the potential dilution upon conversion of the Notes and/or
offset any cash payments we are required to make in excess of the principal amount of converted Notes,
as the case may be, with such reduction and/or offset subject to a cap. If our stock is above $89.98 per
share upon conversion of the Notes, the capped calls will not completely eliminate the dilution from Note
conversion. Furthermore, if our stock price is less than $53.17 upon conversion of the Notes, the capped
calls will have no effect and we will get no benefit from the cash we paid to enter into the capped calls.
In connection with establishing their initial hedges of the capped call transactions, the Option
Counterparties entered into various derivative transactions with respect to our common stock. This activity
could have increased (or reduced the size of any decrease in) the market price of our common stock or
the Notes at that time.
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In addition, the Option Counterparties may modify their hedge positions by entering into or
unwinding derivatives with respect to our common stock and/or purchasing or selling our common stock
or other securities of ours in secondary market transactions prior to the maturity of the Notes (and are
likely to do so during any observation period related to a conversion of Notes or following any repurchase
of Notes by us on any fundamental change repurchase date or otherwise). This activity could also cause
or avoid an increase or decrease in the price of our common stock or the Notes.
The potential effect, if any, of these transactions and activities on the price of our common stock
or the Notes will depend in part on the market conditions and cannot be ascertained at this time. Any of
these activities could adversely affect the value of our common stock.
The accounting method for convertible debt securities that may be settled in cash, such as the
Notes, could have a material effect on our reported financial results.
In May 2008, the Financial Accounting Standards Board (“FASB”) issued Staff Position No. APB 14-
1, Accounting for Convertible Debt Instruments That May Be Settled in Cash Upon Conversion (Including
Partial Cash Settlement), which has subsequently been codified as ASC 470-20, Debt with Conversion
and Other Options. Under ASC 470-20, an entity must separately account for the liability and equity
components of the convertible debt instruments (such as the Notes) that may be settled entirely or
partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect
of ASC 470-20 on the accounting for the Notes is that the equity component is required to be included in
the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the
value of the equity component would be treated as original issue discount for purposes of accounting for
the debt component of the Notes. As a result, we will be required to record a greater amount of non-cash
interest expense in current periods presented as a result of the amortization of the discounted carrying
value of the Notes to their face amount over the term of the Notes. We will report lower net income in our
financial results because ASC 470-20 will require interest to include both the current period’s amortization
of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or
future financial results, the trading price of our common stock and the trading price of the Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Notes) that may
be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method, the
effect of which is that the shares issuable upon conversion of the Notes are not included in the calculation
of diluted earnings per share except to the extent that the conversion value of the Notes exceeds their
principal amount. Under the treasury stock method, for diluted earnings per share purposes, the
transaction is accounted for as if the number of shares of common stock that would be necessary to settle
such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that the
accounting standards in the future will continue to permit the use of the treasury stock method. If we are
unable to use the treasury stock method in accounting for the shares issuable upon conversion of the
Notes, then our diluted earnings per share would be adversely affected.
Risks Related to Ownership of Our Common Stock
Our stock price may be volatile or may decline regardless of our operating performance, and you
may not be able to resell your shares at or above the price at which you purchase it.
The stock market historically has experienced extreme price and volume fluctuations. As a result of
this volatility, you might not be able to sell your common stock at or above the price at which you
purchase it. From our IPO in September 2013 through December 31, 2018, the per share trading price of
our common stock has been as high as $77.00 and as low as $19.58. It might continue to fluctuate
significantly in response to various factors, some of which are beyond our control. These factors include:
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our operating performance and the operating performance of similar companies;
the overall performance of the equity markets;
changes in laws or regulations relating to the sale of health insurance;
announcements by us or our competitors of acquisitions, business plans, or commercial
relationships;
any major change in our management;
threatened or actual litigation;
publication of research reports or news stories about us, our competitors, or our industry, or
positive or negative recommendations or withdrawal of research coverage by securities
analysts;
large volumes of sales of our shares of common stock by existing stockholders; and
general political and economic conditions.
In addition, the stock market in general, and the market for Internet-related companies in particular,
has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. These fluctuations might be even
more pronounced in the relatively new trading market for our stock. Additionally, securities class action
litigation has often been instituted against companies following periods of volatility in the overall market
and in the market price of a company’s securities. This litigation, if instituted against us, could result in
substantial costs, divert our management’s attention and resources, and harm our business, operating
results, and financial condition.
Conversion of the Notes will dilute the ownership interest of existing stockholders, including
holders who had previously converted their Notes, or may otherwise depress the price of our
common stock.
The conversion of some or all of the convertible Notes will dilute the ownership interests of existing
stockholders to the extent we deliver shares upon conversion of any of the Notes. The Notes may
become in the future convertible at the option of their holders prior to their scheduled terms under certain
circumstances. Any sales in the public market of the common stock issuable upon such conversion could
adversely affect prevailing market prices of our common stock. In addition, the existence of the Notes
may encourage short selling by market participants because the conversion of the Notes could be used to
satisfy short positions, or anticipated conversion of the Notes into shares of our common stock could
depress the price of our common stock.
The capped call transactions entered into when we issued the convertible notes may affect the
value of our common stock.
In connection with the pricing of the Notes, we entered into capped call transactions with the option
counterparties. The capped call transactions are expected generally to reduce the potential dilution upon
conversion of the Notes and/or offset any cash payments we are required to make in excess of the
principal amount of converted Notes, as the case may be, with such reduction and/or offset subject to a
cap. In connection with establishing their initial hedges of the capped call transactions, the option
counterparties or their respective affiliates entered into various derivative transactions with respect to our
common stock concurrently with or shortly after the pricing of the Notes. The option counterparties or their
respective affiliates may modify their hedge positions by entering into or unwinding derivatives with
respect to our common stock and/or purchasing or selling our common stock or other securities of ours in
secondary market transactions prior to the maturity of the Notes (and are likely to do so during any
observation period related to a conversion of Notes). This activity could cause or avoid an increase or a
decrease in the market price of our common stock. The capped call transactions may affect the value of
the Notes and our common stock.
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Our stock price could decline due to the large number of outstanding shares of our common
stock and those underlying the Notes eligible for future sale.
Sales of a substantial number of shares of our common stock in the public market or the market
perception that such sales and issuances may occur could reduce the market price of our common stock
and impair our ability to raise capital through the sale of additional common stock or equity-linked
securities at a time and price that we deem appropriate.
As of December 31, 2018, we had an aggregate of 32,017,773 shares of common stock
outstanding. As of December 31, 2018, there also were outstanding options and restricted stock units to
purchase 2,407,497 shares of our common stock that, if exercised or vested, as applicable, will result in
these additional shares becoming available for sale subject in some cases to Rule 144. We have also
registered an aggregate of 9,099,766 shares of our common stock that we may issue or sell under our
stock plans. These shares can be freely sold in the public market upon issuance, unless they are held by
“affiliates”, as that term is defined in Rule 144 of the Securities Act. In addition, a substantial number of
shares of our common stock is reserved for issuance upon conversion of the Notes. If a large number of
these shares are sold in the public market, the sales could reduce the trading price of our common stock.
We might require additional capital to support business growth.
We intend to continue to make investments to support our business growth and might require
additional funds to respond to business challenges or opportunities, including the need to develop new
products and services or enhance our existing services, enhance our operating infrastructure, and
acquire complementary businesses and technologies. Accordingly, we might need to engage in equity or
additional debt financings to secure additional funds. If we raise additional funds through further
issuances of equity or convertible debt securities, our existing stockholders could suffer significant
dilution, and any new equity securities we issue could have rights, preferences and privileges superior to
those of holders of our common stock. Any additional debt financing secured by us could involve
restrictive covenants relating to our capital-raising activities and other financial and operational matters,
which might make it more difficult for us to obtain additional capital and to pursue business opportunities,
including potential acquisitions. In addition, we might not be able to obtain additional financing on terms
favorable to us, if at all. If we are unable to obtain adequate financing or financing on terms satisfactory to
us when we require it, our ability to continue to support our business growth and to respond to business
challenges could be significantly limited.
We do not currently intend to pay dividends on our common stock and, consequently, your ability
to achieve a return on your investment will depend on appreciation in the price of our common
stock.
We have never declared or paid any cash dividends on our common stock and do not currently
intend to do so for the foreseeable future. We currently intend to invest our future earnings, if any, to fund
our growth. Therefore, you are not likely to receive any dividends on your common stock for the
foreseeable future, and the success of an investment in shares of our common stock will depend upon
future appreciation in its value, if any. There is no guarantee that shares of our common stock will
appreciate in value or even maintain the price at which our stockholders purchased their shares.
A limited number of stockholders will have the ability to influence the outcome of director
elections and other matters requiring stockholder approval.
As of December 31, 2018, our directors, executive officers, and their affiliated entities beneficially
owned approximately 21.1% of our outstanding common stock. In particular, GS Capital Partners VI
Parallel, L.P., GS Capital Partners VI Offshore Fund, L.P., GS Capital Partners VI Fund, L.P., and GS
Capital Partners VI GmbH & Co. KG, which are affiliates of Goldman, Sachs & Co. and which we refer to
as the Goldman Funds, collectively beneficially owned approximately 11.8%. These stockholders, if they
act together, could exert substantial influence over matters requiring approval by our stockholders,
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including the election of directors, amendment of our certificate of incorporation and bylaws, and the
approval of mergers or other business combination transactions.
Our business is subject to changing regulations regarding corporate governance, disclosure
controls, internal control over financial reporting, and other compliance areas that will increase
both our costs and the risk of noncompliance.
As a public company, we are subject to the reporting requirements of the Securities Exchange Act
of 1934, or the Exchange Act, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, the Dodd-
Frank Act, and the rules and regulations of our stock exchange. The requirements of these rules and
regulations increase our legal, accounting, and financial compliance costs, make some activities more
difficult, time-consuming, and costly, and may also place undue strain on our personnel, systems, and
resources.
The Sarbanes-Oxley Act requires, among other things, that we maintain effective disclosure controls
and procedures and internal control over financial reporting. Commencing with our fiscal year ending
December 31, 2014, we performed system and process evaluation and testing of our internal control over
financial reporting to allow management to report on the effectiveness of our internal control over financial
reporting, as required by Section 404 of the Sarbanes-Oxley Act. We also are required to disclose
changes made to our internal controls and procedures on a quarterly basis. Our ongoing compliance with
Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and
expend significant management efforts.
In addition, as of December 31, 2018, we no longer qualified as an “emerging growth company” as
defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Accordingly, our
independent registered public accounting firm is required to formally attest to the effectiveness of our
internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act in this Annual
Report on Form 10-K. We are also required to include additional information regarding executive
compensation and include a nonbinding advisory vote on executive compensation in our 2019 proxy
statement. These additional reporting requirements, among others, may increase our legal and financial
compliance costs and cause management and other personnel to divert attention from operational and
other business matters to devote substantial time to public company reporting requirements. In addition, if
we are not able to comply with changing legal requirements in a timely manner, the market price of our
stock could decline and we could be subject to sanctions or investigations by the stock exchange on
which our common stock is listed, the SEC, or other regulatory authorities, which would require additional
financial and management resources.
Failure to develop and maintain adequate financial controls could cause us to have material
weaknesses, which could adversely affect our operations and financial position.
As previously reported, in the first quarter of 2014, we identified a material weakness in internal
controls over the accounting for leasing transactions which resulted in the identification of a material error
in the accounting for our headquarters lease executed in May 2005. We might in the future discover other
material weaknesses that require remediation. In addition, an internal control system, no matter how well-
designed, cannot provide absolute assurance that misstatements due to error or fraud will not occur or
that all control issues and instances of fraud will be detected. If we are not able to comply with the
requirements of Section 404 of the Sarbanes-Oxley Act in a timely manner, or if we are unable to
maintain proper and effective internal controls, we might not be able to produce timely and accurate
financial statements. If that were to happen, the market price of our stock could decline and we could be
subject to sanctions or investigations by the stock exchange on which our common stock is listed, the
SEC, or other regulatory authorities.
Any failure to develop or maintain effective controls, or any difficulties encountered in their
implementation or improvement, could harm our operating results or cause us to fail to meet our reporting
obligations. Any failure to implement and maintain effective internal controls also could adversely affect
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the results of periodic management evaluations regarding the effectiveness of our internal control over
financial reporting that we are required to include in our periodic reports filed with the SEC under Section
404 of the Sarbanes-Oxley Act. Ineffective disclosure controls and procedures or internal control over
financial reporting could also cause investors to lose confidence in our reported financial and other
information, which would likely have a negative effect on the trading price of our common stock.
Implementing any appropriate changes to our internal controls may require specific compliance training of
our directors, officers, and employees, entail substantial costs in order to modify our existing accounting
systems, and take a significant period of time to complete. Such changes may not be effective, however,
in maintaining the adequacy of our internal controls, and any failure to maintain that adequacy, or
consequent inability to produce accurate financial statements on a timely basis, could increase our
operating costs and could materially impair our ability to operate our business. In the event that we are
not able to demonstrate compliance with Section 404 of the Sarbanes-Oxley Act in a timely manner, that
our internal controls are perceived as inadequate, or that we are unable to produce timely or accurate
financial statements, investors may lose confidence in our operating results and our stock price could
decline.
Provisions in our restated certificate of incorporation and amended and restated bylaws and
Delaware law might discourage, delay, or prevent a change in control of our company or changes
in our management and, therefore, depress the trading price of our common stock.
Provisions of our certificate of incorporation and bylaws and Delaware law might discourage, delay,
or prevent a merger, acquisition, or other change in control that stockholders consider favorable, including
transactions in which you might otherwise receive a premium for your shares of our common stock. These
provisions might also prevent or frustrate attempts by our stockholders to replace or remove our
management. These provisions include:
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limitations on the removal of directors;
advance notice requirements for stockholder proposals and nominations;
limitations on the ability of stockholders to call special meetings;
the inability of stockholders to act by written consent;
the inability of stockholders to cumulate votes at any election of directors;
the classification of our board of directors into three classes with only one class, representing
approximately one-third of our directors, standing for election at each annual meeting; and
the ability of our board of directors to make, alter or repeal our bylaws.
Our Board of Directors has the ability to designate the terms of and issue new series of preferred
stock without stockholder approval. In addition, Section 203 of the Delaware General Corporation Law
prohibits a publicly held Delaware corporation from engaging in a business combination with an interested
stockholder, generally a person which together with its affiliates owns, or within the last three years has
owned, 15% of our voting stock, for a period of three years after the date of the transaction in which the
person became an interested stockholder, unless the business combination is approved in a prescribed
manner.
The existence of the foregoing provisions and anti-takeover measures could limit the price that
investors are willing to pay in the future for shares of our common stock. They could also deter potential
acquirers of our company, thereby reducing the likelihood that you could receive a premium for your
common stock in an acquisition.
If securities or industry analysts do not publish research or reports about our business, or
publish inaccurate or unfavorable research or reports about our business, our stock price and
trading volume could decline.
The trading market for our common stock depends, to some extent, on the research and reports that
securities or industry analysts publish about us and our business. We do not have any control over these
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analysts. If one or more of the analysts who cover us downgrade our common stock or change their
opinion of our common stock, our stock price would likely decline. If one or more of these analysts cease
coverage of our company or fail to regularly publish reports on us, we could lose visibility in the financial
markets, which could cause our stock price or trading volume to decline.
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
As of December 31, 2018, we occupied approximately 289,000 square feet on the Daniel Island
Executive Center campus in Charleston, South Carolina. This office space is leased under leases
expiring in 2031. As of December 31, 2018, we also leased facilities in Greenville, South Carolina; New
York City, New York; Tulsa, Oklahoma; and Salt Lake City, Utah.
We believe that our current and planned facilities are sufficient for our needs. We may add other
facilities or expand existing facilities as we expand our associate base and geographic markets in the
future, and we believe that suitable additional space will be available as needed to accommodate any
such expansion of our operations.
Item 3. Legal Proceedings.
From time to time, we might become involved in legal or regulatory proceedings arising in the
ordinary course of our business. We are not currently a party to any material litigation or regulatory
proceeding and we are not aware of any pending or threatened litigation or regulatory proceeding against
us that could have a material adverse effect on our business, operating results, financial condition or cash
flows.
Item 4. Mine Safety Disclosures.
Not applicable.
46
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
PART II
Market Information for Common Stock
Our common stock has been listed on the Nasdaq Global Market under the symbol “BNFT” since
September 18, 2013. Prior to that date, there was no public trading market for our common stock.
As of December 31, 2018, we had 51 holders of record of our common stock. The actual number of
stockholders is greater than this number of record holders and includes stockholders who are beneficial
owners, but whose shares are held in street name by brokers and other nominees. This number of
holders of record also does not include stockholders whose shares may be held in trust by other entities.
Stock Performance Graph
The following shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or
incorporated by reference into any of our other filings under the Exchange Act or the Securities Act of
1933, as amended, except to the extent we specifically incorporate it by reference into such filing.
This chart compares the cumulative total return on our common stock with that of the S&P 500
Index and the S&P 1500 Application Software Index. The chart assumes $100 was invested at the close
of market on September 18, 2013, in the common stock of Benefitfocus, Inc., the S&P 500 Index and the
S&P 1500 Application Software Index, and assumes the reinvestment of any dividends. The stock price
performance on the following graph is not necessarily indicative of future stock price performance.
Comparison of Cumulative Total Return
$280
$240
$200
$160
$120
$80
$40
9/18/2013
12/31/2013
12/31/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
Benefitfocus, Inc.
S&P 500 Index
S&P 1500 Application Software Index
Base
Period
Company / Index
Benefitfocus, Inc.
S&P 500 Index
S&P 1500 Application
Software Index
9/18/2013 12/31/2013 12/31/2014 12/31/2015 12/31/2016 12/31/2017 12/31/2018
85.38
$ 100.00 $ 107.82 $
$ 100.00 $ 107.12 $ 119.32 $ 118.45 $ 129.75 $ 154.95 $ 145.28
55.46 $
50.42 $
61.33 $
67.96 $
$ 100.00 $ 107.46 $ 120.00 $ 143.70 $ 154.95 $ 223.38 $ 269.66
47
Equity Compensation Plans
The information required by Item 5 of Form 10-K regarding equity compensation plans is
incorporated herein by reference to Part III “Item 12. Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters”.
48
Item 6. Selected Financial Data.
CONSOLIDATED SELECTED FINANCIAL DATA
The following selected consolidated financial data for the years December 31, 2018, 2017, 2016,
2015 and 2014 and the selected consolidated balance sheet data as of December 31, 2018, 2017, 2016,
2015, and 2014 are derived from our audited consolidated financial statements. As noted below and
discussed elsewhere in this filing, we adopted Topic 606 in 2018 with an effective date of January 1,
2016. Our historical results are not necessarily indicative of the results to be expected in the future. The
selected consolidated financial data should be read together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”, our consolidated financial statements, related
notes, and other financial information included elsewhere in this Annual Report on Form 10-K.
Consolidated Statement of Operations Data
Revenue(1)
Cost of revenue(2)
Gross profit
Operating expenses:
Sales and marketing(2)
Research and development(2)
General and administrative(2)
Total operating expenses
Loss from operations
Total other expense, net
Loss before income taxes
Income tax expense (benefit)
Net loss
Net loss per common share--basic and
diluted
Weighted-average common shares
outstanding--basic and diluted
Other Financial Data
Adjusted EBITDA(3)
2018
2017
2016
*2015
*2014
Year Ended December 31,
*as adjusted *as adjusted
(in thousands, except share and per share data)
$
258,721 $
129,277
129,444
236,842 $
127,382
109,460
236,523 $
123,308
113,215
185,143 $
102,851
82,292
137,420
87,470
49,950
78,179
47,902
43,062
169,143
(39,699)
(12,900)
(52,599)
28
(52,627) $
70,583
49,549
27,268
147,400
(37,940)
(12,339)
(50,279)
15
(50,294) $
56,311
56,610
32,750
145,671
(32,456)
(7,873)
(40,329)
17
(40,346) $
58,589
52,250
25,727
136,566
(54,274)
(7,785)
(63,059)
25
(62,084) $
48,467
41,729
18,657
108,853
(58,903)
(4,251)
(63,154)
25
(63,179)
(1.66) $
(1.62) $
(1.36) $
(2.19) $
(2.51)
$
$
31,756,415 31,052,378 29,589,857 28,344,680 25,207,099
$
10,340 $
(4,979) $
(1,385) $
(32,160) $
(43,844)
(1)
In the first quarter of 2015, we decreased the estimated expected life of our customer relationships
for both employer and carrier customers from 10 to 7 years. This change shortened the term over
which we will recognize our deferred revenue and results in more revenue recognized in each
period after the change.
(2) Cost of revenue and operating expenses include stock-based compensation expense as follows:
2018
Year Ended December 31,
2016
*2015
2017
*2014
*as adjusted *as adjusted
(in thousands)
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
5,164 $
6,764
5,510
11,430
2,508 $
4,953
2,990
5,686
2,799 $
3,212
4,533
7,544
1,950 $
2,861
2,399
3,244
986
1,395
1,376
1,831
(3) We define adjusted EBITDA as net loss before net interest and other expense, taxes, and
depreciation and amortization expense, adjusted to eliminate stock-based compensation expense
and expense related to the impairment of goodwill and intangible assets, transaction costs
49
expensed, and costs not core to our business. See “Adjusted EBITDA” below for more information
and for a reconciliation of adjusted EBITDA to net loss, the most directly comparable financial
measure calculated and presented in accordance with GAAP.
Our Segments
Revenue from external customers by
segment:
Employer
Carrier
Total net revenue from external
customers
Gross profit by segment
Employer
Carrier
Total gross profit by segment
Consolidated Balance Sheet Data
2018
Year Ended December 31,
2016
*2015
2017
*2014
*as adjusted *as adjusted
(in thousands)
$
169,800 $
88,921
153,481 $
83,361
149,776 $
86,747
94,842 $
90,301
62,016
75,404
$
258,721 $
236,842 $
236,523 $
185,143 $
137,420
$
$
75,397 $
54,047
129,444 $
58,347 $
51,113
109,460 $
61,951 $
51,264
113,215 $
33,655 $
48,637
82,292 $
16,186
33,764
49,950
Cash and cash equivalents
Marketable securities
Accounts receivable, net
Total assets
Deferred revenue, total
Total liabilities
Common stock
Additional paid-in capital
Total stockholders' equity (deficit)
2018
2017
As of December 31,
2016
*as adjusted *as adjusted
(in thousands)
*2015
*2014
$
190,928 $
–
21,077
313,939
45,863
324,149
32
403,631
(10,210)
55,335 $
–
30,091
192,003
55,027
200,722
31
352,496
(8,719)
56,853 $
2,007
32,966
216,555
56,949
194,832
30
332,254
21,723
48,074 $
40,448
29,698
182,119
93,529
200,128
29
310,304
(18,009)
51,074
5,135
21,311
140,018
94,510
182,841
26
223,409
(42,823)
*
The summary consolidated financial data for the years ended December 31, 2018, 2017, and 2016
and as of December 31, 2018, 2017, and 2016 reflects the adoption of Accounting Standards
Update ("ASU") No. 2014-09, Revenue from Contracts with Customers ("Topic 606"). See Note 2 of
the notes to consolidated financial statements for a summary of adjustments. The summary
consolidated financial data for the years ended December 31, 2015 and 2014 and as of December
31, 2015 and 2014 does not reflect the adoption of Topic 606.
Adjusted EBITDA
Within this Annual Report on Form 10-K we use adjusted EBITDA to provide investors with
additional information regarding our financial results. Adjusted EBITDA is a non-GAAP financial measure.
We have provided below a reconciliation of this measure to the most directly comparable GAAP financial
measure, which for adjusted EBITDA is net loss.
We have included adjusted EBITDA in this Annual Report on Form 10-K because it is a key
measure used by our management and board of directors to understand and evaluate our core operating
performance and trends, to prepare and approve our annual budget, and to develop short- and long-term
operational plans. In particular, we believe that the exclusion of the expenses eliminated in calculating
adjusted EBITDA can provide a useful measure for period-to-period comparisons of our core business.
Accordingly, we believe that adjusted EBITDA provides useful information to investors and others in
understanding and evaluating our operating results.
50
Our use of adjusted EBITDA as an analytical tool has limitations, and you should not consider it in
isolation or as a substitute for analysis of our financial results as reported under GAAP. Some of these
limitations are:
•
•
•
•
•
although depreciation and amortization are non-cash charges, the assets being depreciated
and amortized might have to be replaced in the future, and adjusted EBITDA does not reflect
cash capital expenditure requirements for such replacements or for new capital expenditure
requirements;
adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital
needs;
adjusted EBITDA does not reflect the potentially dilutive impact of stock-based compensation;
adjusted EBITDA does not reflect interest or tax payments that would reduce the cash
available to us; and
other companies, including companies in our industry, might calculate adjusted EBITDA or
similarly titled measure differently, which reduces their usefulness as comparative measures.
Because of these and other limitations, you should consider adjusted EBITDA alongside other
GAAP-based financial performance measures, including various cash flow metrics, gross profit, net loss
and our other GAAP financial results. The following table presents a reconciliation of adjusted EBITDA to
net loss for each of the periods indicated:
Year Ended December 31,
2018
2017
*as
adjusted
2016
*as
adjusted
(in thousands)
*2015
*2014
Reconciliation from Net Loss to Adjusted
EBITDA:
Net loss
Depreciation
Amortization of software development
costs
Amortization of acquired intangible assets
Interest income
Interest expense on building lease
financing
obligations
Interest expense on other borrowings
Income tax expense
Stock-based compensation expense
Transaction costs expensed
Costs not core to our business
Total net adjustments
Adjusted EBITDA
$
$
$ (52,627) $ (50,294) $ (40,346) $ (62,084) $ (63,179)
6,931
11,721
12,391
8,791
9,959
3,944
150
(250)
3,257
258
(182)
2,857
257
(138)
2,587
286
(188)
2,257
305
(77)
7,471
5,685
28
28,868
507
4,843
62,967 $
10,340 $
7,450
4,931
15
16,137
-
1,058
45,315 $
(4,979) $
3,624
6,826
682
1,095
25
17
5,588
18,088
708
-
-
-
38,961 $
20,043
(1,385) $ (31,600) $ (43,136)
7,092
877
25
10,454
560
-
30,484 $
*
The summary consolidated financial data for the years ended December 31, 2018, 2017, and 2016
and as of December 31, 2018, 2017, and 2016 reflects the adoption of Topic 606. See Note 2 of the
notes to consolidated financial statements for a summary of adjustments. The summary
consolidated financial data for the years ended December 31, 2015 and 2014 and as of December
31, 2015 and 2014 does not reflect the adoption of Topic 606.
51
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of
operations together with our consolidated financial statements and the related notes and other financial
information included elsewhere in this Annual Report on Form 10-K. Some of the information contained in
this discussion and analysis or set forth elsewhere in this report including information with respect to our
plans and strategy for our business, includes forward-looking statements that involve risks and
uncertainties. You should review the “Risk Factors” section of this report beginning on page 19 for a
discussion of important factors that could cause actual results to differ materially from the results
described in or implied by the forward-looking statements contained in the following discussion and
analysis.
Overview
Benefitfocus provides a leading cloud-based benefits management platform for consumers,
employers, insurance carriers, suppliers and brokers. The Benefitfocus Platform simplifies how
organizations and individuals transact benefits. Our employer, carrier and supplier customers rely on our
platform to manage, scale and exchange benefits data seamlessly. Our solutions drive value for all
participants in our benefits ecosystem.
The Benefitfocus multi-tenant platform has a user-friendly interface designed for consumers to
access all of their benefits in one place. Our comprehensive solutions support medical benefit plans and
non-medical benefits, such as, dental, life, disability insurance, income protection, digital health and
financial wellness. As the number of employer benefits plans has increased, with each plan subject to
many different business rules and requirements, demand for the Benefitfocus Platform is growing.
Since our initial public offering, we have described our target market as comprising two separate but
related market segments – the employer segment and the insurance carrier segment. Within the
employer segment, we sell our technology solutions on an annually recurring or multi-year subscription
basis to large employers, which we define as those with more than 1,000 employees. Similarly, in our
other market segment, we sell our solutions on a subscription basis to insurance carriers, enabling us to
expand our overall footprint in the benefits marketplace by aggregating many key constituents, including
consumers, employers, and brokers. We believe our presence in both the employer and insurance carrier
segments gives us a strong position at the center of the benefits ecosystem.
In 2018, we expanded our economic model to include a transaction-oriented, marketplace solution,
known as BenefitsPlace, that aligns employers, brokers, carriers and suppliers around the needs of
consumers on our platform from our employer, carrier and broker connections. In this model, our
BenefitsPlace partners sell their voluntary benefit offerings through a holistic, multidimensional marketplace.
This marketplace is designed to increase the economic value of the consumer lives on our platform by
aligning platform products to consumer needs. In exchange for Benefitfocus delivering consumer access,
data-driven analysis and operational efficiencies, BenefitsPlace partners pay us a percentage of the
transaction value that is transacted on our platform. BenefitsPlace carrier agreements have terms of two to
four years and are typically cancellable upon breach of contract or insolvency. BenefitsPlace supplier
contracts have terms of one year or less and are generally cancellable upon breach of contract, failure to
cure, bankruptcy and termination for convenience.
We classify our revenue into two streams – software services revenue and professional services
revenue. Software services revenue primarily consists of monthly subscription fees and BenefitsPlace
transactional revenue. Monthly subscription fees are paid to us by our employer and insurance carrier
customers for access to, and usage of, cloud-based benefits software solutions for a specified contract term.
Subscription fees are generally charged based on the number of employees or subscribers with access to
the solution. Software services revenue also includes BenefitsPlace transactional revenue, which is
generated from the value of the policies or products enrolled in through our marketplace. BenefitsPlace
carrier revenue is generally recognized over the policy period of the enrolled products. In arrangements
where we sell policies to employees of our customers as the broker, we earn insurance broker
commissions. Revenue from insurance broker commissions and BenefitsPlace supplier transactions is
52
generally recognized at the time when open enrollment is complete and the orders for policies are
transferred to the supplier. Software services revenue accounted for approximately 78%, 78%, and 79% of
our total revenue during the years ended December 31, 2018, 2017 and 2016, respectively.
Our professional services revenue stream is largely derived from the implementation of our customers
onto our platform, which typically includes discovery, configuration and deployment, integration, testing, and
training. We also provide customer support services and customized media content that supports our
customers’ effort to educate and communicate with consumers. Professional services revenue accounted
for approximately 22%, 22%, and 21% of our total revenue during the years ended December 31, 2018,
2017 and 2016, respectively.
Expanding our customer base is a key element of our growth strategy. Historically we have
measured our expansion by describing the growth in the number of large employer customers utilizing our
solutions, which grew at a 28% compound annual growth rate from 141 as of December 31, 2010 to
1,024 as of December 31, 2018. With the addition of our transactional revenue model, we believe that the
number of large employer customers no longer fully describes the revenue opportunity of our customer
base. As described in “Key Financial and Operating Performance Metrics” below, we are introducing a
new key metric, net benefit eligible lives, and discontinuing disclosure of our current key metric, number of
large employer customers.
We believe that our continued innovation and new solutions, such as BenefitsPlace, extend the
functionality of our mobile offerings, more robust data analytics capabilities and our ability to quickly
respond to evolving market needs with innovative capabilities will help us attract additional net benefit
eligible lives to our platform through new employer customers, partners and brokers and increase our
revenue from existing customers and relationships.
We believe that there is a substantial market for our services, and we have been investing in growth
over the past several years. In particular, we have continued to invest in technology and services to better
serve our larger employer customers, which we believe are an important source of growth for our
business. We have also substantially increased our marketing and sales efforts and expect those
increased efforts to continue. As we have invested in growth, we have had operating losses in each of the
last eight years, and expect our operating losses to continue for at least the next year. Due to the nature
of our customer relationships, which have been stable in spite of some customer losses over the past
years, and our hybrid subscription and transaction-based financial model, we believe that our current
investment in growth should lead to substantially increased revenue, which will allow us to achieve
profitability in the relatively near future. Of course, our ability to achieve profitability will continue to be
subject to many factors beyond our control.
53
Key Financial and Operating Performance Metrics
We regularly monitor a number of financial and operating metrics in order to measure our current
performance and project our future performance. These metrics help us develop and refine our growth
strategies and make strategic decisions. We discuss revenue, gross margin, and the components of
operating loss, as well as segment revenue and segment gross profit, in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations—Components of Operating Results”. In
addition, we utilize other key metrics as described below.
In 2018, we expanded our economic model to include BenefitsPlace, our transaction-oriented,
marketplace solution. We describe this strategy in more detail in “Business—Overview”. This shift
increases the focus on the transactions that occur on our platform. A key component of the success of
this strategy is the number of consumer lives on our platform. We believe this metric is more meaningful
to our business going forward, so we are discontinuing use of the metric of number of large employer and
carrier customers.
We have added a new operating metric, net benefit eligible lives, that we believe is highly correlated
to our subscription revenue and is the foundation of our transaction revenue opportunity.
Number of Large Employer and Carrier Customers
Since our initial public offering, we believed the number of large employer and carrier customers
was a key indicator of our market penetration, growth, and future revenue. As a result of the shift in our
economic model, we believe that the number of large employer and carrier customers will no longer be a
meaningful metric. Accordingly, we are discontinuing use of this metric after December 31, 2018.
We generally define a customer as an entity with an active software services contract as of the
measurement date. The following table sets forth the number of large employer and carrier customers for
the periods indicated:
Number of customers:
Large employer
Carrier
Net Benefit Eligible Lives
Year Ended December 31,
2018
2017
2016
1,024
57
920
54
833
53
We are focused on driving revenue growth from adding lives to our platform and driving incremental
transaction revenue. We believe the number of net benefit eligible lives is a key indicator of our market
penetration, growth and future revenue. We believe net benefit eligible lives is highly correlated to our
subscription revenue and is the foundation of our transaction revenue opportunity. We define a net
benefit eligible life as a carrier or employer enrollment subscription with standard contracting, plus their
estimated dependents, as of the measurement date. This definition excludes lives from other
subscription-related contracts.
December
31,
2018
September
30,
2018
June 30,
2018
March
31,
2018
As of
December
31,
2017
(in millions)
September
30,
2017
June 30,
2017
March
31,
2017
December
31,
2016
Net benefit
eligible lives
13.3
13.2
12.3
11.8
11.2
10.8
10.7
10.5
10.2
Software Services Revenue Retention Rate
We believe that our ability to retain our customers and expand the revenue they generate for us
over time is an important component of our growth strategy and reflects the long-term value of our
customer relationships. We measure our performance on this basis using a metric we refer to as our
software services revenue retention rate. We calculate this metric for a particular period by establishing
the group of our customers that had active contracts for a given period. We then calculate our software
54
services revenue retention rate by taking the amount of software services revenue we recognized for this
group in the subsequent comparable period (for which we are reporting the rate) and dividing it by the
software services revenue we recognized for the group in the prior period.
Our software services revenue retention rate exceeded 95% for the years ended December 31,
2018 and 2017. Because we adopted the revenue accounting rules prescribed by Topic 606 as of
January 1, 2016, we do not have revenue by customer for 2015 under Topic 606, which is required for the
calculation of this metric for 2016. When we recognized revenue in 2016 under Topic 605, our software
services revenue exceeded 95% for that year.
Adjusted EBITDA
Adjusted EBITDA represents our earnings before net interest and other expense, taxes, and
depreciation and amortization expense, adjusted to eliminate stock-based compensation and impairment
of goodwill and intangible assets and costs not core to our business. Adjusted EBITDA is not a measure
calculated in accordance with United States generally accepted accounting principles, or GAAP. Please
refer to “Selected Consolidated Financial Data—Adjusted EBITDA” in this report for a discussion of the
limitations of adjusted EBITDA and reconciliation of adjusted EBITDA to net loss, the most comparable
GAAP measurement, respectively, for 2018, 2017 and 2016.
Components of Operating Results
Revenue
We derive the majority of our revenue from software services fees, which consist primarily of
monthly subscription fees paid to us by our employer and carrier customers for access to, and usage of,
our cloud-based benefits software solutions for a specified contract term. Software services revenue also
includes transactional revenue from both insurance broker commissions from the sale of voluntary and
ancillary benefits policies to employees of our customers and from transaction revenue from life and
ancillary insurance carriers and specialty providers. We also derive revenue from professional services
fees, which primarily include fees related to the implementation of our customers onto our platform. Our
professional services typically include discovery, configuration and deployment, integration, testing, and
training.
The following table sets forth a breakdown of our revenue between software services and
professional services for the periods indicated (in thousands):
Software services
Professional services
Total revenue
2018
Year Ended December 31,
2017
2016
$
$
202,348 $
56,373
258,721 $
184,891 $
51,951
236,842 $
186,158
50,365
236,523
We recognize revenues when control of these services is transferred to customers, in an amount
that reflects the consideration we expect to be entitled to in exchange for those services. Taxes collected
from customers relating to services and remitted to governmental authorities are excluded from revenues.
We determine revenue recognition through the following steps:
Identification of each contract with a customer;
Identification of the performance obligations in the contract;
•
•
• Determination of the transaction price;
•
• Recognition of revenue when, or as, performance obligations are satisfied.
Allocation of the transaction price to the performance obligations in the contract; and
Software Services Revenues
Software services revenues primarily consist of monthly subscription fees paid to us by our
employer and insurance carrier customers for access to, and usage of, cloud-based benefits software
solutions for a specified contract term. Fees are generally charged based on the number of employees or
subscribers with access to the solution. Software services revenue also includes BenefitsPlace
55
transactional revenue, which is generated from the value of the policies or products enrolled in through
our marketplace.
Software services revenues are generally recognized on a ratable basis over the contract term
beginning on the date the software services are made available to the customer. Our software service
contracts are generally three years for both carrier and employer customers. BenefitsPlace carrier
revenue is generally recognized over the policy period of the enrolled products. Revenue from insurance
broker commissions and BenefitsPlace supplier transactions is recognized at the point when the orders for
the policies are received and transferred to the insurance carrier or supplier, and is reduced by estimates
for risk from premium collection, policy cancellation and termination.
Professional Services Revenues
Professional services revenues primarily consist of fees related to the implementation of software
products purchased by customers. Professional services typically include discovery, configuration and
deployment, integration, testing, and training. Fees from consulting services, support services and
training are also included in professional services revenue.
Revenue from implementation services with customers in the Carrier segment are generally
recognized over the contract term of the associated software services contract, including any extension
periods representing a material right. We utilize estimates of hours as a measure of progress to determine
revenue for certain types of arrangements.
Revenues from implementation services with customers in the Employer segment are generally
recognized as those services are performed.
Revenues from support and training fees are recognized over the service contract period.
Contracts with Multiple Performance Obligations
Certain of our contracts with customers contain multiple performance obligations. For these
contracts, the individual performance obligations are accounted for separately if they are distinct. The
transaction price is allocated to the separate performance obligations based on their relative standalone
selling prices. We determine the standalone selling prices based on its overall pricing objectives, taking
into consideration market conditions and other factors, including the value of its contracts, the software
services sold, customer size and complexity, and the number and types of users within the contracts.
Reclassifications
In conjunction with the adoption of the new revenue recognition accounting standard described
below, we reclassified revenue and associated cost of revenue from support and video services from
software services to professional services. This reclassification is reflected in all periods presented.
Adoption of Revenue Accounting Standard
We adopted the new accounting standard for revenue recognition, Topic 606, on January 1, 2018.
We applied the full retrospective transition method to all contracts that were not completed as of
January 1, 2016. As such, all periods presented are on the same basis of revenue accounting.
The adoption of Topic 606 significantly affected the accounting for revenue from certain professional
services in the Carrier segment and insurance broker commission revenue included in software services
revenue in the Employer segment. We describe the effects of adoption of Topic 606 in more detail in
Note 2 of our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Overhead Allocation
Expenses associated with our facilities, security, information technology, and depreciation and
amortization, are allocated between cost of revenue and operating expenses based on employee
headcount determined by the nature of work performed.
56
Cost of Revenue
Cost of revenue primarily consists of salaries and other personnel-related costs, including benefits,
bonuses, and stock-based compensation, for employees, whom we refer to as associates, providing
services to our customers and supporting our SaaS platform infrastructure. Additional expenses in cost of
revenue include co-location facility costs for our data centers, depreciation expense for computer
equipment directly associated with generating revenue, infrastructure maintenance costs, professional
fees, amortization expenses associated with capitalized software development costs, allocated overhead,
and other direct costs.
We expense cost of revenue associated with fulfilling performance obligations as we incur the costs.
Costs that relate directly to a customer contract that are not related to satisfying a performance obligation
are capitalized and amortized to cost of revenue expense over the estimate period of benefit of the
contract asset, which is generally five years.
We plan to continue to expand our capacity to support our growth, which will result in higher cost of
revenue in absolute dollars. However, we expect cost of revenue as a percentage of revenue to decline
and gross margins to increase primarily from the growth of the percentage of our revenue from large
employers and the realization of economies of scale driven by retention of our customer base.
Operating Expenses
Operating expenses consist of sales and marketing, research and development, and general and
administrative expenses. Salaries and personnel-related costs are the most significant component of
each of these expense categories. We expect to continue to hire new associates in these areas in order
to support our anticipated revenue growth; however, we expect to decrease our operating expenses, as a
percentage of revenue, if and as we achieve economies of scale.
Sales and marketing expense. Sales and marketing expense consists primarily of salaries and
other personnel-related costs, including benefits, bonuses, stock-based compensation, and commissions
for our sales and marketing associates. Costs to obtain a contract that are incremental, such as sales
commissions, are capitalized and amortized to expense over the estimated period of benefit of the asset,
which is generally four to five years. Additional expenses include advertising, lead generation,
promotional event programs, corporate communications, travel, and allocated overhead. For instance, our
most significant promotional event is One Place, which we hold annually. We expect our sales and
marketing expense to increase, in absolute dollars, in the foreseeable future as we further increase the
number of our sales and marketing professionals and expand our marketing activities in order to continue
to grow our business.
Research and development expense. Research and development expense consists primarily of
salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation
for our research and development associates. Additional expenses include costs related to the
development, quality assurance, and testing of new technology, and enhancement of our existing
platform technology, consulting, travel, and allocated overhead. We believe continuing to invest in
research and development efforts is essential to maintaining our competitive position. We expect our
research and development expense to decrease, as a percentage of revenue, if and as we achieve
economies of scale.
General and administrative expense. General and administrative expense consists primarily of
salaries and other personnel-related costs, including benefits, bonuses, and stock-based compensation
for administrative, finance and accounting, information systems, legal, and human resource associates.
Additional expenses include consulting and professional fees, insurance and other corporate expenses,
and travel. We expect our general and administrative expenses to increase in absolute terms as a result
of ongoing public company costs, including those associated with compliance with the Sarbanes-Oxley
Act and other regulations governing public companies, increased costs of directors’ and officers’ liability
insurance, and increased professional services expenses, particularly associated with the adoption of
new accounting standards.
57
Other Income and Expense
Other income and expense consists primarily of interest income and expense and gain (loss) on
disposal of property and equipment. Interest income represents interest received on our cash and cash
equivalents and marketable securities. Interest expense consists primarily of the interest incurred on
outstanding borrowings under our financing obligations, capital leases and credit facility.
Income Tax Expense
Income tax expense consists of U.S. federal and state income taxes. We incurred minimal income
tax expense for 2018, 2017, and 2016. Net operating loss carryforwards for federal income tax purposes
were approximately $287.7 million at December 31, 2018. State net operating loss carryforwards were
approximately $285.4 million at December 31, 2018. Federal and state net operating loss carryforwards
will expire at various dates beginning in 2022, if not utilized. Valuation allowances are recorded to reduce
deferred tax assets to the amount we believe is more likely than not to be realized.
Results of Operations
Consolidated Statements of Operations Data
The following table sets forth our consolidated statements of operations data for each of the periods
indicated (in thousands).
Revenue
Cost of revenue(1)
Gross profit
Operating expenses:
Sales and marketing(1)
Research and development(1)
General and administrative(1)
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Year Ended December 31,
2018
2017
2016
$
258,721 $
129,277
129,444
236,842 $
127,382
109,460
78,179
47,902
43,062
169,143
(39,699)
250
(7,471)
(5,685)
6
(12,900)
(52,599)
28
70,583
49,549
27,268
147,400
(37,940)
182
(7,450)
(4,931)
(140)
(12,339)
(50,279)
15
$
(52,627) $
(50,294) $
236,523
123,308
113,215
56,311
56,610
32,750
145,671
(32,456)
138
(6,826)
(1,095)
(90)
(7,873)
(40,329)
17
(40,346)
(1) Cost of revenue and operating expenses include stock-based compensation expense as follows (in
thousands):
Cost of revenue
Sales and marketing
Research and development
General and administrative
$
Year Ended December 31,
2017
2018
2016
5,164 $
6,764
5,510
11,430
2,508 $
4,953
2,990
5,686
2,799
3,212
4,533
7,544
58
The following table sets forth our consolidated statements of operations data as a percentage of
revenue for each of the periods indicated (as a percentage of revenue).
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing obligations
Interest expense on other borrowings
Other expense
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Our Segments
Year Ended December 31,
2018
2017
2016
100.0 %
50.0
50.0
100.0 %
53.8
46.2
100.0 %
52.1
47.9
30.2
18.5
16.6
65.4
(15.3)
0.1
(2.9)
(2.2)
-
(5.0)
(20.3)
-
(20.3) %
29.8
20.9
11.5
62.2
(16.0)
0.1
(3.1)
(2.1)
(0.1)
(5.2)
(21.2)
-
(21.2) %
23.8
23.9
13.8
61.6
(13.7)
0.1
(2.9)
(0.5)
-
(3.3)
(17.1)
-
(17.1) %
The following table sets forth segment results for revenue and gross profit for the periods indicated
(in thousands):
Revenue from external customers by segment:
Employer
Carrier
Total net revenue from external customers
Gross profit by segment
Employer
Carrier
Total gross profit by segment
2018
Year Ended December 31,
2017
2016
$
$
$
$
169,800 $
88,921
258,721 $
75,397 $
54,047
129,444 $
153,481 $
83,361
236,842 $
58,347 $
51,113
109,460 $
149,776
86,747
236,523
61,951
51,264
113,215
Comparison of Years Ended December 31, 2018 and 2017
Revenue
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Software services
Professional services
Total revenue
$ 202,348
56,373
$ 258,721
(in thousands)
78.2 % $ 184,891
51,951
21.8
100.0 % $ 236,842
78.1 % $ 17,457
4,422
21.9
100.0 % $ 21,879
9.4 %
8.5
9.2 %
Growth in software services revenue was primarily attributable to an increase in software
subscription revenue of $9.2 million as a result of increases in net benefit eligible lives at existing
customers (which we call volume increases), and also to existing customers purchasing additional
products, as well as to the net addition of new customers. Software subscription revenue included an
increase of $1.1 million related to a change in estimated revenue from an employer customer contract.
Additionally, transactional revenue from new insurance broker commissions and product enrollments in
2018 contributed an increase of $7.6 million.
59
The increase in professional services revenue was attributable to an increase in support revenue
from newly activated customers of $2.2 million, an increase in customer-specific enhancements of $2.2
million, and an increase in implementation revenue of $1.9 million. These increases were partially offset
by a reduction in non-recurring consulting revenue of $1.7 million.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 169,800
88,921
$ 258,721
(in thousands)
65.6 % $ 153,481
83,361
34.4
100.0 % $ 236,842
64.8 % $ 16,319
5,560
35.2
100.0 % $ 21,879
10.6 %
6.7
9.2 %
Growth in our employer revenue was primarily attributable to a $12.4 million increase in our
employer software services revenue, driven primarily by an increase in software subscription revenue of
$8.0 million as well as an increase in new insurance broker commissions from enrollments in 2018 of $3.2
million, and a decline in the sales returns and allowance of $1.1 million. Additionally, employer
professional services revenue increased $3.9 million primarily from a $2.2 million increase in support
revenue and a $3.3 million increase in implementation revenue, partially offset by decreases in non-
recurring consulting revenue of $1.7 million.
The increase in carrier revenue was primarily attributable to a $4.4 million increase in transactional
revenue from carrier and supplier contracts. Software services revenue also increased $1.0 million from
net volume and contractual rate increases. Additionally, an increase in professional services revenue of
$2.3 million from customer-specific enhancement revenue was partially offset by a decrease in
implementation professional services revenue of $1.4 million.
Cost of Revenue
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 129,277
(in thousands)
50.0 % $ 127,382
53.8 % $
1,895
1.5 %
The increase in cost of revenue in absolute terms was primarily attributable to an increase in
salaries and personnel-related costs to support an increased number of customers and volume, as well
as professional fees associated with third-party deliveries. This increase included an increase in stock-
based compensation of $2.7 million. Cost of revenue as a percentage of revenue has continued to
decrease as a result of economies of scale as our revenues have grown.
Gross Profit
Software services
Professional services
Gross profit
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 136,344
(6,900)
$ 129,444
(in thousands)
67.4 % $ 121,879
(12.2)
50.0 % $ 109,460
(12,419)
65.9 % $ 14,465
(23.9)
5,519
46.2 % $ 19,984
11.9 %
(44.4)
18.3 %
The increase in software services gross profit was driven by a $17.5 million, or 9.4%, increase in
software services revenue. This increase was partially offset by a $3.0 million, or 4.7%, increase in
software services cost of revenue. Software services cost of revenue included $3.0 million and $1.3
million of stock-based compensation expense for the years ended December 31, 2018 and 2017,
respectively, and $10.0 million and $9.6 million of depreciation and amortization for the years ended
December 31, 2018 and 2017, respectively.
60
The improvement in professional services gross loss was driven by a $4.4 million, or 8.5%, increase
in professional services revenue and a decrease in professional services cost of revenue of $1.1 million.
Professional services cost of revenue included $2.2 million and $1.2 million of stock-based compensation
expense for the years ended December 31, 2018 and 2017, respectively. In addition, professional
services cost of revenue included $1.9 million and $2.2 million in depreciation and amortization for the
years ended December 31, 2018 and 2017, respectively.
Segment Gross Profit
Employer
Carrier
Gross profit
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 75,397
54,047
$ 129,444
(in thousands)
44.4 % $ 58,347
60.8
51,113
50.0 % $ 109,460
38.0 % $ 17,050
61.3
2,934
46.2 % $ 19,984
29.2 %
5.7
18.3 %
The increase in employer gross profit was driven by a $16.3 million, or 10.6%, increase in employer
revenue and by a $0.7 million decrease in employer cost of revenue as we continued to achieve
economies of scale. The decrease in cost of revenue was primarily attributable to decreased third-party
costs. Our employer cost of revenue included $3.7 million and $1.9 million of stock-based compensation
expense for the years ended December 31, 2018 and 2017, respectively. In addition, our employer cost
of revenue included $7.4 million and $7.3 million of depreciation and amortization for the years ended
December 31, 2018 and 2017, respectively.
The carrier gross profit was comprised of $5.6 million increase in carrier revenue partially offset by a
$2.6 million increase in carrier cost of revenue. Our carrier cost of revenue included $1.5 million and $0.6
million of stock-based compensation expense for the years ended December 31, 2018 and 2017,
respectively. In addition, carrier cost of revenue included $4.5 million and $4.5 million in depreciation and
amortization for the years ended December 31, 2018 and 2017, respectively.
Operating Expenses
Year Ended December 31,
2018
Percentage of
Revenue
Amount
2017
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 78,179
$ 47,902
$ 43,062
(in thousands)
30.2 % $ 70,583
18.5 % $ 49,549
16.6 % $ 27,268
29.8 % $
20.9 % $
11.5 % $ 15,794
7,596
(1,647)
10.8 %
(3.3) %
57.9 %
The increase in sales and marketing expense was primarily attributable to a $7.4 million increase in
salaries and personnel-related costs due to hires of sales and marketing associates and higher variable
compensation. As discussed above in “Components of Operating Results-Operating Expenses”, certain
sales commissions are capitalized and amortized over a period generally equal to four to five years.
The decrease in research and development expense reflects continued cost efficiencies during
2018 as contracted services and professional fees decreased by $2.0 million. An additional decrease of
$1.3 million is attributable to an increase in the amount of software development costs capitalized. These
decreases were partially offset by an increase in salaries and personnel-related costs of $1.8 million
primarily attributable to an increase in stock-based compensation.
The increase in general and administrative expense included an increase in salary and personnel-
related costs of $8.9 million, including an increase in stock-based compensation of $5.8 million. The
remaining increase was primarily attributable to professional fees incurred in connection with
implementing new accounting standards and costs associated with preparing for our first year of
Sarbanes-Oxley 404(b) audit requirements, as well as transaction costs expensed, primarily in connection
with a secondary stock offering during the second quarter of 2018.
61
Stock-based Compensation
Cost of revenue and operating expenses include an aggregate of $28.9 million and $16.1 million of
stock-based compensation for the years ended December 31, 2018 and 2017, respectively, representing
an increase of $12.8 million, or a 79.5% increase. The increase is primarily attributable to expense from
performance-based awards granted in 2018 that are expected to vest.
Comparison of Years Ended December 31, 2017 and 2016
Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Software services
Professional services
Total revenue
$ 184,891
51,951
$ 236,842
(in thousands)
78.1 % $ 186,158
50,365
21.9
100.0 % $ 236,523
78.7 % $
21.3
100.0 % $
(1,267)
1,586
319
(0.7) %
3.1
0.1 %
Software services revenue decreased as an increase in software subscription revenue of $3.6
million was more than offset by decreases in insurance broker commissions of $3.4 million and non-
recurring software services of $0.9 million and an unfavorable increase in the sales returns and allowance
of $1.2 million.
The increase in professional services revenue was attributable to increases in consulting and
support services and customer-specific enhancements, partially offset by a decrease in implementation
revenue for newly activated customers.
Segment Revenue
Employer
Carrier
Total revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 153,481
83,361
$ 236,842
(in thousands)
64.8 % $ 149,776
86,747
35.2
100.0 % $ 236,523
63.3 % $
36.7
100.0 % $
3,705
(3,386)
319
2.5 %
(3.9)
0.1 %
Growth in our employer revenue was primarily attributable to a $3.8 million increase in our employer
professional services revenue driven by consulting, support services and customer-specific
enhancements. Employer software services was unchanged as increases in software subscriptions of
$5.2 million were offset by decreases in insurance broker commissions of $3.4 million and non-recurring
software services of $1.0 million and an unfavorable increase in sale returns and allowance of $1.3
million.
The decrease in carrier revenue was attributable to a $1.2 million decrease in software services
revenue and $2.2 million decrease professional services revenue. The decrease in software services
revenue was primarily attributable to a decrease in software subscription revenue of $1.6 million, partially
offset by an increase in transactional revenue from product enrollments of $0.8 million. The professional
services revenue decrease was primarily driven by a decrease in implementation revenue of $3.1 million,
partially offset by increases in customer-specific enhancements and consulting with new customers.
Cost of Revenue
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Cost of revenue
$ 127,382
(in thousands)
53.8 % $ 123,308
52.1 % $
4,074
3.3 %
The increase in cost of revenue in absolute terms was primarily attributable to an increase in
salaries and personnel-related costs to support an increased number of customers and volume, as well
62
as professional fees associated with third-party deliveries. This increase was partially offset by a
decrease in stock-based compensation of $0.3 million.
Gross Profit
Software services
Professional services
Gross profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 121,879
(12,419)
$ 109,460
(in thousands)
65.9 % $ 125,010
(23.9)
46.2 % $ 113,215
(11,795)
67.2 % $
(23.4)
47.9 % $
(3,131)
(624)
(3,755)
(2.5) %
5.3
(3.3) %
The decrease in software services gross profit was driven by a $1.3 million decrease in software
services revenue and a $1.9 million, or 3.0%, increase in software services cost of revenue. The increase
in cost of revenue was primarily attributable to an increase professional fees associated with third-party
deliveries. Software services cost of revenue included $1.3 million and $1.4 million of stock-based
compensation expense for the years ended December 31, 2017 and 2016, and $9.6 million and $8.3
million of depreciation and amortization for the years ended December 31, 2017 and 2016, respectively.
The increase in professional services gross loss was driven by a $1.6 million increase in
professional services revenue more than offset by a $2.2 million increase in professional services cost of
revenue. The increase in cost of revenue is primarily attributable to an increase in contracted services.
Professional services cost of revenue included $1.2 million and $1.4 million of stock-based compensation
expense for the years ended December 31, 2017 and 2016, respectively. In addition, professional
services cost of revenue included $2.2 million and $1.8 million in depreciation and amortization for the
years ended December 31, 2017 and 2016, respectively.
Segment Gross Profit
Employer
Carrier
Gross profit
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
$ 58,347
51,113
$ 109,460
(in thousands)
38.0 % $ 61,951
61.3
51,264
46.2 % $ 113,215
41.4 % $
59.1
47.9 % $
(3,604)
(151)
(3,755)
(5.8) %
(0.3)
(3.3) %
The decrease in employer gross profit was driven by a $3.7 million increase in employer revenue
more than offset by a $7.3 million, or 8.3%, increase in employer cost of revenue. The increase in cost of
revenue was primarily attributable to increased personnel-related costs to support our customer base as
well as increased depreciation and amortization, technology infrastructure costs and security-related
costs. Our employer cost of revenue included $1.9 million and $2.0 million of stock-based compensation
expense for the years ended December 31, 2017 and 2016, respectively. In addition, our employer cost
of revenue included $7.3 million and $6.0 million of depreciation and amortization for the years ended
December 31, 2017 and 2016, respectively.
The carrier gross profit was flat as a $3.4 million decrease in carrier revenue was accompanied by a
$3.2 million decrease in carrier cost of revenue. The decrease in cost of revenue was attributable to
operational efficiencies achieved in supporting our carrier customers and a decrease in customer-specific
development, as opposed to platform enhancements and development. Our carrier cost of revenue
included $0.6 million and $0.8 million of stock-based compensation expense for the years ended
December 31, 2017 and 2016, respectively. In addition, our carrier cost of revenue included $4.5 million
and $4.1 million in depreciation and amortization for the years ended December 31, 2017 and 2016,
respectively.
63
Operating Expenses
Year Ended December 31,
2017
Percentage of
Revenue
Amount
2016
Percentage of Period-to-Period Change
Percentage
Amount
Revenue
Amount
Sales and marketing
Research and development
General and administrative
$ 70,583
$ 49,549
$ 27,268
(in thousands)
29.8 % $ 56,311
20.9 % $ 56,610
11.5 % $ 32,750
23.8 % $ 14,272
23.9 % $
13.8 % $
(7,061)
(5,482)
25.3 %
(12.5) %
(16.7) %
The increase in sales and marketing expense was attributable to $9.6 million higher salaries and
personnel-related costs as we continued to invest in our direct sales channel. We increased the number
sales associates during 2017, including hiring our Executive Vice-President, Global Sales. This increase
included $1.7 million increase in stock-based compensation. Additionally, travel-related expenses
increased $2.6 million and marketing expense, professional fees, technology infrastructure costs and
other operating costs increased by $1.8 million.
The decrease in research and development expense reflects a $3.5 million decrease in salaries and
personnel-related costs as the result of a decrease in the number of associates engaged in research and
development activities. This decrease includes a $1.5 million decrease in stock-based compensation.
Additionally, costs related to contracted services decreased $3.2 million.
The decrease in general and administrative expense was partly attributable to a $2.9 million
decrease in salaries and personnel-related costs, which includes a decrease in stock-based
compensation expense of $1.9 million. Sales tax expense decreased $1.3 million related to resolving
liabilities in certain states. We experienced additional decreases in professional and consulting fees of
$1.0 million attributable to discontinuing the use of certain consultants during 2017 and a decrease in bad
debt expense of $0.6 million.
Critical Accounting Policies and Significant Judgments and Estimates
Our management’s discussion and analysis of our financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in accordance with GAAP.
The preparation of these consolidated financial statements requires us to make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the consolidated financial statements, and the reported amounts of revenue and
expenses. In accordance with GAAP, we base our estimates on historical experience and on various
other assumptions that we believe reasonable under the circumstances. Actual results might differ from
these estimates under different assumptions or conditions.
While our significant accounting policies are more fully described in Note 2 to our consolidated
financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following
accounting policies are critical to the process of making significant judgments and estimates in the
preparation of our consolidated financial statements.
Revenue Recognition and Deferred Revenue
We derive our revenue primarily from fees for software services and professional services sold to
employers and insurance carriers. Revenues are recognized when control of these services is
transferred to customers, in an amount that reflects the consideration we expect to be entitled to in
exchange for those services. We also generate transactional revenue from the value of the policies or
products enrolled through our marketplace.
We determine revenue recognition through the following steps:
Identification of each contract with a customer;
Identification of the performance obligations in the contract;
•
•
• Determination of the transaction price;
•
• Recognition of revenue when, or as, performance obligations are satisfied.
Allocation of the transaction price to the performance obligations in the contract; and
The following are some significant judgments estimates involved in the recognition of revenue:
64
• Determination of standalone selling prices based on our overall pricing objectives, taking
•
into consideration market conditions and other factors, including the value of our contracts,
the software services sold, customer size and complexity, and the number and types of
users under the contracts;
Allocation of transaction price to the separate performance obligations based on their
relative standalone selling prices;
Estimation of hours or lives as a measure of progress; and
•
• Reduction of revenue for risks from collectability, policy cancellation and termination.
Convertible Senior Notes
We calculated the fair value of the liability portion of the convertible senior notes using an implied
interest rate. The rate was estimated based on market data available for publicly traded, senior
unsecured corporate bonds issued by companies in the same industry and with similar maturity,
assuming no conversion option. Assumptions used in the estimate represent what market participants
would use in pricing the equity component, including market interest rates, credit standing, and yield
curves.
Accounts Receivable and Allowances for Doubtful Accounts and Returns
We state accounts receivable at realizable value, net of an allowance for doubtful accounts and
estimated returns. We maintain the allowance for doubtful accounts for estimated losses expected to
result from the inability of some customers to make payments as they become due. We base our
estimated allowance on our analysis of past due amounts and ongoing credit evaluations. Historically, our
actual collection experience has not varied significantly from our estimates, due primarily to our credit and
collection policies and the financial strength of our customers.
The allowances for returns are accounted for as reductions of revenue and are estimated based on
the Company’s periodic assessment of historical experience and trends. The Company considers factors
such as the time lag since the initiation of revenue recognition, historical reasons for adjustments, new
customer volume, complexity of billing arrangements, timing of software availability, and past due
customer billings.
Stock-Based Compensation
We currently issue restricted stock units under our stock plans. Stock-based awards granted to
associates, directors, and non-associate third parties are measured at fair value at each grant date. We
recognize stock-based compensation expense, net of forfeitures, ratably over the requisite service period
of the option award. Restricted stock unit awards generally vest 25% on each anniversary of the grant
date over 4 years, however we have granted awards that vest immediately as well as awards that vest
annually over 3 years and 5 years.
As part of our management incentive program, we granted performance restricted stock units, which
have vesting terms that are dependent upon the achievement of certain financial performance targets.
Compensation expense for performance restricted stock units, which are accounted for as equity awards,
is recognized over the requisite service period when it is probable that the award will vest. Significant
judgment is involved in assessing the probability of achieving performance measures.
We determined fair value for restricted stock unit awards based on the closing price of our common
stock on the date of grant or, if not a trading day, the trading day following the grant date.
Based upon the closing stock price of $45.72 on December 31, 2018, the aggregate intrinsic value
of outstanding options to purchase shares of our common stock as of December 31, 2018 was
$8.4 million, all of which was related to vested options. The aggregate intrinsic value of outstanding
restricted stock units that are expected to vest as of December 31, 2018 was $92.2 million, of which all
were unvested.
65
Liquidity and Capital Resources
Sources of Liquidity
As of December 31, 2018, our primary sources of liquidity were our cash and cash equivalents
totaling $190.9 million, $21.1 million in accounts receivables, net of allowance, and unused availability
under a revolving line of credit of $77.3 million, without taking into account the borrowing base limit. The
terms of our revolving line of credit are described in Note 8 of our consolidated financial statements
included elsewhere in this Annual Report on Form 10-K.
In December 2018, we issued $240 million aggregate principal amount of 1.25% convertible senior
notes due December 15, 2023, unless earlier purchased by us or converted by the holder pursuant to
their terms. Interest is payable semiannually in arrears on June 15 and December 15 of each year. Upon
conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a
combination, at our election. The convertible senior notes have an initial conversion rate of 18.8076
shares of common stock per $1,000 principal amount. This represents an initial effective conversion price
of approximately $53.17 per share of common stock, with an aggregate of 4,513,824 shares issuable
upon conversion. The terms of the convertible senior notes are described in Note 7 of our consolidated
financial statements included elsewhere in this Annual Report on Form 10-K.
In December 2018, we amended our revolving line of credit agreement. The amendment altered
definitions and amended sections of the agreement to allow for the convertible senior note financing.
Additionally, in March 2018, we amended our revolving line of credit agreement. The amendment altered
definitions to accommodate our adoption of Topic 606.
We are bound by customary affirmative and negative covenants in connection with the revolving line
of credit, including financial covenants related to liquidity and EBITDA. In the event of a default, the
lenders may declare all obligations immediately due and stop advancing money or extending credit under
the line of credit. The line of credit is collateralized by substantially all of our tangible and intangible
assets, including intellectual property and the equity of our subsidiaries. As of December 31, 2018, there
were no amounts outstanding or due under the revolving line of credit.
Our cash flows from operations has improved in recent years and turned positive for the year ended
December 31, 2018. We expect this trend to continue in at least the near term as we continue to achieve
economies of scale.
Based on our current level of operations and anticipated growth, we believe our future cash flows
from operating activities and existing cash balances will be sufficient to meet our cash requirements for at
least the next 12 months.
Going forward, we may access capital markets to raise additional equity or debt financing for
various business reasons, including required debt payments and acquisitions. The timing, term, size, and
pricing of any such financing will depend on investor interest and market conditions, and there can be no
assurance that we will be able to obtain any such financing on favorable terms or at all.
Operating and Capital Expenditure Requirements
We believe that our existing cash and cash equivalents balances, cash generated from operations,
and our ability to draw on the revolving line of credit will be sufficient to meet our anticipated cash
requirements through at least the next 12 months. Our future capital requirements will depend on many
factors, including our customer growth rate, subscription renewal activity, the timing and extent of
development efforts, the expansion of sales and marketing activities, the introduction of new and
enhanced services offerings, and the continuing market acceptance of our services. We might require
additional capital beyond our currently anticipated amounts. If our available cash and cash equivalents
balances are insufficient to satisfy our liquidity requirements, we may seek to sell equity or convertible
debt securities or enter into an additional credit facility. The sale of equity and convertible debt securities
may result in dilution to our stockholders and those securities may have rights senior to those of our
common shares. If we raise additional funds through the issuance of convertible debt securities, these
securities could contain covenants that would restrict our operations. Additional capital might not be
available on reasonable terms, or at all.
66
Contractual Obligations and Commitments
Our principal commitments consist of obligations under our outstanding credit facility, non-
cancelable leases for our office space and computer equipment and purchase commitments for our co-
location and other support services. The following table summarizes these contractual obligations at
December 31, 2018. Future events could cause actual payments to differ from these estimates.
Contractual Obligations
Payment due by period
Total
Less than 1
year
1-3 years 3-5 years
More than 5
years
(in thousands)
Long-term debt--Convertible senior notes
Long-term debt--Revolving line of
credit (1)
$ 240,000 $
-
- $
-
- $ 240,000 $
-
-
-
-
Operating lease obligations
Capital lease obligations
12,973
1,350
2,041
2,068
7,514
47,426
5,542
7,038
6,269
28,577
Financing obligations, build-to-suit leases
102,300
6,550
13,696
14,530
67,524
Financing obligations, other
Purchase commitments
Total
4,167
1,952
1,974
241
276
$ 407,142 $
276
-
-
15,670 $
24,749 $ 263,108 $ 103,615
-
-
(1) Repayment of the revolving line of credit is due at end of the term in 2020. Early repayment is
allowed. Interest is paid monthly.
In December 2018, we issued $240 million of convertible senior notes that pay interest at 1.25%
and mature December 2023. The terms of the notes are disclosed in more detail in Note 2 of our
consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Borrowing limit under our revolving line of credit agreement is $95.0 million. The agreement
terminates on February 20, 2020. Borrowing capacity under this agreement is subject to a borrowing
base limit that is a function of our monthly recurring revenue as adjusted to reflect lost customer revenue
during the previous three calendar months. Therefore, credit available under our line of credit may be less
than the $95.0 million borrowing limit. Advances under the revolving line of credit agreement bear interest
at the prime rate as published in the Wall Street Journal plus a margin based on the Company’s liquidity
that ranges between 0.75% and 1.25%. The Company is charged an unused line fee under this
arrangement at a rate based on its liquidity of 0.300% to 0.375% per year. Any outstanding principal is
due at the end of the term. Available credit was $77.3 million as of December 31, 2018.
In December 2016, we entered into a cancellable lease agreement to build additional office space
on our headquarters campus. In March 2018, our landlord extended certain terms of the agreement.
Under this agreement and extension, we may commence construction on or about April 1, 2019 for a
target lease commencement date of July 1, 2020. We can terminate the agreement prior to April 1, 2019
subject to reimbursing the lessor for reasonable pre-agreed out-of-pocket expenses. Annual rent
obligation for the first year is $4.4 million and increases 2% each subsequent year during the 15-year
lease term. We can renew the lease for five, one-year terms. The aggregate minimum lease payments
are approximately $75.8 million and are not reflected in the contractual obligations table above.
Off-Balance Sheet Arrangements
As of December 31, 2018, other than as disclosed in Note 7 and 16, we did not have any off-
balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K, such as the use of
unconsolidated subsidiaries, structured finance, or special purpose entities. We are not the primary
beneficiary of, nor do we have a controlling financial interest in, any variable interest entity. Accordingly,
we have not consolidated any variable interest entities.
67
Recent Accounting Pronouncements
In June 2016, the FASB ASU No. 2016-13, “Measurement of Credit Losses on Financial
Instruments.” The purpose of this ASU is to require a financial asset measured at amortized cost basis to
be presented at the net amount expected to be collected. Credit losses relating to available-for-sale debt
securities should be recorded through an allowance for credit losses. This ASU is effective for interim and
annual reporting periods beginning after December 15, 2019. We are currently evaluating the impact of
this guidance on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 “Leases (Topic 842)”. The amendments in
this update require lessees, among other things, to recognize lease assets and lease liabilities on the
balance sheet for those leases classified as operating leases under previous authoritative guidance. This
update also introduces new disclosure requirements for leasing arrangements and is effective for us
beginning January 1, 2019. We will apply Topic 842 without presenting comparative period financial
statements, thus will recognize a cumulative-effect adjustment to the opening balance of retained
earnings in 2019. We plan to utilize the following additional significant transition elections:
•
•
Elect the package of three practical expedients to not reassess:
o whether any expired or existing contracts are or contain a lease;
o
o
the classification of any expired or existing leases; and
the treatment of initial direct costs.
Adopt a policy to not separate lease and associated nonlease components for all classes of
assets. We will apply this policy to all existing leases on transition as well as new leases going
forward.
We are continuing to evaluate the effect of adoption of this standard on our consolidated financial
statements. We expect our consolidated financial statements to be significantly affected by the following:
•
•
•
Assets and related financing obligations for our existing build-to-suit lease arrangements will be
derecognized with a cumulative adjustment to retained earnings. These leases will be
transitioned to the new standard based on a proforma analysis of the lease balances as of the
transition date as if they had been a lease under ASC 840. Based on this analysis, the land
component of these leases will be combined with the remainder of the lease obligation. Currently,
this obligation is accounted for separately and recognized as part of facility expense. The
following impacts are expected on our consolidated financial statements:
o Operating expenses will increase as depreciation expense related to the buildings will
increase as a result of shortening the period of depreciation from the estimated life of the
asset to the expected term of the lease.
o
Interest expense will decrease as a result of a discount rate that is lower than the rate
required for build-to-suit accounting.
Lease liabilities and right-of-use, or ROU, assets related to existing operating lease obligations
(including lease and associated non-lease components) will recorded on the balance sheet.
Lease liabilities and ROU assets will be recorded related to payment obligations for nonlease
components (e.g. common area maintenance and equipment maintenance) associated with
existing capital lease components.
Total net cash flows will not be impacted by adoption of the new lease standard; however,
classification of some transactions are expected to move between operating, investing and financing
activities.
We are evaluating other accounting standards and exposure drafts that have been issued or
proposed by the FASB or other standards setting bodies that do not require adoption until a future date to
determine whether adoption will have a material impact on our consolidated financial statements.
68
Item 7A. Quantitative and Qualitative Disclosures About Risk.
Market risk is the risk of loss to future earnings, values or future cash flows that may result from
changes in the price of a financial instrument. The value of a financial instrument might change as a result
of changes in interest rates, exchange rates, commodity prices, equity prices and other market changes.
We do not use derivative financial instruments for speculative, hedging or trading purposes, although in
the future we might enter into exchange rate hedging arrangements to manage the risks described below.
Interest Rate Risk
We are exposed to market risk related to changes in interest rates. Borrowings under the revolving
line of credit agreement, which was entered into in February 2015 and subsequently amended, bear
interest at rates that are variable. Increases in the Prime Rate would increase the interest rate on
borrowings under the revolving line of credit.
Changes in interest rates may also impact gains or losses from the conversion of our outstanding
convertible senior notes. In December 2018, we issued $240 million in aggregate principal amount of our
1.25% convertible senior notes due 2023, or the Notes. Upon certain events and/or if certain conditions
are met, the Notes can be redeemed into cash, or converted into cash, shares or combination of cash
and shares. Upon conversion or redemption, we are required to record a gain or loss for the difference
between the fair value of the debt to be extinguished and its corresponding net carrying value. The fair
value of the debt to be extinguished depends on our then-current incremental borrowing rate. If our
incremental borrowing rate at the time of conversion is higher or lower than the implied interest rate of the
Notes, we will record a gain or loss in our consolidated statement of operations during the period in which
the Notes are converted. The implicit interest rate for the notes is 7.30%. An incremental borrowing rate
that is a hypothetical 100 basis points lower than the implicit interest rate upon conversion of $240 million
aggregate principal amount of the Notes would result in a loss of approximately $2.4 million.
Interest Rate Sensitivity
We are subject to interest rate risk in connection with borrowings under the revolving line of credit
agreement, which are subject to a variable interest rate. At December 31, 2018, there were no amounts
due under the agreement. Any debt we incur in the future may also bear interest at variable rates.
Inflation Risk
We do not believe that inflation has had a material effect on our business, financial condition, or
results of operations. We continue to monitor the impact of inflation in order to minimize its effects through
pricing strategies, productivity improvements and cost reductions. If our costs were to become subject to
significant inflationary pressures, we may not be able to fully offset such higher costs through price
increases. Our inability or failure to do so could harm our business, financial condition, and results of
operations.
Item 8. Financial Statements and Supplementary Data.
The information required by this Item is set forth in the Consolidated Financial Statements and
Notes thereto beginning at page F-1 of this Report.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosures.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our President and
Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness
69
of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period covered by this report.
In designing and evaluating our disclosure controls and procedures, management recognizes that
any disclosure controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure
controls and procedures must reflect the fact that there are resource constraints and that management is
required to apply its judgment in evaluating the benefits of possible controls and procedures relative to
their costs.
Based on their evaluation, our President and Chief Executive Officer and our Chief Financial Officer
concluded that as of December 31, 2018 our disclosure controls and procedures are designed to, and are
effective to, provide assurance at a reasonable level that the information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in SEC rules and forms, and that such information is accumulated and
communicated to our management, including our President and Chief Executive Officer and our Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosures as of December
31, 2018.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management, including our President and Chief Executive Officer and our Chief Financial
Officer, is responsible for establishing and maintaining adequate internal control over financial reporting
(as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). Internal control over financial
reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with U.S.
GAAP. Our internal control over financial reporting includes those policies and procedures that: (i) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary
to permit preparation of financial statements in accordance with U.S. GAAP, and that our receipts and
expenditures are being made only in accordance with authorizations of our management and directors;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of our assets that could have a material effect on the financial statements.
Under the supervision and with the participation of our management, including our President and
Chief Executive Officer and our Chief Financial Officer, we conducted an evaluation of the effectiveness
of our internal control over financial reporting as of December 31, 2018, based on the Internal Control—
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) (2013 Framework). Based on this evaluation under the 2013 Framework, our
President and Chief Executive Officer and our Chief Financial Officer have concluded that our internal
control over financial reporting was effective as of December 31, 2018.
Changes in Internal Control Over Financial Reporting
No change in internal control over financial reporting occurred during the most recent fiscal quarter
with respect to our operations, which has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
Attestation Report of Registered Public Accounting Firm
Our independent registered public accounting firm, Ernst & Young, LLP, has issued an attestation
report on the effectiveness of our internal controls over financial reporting as of December 31, 2018,
which appears on page F-3 of this Report.
Item 9B. Other Information.
None.
70
PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Information required by this Item concerning our directors is incorporated by reference from the
sections captioned “Election of Directors” and “Corporate Governance Matters” contained in our proxy
statement related to the 2019 Annual Meeting of Stockholders currently scheduled to be held on May 31,
2019 which we intend to file with the Securities and Exchange Commission within 120 days of the end of
our 2018 fiscal year pursuant to General Instruction G(3) of Form 10-K.
Our board of directors has determined that of the members of the Audit Committee, Messrs. Pelzer,
Swad and Dennerline are independent within the meaning of the Nasdaq Stock Market listing rules and
meet the additional test for independence for audit committee members imposed by Securities and
Exchange Commission regulation and the Nasdaq Stock Market listing rules. Our board has also
determined that Mr. Pelzer is an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of
Regulation S-K.
We have adopted a code of ethics relating to the conduct of our business by all of our employees,
officers, and directors, as well as a code of conduct specifically for our principal executive officer and
senior financial officers. Each of these policies is posted on our website, www.benefitfocus.com.
The information required by this Item concerning our executive officers is set forth at the end of
Part I of this Annual Report on Form 10-K.
The information required by this Item concerning compliance with Section 16(a) of the United States
Securities Exchange Act of 1934, as amended, is incorporated by reference from the section of the proxy
statement captioned “Section 16(a) Beneficial Ownership Reporting Compliance”.
Item 11. Executive Compensation.
The information required by this Item is incorporated by reference to the information under the
sections captioned “Executive Compensation,” “Director Compensation” and “Compensation Committee
Interlocks and Insider Participation” in the proxy statement.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.
The following table sets forth the indicated information as of December 31, 2018 with respect to our
equity compensation plans:
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
Weighted-average
exercise price of
outstanding
options, warrants
and rights
Number of securities
remaining available
for future issuance
under equity
compensation plans
- $
-
125,374
2,343,935 $
0.82
1,731,799
63,562 $
2,407,497 $
5.00
0.93
-
1,857,173
Plan Category
Equity compensation plans
approved by security holders
2016 Employee Stock
Purchase Plan
Amended and Restated 2012
Stock Plan
Amended and Restated 2000
Stock Option Plan
Total
Our equity compensation plans consist of the Benefitfocus, Inc. 2016 Employee Stock Purchase
Plan, Amended and Restated 2012 Stock Plan, and the Amended and Restated 2000 Stock Option Plan,
which were approved by our stockholders. We do not have any equity compensation plans or
arrangements that have not been approved by our stockholders.
71
The other information required by this Item is incorporated by reference to the information under the
section captioned “Security Ownership of Certain Beneficial Owners and Management” contained in the
proxy statement.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item is incorporated by reference to the information under the
section captioned “Certain Relationships and Related Party Transactions” and “Corporate Governance
Matters” in the proxy statement.
Item 14. Principal Accounting Fees and Services.
The information required by this Item is incorporated by reference to the information under the
section captioned “Audit Committee Report” in the proxy statement.
72
Item 15. Exhibits, Financial Statement Schedules.
(a) 1. Financial Statements.
PART IV
The following statements are filed as part of this Annual Report on Form 10-K:
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and
2016
Notes to Consolidated Financial Statements
2. Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
F-2
F-4
F-5
F-6
F-7
F-8
F-37
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 notes thereto.
(b) Exhibits.
Exhibit
Number
Exhibit Title
Form
File
Exhibit
Filing Date
Incorporated by Reference
(Unless Otherwise Indicated)
3.1
3.2
4.1
4.2
4.2.1
Restated Certificate of
Incorporation of Benefitfocus,
Inc.
Amended and Restated Bylaws
of Benefitfocus, Inc.
Specimen Certificate for
Common Stock.
Form of Second Amended and
Restated Investors’ Rights
Agreement, dated, 2013, by and
among Benefitfocus, Inc. and
certain stockholders named
therein.
First Amendment to Second
Amended and Restated
Investors’ Rights Agreement,
dated February 24, 2015, by and
among Benefitfocus, Inc. and
certain stockholders named
therein.
10-Q
—
3.1.3 November 12, 2013
8-K
—
3.2.1 September 19, 2016
S-1/A
333-190610
4.1
September 5, 2013
S-1/A
333-190610
4.3 September 16, 2013
10-K
—
4.3.1
February 27, 2015
73
4.3
4.4
10.1
10.2
10.3
10.4
10.5
10.6
10.6.1
10.7
10.8
10.9
10.10
10.10.1
10.11
Indenture of Benefitfocus, Inc.
and U.S. National Bank, as
Trustee, dated as of December
27, 2018.
Form of 1.25% Convertible
Senior Notes due 2023 (included
in Exhibit 4.3).
Form of Second Amended and
Restated Voting Agreement,
dated, 2013, by and among
Benefitfocus, Inc., and certain
stockholders named therein.
Amended and Restated 2000
Stock Option Plan.#
Form of Grant Notice and Stock
Option Agreement under the
Amended and Restated 2000
Stock Option Plan.#
Benefitfocus, Inc. Amended and
Restated 2012 Stock Plan.#
Form of Grant Notice and Stock
Option Agreement under the
2012 Stock Plan, as amended.#
Form of Management Incentive
Bonus Program.#
Benefitfocus, Inc. Management
Incentive Bonus Program.#
Employment Agreement, dated
January 19, 2007, by and
between Benefitfocus.com, Inc.
and Mason R. Holland, Jr.#
Form of Employment
Agreement.#
Form of Indemnification
Agreement.#
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated as
of January 1, 2009, as
amended.
Third Amendment to Lease
between Daniel Island Executive
Center, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Lease between Daniel Island
Executive Center, LLC and
Benefitfocus.com, Inc., dated as
of May 31, 2005.
8-K
8-K
—
—
4.1 December 28, 2018
4.1 December 28, 2018
S-1/A
333-190610
10.2
September 5, 2013
S-1
333-190610
10.3
August 14, 2013
S-1
333-190610
10.5
August 14, 2013
DEF 14A
—
—
April 25, 2014
S-1
333-190610
10.6
August 14, 2013
S-1
333-190610
10.7
August 14, 2013
DEF 14A
—
—
April 25, 2014
S-1
333-190610
10.8
August 14, 2013
S-1
333-190610
10.11
August 14, 2013
S-1
333-190610
10.12
August 14, 2013
S-1
333-190610
10.13
August 14, 2013
8-K
— 10.13.1 December 14, 2016
S-1
333-190610
10.14
August 14, 2013
74
8-K
— 10.14.1 December 14, 2016
S-1
333-190610
10.15
August 14, 2013
10-K
— 10.19
March 21, 2014
8-K
— 10.16.1 December 14, 2016
8-K
10-K
— 10.21
June 23, 2014
— 10.20
February 27, 2015
10-K
— 10.21
February 27, 2015
10.11.1
10.12
10.13
10.13.1
10.14
10.15
10.16
First Amendment to Lease
between Daniel Island Executive
Center, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Master Business Agreement
between Aetna Life Insurance
Company and Benefitfocus.com,
Inc., dated as of November 28,
2006.+
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 13, 2013.
Amendment to Lease between
DIEC II, LLC and
Benefitfocus.com, Inc., dated as
of December 12, 2016.
Form of Independent Director
Compensation Agreement.
Securities Purchase Agreement,
dated as of February 24, 2015,
by and among Benefitfocus, Inc.
and Mercer LLC.
Right of First Offer Agreement,
dated as of February 24, 2015,
by and among Benefitfocus, Inc.,
Mercer LLC, GS Capital
Partners VI Parallel, L.P., GS
Capital Partners VI GmbH & Co.
KG, GS Capital Partners VI
Fund, L.P., GS Capital Partners
VI Offshore Fund, L.P., Oak
Investment Partners XII, Limited
Partnership and certain
stockholders named therein.
75
8-K
— 10.22
April 8, 2015
10-K
— 10.18.1
March 15, 2018
10-Q
— 10.23
May 6, 2015
8-K
— 10.25
June 16, 2015
10-K
— 10.23
February 25, 2016
8-K
— 10.26
March 29, 2016
10.17
10.17.1
10.18
10.18.1
10.18.2
10.18.3
Employment Agreement, dated
June 25, 2014, by and between
Benefitfocus.com, Inc. and Ray
August.#
First Amendment to Employment
Agreement, dated November 20,
2017, by and between
Benefitfocus.com, Inc. and
Raymond A. August.#
Senior Secured Credit Facility,
dated as of February 20, 2015,
by and among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several lenders, Silicon
Valley Bank, as administrative
agent, issuing lender and
swingline lender and Comerica
Bank, as documentation agent.
First Amendment Agreement,
dated as of June 16, 2015, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several banks and other
financial institutions or entities
and Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
Second Amendment Agreement,
dated as of December 18, 2015,
by and among Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., several banks and other
financial institutions or entities
and Silicon Valley Bank, as
administrative agent and
collateral agent for lenders.
Third Amendment Agreement,
dated as of March 24, 2016, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc.,
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.
76
10.18.4
10.18.5
10.18.6
10.18.7
10.18.8
10.19
Fourth Amendment Agreement,
dated as of October 28, 2016, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.+
Fifth Amendment Agreement,
dated as of December 12, 2016,
by and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.
Sixth Amendment Agreement,
dated as of April 26, 2017, by
and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.+
Seventh Amendment
Agreement, dated as of March
29, 2018, by and among
Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.+
Eighth Amendment Agreement,
dated as of December 19, 2018,
by and among Benefitfocus, Inc.,
Benefitfocus.com, Inc. and
BenefitStore, Inc., several banks
and other financial institutions or
entities and Silicon Valley Bank,
as administrative agent and
collateral agent for lenders.++
Guarantee and Collateral
Agreement, dated as of
February 20, 2015, made by
Benefitfocus, Inc.,
Benefitfocus.com, Inc., Benefit
Informatics, Inc., BenefitStore,
Inc., and other grantors, in favor
of Silicon Valley Bank, as
administrative agent.
8-K
— 10.29
October 31, 2016
8-K
— 10.32 December 14, 2016
10-Q
— 10.20.6
April 28, 2017
8-K
— 10.19.7
April 2, 2018
Filed herewith
10-Q
— 10.24
May 6, 2015
77
10.20
10.21
10.22
10.23
10.24
10.25
21.1
23.1
31.1
31.2
32.1
Benefitfocus, Inc. 2016
Employee Stock Purchase
Plan.#
Waiver to Credit Agreement,
dated as of September 1, 2016,
by and among the Benefitfocus,
Inc., Benefitfocus.com, Inc. and
BenefitStore, Inc., the several
banks and other financial
institutions or entities party
thereto and Silicon Valley Bank,
as administration agent and
collateral agent for the lenders.
Lease between DIEC II, LLC
and Benefitfocus.com, Inc.,
dated as of December 12, 2016.
Employment Agreement, dated
June 30, 2017, by and between
Benefitfocus.com and Jonathon
Dussault.#
Form of Call Option Transaction
Notice.
Employment Agreement, dated
June 30, 2017, by and between
Benefitfocus.com and James
Restivo.#
List of Subsidiaries of Registrant.
Consent of Ernst & Young LLP.
Certification of the President and
Chief Executive Officer pursuant
to Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the Chief
Financial Officer pursuant to
Section 302 of the Sarbanes-
Oxley Act of 2002.
Certification of the President and
Chief Executive Officer, and the
Chief Financial Officer pursuant
to Section 906 of the Sarbanes-
Oxley Act of 2002.
101.INS XBRL Instance Document.
101.SCH XBRL Taxonomy Extension
Schema Document.
101.CAL XBRL Taxonomy Extension
Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension
Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension
Label Linkbase Document.
DEF14A
—
—
April 22, 2016
8-K
— 10.28
September 1, 2016
8-K
— 10.31 December 14, 2016
10-Q
— 10.29
August 8, 2017
8-K
—
10.1 December 28, 2018
Filed herewith
—
—
—
—
—
—
Filed herewith
Filed herewith
Filed herewith
—
—
Filed herewith
—
—
Filed herewith
—
—
—
—
—
—
—
—
—
—
Filed herewith
Filed herewith
Filed herewith
Filed herewith
Filed herewith
—
—
—
—
—
—
—
—
—
—
78
101.PRE XBRL Taxonomy Extension
—
—
—
Filed herewith
Presentation Linkbase
Document.
___________
# Management contract or compensatory plan.
+ The registrant has received confidential treatment with respect to portions of this exhibit. Those
portions have been omitted from the exhibit and filed separately with the SEC.
++
The registrant has requested confidential treatment with respect to portions of this exhibit. Those
portions have been omitted from the exhibit and filed separately with the SEC.
Item 16. Form 10-K Summary.
None.
79
SIGNATURES
Pursuant to the requirements of Sections 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: February 26, 2019
Benefitfocus, Inc.
By:
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Capacity
Date
/s/ Mason R. Holland, Jr.
Mason R. Holland, Jr.
/s/ Raymond A. August
Raymond A. August
/s/ Jonathon E. Dussault
Jonathon E. Dussault
/s/ Douglas A. Dennerline
Douglas A. Dennerline
/s/ Joseph P. DiSabato
Joseph P. DiSabato
/s/ A. Lanham Napier
A. Lanham Napier
/s/ Francis J. Pelzer V
Francis J. Pelzer V
/s/ Stephen M. Swad
Stephen M. Swad
/s/ Ana M. White
Ana M. White
Chairman of the Board of Directors
February 26, 2019
President and
Chief Executive Officer (principal
executive officer)
February 26, 2019
Chief Financial Officer (principal financial
and
accounting officer)
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
February 26, 2019
Director
Director
Director
Director
Director
Director
80
BENEFITFOCUS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and
2016
Notes to Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
Schedule II-Valuation and Qualifying Accounts
F-2
F-4
F-5
F-6
F-7
F-8
F-37
F-1
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Benefitfocus, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Benefitfocus, Inc. (the Company) as
of December 31, 2018 and 2017, the related consolidated statements of operations and comprehensive
loss, changes in stockholders' equity (deficit) and cash flows for each of the three years in the period
ended December 31, 2018, and the related notes and the financial statement schedule listed in the Index
at Item 15(a)(2) (collectively referred to as the “consolidated financial statements”). In our opinion, the
consolidated financial statements present fairly, in all material respects, the financial position of the
Company at December 31, 2018 and 2017, and the results of its operations and its cash flows for each of
the three years in the period ended December 31, 2018, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the Company's internal control over financial reporting as of December
31, 2018, based on criteria established in Internal Control-Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated
February 26, 2019 expressed an unqualified opinion thereon.
Adoption of New Accounting Standards
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for
accounting for revenue recognition from contracts with customers due to the adoption of ASU No. 2014-
09, Revenue from Contracts with Customers (Topic 606), as amended, using the full retrospective
adoption method.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audits. We are a public
accounting firm registered with the PCAOB and are required to be independent with respect to the
Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of
the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement, whether due to error or fraud. Our audits included performing procedures to
assess the risks of material misstatement of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the financial statements. We believe that our audits provide a
reasonable basis for our opinion.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2008.
Raleigh, North Carolina
February 26, 2019
F-2
Report of Independent Registered Public Accounting Firm
To the Stockholders and the Board of Directors of Benefitfocus, Inc.
Opinion on Internal Control Over Financial Reporting
We have audited Benefitfocus, Inc.’s internal control over financial reporting as of December 31, 2018,
based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (2013 Framework) (the COSO criteria). In our
opinion, Benefitfocus, Inc. (the Company) maintained, in all material respects, effective internal control
over financial reporting as of December 31, 2018, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States) (PCAOB), the consolidated balance sheets of Benefitfocus, Inc. as of December
31, 2018 and 2017, the related consolidated statements of operations and comprehensive loss, changes
in stockholders' equity (deficit) and cash flows for each of the three years in the period ended December
31, 2018, and the related notes and the financial statement schedule listed in the Index at Item 15(a)(2)
and our report dated February 26, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial reporting included in
the accompanying Management’s Annual Report on Internal Controls Over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules
and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the
risk that a material weakness exists, testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles. A company’s internal
control over financial reporting includes those policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 26, 2019
F-3
BENEFITFOCUS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Accounts receivable, net
Contract, prepaid and other current assets
Total current assets
Property and equipment, net
Intangible assets, net
Goodwill
Deferred contract costs and other non-current assets
Total assets
Liabilities and stockholders' deficit
Current liabilities:
Accounts payable
Accrued expenses
Accrued compensation and benefits
Deferred revenue, current portion
Revolving line of credit, current portion
Financing and capital lease obligations, current portion
Total current liabilities
Deferred revenue, net of current portion
Convertible senior notes
Revolving line of credit, net of current portion
Financing and capital lease obligations, net of current portion
Other non-current liabilities
Total liabilities
Commitments and contingencies
Stockholders' deficit:
$
$
$
As of December 31,
2018
2017
190,928 $
21,077
16,667
228,672
69,965
–
1,634
13,668
313,939 $
$
8,687
11,461
17,269
36,540
–
4,486
78,443
9,323
176,692
–
57,116
2,575
324,149
55,335
30,091
15,859
101,285
72,681
150
1,634
16,253
192,003
4,260
9,110
14,250
43,804
24,000
3,423
98,847
11,223
–
32,246
55,597
2,809
200,722
Preferred stock, par value $0.001, 5,000,000 shares authorized,
no shares issued and outstanding at December 31, 2018
and December 31, 2017
Common stock, par value $0.001, 50,000,000 shares authorized,
32,017,773 and 31,307,989 shares issued and outstanding
at December 31, 2018 and December 31, 2017, respectively
Additional paid-in capital
Accumulated deficit
Total stockholders' deficit
Total liabilities and stockholders' deficit
$
-
-
32
403,631
(413,873)
(10,210)
313,939
$
31
352,496
(361,246)
(8,719)
192,003
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-4
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(in thousands, except share and per share data)
Revenue
Cost of revenue
Gross profit
Operating expenses:
Sales and marketing
Research and development
General and administrative
Total operating expenses
Loss from operations
Other income (expense):
Interest income
Interest expense on building lease financing
obligations
Interest expense on other borrowings
Other income (expense)
Total other expense, net
Loss before income taxes
Income tax expense
Net loss
Comprehensive loss
Net loss per common share:
Basic and diluted
Year Ended December 31,
2018
2017
2016
$
$
258,721
129,277
129,444
$
236,842
127,382
109,460
78,179
47,902
43,062
169,143
(39,699)
70,583
49,549
27,268
147,400
(37,940)
236,523
123,308
113,215
56,311
56,610
32,750
145,671
(32,456)
250
182
138
(7,471)
(5,685)
6
(12,900)
(52,599)
28
(52,627)
(52,627)
$
$
(7,450)
(4,931)
(140)
(12,339)
(50,279)
15
(50,294)
(50,294)
$
$
(6,826)
(1,095)
(90)
(7,873)
(40,329)
17
(40,346)
(40,346)
(1.66)
$
(1.62)
$
(1.36)
$
$
$
Weighted-average common shares outstanding:
Basic and diluted
31,756,415
31,052,378
29,589,857
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-5
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(in thousands, except share and per share data)
Common Stock,
$0.001 Par Value
Additional
Paid-in
Total
Accumulated Stockholders'
Balance, December 31, 2015 (as previously
reported)
Cumulative effect adjustment from adoption
of revenue recognition standard
Balance, January 1, 2016
Exercise of stock options
Issuance of common stock upon
vesting of restricted stock units,
net of shares surrendered for
taxes
Stock-based compensation expense
Net loss
Balance, December 31, 2016
Cumulative effect adjustment from
adoption of new accounting standard
Exercise of stock options
Issuance of common stock upon
vesting of restricted stock units
Issuance of common stock under
Employee Stock Purchase Plan,
or ESPP
Stock-based compensation expense
Net loss
Balance, December 31, 2017
Exercise of stock options
Issuance of common stock upon
vesting of restricted stock units
Issuance of common stock under
Employee Stock Purchase Plan,
or ESPP
Purchase of convertible note capped call
hedge
Equity component of convertible notes
Stock-based compensation expense
Net loss
Balance, December 31, 2018
Shares
Par Value Capital
Deficit
Equity
(Deficit)
29,194,332 $
29 $ 310,304 $
(328,342) $
(18,009)
–
29,194,332 $
944,706
–
(2,805)
29 $ 307,499 $
6,869
1
58,127
(270,215) $
–
55,322
37,313
6,870
289,976
–
–
30,429,014 $
–
–
–
(202)
18,088
–
30 $ 332,254 $
–
–
(40,346)
(310,561) $
(202)
18,088
(40,346)
21,723
–
463,870
406,936
–
1
–
391
3,457
(391)
–
–
3,458
–
–
–
8,169
–
–
31,307,989 $
29,908
–
–
–
257
16,137
–
31 $ 352,496 $
186
–
–
–
(50,294)
(361,246) $
–
257
16,137
(50,294)
(8,719)
186
663,419
1
(1)
–
–
16,457
–
526
–
526
–
–
–
–
32,017,773 $
–
–
–
–
(33,024)
56,950
26,498
–
32 $ 403,631 $
–
–
–
(52,627)
(413,873) $
(33,024)
56,950
26,498
(52,627)
(10,210)
The accompanying notes are an integral part of the Consolidated Financial Statements.
F-6
BENEFITFOCUS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
2017
2018
2016
$
(52,627)
$
(50,294)
$
(40,346)
Cash flows from operating activities
Net loss
Adjustments to reconcile net loss to net cash and cash equivalents
used in operating activities:
Depreciation and amortization
Stock-based compensation expense
Interest accrual on financing obligations
Loss on disposal or impairment of property and equipment
Provision for doubtful accounts
Changes in operating assets and liabilities:
Accounts receivable, net
Accrued interest on short-term investments
Contract, prepaid and other current assets
Deferred costs and other non-current assets
Accounts payable and accrued expenses
Accrued compensation and benefits
Deferred revenue
Other non-current liabilities
Net cash and cash equivalents provided by (used in) operating activities
Cash flows from investing activities
Purchases of short-term investments held to maturity
Proceeds from short-term investments held to maturity
Purchases of property and equipment
Net cash and cash equivalents (used in) provided by investing activities
Cash flows from financing activities
Draws on revolving line of credit
Payments on revolving line of credit
Proceeds from issuance of convertible notes
Payments of debt issuance costs and deferred financing costs
Purchase of convertible note capped call hedge
Proceeds from exercises of stock options and ESPP
Remittance of taxes upon vesting of restricted stock units
Payments on financing and capital lease obligations
Net cash and cash equivalents provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
$
Supplemental disclosure of non-cash investing and financing activities
Property and equipment purchases in accounts
payable and accrued expenses
Property and equipment purchased with financing
and capital lease obligations
Post contract support purchased with financing obligations
Debt issuance costs included in accounts payable and accrued
expenses
Supplemental disclosure of cash flow information
Income taxes paid
Interest paid
$
$
$
$
$
$
15,815
28,868
7,521
7
364
8,650
–
(570)
3,137
6,566
649
(9,165)
(234)
8,981
–
–
(8,290)
(8,290)
115,000
(171,246)
240,000
(6,000)
(33,024)
712
–
(10,540)
134,902
135,593
55,335
190,928
244
4,810
790
358
28
11,884
$
$
$
$
$
$
$
15,906
16,137
7,500
157
75
2,800
7
4,519
5,538
(3,015)
(3,097)
(1,922)
(248)
(5,937)
–
2,000
(8,279)
(6,279)
105,000
(89,000)
–
–
–
3,715
–
(9,017)
10,698
(1,518)
56,853
55,335
$
13,073
18,088
6,827
141
667
(3,936)
220
(6,716)
3,816
(859)
(3,337)
(12,537)
2,073
(22,826)
(2,004)
40,225
(12,705)
25,516
84,000
(74,000)
–
(379)
–
6,870
(202)
(10,200)
6,089
8,779
48,074
56,853
389 $
699
- $
- $
- $
14 $
28,032
1,048
-
7
10,911 $
6,655
The accompanying notes are an integral part of the Consolidated Financial Statements
F-7
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
1. Organization and Description of Business
Benefitfocus, Inc. (the “Company”) provides a leading cloud-based benefits management platform
for consumers, employers, insurance carriers, suppliers and brokers that is designed to simplify how
organizations and individuals transact benefits. The financial statements of the Company include the
financial position and operations of its wholly owned subsidiaries, Benefitfocus.com, Inc. and
BenefitStore, Inc.
2. Summary of Significant Accounting Policies
Principles of Consolidation
These consolidated financial statements have been prepared in accordance with U.S. generally
accepted accounting principles (“GAAP”). The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries. All intercompany accounts and transactions have been
eliminated in consolidation. The Company is not the primary beneficiary of, nor does it have a controlling
financial interest in, any variable interest entity. Accordingly, the Company has not consolidated any
variable interest entity.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires the Company to make
estimates and assumptions that affect the reported amounts in the consolidated financial statements and
accompanying notes. Such estimates include revenue recognition and related reserves, allowances for
doubtful accounts and returns, valuations of deferred income taxes, long-lived assets, warrants,
capitalizable software development costs and the related amortization, stock-based compensation, the
determination of the useful lives of assets, and the impairment assessment of acquired intangibles and
goodwill. Determination of these transactions and account balances are based on the Company’s
estimates and judgments. These estimates are based on the Company’s knowledge of current events
and actions it may undertake in the future as well as on various other assumptions that it believes to be
reasonable. Actual results could differ materially from these estimates.
Revenue and Deferred Revenue
The Company derives its revenues primarily from fees for software services and professional
services sold to employers and insurance carriers. Revenues are recognized when control of these
services is transferred to customers, in an amount that reflects the consideration the Company expects to
be entitled to in exchange for those services. Taxes collected from customers relating to services and
remitted to governmental authorities are excluded from revenues.
The Company determines revenue recognition through the following steps:
Identification of each contract with a customer;
Identification of the performance obligations in the contract;
•
•
• Determination of the transaction price;
•
• Recognition of revenue when, or as, performance obligations are satisfied.
Allocation of the transaction price to the performance obligations in the contract; and
Software Services Revenues
Software services revenues primarily consist of monthly subscription fees paid to the Company by
its employer and insurance carrier customers for access to, and usage of, cloud-based benefits software
solutions for a specified contract term. Fees are generally charged based on the number of employees or
F-8
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
subscribers with access to the solution. Software services revenue also includes certain other revenue
which is generated from the value of policies or products enrolled in through the Company’s marketplace.
Software services revenues are generally recognized on a ratable basis over the contract term
beginning on the date the software services are made available to the customer. The Company’s
software service contracts are generally three years for both carrier and employer customers. Revenue
from insurance broker commissions and supplier transactions is recognized at a point in time when the
orders for the policies are received and transferred to the insurance carrier or supplier, and is reduced by
estimates for risks from collectability, policy cancellation and termination.
Professional Services Revenues
Professional services revenues primarily consist of fees related to the implementation of software
products purchased by customers. Professional services typically include discovery, configuration and
deployment, integration, testing, and training. Fees from consulting services, support services and
training are also included in professional services revenue.
Revenue from implementation services with customers in the Carrier segment are generally
recognized over the contract term of the associated software services contract, including any extension
periods representing a material right. In certain arrangements, the Company utilizes estimates of hours as
a measure of progress to determine revenue.
Revenues from implementation services with customers in the Employer segment are generally
recognized as those services are performed.
Revenues from support and training fees are recognized over the service period.
Contracts with Multiple Performance Obligations
Certain of the Company’s contracts with customers contain multiple performance obligations. For
these contracts, the individual performance obligations are accounted for separately if they are distinct.
The Company allocates the transaction price to the separate performance obligations based on their
relative standalone selling prices. The Company determines the standalone selling prices based on its
overall pricing objectives, taking into consideration market conditions and other factors, including the
value of its contracts, the software services sold, customer size and complexity, and the number and
types of users under the contracts.
Practical Expedients Elected
In addition to practical expedients disclosed elsewhere in the notes to consolidated financial
statements, the Company has elected to use the practical expedient not to adjust the promised amount of
consideration for the effects of a significant financing component for contracts in which the period
between transferring a service to a customer and when the customer pays for that service is one year or
less.
Contract Costs
The Company capitalizes costs to obtain contracts that are considered incremental and recoverable,
such as sales commissions. Payments of sales commissions generally include multiple payments. The
Company capitalizes only those payments made within an insignificant time from the contract inception,
typically three months or less. Subsequent payments are expensed as incurred. The capitalized costs
are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is
generally four to five years. The Company has elected to use the practical expedient to expense the costs
to obtain a contract when the amortization period is less than one year. The balance of deferred costs
related to obtaining contracts included in deferred contract costs and other non-current assets was
$7,506 and $7,376 as of December 31, 2018 and 2017, respectively. Sales and marketing expense
F-9
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
includes $4,217, $4,488 and $4,348 of amortization for the years ended December 31, 2018, 2017 and
2016, respectively.
The Company capitalizes contract fulfillment costs directly associated with customer contracts that
are not related to satisfying performance obligations. The costs are amortized to cost of revenue expense
over the estimated period of benefit, which is generally five years. The balance of deferred fulfillment
costs included in deferred contract costs and other non-current assets was $5,235 and $8,060 as of
December 31, 2018 and 2017, respectively. Cost of revenue expense includes $3,480, $3,525 and
$3,187 of amortization for the years ended December 31, 2018, 2017 and 2016, respectively.
Cost of Revenue
Cost of revenue primarily consists of employee compensation, professional services, data center
co-location costs, networking expenses, depreciation expense for computer equipment directly
associated with generating revenue, amortization expense for capitalized software development costs,
and infrastructure maintenance costs. In addition, the Company allocates a portion of overhead, such as
facilities and security costs, additional depreciation and amortization expense, and employee benefit
costs, to cost of revenue based on headcount.
Cash and Cash Equivalents
Cash and cash equivalents consist of bank checking accounts and money market accounts. The
Company considers all highly liquid investments with original maturities of three months or less at the time
of purchase to be cash equivalents.
Marketable Securities
Marketable securities consist of short-term investments in corporate bonds, commercial paper, and
various U.S. government backed securities. To reflect its intention, the Company classifies its marketable
securities as held-to-maturity at the time of purchase. As a result, the marketable securities are recorded
at amortized cost and any gains or losses realized upon maturity are reported in other expense, net in the
consolidated statements of operations and comprehensive loss.
Concentrations of Credit Risk
The Company’s financial instruments that are exposed to concentrations of credit risk consist
primarily of cash equivalents, marketable securities and accounts receivable. All of the Company’s cash
and cash equivalents are held at financial institutions that management believes to be of high credit
quality. The bank deposits of the Company might, at times, exceed federally insured limits and are
generally uninsured and uncollateralized. The Company has not experienced any losses on cash and
cash equivalents to date.
To manage credit risk related to marketable securities, the Company invests in various types of
highly rated corporate bonds, commercial paper, and various U.S. government backed securities with
maturities of less than two years. The weighted average maturity of the portfolio of investments must not
exceed nine months, per the Company’s investment policy.
To manage accounts receivable risk, the Company evaluates the creditworthiness of its customers
and maintains an allowance for doubtful accounts. Accounts receivable were unsecured and were derived
from revenue earned from customers located in the United States. Accounts receivable from one
customer represented approximately 12% of the total accounts receivable at December 31, 2017, and
approximately 13%, 11% and 12% of total revenue for the year ended December 31, 2018, 2017 and
2016, respectively. The revenue is attributable to the Company’s Employer segment.
F-10
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Accounts Receivable and Allowance for Doubtful Accounts and Returns
Accounts receivable are stated at realizable value, net of allowances for doubtful accounts and
estimated returns. The Company utilizes the allowance method to provide for doubtful accounts based on
management’s evaluation of the collectability of amounts due, and other relevant factors. Bad debt
expense is recorded in general and administrative expense on the consolidated statements of operations
and comprehensive loss. The Company’s estimate is based on historical collection experience and a
review of the current status of accounts receivable. Historically, actual write-offs for uncollectible accounts
have not significantly differed from the Company’s estimates. The Company removes recorded
receivables and the associated allowances when they are deemed permanently uncollectible. However,
higher than expected bad debts may result in future write-offs that are greater than the Company’s
estimates. The allowance for doubtful accounts was $392 and $654 as of December 31, 2018 and 2017,
respectively.
The allowances for returns are accounted for as reductions of revenue and are estimated based on
the Company’s periodic assessment of historical experience and trends. The Company considers factors
such as the time lag since the initiation of revenue recognition, historical reasons for adjustments, new
customer volume, delivery issues or delays, and past due customer billings. The allowance for returns
was $3,191 and $2,877 as of December 31, 2018 and 2017, respectively.
Property and Equipment and Capitalized Software Development Costs
Property and equipment, including capitalized software development costs, are stated at cost less
accumulated depreciation and amortization. Expenditures for major additions and improvements are
capitalized. Depreciation and amortization are recognized over the estimated useful lives of the related
assets using the straight-line method.
The estimated useful lives for significant property and equipment categories are generally as
follows:
Buildings
Computers and related equipment
Purchased software and licenses
Developed software
Furniture and fixtures
Leasehold improvements
Other equipment
Vehicles
30 years
3-5 years
1-7 years
3 years
7 years
Lesser of estimated useful life of asset or lease term
5-12 years
5 years
Useful lives of significant assets are periodically reviewed and adjusted prospectively to reflect the
Company’s current estimates of the respective assets’ expected utility. Costs associated with
maintenance and repairs are expensed as incurred.
F-11
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The Company capitalizes certain costs related to its software developed or obtained for internal use.
Costs related to preliminary project activities and post-implementation activities are expensed as incurred.
Internal and external costs incurred during the application development stage, including upgrades and
enhancements representing modifications that will result in significant additional functionality, are
capitalized. Software maintenance and training costs are expensed as incurred. Capitalized costs are
recorded as part of property and equipment and are amortized on a straight-line basis over the software’s
estimated useful life which is three years. The Company evaluates these assets for impairment whenever
events or changes in circumstances occur that could impact the recoverability of these assets.
Identifiable Intangible Assets
Identifiable intangible assets with finite lives are recorded at their fair values at the date of
acquisition and are amortized on a straight-line basis over their respective estimated useful lives, which is
the period over which the asset is expected to contribute directly or indirectly to future cash flows.
Impairment of Long-Lived Assets and Goodwill
The Company reviews long-lived assets and definite-lived intangible assets for impairment
whenever events or changes in circumstances indicate the carrying amount of an asset might not be
recoverable. Recoverability of the long-lived asset is measured by a comparison of the carrying amount of
the asset or asset group to future undiscounted net cash flows expected to be generated. If such assets
are not recoverable, the impairment to be recognized, if any, is measured as the amount by which the
carrying amount of the assets exceeds the estimated fair value (discounted cash flow) of the assets or
asset group. Assets held for sale are reported at the lower of the carrying amount or fair value, less costs
to sell.
Goodwill represents the excess of the aggregate of the fair value of consideration transferred in a
business combination over the fair value of assets acquired, net of liabilities assumed. Goodwill is not
amortized; rather, goodwill is tested for impairment at the reporting unit level as of October 31 of each
year, or more frequently if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying value.
The Company performs a qualitative assessment to determine whether it is more likely than not that
the fair value of a reporting unit is less than its carrying value before testing goodwill for impairment for
each reporting unit. The reporting units are determined by the components of the Company’s operating
segments that constitute a business for which both (1) discrete financial information is available and
(2) segment management regularly reviews the operating results of that component. If it is more likely
than not that the fair value of a reporting unit is less than its carrying value, the Company performs the
impairment test by applying a fair-value-based test. The Company compares the fair value of a reporting
unit to its carrying value. If the carrying value of the net assets assigned to the reporting unit exceeds the
fair value of our reporting unit, an impairment loss is recorded equal to the difference.
The Company has identified two reporting units, Employer and Carrier. To determine the fair value
of the Company’s reporting units, the Company has used a discounted cash flow analysis, which requires
significant assumptions and estimates about future operations. Significant judgments inherent in this
analysis include the determination of an appropriate discount rate, estimated terminal value and the
amount and timing of expected future cash flows. The Company may also determine fair value of its
reporting units using a market approach by applying multiples of earnings of peer companies to its
operating results.
F-12
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Debt Issuance Costs
Debt issuance costs related to the convertible senior note financing have been recorded as a
reduction of the carrying amount of the debt and are amortized to interest expense using the effective
interest method.
Debt issuance costs related to the revolving line of credit have been recorded in other non-current
assets and are amortized to interest expense over the remaining life of the agreement.
Financing Obligations
In its build-to-suit lease arrangements where the Company is involved in the construction of its
buildings, the Company is deemed the owner for accounting purposes during the construction period. The
Company records an asset for the amount of the total project costs in Property and Equipment, net and
the related financing obligation in Financing and Capital Lease Obligations on the Consolidated Balance
Sheet. Once construction is complete, the Company determines if the asset qualifies for sale-leaseback
accounting treatment. If the arrangement does not qualify for sale-lease back treatment, the Company
continues to reduce the obligation over the lease term as payments are made and depreciates the asset
over its useful life. The Company does not report rent expense for the portion of the rent payment
determined to be related to the assets that it owns for accounting purposes. Rather, this portion of the
rent payment under the lease is recognized as a reduction of the financing obligation and as interest
expense.
Financing obligations also include liabilities for the purchase of software licenses.
Advertising
The Company expenses advertising costs as they are incurred. Direct advertising costs for the
years ended December 31, 2018, 2017 and 2016 were $391, $168 and $635, respectively.
Comprehensive Loss
The Company’s net loss equals comprehensive loss for all periods presented.
Stock-Based Employee Compensation
Stock-based employee compensation is measured based on the grant-date fair value of the awards
and recognized in the Consolidated Statements of Operations and Comprehensive Loss over the period
during which the award holder is required to perform services in exchange for the award, which is the
vesting period. Compensation expense is recognized over the vesting period of the applicable award
using the straight-line method. Compensation expense related to performance-based restricted stock
units, which are accounted for as equity awards, is recognized when it is probable that the performance
measure will be met. Compensation costs related to restricted stock units (“RSUs”) is based on the
market price on the grant date. The Company uses the Black-Scholes option pricing model for estimating
the fair value of stock options. The use of the option valuation model requires the input of subjective
assumptions, including the expected life of the option and the expected stock price volatility. Additionally,
prior to January 1, 2017, the recognition of stock-based compensation expense required the estimation of
the number of options and RSUs that will ultimately vest and the number of options and RSUs that will
ultimately be forfeited. Starting January 1, 2017, the Company recognizes the effect of forfeitures as they
occur. The recognition of stock-based compensation expense associated with performance-based
restricted stock units requires the estimation of the probability of achieving performance measures.
The Company adopted the guidance in Accounting Standards Update ("ASU") 2016-09,
“Compensation - Stock Compensation (Topic 718) - Improvements to Employee Share-Based Payment
Accounting,” on January 1, 2017. Under this ASU, entities are permitted to make an accounting policy
election to either estimate forfeitures on share-based payment awards, as previously required, or to
recognize forfeitures as they occur. The Company has elected to recognize forfeitures as they occur and
F-13
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
the impact of that change in accounting policy has been recorded as a $391 cumulative effect adjustment
to its accumulated deficit as of January 1, 2017.
Income Taxes
The Company uses the asset and liability method for income tax accounting. This method requires
the recognition of deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the financial reporting and tax basis of assets and liabilities, as well as for
operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using the tax
rates that are expected to apply to taxable income for the years in which those tax assets and liabilities
are expected to be realized or settled. Valuation allowances are recorded to reduce deferred tax assets to
the amount the Company believes is more likely than not to be realized. The tax benefits of uncertain tax
positions are recognized only when the Company believes it is more likely than not that the tax position
will be upheld on examination by the taxing authorities based on the merits of the position. The Company
recognizes interest and penalties, if any, related to unrecognized income tax benefits in income tax
expense. Income tax effects related to settlements of share-based payment awards are reported in
earnings as an increase or decrease to income tax expense (benefit), net. Additionally, income tax-
related cash flows resulting from share-based payments are reported as operating activities in the
statement of cash flows.
Basic and Diluted Net Loss per Common Share
Basic net loss per share attributable to common stockholders is computed by dividing the net loss
attributable to common stockholders by the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per share is computed by giving effect to all potential
shares of common stock, including outstanding stock options, outstanding warrants, common stock
related to unvested restricted stock units and convertible senior notes to the extent dilutive, and common
stock issuable pursuant to the ESPP. Basic and diluted net loss per share was the same for each period
presented, as the inclusion of all potential common shares outstanding would have been anti-dilutive.
Recent Accounting Pronouncements
Recently Adopted Accounting Standards
Goodwill Impairment
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards
Update ("ASU") No. 2017-04, "Simplifying the Test for Goodwill Impairment." The ASU eliminates Step 2
from the goodwill impairment test and an entity should recognize an impairment charge for the amount by
which the carrying amount of goodwill exceeds the reporting unit's fair value, not to exceed the carrying
amount of goodwill. The Company adopted this guidance for its goodwill impairment test performed as of
October 31, 2018. Adoption did not have any impact on the Company’s consolidated financial
statements.
Cloud Computing Arrangements
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-15, “Intangibles -
Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Implementation
Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.” The ASU allows
companies to capitalize implementation costs incurred in a hosting arrangement that is a service contract
over the term of the arrangement, including periods covered by renewal options that are reasonably
certain to be exercised. The Company early adopted this standard on a prospective basis in the quarter
ended September 30, 2018. There was no impact on the Company’s consolidated financial statements
upon adoption.
F-14
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Revenue from Contracts with Customers
On January 1, 2018, the Company adopted ASU No. 2014-09, “Revenue from Contracts with
Customers (Topic 606),” applying the full retrospective transition method to all contracts that were not
completed as of January 1, 2016, the initial date of application.
The adoption of Topic 606 significantly affected the accounting for revenue from certain professional
services in the Carrier segment and insurance broker commission revenue included in software services
revenue in the Employer segment.
Prior to the adoption of Topic 606, the Company recognized revenue from certain professional
services in the Carrier segment over the customer relationship period. Under Topic 606, revenue from
certain of these services are recognized over the contract term of the associated software services
contract, including any extension periods representing a material right, which can be shorter than the
customer relationship period. The financial statement impact of this change is a reduction to the deferred
revenue balance as of the date of adoption.
Also prior to the adoption of Topic 606, the Company recognized insurance broker commission
revenue over the policy period. Under Topic 606, the revenue related to broker commissions is
recognized when the performance obligation has been satisfied, which is when the orders for the policies
are received and transferred to the insurance carrier. As a result, software services revenue from these
arrangements in the Employer segment is recognized in the aggregate and earlier under Topic 606 in
comparison to the previous treatment. The financial statement impact of this change is reductions to
balances of deferred revenue and increases in contract asset balances reported in other non-current
assets.
Additionally, prior to the adoption of Topic 606, the Company recognized revenue from
implementation services fees that are paid in advance in the Employer segment either when the
associated software services are made available to the customer or over the customer relationship
period. Under the new standard, revenue from these fees are recognized as the services are provided on
a percentage of completion basis. The financial statement impact of this change is revenue from these
fees being recognized sooner under the new standard.
In connection with the adoption of Topic 606, the Company is required to capitalize costs associated
with obtaining and fulfilling a contract. Contract assets recognized for costs to obtain a contract consist
primarily of sales commissions associated with obtaining contracts in the Carrier segment. These assets
are amortized to sales and marketing expense over the estimated period of benefit of the asset, which is
generally four to five years. Contract assets recognized for costs to fulfill a contract consist primarily of
internal costs related to implementing products in the Carrier segment. These assets are amortized to
cost of revenue expense over the estimated period of benefit, which is generally five years.
The Company used the practical expedient for contracts that were completed by January 1, 2016, the
initial date of application of Topic 606, that allows for the use of the transaction price at the date the
contract was completed for contracts restated in comparative reporting periods, rather than estimating the
variable consideration amount in each comparative reporting period.
F-15
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The following tables show the amounts by which financial statement lines were affected by the
adoption of Topic 606.
As of December 31, 2017
As
previously
reported Adjustments
As
adjusted
Financial Statement Line Item
Consolidated Balance Sheet:
Accounts receivable, net
Contract, prepaid and other current assets
Deferred contract costs and other non-current assets
Accrued expenses
Deferred revenue, current portion
Deferred revenue, net of current portion
Additional paid-in capital
Accumulated deficit
$
30,156 $
4,337
816
9,136
38,821
19,898
355,301
(394,663)
30,091
(65) $
15,859
11,522
16,253
15,437
9,110
(26)
43,804
4,983
11,223
(8,675)
(2,805) 352,496
33,417 (361,246)
Financial Statement Line Item
Consolidated Statement of Operations and
Comprehensive Loss:
Revenue
Cost of revenue
Sales and marketing
Loss from operations
Net loss and comprehensive loss
Net loss per common share: Basic and diluted
Financial Statement Line Item
Consolidated Statement of Operations and
Comprehensive Loss:
Revenue
Cost of revenue
Sales and marketing
Research and development
Loss from operations
Net loss and comprehensive loss
Net loss per common share: Basic and diluted
Year Ended December 31, 2017
As
previously
reported Adjustments
As
adjusted
$ 256,735 $
124,156
69,280
(13,518)
(25,872)
(0.83) $
$
(19,893) $ 236,842
3,226 127,382
70,583
1,303
(37,940)
(24,422)
(50,294)
(24,422)
(1.62)
(0.79) $
Year Ended December 31, 2016
As
previously
reported Adjustments
As
adjusted
$ 233,335 $
120,681
55,488
56,584
(32,168)
(40,058)
(1.35) $
$
3,188 $ 236,523
2,627 123,308
56,311
56,610
(32,456)
(40,346)
(1.36)
823
26
(288)
(288)
(0.01) $
Cash provided by, or used in, operating, investing and financing activities were not affected by the
adoption of Topic 606.
Accounting Standards Not Yet Adopted
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure
Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU modifies
the disclosure requirements required for fair value measurements. This ASU is effective for the Company
for the interim and annual reporting periods starting January 1, 2020. Early adoption is permitted. The
Company does not expect this guidance to have a material impact on its consolidated financial
statements.
F-16
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments – Credit Losses (Topic
326): Measurement of Credit Losses on Financial Instruments.” The purpose of this ASU is to require a
financial asset measured at amortized cost basis to be presented at the net amount expected to be
collected. Credit losses relating to available-for-sale debt securities should be recorded through an
allowance for credit losses. This ASU is effective for interim and annual reporting periods starting January
1, 2020. The Company is currently evaluating the impact of this guidance on its consolidated financial
statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” The amendments in
this update require lessees, among other things, to recognize lease assets and lease liabilities on the
balance sheet for those leases classified as operating leases under previous authoritative guidance.
Topic 842 introduces new disclosure requirements for leasing arrangements and is effective for the
Company beginning January 1, 2019. The Company will apply Topic 842 without presenting comparative
period financial statements, thus will recognize a cumulative-effect adjustment to the opening balance of
retained earnings as of January 1, 2019. The Company plans to utilize the following additional significant
transition elections:
•
•
Elect the package of three practical expedients to not reassess:
o whether any expired or existing contracts are or contain a lease;
o
the classification of any expired or existing leases; and
o
the treatment of initial direct costs.
Adopt a policy to not separate lease and associated nonlease components for all classes of
assets. The Company will apply this policy to all existing leases on transition as well as new
leases going forward.
The Company is continuing to evaluate the effect of adoption of this standard on its consolidated
financial statements. The Company expects its consolidated financial statements to be significantly
affected by the following:
•
•
•
Assets and related financing obligations for the Company’s existing build-to-suit lease
arrangements will be derecognized with a cumulative adjustment to retained earnings. These
leases will be transitioned to the new standard based on a proforma analysis of the lease
balances as of the transition date as if they had been a lease under ASC 840. Based on this
analysis, the land component of these leases will be combined with the remainder of the lease
obligation. Currently, this obligation is accounted for separately and recognized as part of facility
expense. The following impacts are expected on the Company’s consolidated financial
statements:
o Operating expenses will increase as depreciation expense related to the buildings will
increase as function of shortening the period of depreciation from the estimated life of the
asset to the expected term of the lease.
o
Interest expense will decrease as a result of a discount rate that is lower than the rate
required for build-to-suit accounting.
Lease liabilities and right-of-use, or ROU, assets related to existing operating lease obligations
(including lease and associated non-lease components) will recorded on the balance sheet.
Lease liabilities and ROU assets will be recorded related to payment obligations for nonlease
components (e.g. common area maintenance and equipment maintenance) associated with
existing capital lease components.
F-17
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Total net cash flows will not be impacted by adoption of the new lease standard; however,
classification of some transactions are expected to move between operating, investing and financing
activities.
3. Net Loss Per Common Share
Diluted loss per common share is the same as basic loss per common share for all periods
presented because the effects of potentially dilutive items were anti-dilutive given the Company’s net loss.
The following common share equivalent securities have been excluded from the calculation of weighted-
average common shares outstanding because the effect is anti-dilutive for the periods presented:
Anti-Dilutive Common Share Equivalents
Restricted stock units
Stock options
Convertible senior notes
Warrant to purchase common stock
Employee Stock Purchase Plan
Total anti-dilutive common share equivalents
Year Ended December 31,
2017
1,937,014
263,155
-
-
7,039
2,207,208
2018
2,174,250
233,247
4,513,824
-
-
6,921,321
2016
1,467,811
727,559
-
580,813
3,964
2,780,147
In connection with its issuance of the convertible senior notes in December 2018, the Company paid
$33,024 to enter into capped call option agreements to reduce the potential dilution to holders of the
Company’s common stock upon conversion of the convertible senior notes. The capped call option
agreements are excluded from the calculation of diluted net loss per share attributable to common
stockholders as their effect is antidilutive.
Basic and diluted net loss per common share is calculated as follows:
Numerator:
Net loss
Net loss attributable to common
stockholders
Denominator:
Weighted-average common shares
outstanding, basic and diluted
Net loss per common share, basic and diluted
Year Ended December 31,
2018
2017
2016
$
$
(52,627) $
(50,294) $
(40,346)
(52,627) $
(50,294) $
(40,346)
31,756,415 31,052,378 29,589,857
(1.36)
$
(1.66) $
(1.62) $
4. Fair Value Measurement
The carrying amounts of certain of the Company’s financial instruments, including cash and cash
equivalents, net accounts receivable, accounts payable and other accrued liabilities, and accrued
compensation and benefits, approximate fair value due to their short-term nature. The carrying value of
the Company’s financing obligations and revolving line of credit approximates fair value, considering the
borrowing rates currently available to the Company for financing obligations with similar terms and credit
risks.
The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities
measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a
non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the
F-18
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Company to use observable inputs when available, and to minimize the use of unobservable inputs when
determining fair value. The three tiers are defined as follows:
Level 1. Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2. Other inputs that are directly or indirectly observable in the marketplace.
Level 3. Unobservable inputs for which there is little or no market data, which require the Company
to develop its own assumptions.
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company evaluates its financial assets and liabilities subject to fair value measurements on a
recurring basis to determine the appropriate level to classify them for each reporting period. This
determination requires significant judgments to be made.
The following tables present information about the Company’s assets and liabilities that are
measured at fair value on a recurring basis using the above categories, as of December 31, 2018 and
2017.
Description
Cash Equivalents:
Level 1
Level 2
Level 3
Total
December 31, 2018
Money market mutual funds (1)
Total assets
$ 182,748 $
$ 182,748 $
- $
- $
- $ 182,748
- $ 182,748
Description
Cash Equivalents:
Level 1
Level 2
Level 3
Total
December 31, 2017
Money market mutual funds (1)
Total assets
$
$
46,730 $
46,730 $
- $
- $
- $
- $
46,730
46,730
(1) Money market mutual funds are classified as cash equivalents in the Company’s consolidated
balance sheets. As short-term, highly liquid investments readily convertible to known amounts of
cash, with remaining maturities of three months or less at the time of purchase, the Company’s cash
equivalent money market funds have carrying values that approximate fair value.
5. Property and Equipment
Property and equipment consists of the following as of December 31:
Buildings, leased
Computers and related equipment
Purchased software and licenses
Developed software
Furniture and fixtures
Leasehold improvements
Other equipment
Vehicles
Total property and equipment, at cost
Accumulated depreciation and amortization
Property and equipment, net
2018
2017
48,558 $
38,183
30,702
36,713
6,773
4,633
2,313
146
168,021
(98,056)
69,965 $
48,558
35,728
27,317
30,624
6,669
4,289
2,260
146
155,591
(82,910)
72,681
$
$
Depreciation and amortization expense on property and equipment was $15,665, $15,648 and
$12,816, for the years ended December 31, 2018, 2017 and 2016, respectively. Property and equipment
includes fixed assets acquired under capital lease agreements of $31,148 and $35,761 for the years
ended December 31, 2018 and 2017. Accumulated depreciation of assets under capital leases totaled
F-19
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
$6,216 and $9,633 as of December 31, 2018 and 2017, respectively. Amortization of assets under capital
leases is included in depreciation expense.
The Company capitalized software development costs of $6,090 and $4,482 for the years ended
December 31, 2018 and 2017, respectively. Amortization of capitalized software development costs
totaled $3,944, $3,257 and $2,857 during the years ended December 31, 2018, 2017 and 2016,
respectively. The net book value of capitalized software development costs was $9,806 and $7,660 at
December 31, 2018, and 2017, respectively.
6. Goodwill and Intangible Assets
The Company’s goodwill balance of $1,634 is solely attributable to the Employer reporting unit. The
gross carrying amount and accumulated impairment losses were $3,304 and $(1,670), respectively, for
the beginning and ending balances in all periods presented. There were no changes in the carrying
amount of goodwill in the years ended December 31, 2018 and 2017.
Information regarding the Company’s acquisition-related intangible assets is as follows:
As of December 31, 2018
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Trademarks
Customer agreements
Non-compete agreements
Total
$
$
240 $
2,060
126
2,426 $
(240) $
(2,060)
(126)
(2,426) $
Weighted-
Average
Remaining
Useful Life
(in years)
-
-
-
-
-
-
-
-
As of December 31, 2017
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Weighted-
Average
Remaining
Useful Life
(in years)
-
0.6
-
0.6
Trademarks
Customer agreements
Non-compete agreements
Total
$
$
240 $
2,060
126
2,426 $
(240) $
(1,910)
(126)
(2,276) $
-
150
-
150
Amortization expense of acquisition-related intangible assets for the years ended December 31,
2018, 2017 and 2016 was $150, $258 and $257, respectively. As of December 31, 2018, the acquisition-
related intangible assets were fully amortized. There were no impairments of intangible assets during the
years ended December 31, 2018, 2017 and 2016.
7. Convertible Senior Notes
In December 2018, the Company issued $240,000 aggregate principal amount of 1.25% convertible
senior notes (“Notes”) due December 15, 2023, unless earlier repurchased by the Company or converted
by the holder pursuant to their terms. Interest is payable semiannually in arrears on June 15 and
December 15 of each year, commencing on June 15, 2019.
The Notes are governed by an Indenture between the Company, as issuer, and U.S. Bank, National
Association, as trustee. The Notes are unsecured and rank: senior in right of payment to the Company’s
future indebtedness that is expressly subordinated in right of payment to the Notes; equal in right of
payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior in right
of payment to any of the Company’s senior, secured indebtedness to the extent of the value of the assets
F-20
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
securing such indebtedness; and structurally junior to all indebtedness and other liabilities incurred by the
Company’s subsidiaries.
Upon conversion, the Company will pay or deliver, as the case may be, cash, shares of the
Company’s common stock or a combination of cash and shares of common stock, at the Company’s
election.
The Notes have an initial conversion rate of 18.8076 shares of common stock per $1 principal
amount of Notes. This represents an initial effective conversion price of approximately $53.17 per share
of common stock and 4,513,824 shares issuable upon conversion. Throughout the term of the Notes, the
conversion rate may be adjusted upon the occurrence of certain events. Holders of the Notes will not
receive any cash payment representing accrued and unpaid interest, if any, upon conversion of a Note,
except in limited circumstances. Accrued but unpaid interest will be deemed to be paid by cash, shares of
the Company’s common stock or a combination of cash and shares of the Company’s common stock paid
or delivered, as the case may be, to the holder upon conversion of Notes.
Prior to the close of business on September 14, 2023, the Notes will be convertible at the option of
holders during certain periods, only upon satisfaction of certain conditions set forth below. On or after
September 15, 2023, until the close of business on the second scheduled trading day immediately
preceding the maturity date, holders may convert all or any portion of their Notes at the conversion price
at any time regardless of whether the conditions set forth below have been met.
Holders may convert all or a portion of their Notes prior to the close of business on September 14,
2023, in multiples of $1 principal amount, only under the following circumstances:
•
•
•
•
during any calendar quarter commencing after the calendar quarter ending on March 31,
2019 (and only during such calendar quarter), if the last reported sales price of the common
stock for at least 20 trading days (whether or not consecutive) during a period of 30
consecutive trading days ending on, and including, the last trading day of the immediately
preceding calendar quarter is greater than or equal to 130% of the conversion price on each
applicable trading day;
during the five business day period after any five consecutive trading day period, or the
Notes measurement period, in which the “trading price” (as defined in the Indenture) per $1
principal amount of notes for each trading day of the Notes measurement period was less
than 98% of the product of the last reported sale price of the Company’s common stock and
the conversion rate on each such trading day;
if the Company calls any or all of the Notes for redemption, at any time prior to the close of
business on September 14, 2023; or
upon the occurrence of specified corporate events.
As of December 31, 2018, the Notes are not yet convertible.
Based on market data available for publicly traded, senior, unsecured corporate bonds issued by
companies in the same industry and with similar maturity, the Company estimated the implied market
interest rate of its Notes to be approximately 7.30%, assuming no conversion option. Assumptions used
in the estimate represent what market participants would use in pricing the liability component of the
Notes, including market interest rates, credit standing, and yield curves, all of which are defined as Level
2 observable inputs. The estimated implied interest rate was applied to the Notes, which resulted in a fair
value of the liability component of $181,500 upon issuance, calculated as the present value of future
contractual payments based on the $240,000 aggregate principal amount. The excess of the principal
amount of the liability component over its carrying amount, or the debt discount, is amortized to interest
expense over the term of the Notes. The $58,500 difference between the gross proceeds received from
issuance of the Notes of $240,000 and the estimated fair value of the liability component represents the
equity component of the Notes and was recorded in additional paid-in capital. The equity component is
not remeasured as long as it continues to meet the conditions for equity classification.
In accounting for the transaction costs related to the issuance of the Notes, the Company allocated
the total amount incurred to the liability and equity components in proportion to the allocation of proceeds.
Transaction costs attributable to the liability component, totaling $4,808, are being amortized to expense
F-21
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
over the term of the Notes, and transaction costs attributable to the equity component, totaling $1,550,
and were included with the equity component in shareholders’ equity.
The Notes consist of the following as of December 31:
Liability Component:
Principal
Less: debt discount, net of amortization
Net carrying amount
Equity component (a)
2018
2017
$
$
240,000 $
(63,308)
176,692 $
56,950
-
-
-
-
(a) Recorded in the consolidated balance sheet within additional paid-in capital, net of $1,550
transaction costs in equity.
The following table sets forth total interest expense recognized related to the Notes:
Year Ended December 31,
2017
2018
1.25% coupon
Amortization of debt discount and transaction costs
$
$
42 $
-
42 $
-
-
-
As of December 31, 2018, the fair value of the Notes, which was determined based on inputs that
are observable in the market or that could be derived from, or corroborated with, observable market data,
quoted price of the Notes in an over-the-counter market (Level 2), and carrying value of debt instruments
(carrying value excludes the equity component of the Company’s convertible notes classified in equity)
were as follows:
December 31, 2018
December 31, 2017
Convertible senior notes
Fair Value
$ 254,400 $ 176,692 $
Carrying
Value
Fair Value
Carrying
Value
- $
-
In connection with the issuance of the Notes, the Company entered into capped call transactions
with certain counterparties affiliated with the initial purchasers and others. The capped call transactions
are expected to reduce potential dilution of earnings per share upon conversion of the Notes. Under the
capped call transactions, the Company purchased capped call options that in the aggregate relate to the
total number of shares of the Company’s common stock underlying the Notes, with an initial strike price of
approximately $53.17 per share, which corresponds to the initial conversion price of the Notes and is
subject to anti-dilution adjustments substantially similar to those applicable to the conversion rate of the
Notes, and have a cap price of approximately $89.98. The cost of the purchased capped calls of $33,024
was recorded to stockholders’ deficit and will not be re-measured. The capped call will not be re-
measured provided it continues to meet the conditions for equity classification.
Based on the closing price of our common stock of $45.72 on December 31, 2018, the if-converted
value of the Notes was less than their respective principal amounts.
8. Revolving Line of Credit
In February 2015, the Company executed a loan and security agreement with a syndicate of lenders
led by Silicon Valley Bank for a senior revolving credit agreement (“Senior Revolver”) to replace its then
current revolving line of credit. Debt issuance fees of $591 were capitalized in the Company’s balance
sheet and are amortized over the life of the Senior Revolver.
The Senior Revolver had an original borrowing limit of $60,000 and an original term of three
years. Borrowing capacity under the Senior Revolver is subject to a borrowing base limit that is a function
of the Company’s monthly recurring revenue as adjusted to reflect lost customer revenue during the
previous three calendar months. Therefore, credit available under the Senior Revolver may be less than
the borrowing limit. Interest is payable monthly. Advances under the Senior Revolver bear interest at the
prime rate as published in the Wall Street Journal plus a margin based on the Company’s liquidity, which
F-22
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
originally ranged between 1.0% and 1.5%. The Company is charged an unused line fee under this
arrangement at a rate based on its liquidity, which was originally 0.300% to 0.375% per year. Any
outstanding principal is due at the end of the term.
In 2016, the Company amended its Senior Revolver agreement. The amendments, among other
things, increased the borrowing capacity to $95,000, extended the termination date of the facility to
February 20, 2020, added Goldman Sachs Lending Partners LLC to the lending syndicate and revised
certain covenants including those related to accounts receivable, Minimum Consolidated EBITDA
requirements, Indebtedness, permitted Indebtedness and certain capital expenditure limits. Additionally,
the amendments altered definitions in the Senior Revolver agreement, including Alternate Base Rate,
Applicable Margin, Consolidated EBITDA, Liquidity and Commitment Fee Rate. As a result of certain of
these definitional changes, the Alternate Base Rate was modified to be the prime rate as published in the
Wall Street Journal plus a margin based on our liquidity that ranges between 0.75% and 1.25%. The
amendments further waived any default that may have occurred as a result of certain Indebtedness
previously incurred by the Company and the disclosure to the lenders of registered Intellectual Property.
In connection with the amendments, debt issuance fees of $379 were capitalized in the Company’s
balance sheet and are being amortized over the remaining life of the Senior Revolver.
The Company further amended its Senior Revolver agreement in April 2017 to adjust terms in the
agreement to accommodate changes in its business.
In March 2018, the Company amended its Senior Revolver to modify certain terms and
requirements to account for the Company’s adoption of Topic 606. The Company amended its Senior
Revolver again in December 2018. The amendment altered definitions and amended sections of the
agreement to allow for transactions required to administer the convertible senior note financing.
The Company is bound by customary affirmative and negative covenants in connection with the
Senior Revolver agreement, including financial covenants related to liquidity and EBITDA. In the event of
a default, the lenders may declare all obligations immediately due and stop advancing money or
extending credit under the line of credit. The line of credit is collateralized by substantially all of the
Company’s tangible and intangible assets, including intellectual property and the equity of subsidiaries.
During the years ended December 31, 2018, 2017 and 2016, the Company borrowed an aggregate
of $115,000, $105,000 and $84,000, respectively, under the Senior Revolver for general operating
purposes and repaid an aggregate of $171,246, $89,000 and $74,000, respectively. As of December 31,
2018, there were no amounts outstanding under the Senior Revolver and the amount available to borrow
was $77,264.
9. Commitments and Contingencies
The Company leases three buildings on its Charleston, South Carolina campus. One leasing
arrangement is accounted for as a capital lease. The remaining two lease agreements are accounted for
as build-to-suit, failed sale-leaseback arrangements. Accordingly, the Company recognized liabilities for
the lease payments related to these two buildings, which have been recorded as financing obligations. A
portion of the lease payment for these two leases has been allocated to land and is accounted for using
operating lease accounting. Information regarding these three leases is incorporated in the following
disclosures.
Operating Lease Commitments
The Company leases office facilities under various non-cancelable operating lease agreements
with original lease periods expiring between 2019 and 2023. Some of the leases provide for renewal
terms at the Company’s option. Certain future minimum lease payments due under these operating lease
agreements contain free rent periods or escalating rent payment provisions. These leases generally do
not contain purchase options. Rent expense on these operating leases is recognized over the term of the
F-23
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
lease on a straight-line basis. Operating lease commitments include rent for land associated with the
Company’s build-to-suit leases expiring through 2031.
In December 2016, the Company amended its three leases for buildings on its Charleston, South
Carolina campus. As a result, one lease, that was previously accounted for as an operating lease was
classified as a capital lease at the end of 2016.
Rent expense totaled $2,063, $1,605, and $4,403 for the years ended December 31, 2018, 2017,
and 2016, respectively.
Future minimum lease payments are as follows:
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease payments
Operating
Leases
$
$
1,350
1,042
999
1,022
1,046
7,514
12,973
Financing and Capital Lease Obligations
The Company has entered into various purchase arrangements to obtain property and equipment
for operations that are accounted for as capital leases. Certain purchase arrangements contain
payments for licenses, which the Company records as financing obligations. These arrangements have
original terms ranging from 3 to 5 years with interest rates ranging from 0.5% to 15.0%. The leases are
secured by the underlying leased property and equipment.
In December 2016, the Company amended a lease agreement for office space that had been
previously accounted for as an operating lease. The amendment extended the term of the lease by 15
years from the amendment date. This modification required the Company to evaluate the lease as if it
were a new lease. Upon evaluation, the lease was classified as a capital lease because the present
value of the lease payments exceeded 90% of the fair value of the leased asset. Aggregate payments
under this lease are $48,600, including executory costs of $5,938. As of December 31, 2018, capital
lease obligations include amounts under this lease of $20,325. Details of the lease extension are
disclosed under “Contractual Commitments” below.
Financing obligations were $37,544 and $34,233, as of December 31, 2018 and 2017, respectively,
and consist primarily of obligations for build-to-suit lease arrangements. The aggregate amount of future
minimum payments for financing obligations was $106,467 at December 31, 2018 which includes
aggregate payments of $102,300 related to build-to-suit arrangements. Details of the build-to-suit lease
arrangements are disclosed in Note 16.
Financing obligations are allocated as follows:
Buildings, build-to-suit
Software and support
Total financing obligations
Less: current portion
Financing obligations, net of current portion
As of December 31,
2018
2017
33,814 $
3,730
37,544 $
(1,678)
35,866 $
32,652
1,581
34,233
(1,283)
32,950
$
$
$
F-24
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Future minimum lease payments are as follows:
Capital
Leases
Financing
Obligations
Year Ending December 31,
2019
2020
2021
2022
2023
Thereafter
Total minimum lease and financing obligation payments
Less: executory costs
Less: imputed interest
Less: current portion
Capital lease obligations, net of current portion
$
$
5,542 $
3,777
3,261
3,089
3,180
28,577
47,426 $
(5,147)
(18,221)
(2,808)
21,250
8,502
8,166
7,504
7,278
7,493
67,524
106,467
Contractual Commitments
In connection with a 2013 lease for office space on its Charleston, South Carolina campus, the
Company entered into an option to lease space in two additional adjacent buildings. The option term was
36 months and required the Company to incur costs annually prior to the exercise of the option in the
amount of up to $466 per year. If the Company terminated the option or did not exercise the option prior
to expiration it would incur termination fees pro-rated through the dates of termination or expiration. The
maximum liability for termination fees was $757. During the year ended December 31, 2016, the
Company determined that the options would expire unexercised and expensed the full amount of the
termination fees.
On December 12, 2016, the Company executed an amendment to each of three lease agreements
for office space on its Charleston, South Carolina campus. The amendments extended the term of the
leases to December 31, 2031. The amendments also provided for the following:
•
extending from December 13, 2016 to December 31, 2018 the term of an option that allows
the Company to require the lessors to build a two-story building, including potentially for a
welcome center, of approximately 18,500 square feet on its campus (“Building 5”) for the
Company to lease;
• waiving accrued and future carrying costs and termination fees otherwise payable to the
lessors by the Company under the existing option in the amount of $1,223; and
•
contingent upon construction of Building 4 described below, reducing the annual rent
increases from 3% to 2% for the Company’s Customer Success Center, a 145,800 square
foot building on its campus which it first occupied on January 1, 2015.
The waived carrying and termination fees in the amount of $1,223 is being amortized over the 15-
year term of the extension as a reduction of interest and rent expense.
On December 12, 2016, the Company also executed a lease agreement pursuant to which the
lessor will construct a building of approximately 145,800 square feet on its campus for the Company to
accommodate anticipated future growth (“Building 4”). Through an extension by the landlord, the target
commencement date of the lease is July 1, 2020 with a term of 15 years. Under the terms of the lease,
the Company agrees to commence construction on or about April 1, 2019, but can terminate the lease
prior to that time, subject to the payment of reasonable, documented, and agreed-to out-of-pocket costs
with respect to the lease and building to date. If the Company delays beginning construction past
December 31, 2019, the lessor may terminate the lease. The Company may renew the lease upon 365
days’ notice to the lessor for five additional one-year terms, provided that the Company is not in default at
the time of its request. Significant terms of the lease for Building 4 include annual rent for the first year of
the lease of $30.05 per square foot of rentable area with annual rent increases of 2% of the rent paid for
the preceding lease year. If the Company exercises its option to cause the construction of Building 5, the
F-25
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
term of the lease will reset to 15 years from the date the Company begins paying rent for Building 5. The
Company will begin to capitalize costs associated with the construction of Building 4 when construction
has commenced.
The Company also has $276 of non-cancellable contractual commitments as of December 31, 2018
related to the purchase of software and maintenance. These commitments are not accrued in the
consolidated balance sheet of the Company.
Legal Contingencies
The Company may become a party to a variety of legal proceedings that arise in the normal course
of business. While the results of such normal course legal proceedings cannot be predicted with certainty,
management believes, based on current knowledge, that the final outcome of any matters will not have a
material adverse effect on the Company’s business, financial position, results of operations or cash flows.
10. Stock-Based Compensation
Employee Stock-based Compensation Plan
The Company maintains the Amended and Restated Benefitfocus.com, Inc. 2000 Stock Option Plan
(the “2000 Plan”) and the Benefitfocus.com, Inc. Amended and Restated 2012 Stock Plan, (the “2012
Plan”), pursuant to which the Company has reserved 4,139,296 shares of its common stock for issuance
to its employees, directors and non-employee third parties. The 2012 Plan, effective on January 31, 2012,
serves as the successor to the 2000 Plan and permits the granting of incentive stock options, non-
statutory stock options, stock bonuses, stock purchase rights, stock appreciation rights, and restricted
stock units and awards. No new awards can be issued under the 2000 Plan after the effective date of the
2012 Plan. Outstanding awards under the 2000 Plan continue to be subject to the terms and conditions of
the 2000 Plan. Shares available for grant under the 2000 Plan, which were reserved but not issued or
subject to outstanding awards under the 2000 Plan as of the effective date, were added to the reserves of
the 2012 Plan. As of December 31, 2018, the Company had 1,731,799 shares allocated to the 2012 Plan,
but not yet issued.
The Company has issued two types of awards under these plans: stock options and restricted stock
units (“RSUs”). The following table sets forth the number of awards outstanding for each award type is as
follows:
Award type
Restricted stock units
Stock options
Outstanding at December 31,
2017
1,937,014
263,155
2018
2,174,250
233,247
2016
1,467,811
727,559
The grant date value of RSUs is equal to the closing price of the Company’s stock on the date of
grant, or, if not a trading day, the closing price of the previous trading day. Stock options are granted at
exercise prices not less than the estimated fair market value of the Company’s common stock at the date
of grant. Generally, the Company issues previously unissued shares for the exercise of stock options or
exchange of RSUs; however, previously acquired shares may be reissued to satisfy future issuances.
The standard vesting period for RSU and option awards is over four years however vesting periods range
from one to five years. Some RSUs vest immediately upon grant. The options expire 10 years from the
grant date. Compensation expense for the fair value of the stock-based awards at their grant date is
recognized ratably over the vesting period.
F-26
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Compensation expense related to stock-based awards is included in the following line items in the
accompanying consolidated statements of operations and comprehensive loss for the years ended
December 31:
Cost of revenue
Sales and marketing
Research and development
General and administrative
2018
2017
2016
$
$
5,164 $
6,764
5,510
11,430
28,868 $
2,508 $
4,953
2,990
5,686
16,137 $
2,799
3,212
4,533
7,544
18,088
The total compensation cost related to non-vested awards not yet recognized as of December 31,
2018 was $43,842 and will be recognized over a weighted-average period of approximately 2.59 years.
Restricted Stock Units
During 2018, the Company granted RSUs under the 2012 Plan. Restricted stock units granted to
employees vest in equal annual installments over terms that range from immediate vesting at grant to 4
years. The fair value of the stock at the time of grant is amortized based on a straight-line basis over the
vesting period.
The summary of unvested restricted stock units is as follows:
Unvested at December 31, 2017
Granted
Forfeited
Vested
Unvested at December 31, 2018
Restricted
stock units
1,937,014 $
1,664,652
(763,997)
(663,419)
2,174,250 $
Weighted
average
grant date
fair value
30.90
31.96
29.38
33.01
31.61
As of December 31, 2018, the number and intrinsic value of restricted stock units expected to vest
was 2,015,771 and $92,161, respectively. The aggregate fair value of restricted stock units vested during
the years ended December 31, 2018, 2017 and 2016 was $18,623, $12,137 and $10,311, respectively.
Included in the grants of 2018 restricted stock units are performance restricted stock units for which
vesting is contingent upon meeting various financial targets to support growth initiatives. The Company
granted 857,827 performance restricted stock units to officers and certain employees with an aggregate
grant-date fair value of $28,589. The actual number of shares issued upon vesting could range from 0%
to 100%. As of December 31, 2018, there were 818,975 performance restricted stock units outstanding
with a weighted average grant-date fair value of $33.32 per unit, of which 650,190 units with a weighted
average grant-date fair value of $33.26 per unit were expected to vest.
F-27
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Stock Options
The following is a summary of the option activity for the year ended December 31, 2018:
Outstanding balance at December 31, 2017
Granted
Exercised
Forfeited or expired
Outstanding balance at December 31, 2018
Exercisable at December 31, 2018
Vested and expected to vest at December 31,
2018
Weighted-
Average
Remaining
Contractual
Term
(in years)
Aggregate
Intrinsic Value
Weighted-
Average
Exercise
Price
9.22
-
6.22
-
9.60
9.60
3.2 $
3.2 $
8,425
8,425
Number
of
Options
263,155 $
-
(29,908)
-
233,247 $
233,247 $
233,247 $
9.60
3.2 $
8,425
The aggregate intrinsic value of employee options exercised during the years ended December 31,
2018, 2017, and 2016 was $915, $10,829 and $21,117, respectively.
No stock options were granted during the years ended December 31, 2018, 2017 and 2016.
11. Stockholders’ Deficit
Preferred stock
The Company has 5,000,000 shares of preferred stock authorized all of which is undesignated.
Common Stock
The holders of common stock are entitled to one vote for each share. The voting, dividend and
liquidation rights of the holders of common stock are subject to and qualified by the rights, powers and
preferences of the holders of preferred stock.
The Company maintains the Benefitfocus, Inc. 2016 Employee Stock Purchase Plan (“ESPP”)
pursuant to which the Company has reserved 125,374 shares of its common stock for purchase by its
employees who meet certain criteria. Under the ESPP, eligible employees may purchase the Company’s
common stock through accumulated payroll deductions. Options to purchase shares are granted twice
yearly on or about January 1 and July 1 and exercisable on or about the succeeding June 30 and
December 31, respectively, of each year. Shares are purchased at acquisition prices equal to 95% of the
fair market value of the Company’s common stock at the purchase date. No participant may purchase
more than $12 worth of the Company’s common stock in a six-month offering period.
At December 31, 2018, the Company had reserved a total of 4,264,670 of its authorized 50,000,000
shares of common stock for future issuance as follows:
Outstanding stock options
Restricted stock units
Available for future issuance under stock award plans
Available for future issuance under ESPP
Total common shares reserved for future issuance
233,247
2,174,250
1,731,799
125,374
4,264,670
F-28
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
12. Revenue
Disaggregation of Revenue
The following tables provide information about disaggregation of revenue by service line and
includes a reconciliation of disaggregated revenue with reportable segments:
Service line:
Software services
Professional services
Total
Service line:
Software services
Professional services
Total
Service line:
Software services
Professional services
Total
Employer
Year ended December 31, 2018
Carrier
Total
$
$
129,643 $
40,157
169,800 $
72,705
16,216
88,921
$
$
202,348
56,373
258,721
Employer
Year ended December 31, 2017
Carrier
Total
$
$
117,236 $
36,245
153,481 $
67,655
15,706
83,361
$
$
184,891
51,951
236,842
Employer
Year ended December 31, 2016
Carrier
Total
$
$
117,342 $
32,434
149,776 $
68,816
17,931
86,747
$
$
186,158
50,365
236,523
Contract Balances
The following table provides information about contract assets and contract liabilities from contracts
with customers:
As of December 31, 2018
Contract assets
Contract liabilities:
Deferred revenue
As of December 31, 2017
Contract assets
Contract liabilities:
Deferred revenue
Balance at
Beginning of
Period
Balance at End of
Period
11,522 $
12,798
55,027 $
45,863
15,929 $
11,522
56,949 $
55,027
$
$
$
$
The Company recognizes payments from customers based on contractual billing schedules.
Accounts receivable are recorded when the right to consideration becomes unconditional. Contract
assets include amounts related to the Company’s contractual right to consideration for completed
performance objectives not yet invoiced. Contract liabilities include payments received in advance of
performance under the contract and are recognized as revenue when earned under the contract. The
Company had no asset impairment charges related to contract assets during the years ended December
31, 2018 and 2017.
F-29
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Contract assets are largely comprised of unbilled software services revenue from insurance broker
commissions. The performance obligation for this revenue is satisfied when the order is received.
Amounts are recorded as accounts receivable when the right to consideration becomes unconditional
which generally occurs over the period of underlying insurance policy. Payments from insurance broker
commissions are typically received monthly in arrears.
The following tables show the significant changes in contract asset balances:
Contract Assets
Transferred to receivables from contract assets
Revenue recognized from performance
obligations satisfied but not billed
$
$
Year ended December 31,
2018
2017
20,560 $
19,512
21,836 $
15,106
Revenue recognized during the years ended December 31, 2018 and 2017 that was included in the
deferred revenue balance at the beginning of the periods was $33,421 and $25,238, respectively.
The Company recorded favorable transaction price adjustments to software services revenue from
performance obligations satisfied or partially satisfied in previous periods of $1,161 during the year ended
December 31, 2018. There were no such adjustments during the ended December 31, 2017.
Performance Obligations
As of December 31, 2018, the aggregate amount of the Company’s performance obligations that
are unsatisfied or partially unsatisfied were approximately $216,000, of which a majority are expected to
be satisfied within the next three years. The Company excludes from its population of performance
obligations contracts with original durations of one year or less, contract renewal periods that renew
automatically, and amounts of variable consideration that are allocated to wholly unsatisfied distinct
service that forms part of a single performance obligation and meets certain variable allocation criteria.
13. Employee Benefit Plan
The Company maintains a qualified defined contribution plan under Section 401(k) of the U.S.
Internal Revenue Code (the “401(k) Plan”) covering substantially all employees. Employees are eligible to
participate in the 401(k) Plan after one day of service and upon attainment of age 21, and may elect to
defer an amount or percentage of their annual compensation up to amounts prescribed by law. The
Company makes discretionary matching contributions to employee plan accounts. During each of the
years ended December 31, 2018, 2017 and 2016, the Company matched 50% of the employees’
contribution, with the match limited to 3% of qualifying compensation. Employee vesting in matching
company contributions occurs at a rate of 20% per year after one year of service. During the years ended
December 31, 2018, 2017, and 2016, employer matching contributions were $3,162, $3,020 and $2,649,
respectively.
14. Income Taxes
The Company files income tax returns in the U.S. for federal and various state jurisdictions. The
Company is subject to U.S. federal income tax examination for calendar tax years 2014 through 2017 as
well as state income tax examinations for various years depending on statutes of limitations of those
jurisdictions.
F-30
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The following summarizes the components of income tax expense for the years ended December
31:
Current:
Federal
State and local
Total current expense
Deferred:
Federal
State and local
Total deferred taxes
2018
2017
2016
$
$
$
$
- $
28
28 $
- $
-
- $
- $
15
15 $
- $
-
- $
-
17
17
-
-
-
Reconciliation between the effect of applying the federal statutory rate and the effective income tax
rate used to calculate the Company’s income tax provision is as follows for the years ended December
31:
Federal statutory rate
Effect of:
State income taxes, net of federal benefit
Change in state tax rates
Change in federal tax rates
Change in valuation allowance
State tax credits
Stock-based compensation
Section 162(m)
Other permanent items
Deferred true-up
Income tax provision effective rate
2018
2017
2016
21.0%
34.0%
34.0%
10.3%
1.7%
0.0%
(29.4%)
0.3%
(2.2%)
(0.8%)
(0.9%)
0.0%
0.0%
6.6%
0.4%
(67.8%)
24.3%
0.4%
3.8%
(1.2%)
(0.5%)
0.0%
0.0%
6.0%
2.6%
0.0%
(46.3%)
4.0%
(0.1%)
0.0%
(0.2%)
0.0%
0.0%
The significant components of the Company’s deferred tax asset and liability were as follows as of
December 31:
Deferred tax assets relating to:
Net operating loss carryforwards
Deferred revenue
Commissions and incentive accrual
Deferred rent
State tax credits
Stock-based compensation
Compensation and other accruals
Property and equipment and intangible assets
Interest limitation
Total gross deferred tax assets
Deferred tax liabilities
Compensation and other accruals
Convertible debt
Total gross deferred tax liabilities
Deferred tax assets less liabilities
Less: valuation allowance
Net deferred tax asset (liability)
2018
2017
$
$
$
82,057 $
3,150
678
433
7,936
4,595
-
1,138
968
100,955
(2,366) $
(16,281)
(18,647)
82,308
(82,308)
- $
69,452
7,929
547
471
7,866
4,060
2,539
551
-
93,415
(4,322)
-
(4,322)
89,093
(89,093)
-
As of December 31, 2018 and 2017, the Company’s gross deferred tax was reduced by a valuation
allowance of $82,308 and $89,093, respectively.
F-31
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The valuation allowance decreased by $6,785 and increased by $7,832 during the years ended
December 31, 2018 and 2017, respectively. The valuation allowance decrease in 2018 resulted primarily
from establishing deferred tax liabilities related to tax method changes and convertible debt issuance
partially offset by changes in the deferred tax assets related to the net operating loss carryforwards. The
increase in the valuation allowance in 2017 resulted primarily from changes in deferred tax assets
partially offset by a decrease from the revaluation of the deferred tax assets and liabilities in connection
with enactment of the Tax Cuts & Jobs Act (“Tax Reform”) on December 22, 2017. Among other things,
the primary provision of Tax Reform impacting the Company is the reduction to the U.S. corporate income
tax rate from 34% to 21%.
The Company adopted the revenue accounting rules prescribed by Topic 606 in 2018 with an
effective date of January 1, 2016. As a result of this adoption, the Company has restated its deferred tax
assets related to net operating loss carryforwards for both federal and state income tax purposes along
with the related offsetting valuation allowances.
Net operating loss carryforwards for federal income tax purposes were approximately $287,686 and
$253,946 at December 31, 2018 and 2017, respectively. State net operating loss carryforwards were
$285,377 and $221,189 at December 31, 2018 and 2017, respectively. The federal and state net
operating loss carryforwards will expire at various dates during 2019 through 2037, if not utilized. Net
operating loss carryforwards and credit carryforwards reflected above may be limited due to historical and
future ownership changes.
South Carolina jobs tax credit and headquarters tax credit carryovers of $10,483 and $10,322 were
available at December 31, 2018 and 2017, respectively. Headquarters credits are expected to be used to
offset future state income tax license fees. The credits expire in various amounts during 2020 through
2033.
The Company follows FASB ASC 740-10 for accounting for unrecognized tax benefits. As of
December 31, 2018, the Company had gross unrecognized tax benefits of $437.
A reconciliation of the beginning and ending amounts of unrecognized tax benefits is as follows for
the years ended December 31:
Balance at beginning of year
Additions based on tax positions related to the
current year
Additions for tax positions in prior years
Reductions for tax positions of prior years
Reductions for tax positions due to lapse
of statute
Settlements
Balance at end of year
2018
2017
2016
$
437 $
437 $
437
-
-
-
-
-
437 $
-
-
-
-
-
437 $
-
-
-
-
-
437
$
At December 31, 2018 and 2017, none of the $437 liabilities for unrecognized tax benefits could
impact the Company’s effective tax rate, if recognized. The Company does not expect the unrecognized
tax benefits to change within the next twelve months.
15. Segments and Geographic Information
Operating segments are defined as components of an enterprise for which discrete financial
information is available that is evaluated regularly by the chief operating decision maker (“CODM”) for
purposes of allocating resources and evaluating financial performance. The Company’s CODM, the Chief
Executive Officer, reviews financial information presented on a consolidated basis, accompanied by
information about operating segments, for purposes of allocating resources and evaluating financial
performance.
F-32
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
The Company’s reportable segments are based on the type of customer. The Company determined
its operating segments to be: Employer, which derives substantially all of its revenue from customers that
use the Company’s services for the provision of benefits to their employees, and administrators acting on
behalf of employers; and Carrier, which derives substantially all of its revenue from insurance companies
that provide coverage at their own risk.
Segments are evaluated based on gross profit. The Company does not allocate interest income,
interest expense or income tax expense by segment. Accordingly, the Company does not report such
information. Additionally, Employer and Carrier segments share the majority of the Company’s assets.
Therefore, no segment asset information is reported.
Revenue from external customers by
segment:
Employer
Carrier
$
Total net revenue from external customers $
Depreciation and amortization by segment:
Employer
Carrier
Total depreciation and amortization
Gross profit by segment
Employer
Carrier
Total gross profit by segment
$
$
$
$
Year Ended December 31,
2017
2016
2018
169,800 $
88,921
258,721 $
153,481 $
83,361
236,842 $
149,776
86,747
236,523
10,232 $
5,583
15,815 $
10,229 $
5,677
15,906 $
8,116
4,957
13,073
75,397 $
54,047
129,444 $
58,347 $
51,113
109,460 $
61,951
51,264
113,215
Substantially all assets were held and all revenue was generated in the United States during the
years ended December 31, 2018, 2017 and 2016.
16. Related Parties
Related Party Leasing Arrangements
The Company leases its office space at its Charleston, South Carolina headquarters campus under
the terms of three non-cancellable leases from entities with which one of the Company’s directors,
significant stockholders, and executives as well as another significant stockholder are affiliated. The
Company’s headquarters building lease and an additional building lease are accounted for as build-to-suit
leases and recorded as financing obligations in the Consolidated Balance Sheets. The remaining lease,
also for office space, was accounted for as an operating lease during 2016 and periods prior and as a
capital lease in 2017 and after. The Company executed an amendment to each of the three lease
agreements on December 12, 2016. These amendments extended the term of the leases to December
31, 2031. The leases contain options to renew the leases for five additional years. The arrangements
provide for 3.0% fixed annual rent increases. In addition to extending the lease term, the amendment to
the lease for the Company’s Customer Success Center, a 145,800 square foot building on its campus,
which commenced January 1, 2015:
•
extended from December 13, 2016 to December 31, 2018 the term of an option
that allows the Company to require the lessor to build Building 5 for the Company
to lease,
• waived certain accrued and future carrying costs and termination fees payable to
the lessor by the Company under the existing option in the amount of $1,223, and
•
reduced the annual rent increases for the Customer Success Center from 3% to
2% contingent upon construction of Building 4.
F-33
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
On December 12, 2016 and in conjunction with the lease amendments, the Company also executed
a cancellable lease agreement with an entity with which one of the Company’s directors, significant
stockholders, and executives as well as another significant stockholder are affiliated. Pursuant to the
agreement the lessor will construct a building of approximately 145,800 square feet on its campus for the
Company to accommodate anticipated future growth (“Building 4”). Through an extension provided by the
lessor, the target commencement date of the lease is July 1, 2020 with a term of 15 years. Under the
terms of the lease, the Company agrees to commence construction on or about April 1, 2019, but can
terminate the lease prior to that time, subject to payment of reasonable, documented, and agreed-to out-
of-pocket costs with respect to the lease and building to date. If the Company delays beginning
construction past December 31, 2019, the lessor may terminate the lease. The Company may renew the
lease upon 365 days’ notice to the lessor for five additional one-year terms, provided that the Company is
not in default at the time of its request. Significant terms of the lease for Building 4 include annual rent for
the first year of the lease of $30.05 per square foot of rentable area with annual rent increases of 2% of
the rent paid for the preceding lease year. If the Company exercises its option to cause the construction
of Building 5, the term of the lease will reset to 15 years from the date the Company begins paying rent
for Building 5.
In connection with the cancellable lease for Building 4 and the option for Building 5 described above,
the leasing entity meets the criteria to be a variable interest entity. The Company is not the primary
beneficiary of the leasing entity, as the activities that are most significant to the leasing entity’s economic
performance, consisting of financing, development, management, and sale of office facilities, are directed by
another party. As such, the Company is not required to consolidate the entity as the primary beneficiary.
The lease terms would not include a residual value guarantee, fixed-price purchase option, or similar feature
that would obligate the Company to absorb decreases in value or would entitle the Company to participate
in increases in the value of Buildings 4 or 5. The Company has not and does not intend to provide financial
or other support to the leasing entity. The Company’s maximum exposure, assuming the exercise of the
option, would consist of rent to be paid over the 15-year term of the lease, construction cost overruns,
agreed upon pre-construction costs incurred prior to termination and operating expenses in excess of a
certain threshold. The Company’s maximum exposure currently cannot be quantified.
Payments related to these agreements were $10,659, $10,328, and $10,417 for the years ended
December 31, 2018, 2017 and 2016, respectively. Amounts due to the related parties were recorded as
$833 and $901 in accrued expenses in the accompanying consolidated balance sheets as of December
31, 2018 and 2017, respectively.
Other Related Party Expenses
The Company utilizes the services of various companies that are owned and controlled by an
executive who is also a Company director and significant stockholder. The companies provide
construction project management services, private air transportation and other services. Expenses
related to these companies were $107, $20, and $80 for the years ended December 31, 2018, 2017 and
2016, respectively. No amounts were due to the related parties as of December 31, 2018 and 2017.
During 2018, the Company entered into an agreement to purchase software and services from a
company affiliated with a Company director. The aggregate amount of payments due under this contract
is $115. Payments related to this agreement were $35 for the year ended December 31, 2018. Amounts
due to this company were $35 as of December 31, 2018.
Related Party Revenues
The Company entered into a Stock Purchase Agreement with Mercer, a customer, on February 24,
2015 pursuant to which Mercer acquired 2,817,526 shares of the Company’s common stock and a
warrant to purchase up to an additional 580,813 shares of the Company’s common stock. As a result of
this transaction, Mercer became a related party by virtue of beneficially owning more than 10% of the
voting interest of the Company. At the same time, the Company entered into an amendment of its
commercial contract with Mercer. The amendment to the commercial contract, among other things,
expanded certain terms and conditions of the existing relationship between the Company and Mercer and
F-34
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
its affiliates. On August 24, 2017, Mercer’s warrant to purchase common stock of the Company expired
unexercised resulting in Mercer’s beneficial ownership of the Company falling below 10%. Accordingly, as
of that date, the Company no longer considers Mercer a related party. As of December 31, 2018, Mercer
beneficially owned 8.8% of the Company’s outstanding common stock. For the period January 1, 2017 to
August 24, 2017, revenue from Mercer was $17,611. For the year ended December 31, 2016, revenue
from Mercer was $27,663. Revenue from Mercer was reflected in “Revenues,” within the accompanying
statements of operations.
Related Party Revolving Line of Credit
As disclosed in Note 8, the Company amended its Senior Revolver at various times in 2017 and
2018. As part of the amendment in October 2016, Goldman Sachs Lending Partners, LLC was added to
the lending syndicate. Goldman Sachs Lending Partners, LLC is an affiliate of The Goldman Sachs
Group, Inc., as are the Goldman Sachs funds that owned approximately 11.8% of the Company’s
outstanding common stock as of December 31, 2018. Goldman Sachs Lending Partners, LLC committed
$10,000 to the revolving commitment and participates in amounts borrowed under the credit facility at a
rate of approximately 10.5%.
17. Selected Quarterly Financial Data (unaudited)
The following tables set forth selected unaudited quarterly statements of operations data for each of
the eight quarters in the years ended December 31, 2018 and 2017.
December 31,
2018
September
30,
2018
June 30,
2018
March 31,
2018
December 31,
2017
September
30,
2017
June 30,
2017
March 31,
2017
Quarter Ended
74,771 $
39,358
61,006 $
29,266
60,581 $
29,860
62,363 $
30,960
67,879 $
33,705
56,251 $
24,941
55,089 $
25,393
57,623
25,421
48,995
(9,637 )
(12,966 ) $
37,600
(8,334 )
(11,598 ) $
40,915
(11,055 )
(14,261 ) $
41,633
(10,673 )
(13,802 ) $
37,338
(3,633 )
(6,855 ) $
35,888
(10,947 )
(14,006 ) $
36,213
(10,820 )
(13,850 ) $
37,961
(12,540 )
(15,583 )
(0.41 ) $
(0.36 ) $
(0.45 ) $
(0.44 ) $
(0.22 ) $
(0.45 ) $
(0.45 ) $
(0.51 )
Consolidated
Statements of
Operations Data:
Revenue
Gross profit
Total operating
expenses
Operating loss
Net loss
Net loss per common
share (a)
Weighted-average
common shares
outstanding--basic and
diluted
$
$
$
31,988,033 31,883,029 31,806,972 31,333,348 31,285,263 31,181,141 31,076,995 30,658,468
(a) Quarterly and year-to-date computations of per share amounts are made independently. Therefore,
the sum of the per-share amounts for the quarters may not agree with per share amounts for the
year.
The quarterly unaudited consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements included in this report and include all adjustments,
consisting only of normal recurring adjustments, that we consider necessary for a fair presentation of
such information when read in conjunction with our annual audited consolidated financial statements and
notes appearing in this report. The operating results for any quarter do not necessarily indicate the results
for any subsequent period or for the entire fiscal year.
18. Subsequent Events
Business Combinations
On February 25, 2019, the Company purchased certain operating assets and liabilities, intellectual
property and intangible assets, including the workforce in place, from the commercial business of
Connecture, Inc., for $24,000 in cash. This acquisition will add technology to potentially strengthen the
F-35
BENEFITFOCUS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(thousands, except share and per share data)
Company’s platform, expand its customer reach and enhance the value the Company delivers to its
carrier customers. The Company has not completed its purchase price allocation.
Stock-Based Compensation
During January 2019, the Company granted 35,284 restricted stock units to employees with an
aggregate grant date fair value of $1,710. These restricted stock units generally vest in equal annual
installments generally over 3 and 4 years from the grant date. The Company amortizes the fair value of
the stock subject to the restricted stock units at the time of grant on a straight-line basis over the period of
vesting.
During January and February 2019, stock option exercises and vesting of restricted stock units
resulted in the issuance of 23,121 shares of common stock.
F-36
Schedule II—Valuation and Qualifying Accounts (in thousands)
Allowance for doubtful accounts and
returns:
Year Ended December 31, 2018
Year Ended December 31, 2017
Year Ended December 31, 2016
Balance at
Beginning
of Period
Additions
Charged To
Expense
Additions
Charged
Against
Revenue Deductions
Balance
at End of
Period
$
$
$
3,531 $
4,595 $
2,585 $
138 $
75 $
667 $
4,813 $
5,593 $
5,004 $
(4,898) $
(6,732) $
(3,661) $
3,584
3,531
4,595
Balance at
Beginning
of Period
Additions
Charged To
Costs and
Expenses
(1)
Deductions
Balance
at End of
Period
Deferred tax asset valuation allowance:
Year Ended December 31, 2018 (2)
Year Ended December 31, 2017 (3)(4)
Year Ended December 31, 2016 (5)
$
$
$
89,093 $
81,261 $
63,252 $
15,444 $
41,904 $
18,009 $
(22,229) $
(34,072) $
- $
82,308
89,093
81,261
(1)
Increase in valuation allowance is related to the generation of net operating losses and other
deferred tax assets.
(2) Decrease in valuation on allowances is related to adjustments to deferred revenue and convertible
debt issuance.
(3)
Increase in valuation allowance is related to adoption of ASU 2016-09.
(4) Decrease in valuation on allowances is related to the change in the enacted tax rule.
(5) Beginning balance has been adjusted for the effects of adoption of Topic 606.
F-37
Portions of this exhibit marked [*] are requested to be treated confidentially.
Exhibit 10.18.8
EIGHTH AMENDMENT AGREEMENT
BENEFITFOCUS.COM,
This Eighth Amendment Agreement (this “Amendment”) is entered into this 19th day of
December 2018, by and among BENEFITFOCUS, INC., a Delaware corporation (the
corporation
INC.,
“Parent”),
(“Benefitfocus.com”), and BENEFITSTORE, INC., a South Carolina corporation
(“BenefitStore”, and together with the Parent and Benefitfocus.com, each individually, a
“Borrower”, and collectively, the “Borrowers”), the several banks and other financial
institutions or entities party hereto (each a “Lender” and, collectively, the “Lenders”), and
SILICON VALLEY BANK, as administrative agent and collateral agent for the Lenders (in
such capacity, the “Administrative Agent”).
Carolina
South
a
RECITALS
A. The Borrowers, the Lenders and the Administrative Agent have entered into that certain
Credit Agreement dated as of February 20, 2015, as amended pursuant to that certain First
Amendment Agreement dated June 16, 2015, pursuant to that certain Second Amendment
Agreement dated December 18, 2015, pursuant to that certain Third Amendment Agreement
dated March 24, 2016, pursuant to that certain Fourth Amendment Agreement dated October 28,
2016, pursuant to that certain Fifth Amendment Agreement dated December 12, 2016, pursuant
to that certain Sixth Amendment Agreement dated April 26, 2017 and pursuant to that Seventh
Amendment Agreement dated March 29, 2018 (as amended and as the same may from time to
time be further amended, modified, supplemented or restated, the “Credit Agreement”), pursuant
to which the Lenders have extended credit to the Borrowers for the purposes permitted in the
Credit Agreement.
B. The Borrowers have requested and the Required Lenders and the Administrative Agent
agree to modify and amend certain terms and conditions of the Credit Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing recitals and other good and valuable
consideration, the receipt and adequacy of which is hereby acknowledged, and intending to be
legally bound, the parties hereto agree as follows:
1. Definitions. Capitalized terms used but not defined in this Amendment shall have
the meanings given to them in the Credit Agreement.
2. Amendments to Credit Agreement. The Credit Agreement is hereby amended by
deleting the stricken text (indicated textually in the same manner as the following
example: stricken text) and adding the double-underlined text (indicated textually in the
same manner as the following example: double-underlined text) as set forth in the
amended Credit Agreement attached as Exhibit A hereto.
3. Conditions Precedent to Effectiveness. This Amendment shall not be effective
until each of the following conditions precedent have been fulfilled to the satisfaction of
(and in form and substance satisfactory to, as applicable) the Administrative Agent (such
date, the “Eighth Amendment Effective Date”):
Error! Unknown document property name.Error! Unknown document property name.Error! Unknown document property name.
3.1 This Amendment shall have been duly executed and delivered by the
respective parties hereto. The Administrative Agent shall have received a fully executed copy
hereof.
3.2 All necessary consents and approvals to this Amendment shall have been
obtained by the Loan Parties.
3.3 No Default or Event of Default shall have occurred and be continuing
immediately after giving effect to this Amendment.
3.4 After giving effect to this Amendment and subject to the qualifications set
forth in Section 5.1, each of the representations and warranties herein and in the Credit Agreement
and the other Loan Documents (i) that is qualified by materiality shall be true and correct, and (ii)
that is not qualified by materiality, shall be true and correct in all material respects, in each case,
on and as of the Eighth Amendment Effective Date as if made on and as of such date, except to
the extent any such representation and warranty expressly relates to an earlier date, in which case
such representation and warranty shall have been true and correct in all material respects as of
such earlier date.
For purposes of determining compliance with the conditions specified in this Section 3,
each Lender that has executed this Amendment shall be deemed to have consented to, approved
or accepted or to be satisfied with, each document or other matter either sent (or made available)
by the Administrative Agent to such Lender for consent, approval, acceptance or satisfaction, or
required thereunder to be consented to or approved by or acceptable or satisfactory to such
Lender, unless an officer of the Administrative Agent responsible for the transactions
contemplated by the Loan Documents shall have received notice from such Lender prior to the
Eighth Amendment Effective Date specifying such Lender’s objection thereto and such objection
shall not have been withdrawn by notice to the Administrative Agent to that effect on or prior to
the Eighth Amendment Effective Date.
4. Limitation of Amendment.
4.1 The amendments set forth in Section 2, above, are effective for the purposes
set forth herein and shall be limited precisely as written and shall not be deemed to (a) be a consent
to any amendment, waiver or modification of any other term or condition of any Loan Document,
or (b) otherwise prejudice any right or remedy which the Administrative Agent or the Lenders
may now have or may have in the future under or in connection with any Loan Document.
4.2 This Amendment shall be construed in connection with and as part of the
Loan Documents and all terms, conditions, representations, warranties, covenants and agreements
set forth in the Loan Documents, except as herein amended, are hereby ratified and confirmed
and shall remain in full force and effect.
5. Representations and Warranties. To induce the Administrative Agent and the
Required Lenders to enter into this Amendment, the Borrowers hereby represent and
warrant as follows:
39
5.1 Immediately after giving effect to this Amendment (a) the representations
and warranties contained in the Loan Documents are true, accurate and complete in all material
respects as of the date hereof (except to the extent such representations and warranties relate to
an earlier date, in which case they are true and correct as of such date), it being understood and
agreed that the Borrowers are not required to update Schedules to the Loan Documents except to
reflect material changes in the information contained therein since the date on which such
Schedules were most recently updated, and (b) no Event of Default has occurred and is
continuing;
5.2 Each Borrower has the power and authority to execute and deliver this
Amendment and to perform its obligations under the Credit Agreement, as amended by this
Amendment;
5.3 The execution and delivery by each Borrower of this Amendment and the
performance by such Borrower of its obligations under the Credit Agreement, as amended by this
Amendment, have been duly authorized;
5.4 The execution and delivery by each Borrower of this Amendment and the
performance by each Borrower of its obligations under the Credit Agreement, as amended by this
Amendment, do not and will not contravene (a) any law or regulation binding on or affecting such
Borrower, (b) any contractual restriction with a Person binding on such Borrower, (c) any order,
judgment or decree of any court or other governmental or public body or authority, or subdivision
thereof, binding on such Borrower, or (d) the organizational documents of such Borrower;
5.5 The execution and delivery by each Borrower of this Amendment and the
performance by such Borrower of its obligations under the Credit Agreement, as amended by this
Amendment, do not require any order, consent, approval, license, authorization or validation of,
or filing, recording or registration with, or exemption by any governmental or public body or
authority, or subdivision thereof, binding on such Borrower, except as already has been obtained
or made; and
5.6 This Amendment has been duly executed and delivered by each Borrower
and is the binding obligation of such Borrower, enforceable against such Borrower in accordance
with its terms, except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, liquidation, moratorium or other similar laws of general application and equitable
principles relating to or affecting creditors’ rights.
6. Payment of Costs and Fees. The Borrower shall pay to the Administrative Agent
all costs and all reasonable out-of-pocket expenses in connection with the preparation,
negotiation, execution and delivery of this Amendment and any documents and
instruments relating hereto (which costs include, without limitation, the reasonable fees
and expenses of outside counsel retained by Administrative Agent), in each case, as set
forth in Section 10.5 of the Credit Agreement.
7. No Defenses of Borrowers. Each Borrower hereby acknowledges and agrees that
such Borrower has no offsets, defenses, claims, or counterclaims against the
40
Administrative Agent or any Lender with respect to the Obligations, or otherwise, and
that if such Borrower now has, or ever did have, any offsets, defenses, claims, or
counterclaims against the Administrative Agent or any Lender, whether known or
unknown, at law or in equity, all of them are hereby expressly WAIVED and such
Borrower hereby RELEASES the Administrative Agent and each Lender from any
liability thereunder.
8. Integration. This Amendment and the Loan Documents represent the entire
agreement about this subject matter and supersede prior negotiations or agreements. All
prior agreements, understandings, representations, warranties, and negotiations between
the parties about the subject matter of this Amendment and the Loan Documents merge
into this Amendment and the Loan Documents.
9. Counterparts. This Amendment may be executed in any number of counterparts
and all of such counterparts taken together shall be deemed to constitute one and the same
instrument.
10. Effect on Loan Documents.
10.1 The amendments set forth herein shall be limited precisely as written and
shall not be deemed (a) to be a forbearance, waiver, or modification of any other term or condition
of the Credit Agreement or of any Loan Documents or to prejudice any right or remedy which the
Administrative Agent may now have or may have in the future under or in connection with the
Loan Documents; (b) to be a consent to any future consent or modification, forbearance, or waiver
to the Credit Agreement or any other Loan Document, or to any waiver of any of the provisions
thereof; or (c) to limit or impair the Administrative Agent’s right to demand strict performance
of all terms and covenants as of any date. The Borrowers, on behalf of each Loan Party, hereby
ratify and reaffirm the Borrowers’ obligations under the Credit Agreement and each Loan Party’s
obligations under each other Loan Document to which it is a party and agrees that none of the
amendments or modifications to the Credit Agreement set forth in this Amendment shall impair
any Loan Party’s obligations under the Loan Documents or the Administrative Agent’s rights
under the Loan Documents. The Borrowers, on behalf of each Loan Party, hereby further ratify
and reaffirm the validity and enforceability of all of the Liens heretofore granted, pursuant to and
in connection with the Guarantee and Collateral Agreement or any other Loan Document to the
Administrative Agent on behalf and for the benefit of the Secured Parties, as collateral security
for the obligations under the Loan Documents, in accordance with their respective terms, and
acknowledge that all of such Liens, and all collateral heretofore pledged as security for such
obligations, continues to be and remain collateral for such obligations (as amended hereby) from
and after the date hereof. The Borrowers, on behalf of each Loan Party, acknowledge and agree
that the Credit Agreement and each other Loan Document is still in full force and effect and
acknowledge as of the date hereof that no Loan Party has any defenses to enforcement of the Loan
Documents. The Borrowers, on behalf of each Loan Party, waive any and all defenses to
enforcement of the Credit Agreement as amended hereby and each other Loan Document that
might otherwise be available as a result of this Amendment. To the extent any terms or provisions
of this Amendment conflict with those of the Credit Agreement or other Loan Documents, the
terms and provisions of this Amendment shall control.
41
10.2 To the extent that any terms and conditions in any of the Loan Documents
shall contradict or be in conflict with any terms or conditions of the Credit Agreement, after giving
effect to this Amendment, such terms and conditions are hereby deemed modified or amended
accordingly to reflect the terms and conditions of the Credit Agreement as modified or amended
hereby.
10.3 This Amendment is a Loan Document.
11. Acknowledgement of Obligations. The Loan Parties acknowledge that on and as
of the Eighth Amendment Effective Date, all Obligations are payable without defense,
offset, counterclaim or recoupment. Each of the Loan Parties, the Administrative Agent,
the Issuing Lender and Swingline Lender and each other Lender party hereto does hereby
adopt, ratify, and confirm the Credit Agreement, as amended hereby, and acknowledges
and agrees that the Credit Agreement, as amended hereby, is and remains in full force and
effect, and the Borrower acknowledges and agrees that their Obligations under the Credit
Agreement, as amended hereby, are not impaired in any respect by this Amendment.
12. Reaffirmation. Each Loan Party hereby reaffirms its obligations under each Loan
Document to which it is a party. Each Loan Party hereby further ratifies and reaffirms the
validity and enforceability (except as enforceability may be limited by bankruptcy,
insolvency, or similar laws affecting creditors’ rights generally and general principles of
equity) of all of the Liens heretofore granted, pursuant to and in connection with the
Guaranty and Collateral Agreement or any other Loan Document to the Administrative
Agent on behalf and for the benefit of Secured Parties, as collateral security for the
obligations under the Loan Documents (including such obligations as amended hereby) in
accordance with their respective terms, and acknowledges that all of such Liens, and all
collateral heretofore pledged as security for such obligations, continues to be and remain
collateral for such obligations from and after the date hereof.
13. Severability. The provisions of this Amendment are severable, and if any clause
or provision shall be held invalid or unenforceable in whole or in part in any jurisdiction,
then such invalidity or unenforceability shall affect only such clause or provision, or part
thereof, in such jurisdiction and shall not in any manner affect such clause or provision in
any other jurisdiction, or any other clause or provision in this Amendment in any
jurisdiction.
14. Choice of Law. Section 10.13 and Section 10.14 of the Credit Agreement are
hereby incorporated by reference in their entity mutatis mutandis.
[Signature page follows.]
42
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly
executed and delivered as of the date first written above.
BORROWERS:
BENEFITFOCUS.COM, INC.
BENEFITFOCUS, INC.
By: /s/ Jonathon E. Dussault
Name: Jonathon E. Dussault
Title: Chief Financial Officer
By: /s/ Jonathon E. Dussault
Name: Jonathon E. Dussault
Title: Chief Financial Officer
BENEFITSTORE, INC.
By: /s/ Jonathon E. Dussault
Name: Jonathon E. Dussault
Title: Chief Financial Officer
Signature Page to Eighth Amendment
SILICON VALLEY BANK, as Administrative Agent and as a Lender
By /s/ Will Deevy
Name: Will Deevy
Title: Director
Signature Page to Eighth Amendment
COMERICA BANK, as a Lender
By /s/ John Benetti
Name: John Benetti
Title: SVP
Signature Page to Eighth Amendment
PACIFIC WESTERN BANK, as a Lender
By: /s/ Stephen J. Berens
Name: Stephen J. Berens
Title: SVP
Signature Page to Eighth Amendment
GOLDMAN SACHS LENDING PARTNERS LLC, as a Lender
By /s/ Jamie Minieri
Name: Jamie Minieri
Title: Authorized Signator
Attachment 3 to Compliance Certificate
Exhibit A – Conformed Credit Agreement
CONFORMED COPY – SEVENTH AMENDMENTReflects changes of Eighth Amendment to Credit
Agreement
SENIOR SECURED REVOLVING CREDIT FACILITY
CREDIT AGREEMENT
dated as of February 20, 2015,
among
BENEFITFOCUS, INC.
BENEFITFOCUS.COM, INC.
BENEFIT INFORMATICS, INC.
BENEFITSTORE, INC.
as the Borrowers,
THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO,
SILICON VALLEY BANK,
as Administrative Agent, Issuing Lender and Swingline Lender
and
COMERICA BANK,
as Documentation Agent
SECTION 1 DEFINITIONS
1.1
1.2
Defined Terms
Other Definitional Provisions.
SECTION 2 AMOUNT AND TERMS OF REVOLVING COMMITMENTS
2.1
2.2
2.3
2.4
2.5
2.6
2.7
2.8
2.9
2.10
2.11
2.12
2.13
2.14
2.15
2.16
2.17
2.18
2.19
2.20
2.21
2.22
2.23
2.24
2.25
2.26
Reserved
Reserved
Reserved
Revolving Commitments.
Procedure for Revolving Loan Borrowing
Swingline Commitment
Procedure for Swingline Borrowing; Refunding of Swingline Loans.
Overadvances
Fees.
Termination or Reduction of Total Revolving Commitments; Total L/C
Commitments.
Optional Loan Prepayments.
Incremental Facility.
Reserved.
Reserved
Interest Rates and Payment Dates.
Computation of Interest and Fees.
Reserved
Pro Rata Treatment and Payments.
Requirements of Law.
Taxes.
Reserved
Change of Lending Office
Substitution of Lenders
Defaulting Lenders.
Joint and Several Liability of the Borrowers.
Notes
SECTION 3 LETTERS OF CREDIT
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
3.10
3.11
3.12
3.13
L/C Commitment.
Procedure for Issuance of Letters of Credit
Fees and Other Charges.
L/C Participations.
Reimbursement.
Obligations Absolute
Letter of Credit Payments
Applications
Interim Interest
Cash Collateral.
Reserved
Reserved
Applicability of ISP
SECTION 4 REPRESENTATIONS AND WARRANTIES
4.1
Financial Condition.
1
1
2729
2830
2830
2830
2830
2830
2930
2931
3031
3132
3233
3234
3234
3335
3436
3436
3536
3536
3537
3537
3839
3941
4344
4344
4345
4446
4748
5051
5051
5051
5152
5153
5254
5254
5355
5455
5455
5455
5456
5557
5557
5557
5557
5657
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
4.13
4.14
4.15
4.16
4.17
4.18
4.19
4.20
4.21
4.22
4.23
4.24
4.25
4.26
4.27
4.28
4.29
No Change
Existence; Compliance with Law
Power, Authorization; Enforceable Obligations
No Legal Bar
Litigation
No Default
Ownership of Property; Liens; Investments
Intellectual Property
Taxes
Federal Regulations
Labor Matters
ERISA
Investment Company Act; Other Regulations
Subsidiaries
Use of Proceeds
Environmental Matters
Accuracy of Information, Etc.
Security Documents.
Solvency
Regulation H
Designated Senior Indebtedness
Reserved
Insurance
No Casualty
Accounts Receivable.
Definition of “Knowledge”
Patriot Act
OFAC
SECTION 5 CONDITIONS PRECEDENT
5.1
5.2
5.3
Conditions to Initial Extension of Credit
Conditions to Each Extension of Credit
Post-Closing Conditions Subsequent
SECTION 6 AFFIRMATIVE COVENANTS
6.1
6.2
6.3
6.4
6.5
6.6
6.7
6.8
6.9
6.10
6.11
6.12
6.13
6.14
6.15
6.16
Financial Statements
Certificates; Reports; Other Information
Accounts Receivable.
Payment of Obligations
Maintenance of Existence; Compliance
Maintenance of Property; Insurance
Inspection of Property; Books and Records; Discussions
Notices
Environmental Laws.
Operating Accounts
Audits
Additional Collateral, Etc.
Use of Proceeds
Licensee Consent.
Designated Senior Indebtedness
Further Assurances
5658
5658
5758
5758
5759
5759
5759
5759
5859
5859
5860
5860
5961
5961
5961
5961
6062
6162
6163
6163
6163
6163
6163
6263
6263
6263
6264
6264
6264
6264
6668
6768
6769
6769
6869
6971
7072
7072
7173
7173
7173
7274
7374
7374
7375
7577
7577
7677
7677
SECTION 7 NEGATIVE COVENANTS
7.1
7.2
7.3
7.4
7.5
7.6
7.7
7.8
7.9
7.10
7.11
7.12
7.13
7.14
7.15
7.16
7.17
7.18
7.19
7.20
7.21
7.22
7.23
Financial Condition Covenants.
Indebtedness
Liens
Fundamental Changes
Disposition of Property
Restricted Payments
Consolidated Capital Expenditures
Investments
ERISA
Optional Payments and Modifications of Certain Preferred Stock and Debt
Instruments
Transactions with Affiliates
Sale Leaseback Transactions
Swap Agreements
Accounting Changes
Negative Pledge Clauses
Clauses Restricting Subsidiary Distributions
Lines of Business
Designation of other Indebtedness
Certification of Certain Capital Stock
Amendments to Organizational Agreements and Material Contracts
Use of Proceeds
Subordinated Indebtedness.
Anti-Terrorism Laws.
SECTION 8 EVENTS OF DEFAULT
8.1
8.2
8.3
Events of Default
Remedies upon Event of Default
Application of Funds
SECTION 9 THE ADMINISTRATIVE AGENT
9.1
9.2
9.3
9.4
9.5
9.6
9.7
9.8
9.9
9.10
9.11
9.12
9.13
9.14
Appointment and Authority.
Delegation of Duties
Exculpatory Provisions
Reliance by Administrative Agent
Notice of Default
Non-Reliance on Administrative Agent and Other Lenders
Indemnification
Agent in Its Individual Capacity
Successor Administrative Agent.
Collateral and Guaranty Matters
Administrative Agent May File Proofs of Claim
Reports and Financial Statements.
No Other Duties, Etc.
Survival.
SECTION 10 MISCELLANEOUS
10.1
10.2
Amendments and Waivers.
Notices.
7677
7678
7678
7779
7981
7981
8082
8183
8184
8386
8487
8487
8487
8487
8487
8487
8588
8588
8588
8588
8588
8588
8689
8689
8689
8689
8689
9093
9194
9194
9194
9194
9296
9396
9396
9497
9497
9498
9699
9699
97100
97100
97100
97100
97101
97101
No Waiver; Cumulative Remedies
Survival of Representations and Warranties
Expenses; Indemnity; Damage Waiver.
Successors and Assigns; Participations and Assignments.
Adjustments; Set-off.
Payments Set Aside
Interest Rate Limitation
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10 Counterparts; Electronic Execution of Assignments.
10.11 Severability
10.12
Integration
10.13 GOVERNING LAW
10.14 Submission to Jurisdiction; Waivers
10.15 Acknowledgements
10.16 Releases of Guarantees and Liens.
10.17 Treatment of Certain Information; Confidentiality
10.18 Automatic Debits
10.19
10.20 Patriot Act
10.21 Termination
Judgment Currency
101104
101104
101105
103106
107110
108111
108111
108111
109112
109112
109112
109112
110113
110113
110113
111114
112115
112115
112115
Schedule 1.1A:
Schedule 4.15:
Schedule 4.17:
Schedule 4.19(a):
Schedule 5.3:
Schedule 6.10:
Schedule 7.2(d):
Schedule 7.3(f):
Schedule 7.8(m):
SCHEDULES
Commitments
Subsidiaries
Environmental Matters
Financing Statements and Other Filings
Post-Closing Matters
NBSC Bank Accounts
Existing Indebtedness
Existing Liens
Existing Investments
EXHIBITS
Exhibit A:
Exhibit B:
Exhibit C:
Exhibit D:
Exhibit E:
Exhibits F-1 – F-4:
Exhibit G-1:
Exhibit G-2:
Exhibit H:
Exhibit I:
Form of Guarantee and Collateral Agreement
Form of Compliance Certificate
Form of Secretary’s/Managing Member’s Certificate
Form of Solvency Certificate
Form of Assignment and Assumption
Forms of U.S. Tax Compliance Certificate
Form of Revolving Loan Note
Form of Swingline Loan Note
Form of Collateral Information Certificate
Form of Notice of Borrowing
CREDIT AGREEMENT
INC., a Delaware corporation
THIS CREDIT AGREEMENT (this “Agreement”), dated as of February 20, 2015, is entered
into by and among BENEFITFOCUS,
(the “Parent”),
BENEFITFOCUS.COM, INC., a South Carolina corporation (“Benefitfocus.com”), BENEFIT
INFORMATICS, INC., a Delaware corporation (“Benefit Informatics”) and BENEFITSTORE, INC.,
a South Carolina corporation (“BenefitStore”, and together with the Parent, Benefitfocus.com and Benefit
Informatics, each individually, a “Borrower”, and collectively, the “Borrowers”), the several banks and
other financial institutions or entities from time to time parties to this Agreement (each a “Lender” and,
collectively, the “Lenders”), SILICON VALLEY BANK, as the Issuing Lender and the Swingline Lender,
SILICON VALLEY BANK (“SVB”), as administrative agent and collateral agent for the Lenders (in such
capacity, the “Administrative Agent”) and COMERICA BANK, as documentation agent (in such
capacity, the “Documentation Agent”).
RECITALS:
WHEREAS, the Borrowers desire to obtain financing to refinance the Existing Credit Facility (as
defined herein), as well as for working capital financing and letter of credit facilities;
WHEREAS, the Lenders have agreed to extend a revolving loan facility to the Borrowers, upon
the terms and conditions specified in this Agreement, in an aggregate amount not to exceed $95,000,000,
with a letter of credit sub-facility in the aggregate availability amount of $5,000,000 (as a sublimit of the
revolving loan facility) and a swingline sub-facility in the aggregate availability amount of $5,000,000 (as
a sublimit of the revolving loan facility);
WHEREAS, each Loan Party has agreed to secure all of its respective Obligations by granting to
the Administrative Agent, for the ratable benefit of the Secured Parties, a first priority lien (subject to Liens
permitted by the Loan Documents) in substantially all of its respective personal property assets pursuant to
the terms of the Guarantee and Collateral Agreement and the other Security Documents; and
WHEREAS, each of the Guarantors has agreed to guarantee the Obligations of the Borrowers and
to secure its respective Secured Obligations by granting to the Administrative Agent, for the ratable benefit
of the Secured Parties, a first priority lien (subject to Liens permitted by the Loan Documents) in
substantially all of such Guarantor’s personal property assets pursuant to the terms of the Guarantee and
Collateral Agreement and the other Security Documents.
NOW, THEREFORE, the parties hereto hereby agree as follows:
SECTION 1
DEFINITIONS
1.1 Defined Terms. As used in this Agreement (including the recitals hereof), the terms listed
in this Section 1.1 shall have the respective meanings set forth in this Section 1.1.“ABR”: for any day, a
rate per annum equal to the higher of (a) the Prime Rate in effect on such day and (b) the Federal Funds
Effective Rate in effect for such day plus 0.50%. Any change in the ABR due to a change in the Prime
Rate or the Federal Funds Effective Rate shall be effective as of the opening of business on the effective
day of such change in the Prime Rate or the Federal Funds Effective Rate. In no event shall the ABR be
less than 0.00%.
“Account Debtor”: any Person who may become obligated to any Person under, with respect to,
or on account of, an Account, chattel paper or general intangible (including a payment intangible). Unless
1
otherwise stated, the term “Account Debtor,” when used herein, shall mean an Account Debtor in respect
of an Account of a Borrower.
“Accounts”: all “accounts” (as defined in the UCC) of a Person, including, without limitation,
accounts, accounts receivable, monies due or to become due and obligations in any form (whether arising
in connection with contracts, contract rights, instruments, general intangibles, or chattel paper), in each case
whether arising out of goods sold or services rendered or from any other transaction and whether or not
earned by performance, now or hereafter in existence, and all documents of title or other documents
representing any of the foregoing, and all collateral security and guaranties of any kind, now or hereafter in
existence, given by any Person with respect to any of the foregoing. Unless otherwise stated, the term
“Account,” when used herein, shall mean an Account of a Borrower.
“Administrative Agent”: SVB, as the administrative agent under this Agreement and the other
Loan Documents, together with any of its successors in such capacity.
“Affected Lender”: as defined in Section 2.23.
“Affiliate”: 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; provided, that, neither the Administrative Agent nor the Lenders shall be deemed Affiliates of
the Loan Parties as a result of the exercise of their rights and remedies under the Loan Documents.
“Agent Parties”: as defined in Section 10.2(d)(ii).
“Agreement”: as defined in the preamble hereto.
“Agreement Currency”: as defined in Section 10.19.
“Annualized Recurring Revenue Retention Rate”: a percentage equal to one (1) minus the ratio
of the annualized amount of Recurring Revenue Lost during the Measurement Period, divided by Recurring
Revenue of the last month of the Measurement Period multiplied by twelve (12). Annualized Recurring
Revenue Retention Rate will be adjusted quarterly based on Recurring Revenue Lost during the preceding
calendar quarter.
“Applicable Margin”:
(a) from the Fourth Amendment Effective Date until November 5, 2016, the percentages set
forth in Level I of the pricing grid below; and
(b) from and after November 5, 2016 and on the fifth day of each month thereafter, the
Applicable Margin shall be determined from the following pricing grids based upon Liquidity as set forth
in the most recent Liquidity Report delivered or required to be delivered pursuant to Section 6.2(g) hereof;
provided however if any Transaction Report or other calculation of a component of Liquidity is at any time
restated or otherwise revised (including as a result of an audit) or if the information set forth in any
Transaction Report or other calculation of a component of Liquidity otherwise proves to be false or incorrect
such that the Applicable Margin would have been higher than was otherwise in effect during any period,
without constituting a waiver of any Default or Event of Default arising as a result thereof, interest and/or
fees due under this Agreement shall be immediately recalculated at such other rate for any applicable
periods and shall be due and payable promptly after demand from the Administrative Agent if such other
rate would have been higher.
2
REVOLVING LOANS AND SWINGLINE LOANS
Level
Liquidity
Revolving Loans Swingline Loans
I
II
III
> $90,000,000
> $60,000,000 but <
$90,000,000
< $60,000,000
0.75%
1.00%
1.25%
0.75%
1.00%
1.25%
LETTER OF CREDIT FEE
Level
Liquidity
Letter of Credit Fees
I
II
III
> $90,000,000
> $60,000,000 but < $90,000,000
< $60,000,000
0.75%
1.00%
1.25%
Notwithstanding the foregoing, (a) if the Borrowers fail to deliver a Transaction Report or other
calculation of a component of Liquidity as required herein, the Applicable Margin shall be the rates
corresponding to Level III in the foregoing tables until such Transaction Report and/or calculation is
delivered, and (b) no reduction to the Applicable Margin shall become effective at any time when an Event
of Default has occurred and is continuing.
“Application”: an application, in such form as the Issuing Lender may specify from time to time,
requesting the Issuing Lender to issue a Letter of Credit.
“Approved Fund”: any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of
a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
“ASC 606”: Accounting Standards Codification (ASC) Topic 606: Revenue from Contracts with
Customers issued by the Financial Accounting Standards Board.
“Assignment and Assumption”: an assignment and assumption entered into by a Lender and an
Eligible Assignee (with the consent of any party whose consent is required by Section 10.6), and accepted
by the Administrative Agent, in substantially the form of Exhibit E or any other form (including electronic
documentation generated by an electronic platform) approved by the Administrative Agent and reasonably
acceptable to the Borrowers.
“Available Revolving Commitment”: at any time, an amount equal to (a) (x) the lesser of (i) the
Total Revolving Commitments in effect at such time and (ii) the Borrowing Base in effect at such time, less
(y) Reserves imposed by the Administrative Agent in its Permitted Discretion from time to time, minus
(b) the Total Revolving Extensions of Credit.
“Available Revolving Increase Amount”: as of any date of determination, an amount equal to the
result of (a) $40,000,000 minus (b) the aggregate principal amount of Increases to the Revolving
Commitments previously made pursuant to Section 2.12. As of the Fourth Amendment Effective Date, the
Available Revolving Increase Amount is $5,000,000.00.
3
“Bankruptcy Code”: Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter
in effect, or any successor thereto.
“Bank Services”: any products, credit services and/or financial accommodations previously, now,
or hereafter provided to any Group Member by any Bank Services Provider, including any letters of credit
(other than any Letters of Credit provided for the account of the Borrowers hereunder), cash management
services, credit cards and foreign exchange services, in each case, other than to the extent constituting
Specified Swap Agreements, as any such products or services may be identified in such Bank Services
Provider’s various agreements related thereto (each, a “Bank Services Agreement”).
“Bank Services Agreement”: as defined in the definition of “Bank Services.”
“Bank Services Provider”: the Administrative Agent, any Lender, or any Affiliate of the foregoing
who provides Bank Services to any Group Member.
“Benefitted Lender”: as defined in Section 10.7(a).
“Board”: the Board of Governors of the Federal Reserve System of the United States (or any
successor).
“Borrower” or “Borrowers”: as defined in the preamble hereto.
“Borrowing Base”: the product of (i) four hundred percent (400%), multiplied by (ii) the
Borrowers’ monthly Recurring Revenue (as stated within the last month of the applicable Measurement
Period) multiplied by (iii) the Borrowers’ Annualized Recurring Revenue Retention Rate.
“Borrowing Date”: any Business Day specified by a Borrower in a Notice of Borrowing as a date
on which such Borrower requests the relevant Lenders to make Loans hereunder.
“Business”: as defined in Section 4.17(b).
“Business Day”: a day other than a Saturday, Sunday or other day on which commercial banks in
the State of California or the State of New York are authorized or required by law to close.
“Capital Lease Obligations”: as to any Person, 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 leases
on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such
obligations at any time shall be the capitalized amount thereof at such time determined in accordance with
GAAP.
“Capital Stock”: any and all shares, interests, participations or other equivalents (however
designated) of capital stock of a corporation, any and all equivalent ownership interests in a Person (other
than a corporation) and any and all warrants, rights or options to purchase any of the foregoing; provided
that Permitted Convertible Indebtedness, or other debt securities that are or by their terms may be
convertible or exchangeable into or for Capital Stock that is not Disqualified Stock, shall not constitute
Capital Stock prior to settlement, conversion or exchange thereof.
“Cash Collateral Account”: as defined in Section 6.3(c).
“Cash Collateralize”: to pledge and deposit with or deliver to (a) with respect to Obligations in
4
respect of Letters of Credit, the Administrative Agent, for the benefit of the Issuing Lender and one or more
of the Lenders, as applicable, as collateral for L/C Exposure or obligations of the Lenders to fund
participations in respect thereof, cash or Deposit Account balances having an aggregate value of at least
105% (110% in the case of any L/C Exposure in respect of a Letter of Credit denominated in a Foreign
Currency) of the L/C Exposure or, if the Administrative Agent and the Issuing Lender shall agree in their
sole discretion, other credit support, in each case pursuant to documentation in form and substance
satisfactory to the Administrative Agent and the Issuing Lender; (b) with respect to Obligations arising
under any Bank Services Agreement in connection with Bank Services, the applicable Bank Services
Provider, for its own benefit or any of its applicable Affiliates’ benefit, as provider of such Bank Services,
cash or Deposit Account balances having an aggregate value of at least 105% of the aggregate amount of
the Obligations of the Group Members arising under all such Bank Services Agreements evidencing such
Bank Services, or, if such Bank Services Provider shall agree in its sole discretion, other credit support
pursuant to documentation in form and substance reasonably satisfactory to the Bank Services Provider; or
(c) with respect to Obligations in respect of any Specified Swap Agreements, the applicable Qualified
Counterparty, as Collateral for such Obligations, cash or Deposit Account balances or, if such Qualified
Counterparty shall agree in its sole discretion, other credit support, in each case pursuant to documentation
in form and substance satisfactory to such Qualified Counterparty. “Cash Collateral” shall have a meaning
correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
“Cash Equivalents”: (a) marketable direct obligations issued by, or unconditionally guaranteed
by, the United States Government or issued by any agency thereof and backed by the full faith and credit
of the United States, in each case maturing within one year from the date of acquisition; (b) certificates of
deposit, time deposits, eurodollar time deposits or overnight bank deposits having maturities of one year or
less from the date of acquisition issued by any Lender or by any commercial bank organized under the laws
of the United States or any state thereof having combined capital and surplus of not less than $250,000,000;
(c) commercial paper of an issuer rated at least A-1 by S&P or P-1 by Moody’s, or carrying an equivalent
rating by a nationally recognized rating agency, if both of the two named rating agencies cease publishing
ratings of commercial paper issuers generally, and maturing within six months from the date of acquisition;
(d) repurchase obligations of any Lender or of any commercial bank satisfying the requirements of clause
(b) of this definition, having a term of not more than 30 days, with respect to securities issued or fully
guaranteed or insured by the United States government; (e) securities with maturities of one year or less
from the date of acquisition issued or fully guaranteed by any state, commonwealth or territory of the United
States, by any political subdivision or taxing authority of any such state, commonwealth or territory or by
any foreign government, the securities of which state, commonwealth, territory, political subdivision, taxing
authority or foreign government (as the case may be) are rated at least A by S&P or A by Moody’s; (f)
securities with maturities of six months or less from the date of acquisition backed by standby letters of
credit issued by any Lender or any commercial bank satisfying the requirements of clause (b) of this
definition; (g) money market mutual or similar funds that invest exclusively in assets satisfying the
requirements of clauses (a) through (f) of this definition; or (h) money market funds that (i) comply with
the criteria set forth in SEC Rule 2a-7 under the Investment Company Act of 1940, as amended, (ii) are
rated AAA by S&P and Aaa by Moody’s and (iii) have portfolio assets of at least $5,000,000,000.
“Casualty Event”: any damage to or any destruction of, or any condemnation or other taking by
any Governmental Authority of any property of the Loan Parties.
“Certificated Securities”: as defined in Section 4.19(a).
“Change of Control”: (a) at any time, 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 or
5
its Subsidiaries and any person acting in its capacity as trustee, agent or other fiduciary or administrator of
any such plan) other than a Permitted Holder shall become, or obtain rights (whether by means of warrants,
options or otherwise) to become, the “beneficial owner” (as defined in Rules 13(d)-3 and 13(d)-5 under the
Exchange Act), directly or indirectly, of 35% or more of the ordinary voting power for the election of
directors of the Parent (determined on a fully diluted basis); (b) during any period of 12 consecutive months,
a majority of the members of the board of directors or other equivalent governing body of the Parent cease
to be composed of individuals (i) who were members of that board or equivalent governing body on the
first day of such period, (ii) whose election or nomination to that board or equivalent governing body was
approved by individuals referred to in clause (i) above constituting at the time of such election or
nomination at least a majority of that board or equivalent governing body or (iii) whose election or
nomination to that board or other equivalent governing body was approved by individuals referred to in
clauses (i) and (ii) above constituting at the time of such election or nomination at least a majority of that
board or equivalent governing body; or (c) except as permitted under Article VII of this Agreement, the
Parent shall cease to own and control, of record and beneficially, directly or indirectly, 100% of each class
of outstanding Capital Stock of each other Loan Party free and clear of all Liens (except Liens created by
the Security Documents and non-consensual Liens permitted by Section 7.3 arising by operation of law; or
(d) the occurrence of any “fundamental change” or similar event under any agreement governing
Permitted Convertible Indebtedness.
“Closing Date”: the date on which all of the conditions precedent set forth in Section 5.1 are
satisfied or waived by the Administrative Agent and, as applicable, the Lenders or the Required Lenders.
“Code”: the Internal Revenue Code of 1986, as amended from time to time.
“Collateral”: all property of the Loan Parties, now owned or hereafter acquired, upon which a Lien
is purported to be created by any Security Document.
“Collateral Information Certificate”: the Collateral Information Certificate to be executed and
delivered by the Loan Parties pursuant to Section 5.1, substantially in the form of Exhibit H.
“Collateral-Related Expenses”: all reasonable and out-of-pocket costs and expenses of the
Administrative Agent paid or incurred in connection with any sale, collection or other realization on the
Collateral, including reasonable compensation to the Administrative Agent and its agents and counsel, and
reimbursement for all other costs, expenses and liabilities and advances made or incurred by the
Administrative Agent in connection therewith (including as described in Section 6.6 of the Guarantee and
Collateral Agreement), and all amounts for which the Administrative Agent is entitled to indemnification
under the Security Documents and all advances made by the Administrative Agent under the Security
Documents for the account of any Loan Party.
“Commitment Fee”: as defined in Section 2.9(b).
“Commitment Fee Rate”:
(a) from and after the Fourth Amendment Effective Date until November 5, 2016, the percentages
set forth in Level I of the pricing grid below; and
(b) from and after November 5, 2016 and on the fifth day of each month thereafter, the
Commitment Fee Rate shall be determined from the following grid based upon Liquidity as set forth in the
most recent Liquidity Report delivered or required to be delivered pursuant to Section 6.2(g) hereof;
provided however if any Transaction Report or other calculation of a component of Liquidity is at any time
restated or otherwise revised (including as a result of an audit) or if the information set forth in any
6
Transaction Report or other calculation of a component of Liquidity otherwise proves to be false or incorrect
such that the Commitment Fee Rate would have been higher than was otherwise in effect during any period,
without constituting a waiver of any Default or Event of Default arising as a result thereof, the Commitment
Fee due under this Agreement shall be immediately recalculated at such other rate for any applicable periods
and shall be due and payable promptly after demand from the Administrative Agent if such other rate would
have been higher.
Level
Liquidity
Commitment Fee Rate
I
II
III
> $90,000,000
> $60,000,000 but < $90,000,000
< $60,000,000
0.30000%
0.35000%
0.37500%
Notwithstanding the foregoing, (a) if the Borrower fails to deliver a Transaction Report or other
calculation of a component of Liquidity as required herein, the Commitment Fee Rate shall be the rate
corresponding to Level III in the foregoing table until such Transaction Report and/or calculation is
delivered, and (b) no reduction to the Commitment Fee Rate shall become effective at any time when an
Event of Default has occurred and is continuing.
“Communications”: as defined in Section 10.2(d)(ii).
“Compliance Certificate”: a certificate duly executed by a Responsible Officer of the Borrowers
substantially in the form of Exhibit B.
“Connection Income Taxes”: Other Connection Taxes that are imposed on or measured by net
income (however denominated) or that are franchise Taxes or branch profits Taxes.
“Consolidated Capital Expenditures”: for any period, with respect to the Parent and its
consolidated Subsidiaries, the aggregate of all expenditures (whether paid in cash or other consideration or
accrued as a liability and including that portion of Capital Lease Obligations which is capitalized on the
consolidated balance sheet of the Parent) by such Group Members during such period for the acquisition or
leasing (pursuant to a capital lease) of fixed or capital assets or additions to equipment (including
replacements, capitalized repairs and improvements during such period) that, in conformity with GAAP,
are included in “additions to property, plant or equipment” or comparable items reflected in the consolidated
statement of cash flows of the Parent.
“Consolidated EBITDA”: with respect to the Parent and its consolidated Subsidiaries for any
trailing twelve month period for which a calculation is to be made under this Agreement, (a) the sum,
without duplication, of the amounts for such period of (i) Consolidated Net Income, plus (ii) Consolidated
Interest Expense, plus (iii) provisions for taxes based on income, plus (iv) total depreciation expense, plus
(v) total amortization expense, plus (vi) non-cash compensation expense, plus (vii) the fees, costs and
expenses incurred in connection with this Agreement and the other Loan Documents and the transactions
hereunder and thereunder, plus (viii) reasonable one-time fees, costs and expenses incurred in connection
7
with a Permitted Acquisition or a successful offering or issuance of Capital Stock, in each case to the extent
approved in writing by the Administrative Agent as an ‘add-back’ to Consolidated EBITDA, plus (ix) other
non-cash items reducing Consolidated Net Income (excluding any such non-cash item to the extent that it
represents an accrual or reserve for potential cash items in any future period or amortization of a prepaid
cash item that was paid in a prior period) approved by the Administrative Agent in writing as an ‘add back’
to Consolidated EBITDA, plus (x) any extraordinary or non-recurring losses, expenses or charges in
connection with the transition to ASC 606 or otherwise not to exceed $2,000,000 in the aggregate for such
trailing twelve month period (or such higher amounts as may be approved by the Required Lenders as an
‘add-back’ to Consolidated EBITDA), minus (b) the sum, without duplication of the amounts for such
period of (i) other non-cash items increasing Consolidated Net Income for such period (excluding any such
non-cash item to the extent it represents the reversal of an accrual or reserve for potential cash item in any
prior period), plus (ii) interest income.
“Consolidated Interest Expense”: for any period, total interest expense (including that portion of
any Capital Lease Obligations that is treated as interest in accordance with GAAP) of the Parent and its
consolidated Subsidiaries for such period with respect to all outstanding Indebtedness of such Persons
(including all commissions, discounts and other fees and charges owed with respect to letters of credit and
bankers’ acceptance financing and net costs under Swap Agreements in respect of interest rates to the extent
such net costs are allocable to such period in accordance with GAAP).
“Consolidated Net Income”: for any period, the consolidated net income (or loss) of the Parent
and its consolidated Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided
that there shall be excluded from the calculation of “Consolidated Net Income” (a) the income (or deficit)
of any such Person accrued prior to the date it becomes a Subsidiary of a Borrower or is merged into or
consolidated with a Borrower or one of its Subsidiaries, (b) the income (or deficit) of any such Person (other
than a Subsidiary of a Borrower) in which a Borrower or one of its Subsidiaries has an ownership interest,
except to the extent that any such income is actually received by such Borrower or such Subsidiary in the
form of dividends or similar distributions, and (c) the undistributed earnings of any Subsidiary of a
Borrower to the extent that the declaration or payment of dividends or similar distributions by such
Subsidiary is not at the time permitted by the terms of any Contractual Obligation (other than under any
Loan Document) or any Requirement of Law applicable to such Subsidiary or any owner of Capital Stock
of such Subsidiary.
“Contractual Obligation”: as to any Person, any provision of any security issued by such Person
or of any agreement, instrument or other undertaking to which such Person is a party or by which it or any
of its property is bound.
“Control”: 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. “Controlling” and “Controlled” have meanings correlative thereto.
“Control Agreement”: any account control agreement entered into among the depository
institution at which a Loan Party maintains a Deposit Account or the securities intermediary at which a
Loan Party maintains a Securities Account, such Loan Party, and the Administrative Agent pursuant to
which the Administrative Agent obtains control (within the meaning of the UCC or any other applicable
law) over such Deposit Account or Securities Account, and which agreement is otherwise in form and
substance reasonably satisfactory to the Administrative Agent.
“Controlled Account”: each Deposit Account and Securities Account that is subject to a Control
Agreement in form and substance reasonably satisfactory to the Administrative Agent.
8
“Debtor Relief Laws”: 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.
“Default”: any of the events specified in Section 8.1, whether or not any requirement for the giving
of notice, the lapse of time, or both, has been satisfied.
“Default Rate”: as defined in Section 2.15(b).
“Defaulting Lender”: subject to Section 2.24(b), any Lender that (a) has failed to (i) fund all or
any portion of its Loans within two (2) Business Days of the date such Loans were required to be funded
hereunder unless such Lender notifies the Administrative Agent and the Borrowers in writing that such
failure is the result of such Lender’s determination that one or more conditions precedent to funding (each
of which conditions precedent, together with any applicable default, shall be specifically identified in such
writing) has not been satisfied, or (ii) pay to the Administrative Agent, the Issuing Lender, 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 (2) Business Days of the date when
due, (b) has notified the Borrowers, the Administrative Agent, the Issuing Lender or the Swingline Lender
in writing that it does not intend to comply with its funding obligations hereunder, or has made a public
statement to that effect (unless such writing or public statement relates to such Lender’s obligation to fund
a Loan hereunder and states that such position is based on such Lender’s reasonable determination that a
condition precedent to funding (which condition precedent, together with any applicable default, shall be
specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three
(3) Business Days after written request by the Administrative Agent or the Borrowers, to confirm in writing
to the Administrative Agent and the Borrowers 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 Borrowers), or (d) has, or has a
direct or indirect parent company that has, (i) become the subject of a proceeding under any Debtor Relief
Law, or (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; 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) to reject,
repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination
by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of 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 2.24(b)) upon delivery of written notice of such determination
to the Borrowers, the Issuing Lender, the Swingline Lender and each Lender.
“Deposit Account”: any “deposit account” as defined in the UCC with such additions to such term
as may hereafter be made.
“Deposit Account Control Agreement”: any Control Agreement entered into by the
Administrative Agent, a Loan Party and a financial institution holding a Deposit Account of such Loan
Party pursuant to which the Administrative Agent is granted “control” (for purposes of the UCC) over such
Deposit Account.
9
“Discharge of Obligations”: subject to Section 10.8, the satisfaction of the Obligations (including
all such Obligations relating to Bank Services) by the payment in full, in cash (or, as applicable, Cash
Collateralization in accordance with the terms hereof or as otherwise may be reasonably satisfactory to the
applicable Bank Services Provider) of the principal of and interest on or other liabilities relating to each
Loan and any previously provided Bank Services, all fees and all other expenses or amounts payable under
any Loan Document (other than contingent indemnification obligations and any other obligations which
pursuant to the terms of any Loan Document specifically survive repayment of the Loans for which no
claim has been made), and other Obligations under or in respect of Specified Swap Agreements and Bank
Services, to the extent (a) no default or termination event shall have occurred and be continuing thereunder,
(b) any such Obligations in respect of Specified Swap Agreements have, if required by any applicable
Qualified Counterparties, been Cash Collateralized), (c) no Letter of Credit shall be outstanding (or, as
applicable, each outstanding and undrawn Letter of Credit has been Cash Collateralized in accordance with
the terms hereof or as otherwise may be reasonably satisfactory to the Issuing Lender), (d) no Obligations
in respect of any Bank Services are outstanding (or, as applicable, all such outstanding Obligations in
respect of Bank Services have been Cash Collateralized in accordance with the terms hereof or as otherwise
may be reasonably satisfactory to the applicable Bank Services Provider), and (e) the aggregate Revolving
Commitments of the Lenders are terminated.
“Disposition”: with respect to any property (including, without limitation, Capital Stock of any of
the Subsidiaries of the Parent), any sale, lease, Sale Leaseback Transaction, assignment, conveyance,
transfer, encumbrance or other disposition thereof and any issuance of Capital Stock of any of the
Subsidiaries of the Parent. The terms “Dispose” and “Disposed of” shall have correlative meanings.
“Disqualified Institutions”: each of (x) those Persons identified by the Borrowers in writing to
SVB prior to the date of the Engagement Letter, (y) the Borrowers’ or any of their controlled Affiliates’
competitors identified by the Borrowers in writing to SVB prior to the date of the Engagement Letter and
(z), in each case of clauses (x) and (y) above, any such Person’s known Affiliates that are readily identifiable
by name (such Persons in clauses (x) and (y), collectively, the “Primary Disqualified Institutions”)
excluding, in the case of clause (y) above, any affiliate of a competitor that is primarily engaged in, or that
advises funds or other investment vehicles that are engaged in, making, purchasing, holding or otherwise
investing in commercial loans, bonds and similar extensions of credit or securities in the ordinary course
and with respect to which no Primary Disqualified Institution, directly or indirectly, possesses the power to
direct or cause the direction of the investment policies of such entity.
“Disqualified Stock”: any Capital Stock that, by its terms (or by the terms of any security into
which it is convertible, or for which it is exchangeable, in each case at the option of the holder thereof), or
upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to
the date that is ninety-one (91) days after the date on which the Loans mature. The amount of Disqualified
Stock deemed to be outstanding at any time for purposes of this Agreement will be the maximum amount
that the Borrowers and their Subsidiaries may become obligated to pay upon maturity of, or pursuant to any
mandatory redemption provisions of, such Disqualified Stock or portion thereof, plus accrued dividends.
“Documentation Agent”: Comerica Bank, together with any of its successors in such capacity.
“Dollars” and “$”: dollars in lawful currency of the United States.
“Domestic Subsidiary”: any Subsidiary that is incorporated, organized or otherwise formed under
the laws of the United States, any state thereof or the District of Columbia.
10
“Eighth Amendment”: the Eighth Amendment Agreement by and among the Borrowers, the
Lenders and the Administrative Agent, dated as of December 19, 2018.
“Eligible Assignee”: any Person that meets the requirements to be an assignee under
Section 10.6(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under
Section 10.6(b)(iii)).
“Engagement Letter”: that certain Engagement Letter dated January 16, 2015 by and among the
Administrative Agent and the Borrowers.
“Environmental Laws”: any and all foreign, Federal, state, local or municipal laws, rules, orders,
regulations, statutes, ordinances, codes, decrees, requirements of any Governmental Authority or other
Requirements of Law (including common law) regulating, relating to or imposing liability or standards of
conduct concerning protection of human health or the environment, as now or may at any time hereafter be
in effect.
“Environmental Liability”: any liability, contingent or otherwise (including any liability for
damages, costs of environmental remediation, fines, penalties or indemnities), of a Borrower, any other Loan
Party or any of their respective Subsidiaries directly or indirectly resulting from or based upon (a) a violation
of an Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of
any Materials of Environmental Concern, (c) exposure to any Materials of Environmental Concern, (d) the
release or threatened release of any Materials of Environmental Concern into the environment, or (e) any
contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with
respect to any of the foregoing.
“ERISA”: the Employee Retirement Income Security Act of 1974, including (unless the context
otherwise requires) any rules or regulations promulgated thereunder.
“ERISA Affiliate”: each business or entity which is, or within the last six years was, a member of
a “controlled group of corporations,” under “common control” or an “affiliated service group” with any
Loan Party within the meaning of Section 414(b), (c) or (m) of the Code, required to be aggregated with any
Loan Party under Section 414(o) of the Code, or is, or within the last six years was, under “common control”
with any Loan Party, within the meaning of Section 4001(a)(14) of ERISA.
“ERISA Event”: any of (a) a reportable event as defined in Section 4043 of ERISA with respect to
a Pension Plan, excluding, however, such events as to which the PBGC by regulation has waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of the occurrence of such event;
(b) the applicability of the requirements of Section 4043(b) of ERISA with respect to a contributing sponsor,
as defined in Section 4001(a)(13) of ERISA, to any Pension Plan where an event described in paragraph (9),
(10), (11), (12) or (13) of Section 4043(c) of ERISA is reasonably expected to occur with respect to such
plan within the following 30 days; (c) a withdrawal by any Loan Party or any ERISA Affiliate thereof from
a Pension Plan or the termination of any Pension Plan resulting in liability under Sections 4063 or 4064 of
ERISA; (d) the withdrawal of any Loan Party or, to the knowledge of any Loan Party, any ERISA Affiliate
thereof in a complete or partial withdrawal (within the meaning of Section 4203 and 4205 of ERISA) from
any Multiemployer Plan if there is any potential liability therefore, or the receipt by any Loan Party or, to
the knowledge of an Loan Party, any ERISA Affiliate thereof of notice from any Multiemployer Plan that it
is in reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA; (e) the filing of a notice of
intent to terminate, the treatment of a plan amendment as a termination under Section 4041 or 4041A of
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer
Plan; (f) the imposition of liability on any Loan Party or any ERISA Affiliate thereof pursuant to Sections
4062(e) or 4069 of ERISA or by reason of the application of Section 4212(c) of ERISA; (g) the failure by
11
any Loan Party or any ERISA Affiliate thereof to make any required contribution to a Pension Plan, or the
failure to meet the minimum funding standard of Section 412 of the Code with respect to any Pension Plan
(whether or not waived in accordance with Section 412(c) of the Code) or the failure to make by its due date
a required installment under Section 430 of the Code with respect to any Pension Plan or the failure to make
any required contribution to a Multiemployer Plan; (h) the determination that any Pension Plan is considered
an at-risk plan or a plan in endangered to critical status within the meaning of Sections 430, 431 and 432 of
the Code or Sections 303, 304 and 305 of ERISA; (i) an event or condition which might reasonably be
expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a
trustee to administer, any Pension Plan or Multiemployer Plan; (j) the imposition of any liability under Title
I or Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA,
upon any Loan Party or any ERISA Affiliate thereof; (k) an application for a funding waiver under Section
303 of ERISA or an extension of any amortization period pursuant to Section 412 of the Code with respect
to any Pension Plan; (l) the occurrence of a non-exempt prohibited transaction under Sections 406 or 407 of
ERISA for which any Loan Party or any Subsidiary thereof may be directly or indirectly liable; (m) the
occurrence of an act or omission which could give rise to the imposition on any Loan Party or any ERISA
Affiliate thereof of fines, penalties, taxes or related charges under Chapter 43 of the Code or under Sections
409, 502(c), (i) or (1) or 4071 of ERISA; (n) the assertion of a material claim (other than routine claims for
benefits) against any Pension Plan or the assets thereof, or against any Loan Party or any Subsidiary thereof
in connection with any such Pension Plan; (o) receipt from the IRS of notice of the failure of any Pension
Plan to qualify under Section 401(a) of the Code, or the failure of any trust forming part of any Pension Plan
to fail to qualify for exemption from taxation under Section 501(a) of the Code; or (p) the imposition of any
lien (or the fulfillment of the conditions for the imposition of any lien) on any of the rights, properties or
assets of any Loan Party or any ERISA Affiliate thereof, in either case pursuant to Title I or IV, including
Section 302(f) or 303(k) of ERISA or to Section 401(a)(29) or 430(k) of the Code.
“ERISA Funding Rules”: the rules regarding minimum required contributions (including any
installment payment thereof) to Pension Plans, as set forth in Section 412 of the Code and Section 302 of
ERISA, with respect to Plan years ending prior to the effective date of the Pension Protection Act of 2006,
and thereafter, as set forth in Sections 412, 430, 431, 432 and 436 of the Code and Sections 302, 303, 304
and 305 of ERISA.
“Event of Default”: any of the events specified in Section 8.1; provided that any requirement for
the giving of notice, the lapse of time, or both, has been satisfied.
“Exchange Act”: the Securities Exchange Act of 1934, as amended from time to time and any
successor statute.
“Excluded Foreign Subsidiary”: in respect of any Loan Party, any Subsidiary of such Loan Party,
at any date of determination, (a) that is a “controlled foreign corporation” as defined in Section 957 of the
Code, (b) that is a Subsidiary of a “controlled foreign corporation” as defined in Section 957 of the Code,
or (c) substantially all of the assets of which are equity interests in a “controlled foreign corporation” as
defined in Section 957 of the Code, and in each case, either (a) the pledge of all of the Capital Stock of such
Subsidiary as Collateral or (b) the guaranteeing by such Subsidiary of the Obligations, would, in the good
faith judgment of the Loan Parties, reasonably be expected to result in material adverse tax consequences
to the Loan Parties.
“Excluded Taxes”: any of the following Taxes imposed on or with respect to a Recipient or
required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by
net income (however denominated), franchise Taxes, and branch profits Taxes, in any such case (i) to the
extent imposed as a result of such Recipient being organized under the laws of, or having its principal
12
office or, in the case of any Lender, its applicable lending office located in, the jurisdiction imposing such
Tax (or any political subdivision thereof), or (ii) to the extent constituting Other Connection Taxes; (b) in
the case of a Lender, U.S. federal withholding Taxes imposed on amounts payable to or for the account of
such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on
the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant
to an assignment request by the Borrower under Section 2.23) or (ii) such Lender changes its lending office,
except in each case to the extent that, pursuant to Section 2.20, amounts with respect to such Taxes were
payable either to such Lender's assignor immediately before such Lender became a party hereto or to such
Lender immediately before it changed its lending office; (c) Taxes attributable to such Recipient’s failure
to comply with Section 2.20(f); and (d) any U.S. federal withholding Taxes imposed under FATCA.
“Existing Credit Facility”: the credit facility described in the Loan and Security Agreement dated
as of August 27, 2013, by and between the Existing Lender and certain of the Borrowers, as the same has
been amended, restated, supplemented or otherwise modified from time to time prior to the Closing Date.
“Existing Lender”: SVB, as the sole lender under the Existing Credit Facility.
“Facility”: each of (a) the Revolving Facility, (b) the L/C Facility (which is a sub-facility of the
Revolving Facility), and (c) the Swingline Facility (which is a sub-facility of the Revolving Facility).
“FASB ASC”: the Accounting Standards certification of the Financial Accounting Standards
Board.
“FATCA”: (a) Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any
amended or successor version that is substantively comparable and not materially more onerous to comply
with) and any current or future regulations or official interpretations thereof, (b) any treaty, law, regulation
or other official guidance enacted in any other jurisdiction, or relating to an intergovernmental agreement
between the United States and any other jurisdiction with the purpose (in either case) of facilitating the
implementation of (a) above, or (c) any agreement pursuant to the implementation of paragraphs (a) or (b)
above with the United States Internal Revenue Service, the United States government or any governmental
or taxation authority in the United States.
“Federal Funds Effective Rate”: for any day, the weighted average of the rates on overnight
federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers,
as published on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the quotations for the day of such
transactions received by the Administrative Agent from three federal funds brokers of recognized standing
selected by it. In no event shall the Funds Federal Effective Rate be less than zero.
“Fee Letter”: the amended and restated fee letter agreement dated October 11, 2016, by and among
the Borrowers and the Administrative Agent, as may be amended, supplemented or otherwise modified
from time to time.
“Flow of Funds Agreement”: the spreadsheet or other similar statement prepared and certified by
the Borrowers, regarding the disbursement of Revolving Loan proceeds on the Closing Date, the funding
and the payment of the fees and expenses of the Administrative Agent and the Lenders (including their
respective counsel), and such other matters as may be agreed to by the Borrowers, the Administrative Agent
and the Lenders.
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“Foreign Currency”: lawful money of a country other than the United States.
“Foreign Lender”: (a) if a Borrower is a U.S. Person, a Lender that is not a U.S. Person, and (b)
if a Borrower is not a U.S. Person, a Lender that is resident or organized under the laws of a jurisdiction
other than that in which such Borrower is resident for tax purposes.
“Foreign Subsidiary”: any Subsidiary that is not a Domestic Subsidiary.
“Fourth Amendment”: the Fourth Amendment to Credit Agreement, dated as of October 28, 2016.
“Fourth Amendment Effective Date”: as defined in the Fourth Amendment.
“Fronting Exposure”: at any time there is a Defaulting Lender, as applicable, (a) with respect to
the Issuing Lender, such Defaulting Lender’s L/C Percentage of the outstanding L/C Exposure other than
L/C Exposure as to which such Defaulting Lender’s participation obligation has been reallocated to other
Lenders or Cash Collateralized in accordance with the terms hereof, and (b) with respect to the Swingline
Lender, such Defaulting Lender’s Revolving Percentage of outstanding Swingline Loans made by the
Swingline Lender other than Swingline Loans as to which such Defaulting Lender’s participation obligation
has been reallocated to other Lenders.
“Fund”: any Person (other than a natural Person) that is (or will be) engaged in making, purchasing,
holding or otherwise investing in commercial loans and similar extensions of credit in the ordinary course
of its activities.
“GAAP”: generally accepted accounting principles in the United States as in effect from time to
time, except that for purposes of Section 7.1, GAAP shall be determined on the basis of such principles in
effect on the date hereof and consistent with those used in the preparation of the most recent audited
financial statements referred to in Section 4.1(b). 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 each party to this Agreement agrees to enter into negotiations to
amend such provisions of this Agreement so as to reflect equitably such Accounting Changes with the
desired result that the criteria for evaluating the Borrowers’ financial condition shall be the same after such
Accounting Changes as if such Accounting Changes had not been made. Until such time as such an
amendment shall have been executed and delivered by the Borrowers, the Administrative Agent and the
Required Lenders, all financial covenants, standards and terms in this Agreement shall continue to be
calculated or construed as if such Accounting Changes had not occurred. “Accounting Changes” refers to
changes in accounting principles required by the promulgation of any rule, regulation, pronouncement or
opinion by the Financial Accounting Standards Board of the American Institute of Certified Public
Accountants or, if applicable, the SEC.
“Governmental Approval”: any consent, authorization, approval, order, license, franchise, permit,
certificate, accreditation, registration, filing or notice, of, issued by, from or to, or other act by or in respect
of, any Governmental Authority.
“Governmental Authority”: the government of the United States of America or any other nation,
or of any political subdivision thereof, whether state or local, 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).
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“Group Members”: the collective reference to the Borrowers and their respective Subsidiaries.
“Guarantee and Collateral Agreement”: the Guarantee and Collateral Agreement to be executed
and delivered by the Borrowers and each Guarantor, substantially in the form of Exhibit A.
“Guarantee Obligation”: as to any Person (the “guaranteeing person”), any obligation, including
a reimbursement, counterindemnity or similar obligation, of the guaranteeing person that guarantees or in
effect guarantees, or which is given to induce the creation of a separate obligation by another Person
(including any bank under any letter of credit) that guarantees or in effect guarantees, any Indebtedness,
leases, dividends or other obligations (the “primary obligations”) of any other third Person (the “primary
obligor”) in any manner, whether directly or indirectly, including any obligation of the guaranteeing person,
whether or not contingent, (i) to purchase any such primary obligation or any property constituting direct
or indirect security therefor, (ii) to advance or supply funds (1) for the purchase or payment of any such
primary obligation or (2) to maintain working capital or equity capital of the primary obligor or otherwise
to maintain the net worth or solvency of the primary obligor, (iii) to purchase property, securities or services
primarily for the purpose of assuring the owner of any such primary obligation of the ability of the primary
obligor to make payment of such primary obligation or (iv) otherwise to assure or hold harmless the owner
of any such primary obligation against loss in respect thereof; provided that the term Guarantee Obligation
shall not include endorsements of instruments for deposit or collection in the ordinary course of business.
The amount of any Guarantee Obligation of any guaranteeing person shall be deemed to be the lower of (a)
an amount equal to the stated or determinable amount of the primary obligation in respect of which such
Guarantee Obligation is made and (b) the maximum amount for which such guaranteeing person may be
liable pursuant to the terms of the instrument embodying such Guarantee Obligation, unless such primary
obligation and the maximum amount for which such guaranteeing person may be liable are not stated or
determinable, in which case the amount of such Guarantee Obligation shall be such guaranteeing person’s
maximum reasonably anticipated liability in respect thereof as determined by the Borrowers in good faith.
“Guarantors”: a collective reference to each Borrower and each Subsidiary of the Borrowers which
has become a Guarantor pursuant to the Guarantee and Collateral Agreement.
“Increase”: as defined in Section 2.12.
“Increase Joinder”: an instrument, in form and substance reasonably satisfactory to the
Administrative Agent, by which a Lender becomes a party to this Agreement pursuant to Section 2.12.
“Indebtedness”: of any Person at any date, without duplication, (a) all indebtedness of such Person
for borrowed money, (b) all obligations of such Person for the deferred purchase price of property or
services (other than current trade payables incurred in the ordinary course of such Person’s business), (c)
all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all
indebtedness created or arising under any conditional sale or other title retention agreement with respect to
property acquired by such Person (even though the rights and remedies of the seller or lender under such
agreement in the event of default are limited to repossession or sale of such property), (e) all Capital Lease
Obligations and all Synthetic Lease Obligations of such Person, (f) all obligations of such Person,
contingent or otherwise, as an account party or applicant under or in respect of acceptances, letters of credit,
surety bonds or similar arrangements, (g) all obligations of such Person to purchase, redeem, retire, defease
or otherwise make any payment in respect of any Capital Stock in such Person or any other Person
(including, without limitation, Disqualified Stock), or any warrant, right or option to acquire such Capital
Stock, valued, in the case of a redeemable preferred interest, at the greater of its voluntary or involuntary
liquidation preference plus accrued and unpaid dividends, (h) all Guarantee Obligations of such Person in
respect of obligations of the kind referred to in clauses (a) through (g)
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above, (i) all obligations of the kind referred to in clauses (a) through (h) above secured by (or for which
the holder of such obligation has an existing right, contingent or otherwise, to be secured by) any Lien on
property (including accounts and contract rights) owned by such Person, whether or not such Person has
assumed or become liable for the payment of such obligation, and (j) the net obligations of such Person in
respect of Swap Agreements. The Indebtedness of any Person shall include the Indebtedness of any other
entity (including 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 or other relationship with such entity, except
to the extent the terms of such Indebtedness expressly provide that such Person is not liable therefor.
“Indemnified Taxes”: (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment
made by or on account of any Obligation of any Loan Party under any Loan Document and (b) to the extent
not otherwise described in (a), Other Taxes.
“Indemnitee”: as defined in Section 10.5(b).
“Insolvency Proceeding”: (a) any case, action or proceeding before any court or other Governmental
Authority relating to bankruptcy, reorganization, insolvency, liquidation, receivership, dissolution,
winding-up or relief of debtors, or (b) any general assignment for the benefit of creditors, composition,
marshalling of assets for creditors, or other, similar arrangement in respect of any Person’s creditors
generally or any substantial portion of such Person’s creditors, in each case undertaken under U.S. Federal,
state or foreign law, including any Debtor Relief Law.
“Intellectual Property”: the collective reference to all rights, priorities and privileges relating to intellectual
property, whether arising under United States, multinational or foreign laws or otherwise, including
copyrights, copyright licenses, patents, patent licenses, trademarks, trademark licenses, technology, know-
how and processes, any and all source code, and all rights to sue at law or in equity for any infringement or
other impairment thereof, including the right to receive all proceeds and damages therefrom.
“Intellectual Property Security Agreement”: an intellectual property security agreement entered into
between a Loan Party and the Administrative Agent pursuant to the terms of the Guarantee and Collateral
Agreement in form and substance satisfactory to the Administrative Agent, together with each other
intellectual property security agreement and supplement thereto, in each case as amended, restated,
supplemented or otherwise modified from time to time.
“Interest Payment Date”: as to any Loan (including any Swingline Loan), the fifth day (or, if such day is
not a Business Day, the immediately succeeding Business Day) of each calendar month to occur while such
Loan is outstanding and the final maturity date of such Loan.
“Interest Rate Agreement”: with respect to any Person, any interest rate swap agreement, interest rate cap
agreement, interest rate collar agreement, interest rate hedging agreement or other similar agreement or
arrangement, each of which is (a) for the purpose of hedging the interest rate exposure associated with such
Person’s operations, (b) approved by Administrative Agent, and (c) not for speculative purposes.
“Inventory”: all “inventory,” as such term is defined in the UCC, now owned or hereafter acquired by any
Loan Party, wherever located, and in any event including inventory, merchandise, goods and other personal
property that are held by or on behalf of any Loan Party for sale or lease or are furnished or are to be
furnished under a contract of service, or that constitutes raw materials, work in process, finished goods,
returned goods, or materials or supplies of any kind used or consumed or to be used or consumed in such
Loan Party’s business or in the processing, production, packaging, promotion, delivery or shipping of the
same, including all supplies and embedded software.
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“Investments”: as defined in Section 7.8.
“IRS”: the Internal Revenue Service, or any successor thereto.
“ISP”: with respect to any Letter of Credit, the “International Standby Practices 1998” published
by the Institute of International Banking Law & Practice (or such later version thereof as may be in effect
at the time of issuance).
“Issuing Lender”: as the context may require, (a) SVB or any Affiliate thereof, in its capacity as
issuer of any Letter of Credit, and (b) any other Lender that may become an Issuing Lender pursuant to
Section 3.12, with respect to Letters of Credit issued by such Lender. The Issuing Lender may, in its
discretion, arrange for one or more Letters of Credit to be issued by Affiliates of the Issuing Lender or other
financial institutions, in which case the term “Issuing Lender” shall include any such Affiliate or other
financial institution with respect to Letters of Credit issued by such Affiliate or other financial institution.
“Issuing Lender Fees”: as defined in Section 3.3(a).
“Judgment Currency”: as defined in Section 10.19.
“L/C Advance”: each L/C Lender’s funding of its participation in any L/C Disbursement in
accordance with its L/C Percentage of the L/C Commitment.
“L/C Commitment”: as to any L/C Lender, the obligation of such L/C Lender, if any, to purchase
an undivided interest in the Issuing Lenders’ obligations and rights under and in respect of each Letter of
Credit (including to make payments with respect to draws made under any Letter of Credit pursuant to
Section 3.5(b)) in an aggregate principal amount not to exceed the amount set forth under the heading “L/C
Commitment” opposite such L/C Lender’s name on Schedule 1.1A or in the Assignment and Assumption
or the Increase Joinder pursuant to which such L/C Lender becomes a party hereto, as the same may be
changed from time to time pursuant to the terms hereof. The L/C Commitment is a sublimit of the Revolving
Commitment and the aggregate amount of the L/C Commitments shall not exceed the amount of the Total
L/C Commitments at any time.
“L/C Disbursements”: a payment or disbursement made by the Issuing Lender pursuant to a Letter
of Credit.
“L/C Exposure”: at any time, the sum of (a) the aggregate undrawn amount of all outstanding
Letters of Credit at such time, and (b) the aggregate amount of all L/C Disbursements that have not yet been
reimbursed or converted into Revolving Loans at such time. The L/C Exposure of any L/C Lender at any
time shall equal its L/C Percentage of the aggregate L/C Exposure at such time.
“L/C Facility”: the L/C Commitments and the extensions of credit made thereunder.
“L/C Fee Payment Date”: as defined in Section 3.3(a).
“L/C Lender”: a Lender with an L/C Commitment.
“L/C Percentage”: as to any L/C Lender at any time, the percentage of the Total L/C Commitments
represented by such L/C Lender’s L/C Commitment, as such percentage may be adjusted as provided in
Section 2.23.
“L/C-Related Documents”: collectively, each Letter of Credit, all applications for any Letter of
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Credit (and applications for the amendment of any Letter of Credit) submitted by a Borrower to the Issuing
Lender and any other document, agreement and instrument relating to any Letter of Credit, including any
of the Issuing Lender’s standard form documents for letter of credit issuances.
“Lenders”: as defined in the preamble hereto; provided that unless the context otherwise requires,
each reference herein to the Lenders shall be deemed to include the Issuing Lender and the Swingline
Lender.
“Letter of Credit”: as defined in Section 3.1(a).
“Letter of Credit Availability Period”: the period from and including the Closing Date to but
excluding the Letter of Credit Maturity Date.
“Letter of Credit Fees”: as defined in Section 3.3(a).
“Letter of Credit Fronting Fees”: as defined in Section 3.3(a).
“Letter of Credit Maturity Date”: the date occurring 15 days prior to the Revolving Termination
Date then in effect (or, if such day is not a Business Day, the next preceding Business Day).
“Lien”: any mortgage, deed of trust, pledge, hypothecation, collateral assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security interest or any preference,
priority or other security agreement or preferential arrangement of any kind or nature whatsoever (including
any conditional sale or other title retention agreement and any capital lease having substantially the same
economic effect as any of the foregoing).
“Liquidity”: at any time, the sum of (i) the aggregate amount of unrestricted cash and Cash
Equivalents (including short term marketable securities) held by the Borrowers and the Guarantors in
Deposit Accounts or Securities Accounts maintained with SVB or SVB’s Affiliates or another Lender or
an Affiliate thereof, or with National Bank of South Carolina (“NBSC”, provided that the aggregate
amounts held in deposit accounts with NBSC shall not exceed $6,500,000 at any time), and in each case
subject to a first priority lien in favor of the Administrative Agent, including, without limitation, pursuant
to a Deposit Account Control Agreement with respect to each such Deposit Account or Securities Account
Control Agreement with respect to each such Securities Account, plus (ii) the Available Revolving
Commitment at such time; provided that, in connection with any calculation of Liquidity required
hereunder, at least $25,000,000 must consist of unrestricted cash and Cash Equivalents (including short
term marketable securities) satisfying the requirements of clause (i) above.
“Liquidity Report”: a report, in form and substance reasonably satisfactory to the Administrative
Agent, delivered by the Borrowers to the Administrative Agent which discloses, as of the date of such
report, the amount and composition of Liquidity as of such date.
“Loan”: any loan made or maintained by any Lender pursuant to this Agreement.
“Loan Documents”: this Agreement, the Security Documents, the Notes, the Fee Letter, the Flow
of Funds Agreement, the Solvency Certificate, the Collateral Information Certificate, each L/C-Related
Document, each Compliance Certificate, each Transaction Report, each Liquidity Report, each Notice of
Borrowing, each Bank Services Agreement, and any agreement creating or perfecting rights in Cash
Collateral pursuant to the provisions of Section 3.10, and any amendment, waiver, supplement or other
modification to any of the foregoing.
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“Loan Parties”: each Group Member that is a party to a Loan Document.
“Material Adverse Effect”: (a) a material impairment in the perfection or priority of the
Administrative Agent’s Lien in the Collateral or in the value of such Collateral; (b) a material adverse
change in the business, operations, or condition (financial or otherwise) of all of the Borrowers taken as a
whole; or (c) a material impairment of the prospect of repayment of any portion of the Obligations.
“Materials of Environmental Concern”: any substance, material or waste that is defined,
regulated, governed or otherwise characterized under any Environmental Law as hazardous or toxic or as a
pollutant or contaminant (or by words of similar meaning and regulatory effect), any petroleum or
petroleum products, asbestos, polychlorinated biphenyls, urea-formaldehyde insulation, molds or fungus,
and radioactivity, radiofrequency radiation at levels known to be hazardous to human health and safety.
“Maximum Rate”: as defined in Section 10.9.
“Measurement Period”: for any period of measurement, the trailing three (3) month period ending
as of the then-current measurement date. A measurement period can be either a calendar quarter, or any
trailing three (3) calendar month period.
“Minority Lender”: as defined in Section 10.1(b).
“Moody’s”: Moody’s Investors Service, Inc.
“Mortgaged Properties”: the real properties as to which, pursuant to Section 6.12(b) or otherwise,
the Administrative Agent, for the benefit of the Secured Parties, shall be granted a Lien pursuant to the
Mortgages.
“Mortgages”: each of the mortgages, deeds of trust, deeds to secure debt or such equivalent
documents hereafter entered into and executed and delivered by one or more of the Loan Parties to the
Administrative Agent, in each case, as such documents may be amended, amended and restated,
supplemented or otherwise modified, renewed or replaced from time to time and in form and substance
reasonably acceptable to the Administrative Agent.
“Multiemployer Plan”: a “multiemployer plan” (within the meaning of Section 3(37) of ERISA)
to which any Loan Party or any ERISA Affiliate thereof makes, is making, or is obligated or has ever been
obligated to make, contributions.
“Non-Consenting Lender”: any Lender that does not approve any consent, waiver or amendment
that (a) requires the approval of all Affected Lenders in accordance with the terms of Section 10.1 and (b)
has been approved by the Required Lenders.
“Non-Defaulting Lender”: at any time, each Lender that is not a Defaulting Lender at such time.
“Note”: a Revolving Loan Note or a Swingline Loan Note.
“Notice of Borrowing”: a notice substantially in the form of Exhibit I.
“Obligations”: the unpaid principal of and interest on (including interest accruing after the maturity
of the Loans and interest accruing after the filing of any petition in bankruptcy, or the commencement of
any insolvency, reorganization or like proceeding, relating to any Loan Party, whether or not a claim for
post-filing or post-petition interest is allowed or allowable in such proceeding) the Loans and all other
19
obligations and liabilities of the Loan Parties to the Administrative Agent, the Issuing Lender, any other
Lender, any Bank Services Provider (in its capacity as provider of Bank Services), and any Qualified
Counterparty party to a Specified Swap Agreement, whether direct or indirect, absolute or contingent, due
or to become due, or now existing or hereafter incurred, which may arise under, out of, or in connection
with, this Agreement, any other Loan Document (including, for the avoidance of doubt, any Bank Services
Agreement), the Letters of Credit, any Specified Swap Agreement or any other document made, delivered
or given in connection herewith or therewith, whether on account of principal, interest, reimbursement
obligations, payment obligations, fees, indemnities, costs, expenses (including all reasonable and
documented fees, charges and disbursements of one primary counsel to the Administrative Agent, the
Issuing Lender, and the Lenders, or any Bank Services Provider, to the extent that any applicable Bank
Services Agreement requires the reimbursement by any applicable Group Member of any such expenses,
and any Qualified Counterparty party to a Specified Swap Agreement that are required to be paid by any
Loan Party pursuant to such Specified Swap Agreement) or otherwise. For the avoidance of doubt, the
Obligations shall not include any obligations arising under any warrants or other equity instruments issued
by any Loan Party to any Lender.
“Operating Documents”: for any Person as of any date, such Person’s constitutional documents,
formation documents and/or certificate of incorporation (or equivalent thereof), as certified (if applicable)
by such Person’s jurisdiction of formation as of a recent date, and, (a) if such Person is a corporation, its
bylaws or memorandum and articles of association (or equivalent thereof) in current form, (b) if such Person
is a limited liability company, its limited liability company agreement (or similar agreement), and (c) if
such Person is a partnership, its partnership agreement (or similar agreement), each of the foregoing with
all current amendments or modifications thereto.
“OFAC”: The Office of Foreign Assets Control of the U.S. Department of the Treasury.
“Other Connection Taxes”: with respect to any Recipient, Taxes imposed as a result of a present
or former connection between such Recipient and the jurisdiction imposing such Tax (other than
connections arising from such Recipient having executed, delivered, become a party to, performed its
obligations under, received payments under, received or perfected a security interest under, engaged in any
other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan
or Loan Document).
“Other Taxes”: all present or future stamp, court or documentary, intangible, recording, filing or
similar Taxes that arise from any payment made under, from the execution, delivery, performance,
enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with
respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with
respect to an assignment (other than an assignment made pursuant to Section 2.23).
“Overadvance”: as defined in Section 2.8.
“Parent”: as defined in the Preamble hereto.
“Participant”: as defined in Section 10.6(d).
“Participant Register”: as defined in Section 10.6(d).
“Patriot Act”: the Uniting and Strengthening America by Providing Appropriate Tools Required
to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act of 2001, Title III of Pub. L. 107-56, signed
into law October 26, 2001.
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“Payoff Letter”: a letter, in form and substance satisfactory to the Administrative Agent, dated as
of a date on or prior to the Closing Date and executed by each of the Existing Lender and the Borrowers
that are party to the Existing Credit Facility to the effect that upon receipt by the Existing Lender of the
“payoff amount” (however designated) referenced therein, (a) the obligations of the Group Members under
the Existing Credit Facility shall be satisfied in full, (b) the Liens held by the Existing Lender under the
Existing Credit Facility shall terminate without any further action, and (c) such Borrowers and the
Administrative Agent (and their respective counsel and such counsels’ agents) shall be entitled to file UCC-
3 amendment statements, USPTO releases, USCRO releases and any other releases necessary to further
evidence the termination of such Liens.
“PBGC”: the Pension Benefit Guaranty Corporation, or any successor thereto.
“Pension Plan”: an employee pension plan (as defined in Section 3(2) of ERISA) other than a
Multiemployer Plan subject to the provisions of Title IV of ERISA or Sections 412 and 430 of the Code or
Sections 302 and 303 of ERISA and in respect of which any Loan Party or any ERISA Affiliate thereof is
(or if such plan were terminated would under Section 4069 of ERISA be deemed to be) a “contributing
sponsor” as defined in Section 4001(a)(13) of ERISA.
“Permitted Acquisition”: as defined in Section 7.8(l).
“Permitted Bond Hedge Transaction”: any call or capped call option (or substantively equivalent
derivative transaction) relating to Parent’s common stock (or other securities or property following a merger
event, reclassification or other change of the common stock of Parent) purchased by Parent in connection
with the issuance of any Permitted Convertible Indebtedness and settled in common stock of Parent (or
such other securities or property), cash or a combination thereof (such amount of cash determined by
reference to the price of Parent’s common stock or such other securities or property), and cash in lieu of
fractional shares of common stock of Parent; provided that (a) the purchase price for such Permitted Bond
Hedge Transaction does not exceed the net cash proceeds received by Parent from the sale of the Permitted
Convertible Indebtedness in connection with which such Permitted Bond Hedge Transaction was
purchased, (b) the other terms, conditions and covenants of each such transaction shall be such as are
customary for transactions of such type (as determined by Parent in good faith), and (c) any payments or
settlements by a Group Member in respect of such Permitted Bond Hedge Transaction shall only be
permitted to the extent permitted under Section 7.6
“Permitted Convertible Indebtedness”: senior unsecured Indebtedness of Parent that (a) as of
the date of issuance thereof contains terms, conditions, covenants, conversion or exchange rights,
redemption rights and offer to repurchase rights, in each case, as are typical and customary for
Indebtedness of such type (in each case, as determined by Parent in good faith) and (b) is convertible or
exchangeable into shares of common stock of Parent (or other securities or property following a merger
event, reclassification or other change of the common stock of Parent), cash or a combination thereof
(such amount of cash determined by reference to the price of Parent’s common stock or such other
securities or property), and cash in lieu of fractional shares of common stock of Parent; provided that
(i) such Permitted Convertible Indebtedness shall have a stated final maturity no earlier than 91 days
after February 20, 2020 and shall not be subject to any conditions that could result in such stated final
maturity occurring on a date earlier than 91 days after February 20, 2020 (it being understood that any
conversion of such Indebtedness (whether into cash, shares of common stock in Parent or any
combination thereof), a repurchase of such Indebtedness on account of the occurrence of a
“fundamental change” or any redemption of such Indebtedness at the option of Parent shall not be
deemed to constitute a change in the stated final maturity thereof), (ii) such Indebtedness shall not be
required to be repaid, prepaid, redeemed, repurchased or defeased, whether on one or more fixed dates,
upon the occurrence of one or more events or at the option of any holder thereof (except, in each case,
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upon any conversion of such Indebtedness (whether into cash, shares of common stock in Parent or any
combination thereof), the occurrence of an event of default or a “fundamental change” or following
Parent’s election to redeem such Indebtedness) prior to the date that is 91 days after February 20, 2020,
(iii) no Subsidiary that is not a Loan Party shall have Guarantee Obligations with respect to obligations
of Parent thereunder, (iv) notwithstanding anything in clauses (i) and (ii) above to the contrary, any
payments in respect thereof shall only be permitted to the extent permitted by Section 7.6, and (v) such
Indebtedness shall include a 30-day customary (as determined by Parent in good faith) cure period with
respect to any cross-default or cross-acceleration related to the Obligations.
“Permitted Discretion”: the commercially reasonable (from the perspective of a secured lender)
credit judgment exercised in good faith, in accordance with customary business practices of the
Administrative Agent for comparable secured lending transactions.
“Permitted Holders”: GS Capital Partners VI Fund, L.P., GS Capital Partners VI Offshore Fund,
L.P., GS Capital Partners VI Parallel, L.P., GS Capital Partners VI GmbH & Co. KG, Oak Investment
Partners XII, L.P., Mason R. Holland, Jr., Holland Family Trust, and Shawn A. Jenkins and any of their
respective Affiliates and any funds, investment vehicles or partnerships managed, advised or sub-advised
by any of them or any of their respective Affiliates but not including any portfolio operating company of
any of the foregoing.
Indebtedness of any Person
“Permitted Refinancing Indebtedness”:
(“Refinancing
Indebtedness”) issued or incurred by such Person (including by means of the extension or renewal of
existing Indebtedness) to refinance, refund, extend, renew or replace existing Indebtedness of such Person
(“Refinanced Indebtedness”); provided that (a) the principal amount of such Refinancing Indebtedness is
not greater than the principal amount of such Refinanced Indebtedness plus the amount of any premiums
or penalties and accrued and unpaid interest paid thereon and reasonable fees and expenses, in each case
associated with such Refinancing Indebtedness, (b) other than Refinancing Indebtedness in respect of
Indebtedness permitted pursuant to Sections 7.2(d) and 7.2(e), such Refinancing Indebtedness has a final
maturity that is no sooner than, and a weighted average life to maturity that is no shorter than, such
Refinanced Indebtedness, (c) if such Refinanced Indebtedness or any Guarantee Obligation thereof or any
security therefor are subordinated to the Obligations, such Refinancing Indebtedness and any Guarantee
Obligations thereof and any security therefor remain so subordinated on terms no less favorable to the
Lenders and the other Secured Parties, (d) the obligors in respect of such Refinanced Indebtedness
immediately prior to such refinancing, refunding extension, renewal or replacement are the only obligors
on such Refinancing Indebtedness and (e) any Guarantee Obligations which constitute all or a portion of
such Refinancing Indebtedness, taken as a whole, are determined in good faith by a Responsible Officer of
such Person to be no less favorable to such Person and the Lenders and the other Secured Parties in any
material respect than the covenants and events of default or Guarantee Obligations, if any, applicable to
such Refinanced Indebtedness.
“Person”: any natural Person, corporation, limited liability company, trust, joint venture,
association, company, partnership, Governmental Authority or other entity.
“Platform”: as defined in Section 10.2(d)(i).
“Preferred Stock”: the preferred Capital Stock of any Loan Party.
“Prime Rate”: the rate of interest per annum from time to time published in the money rates section
of the Wall Street Journal or any successor publication thereto as the “prime rate” then in effect; provided
that if such rate of interest, as set forth from time to time in the money rates section of the Wall Street
22
Journal, becomes unavailable for any reason as determined by the Administrative Agent, the “Prime Rate”
shall mean the rate of interest per annum announced by the Administrative Agent as its prime rate in effect
at its principal office (such Administrative Agent announced Prime Rate not being intended to be the lowest
rate of interest charged by the Administrative Agent in connection with extensions of credit to debtors). In
no event shall the Prime Rate be less than zero.
“Pro Forma Financial Statements”: balance sheets, income statements and cash flow statements
prepared by the Parent and its consolidated Subsidiaries that give effect (as if such events had occurred on
such date) to (a) the Loans and extensions of credit to be made on the Closing Date and the use of proceeds
thereof and (b) the payment of fees and expenses in connection with the foregoing, in each case prepared
for (i) the month ending December 31, 2014, as if such transactions had occurred on the first date of such
month and (ii) on a monthly basis through the Revolving Termination Date, in each case, demonstrating
pro forma compliance with the covenants set forth in Section 7.1.
“Projections”: as defined in Section 6.2(b).
“Properties”: as defined in Section 4.17(a).
“Protective Overadvance”: as defined in Section 2.8(b).
“Qualified Counterparty”: with respect to any Specified Swap Agreement, any counterparty
thereto that, at the time such Specified Swap Agreement was entered into or as of the Closing Date, was
the Administrative Agent or a Lender or an Affiliate of the Administrative Agent or a Lender.
“Recipient”: the Administrative Agent or a Lender, as applicable.
“Recurring Revenue”: the Borrowers’ software services revenue and professional services revenue
related to the Benefit Service Center business line as currently classified and presented in the Parent’s
consolidated GAAP financial statements (e.g. monthly managed services, testing services, maintenance,
license fees, video, voluntary benefits) that in each case meets all of the Borrowers’ representations and
warranties set forth in the Loan Documents. Monthly revenue from the Benefitstore business line shall be
calculated based on the average trailing twelve months period.
“Recurring Revenue Lost”: (i) the total quarterly Recurring Revenue of a customer from the
penultimate quarter, for which Recurring Revenue for such customer in the Measurement Period was either
zero (0) or less in the last month of the Measurement Period, or (ii) the decrease in Recurring Revenue for
a customer from the penultimate quarter to the Measurement Period when such change is both greater than
or equal to fifty percent (50%), and Two Hundred Thousand Dollars ($200,000).
“Refunded Swingline Loans”: as defined in Section 2.7(b).
“Register”: as defined in Section 10.6(c).
“Regulation U”: Regulation U of the Board as in effect from time to time.
“Related Parties”: with respect to any Person, such Person’s Affiliates and the partners, directors,
officers, employees, agents and advisors of such Person and of such Person’s Affiliates.
“Replacement Lender”: as defined in Section 2.23.
“Required Lenders”: at any time, (a) if only one Lender holds the Total Revolving Commitments,
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such Lender; and (b) if more than one Lender who are not Affiliates of one another holds the Total
Revolving Commitments, then at least two unaffiliated Lenders who together hold more than 50% of the
Total Revolving Commitments (including, without duplication, the L/C Commitments) then in effect or, if
the Revolving Commitments have been terminated, the Total Revolving Extensions of Credit then
outstanding; provided that for the purposes of this clause (b), the Revolving Commitments of, and the
portion of the Revolving Loans and participations in L/C Exposure and Swingline Loans held or deemed
held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required
Lenders.
“Requirement of Law”: as to any Person, the Operating Documents of such Person, and any law,
treaty, rule or regulation or determination of an arbitrator or a 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.
“Reserves”: as of any date of determination, such amounts as the Administrative Agent may from
time to time establish and revise in its Permitted Discretion, reducing the amount of Revolving Loans and
other financial accommodations which would otherwise be available to the Borrowers (a) to reflect events,
conditions, contingencies or risks which, as determined by the Administrative Agent in its Permitted
Discretion, do or are reasonably likely to adversely affect (i) the Collateral or any other property which is
security for the Obligations or its value (including without limitation any increase in delinquencies of
Accounts), (ii) the assets, business or prospects of any Loan Party, or (iii) the security interests and other
rights of the Administrative Agent and the Secured Parties in the Collateral (including the enforceability,
perfection and priority thereof); or (b) to reflect the Administrative Agent’s reasonable belief that any
collateral report or financial information furnished by or on behalf of the Loan Parties, if any, to the
Administrative Agent is or may have been incomplete, inaccurate or misleading in any material respect; or
(c) in respect of any state of facts which the Administrative Agent determines constitutes an Event of
Default or may, with notice or passage of time or both, constitute an Event of Default.
“Responsible Officer”: the chief executive officer, president, chief financial officer, treasurer,
controller or comptroller of an applicable Loan Party, but in any event, with respect to financial matters,
the chief executive officer, the chief financial officer, treasurer, controller or comptroller of such Loan Party
and solely for the purposes of notices given pursuant to Section 2, any other officer or employee of the
applicable Loan Party so designated by any of the foregoing officers in a written notice to the
Administrative Agent (together with incumbency and other related documentation reasonably requested by
the Administrative Agent). Any document delivered hereunder that is signed by a Responsible Officer of
a Loan Party shall be conclusively presumed to have been authorized by all necessary corporate, partnership
and/or other action on the part of such Loan Party and such Responsible Officer shall be conclusively
presumed to have acted on behalf of such Loan Party.
“Restricted Payments”: as defined in Section 7.6.
“Revolving Commitment”: as to any Lender, the obligation of such Lender, if any, to make
Revolving Loans and participate in Swingline Loans and Letters of Credit in an aggregate principal amount
not to exceed the amount set forth under the heading “Revolving Commitment” opposite such Lender’s
name on Schedule 1.1A or in the Assignment and Assumption or the Increase Joinder pursuant to which
such Lender becomes a party hereto, as the same may be changed from time to time pursuant to the terms
hereof (including in connection with assignments and Increases permitted hereunder).
“Revolving Commitment Period”: the period from and including the Closing Date to the
Revolving Termination Date.
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“Revolving Extensions of Credit”: as to any Revolving Lender at any time, an amount equal to
the sum of (a) the aggregate principal amount of all Revolving Loans held by such Lender then outstanding,
plus (b) such Lender’s L/C Percentage of the aggregate undrawn amount of all outstanding Letters of Credit
at such time, plus (c) such Lender’s L/C Percentage of the aggregate amount of all L/C Disbursements that
have not yet been reimbursed or converted into Revolving Loans at such time, plus (d) such Lender’s
Revolving Percentage of the aggregate principal amount of Swingline Loans then outstanding.
“Revolving Facility”: the Revolving Commitments and the extensions of credit made thereunder.
“Revolving Lender”: each Lender that has a Revolving Commitment or that holds Revolving
Loans.
“Revolving Loan Funding Office”: the office of the Administrative Agent specified in
Section 10.2 or such other office as may be specified from time to time by the Administrative Agent as its
funding office by written notice to the Borrowers and the Lenders.
“Revolving Loan Note”: a promissory note in the form of Exhibit G-1, as it may be amended,
supplemented or otherwise modified from time to time.
“Revolving Loans”: as defined in Section 2.4(a).
“Revolving Percentage”: as to any Revolving Lender at any time, the percentage which such
Lender’s Revolving Commitment then constitutes of the Total Revolving Commitments or, at any time
after the Revolving Commitments shall have expired or terminated, the percentage which the aggregate
principal amount of such Lender’s Revolving Loans then outstanding constitutes of the aggregate principal
amount of all Revolving Loans then outstanding; provided that in the event that the Revolving Loans are
paid in full prior to the reduction to zero of the Total Revolving Commitments, the Revolving Percentages
shall be determined in a manner designed to ensure that the other outstanding Revolving Extensions of
Credit shall be held by the Revolving Lenders on a comparable basis.
“Revolving Termination Date”: is February 20, 2020.
“S&P”: Standard & Poor’s Ratings Services.
“Sale Leaseback Transaction”: any arrangement with any Person or Persons, whereby in
contemporaneous or substantially contemporaneous transactions a Loan Party sells substantially all of its
right, title and interest in any property and, in connection therewith, acquires, leases or licenses back the
right to use all or a material portion of such property.
“Sanctioned Entity”: (a) a country or a government of a country, (b) an agency of the government
of a country, (c) an organization directly or indirectly controlled by a country or its government, or (d) a
Person resident in or determined to be resident in a country, in each case, that is subject to a country
sanctions program administered and enforced by OFAC.
“Sanctioned Person”: a Person named on the list of Specially Designated Nationals maintained by
OFAC.
“SEC”: the Securities and Exchange Commission, any successor thereto and any analogous
Governmental Authority.
“Secured Obligations”: as defined in the Guarantee and Collateral Agreement.
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“Secured Parties”: the collective reference to the Administrative Agent, the Lenders (including
the Issuing Lender in its capacity as Issuing Lender and any Swingline Lender in its capacity as Swingline
Lender), each Bank Services Provider and any Qualified Counterparties.
“Securities Account”: any “securities account” as defined in the UCC with such additions to such
term as may hereafter be made.
“Securities Account Control Agreement”: any Control Agreement entered into by the
Administrative Agent, a Loan Party and a securities intermediary holding a Securities Account of such
Loan Party pursuant to which the Administrative Agent is granted “control” (for purposes of the UCC) over
such Securities Account.
“Securities Act”: the Securities Act of 1933, as amended from time to time and any successor
statute.
“Security Documents”: the collective reference to (a) the Guarantee and Collateral Agreement, (b)
the Mortgages, (c) the Intellectual Property Security Agreements, (d) each Deposit Account Control
Agreement, (e) each Securities Account Control Agreement, (f) all other security documents hereafter
delivered to the Administrative Agent granting a Lien on any property of any Person to secure the
Obligations of any Loan Party arising under any Loan Document, and (g) all financing statements, fixture
filings, patent, trademark and copyright filings, assignments, acknowledgments and other filings,
documents and agreements made or delivered pursuant to any of the foregoing.
“Seventh Amendment”: the Seventh Amendment Agreement by and among the Borrowers, the
Lenders and the Administrative Agent, dated as of March 29, 2018.
“Seventh Amendment Effective Date”: as defined in the Seventh Amendment.
“Solvency Certificate”: the Solvency Certificate, dated the Closing Date, delivered to the
Administrative Agent and the Lenders pursuant to Section 5.1(o), which Solvency Certificate shall be in
substantially the form of Exhibit D.
“Solvent”: when used with respect to any Person, as of any date of determination, (a) the amount
of the “fair value” of the assets of such Person will, as of such date, exceed the amount of all “liabilities of
such Person, contingent or otherwise,” as of such date, as such quoted terms are determined in accordance
with applicable federal and state laws governing determinations of the insolvency of debtors, (b) the
“present fair saleable value” of the assets of such Person will, as of such date, be greater than the amount
that will be required to pay the liability of such Person on its debts as such debts become absolute and
matured, as such quoted terms are determined in accordance with applicable federal and state laws
governing determinations of the insolvency of debtors, (c) such Person will not have, as of such date, an
unreasonably small amount of capital with which to conduct its business, and (d) such Person will be able
to pay its debts as they mature. For purposes of this definition, (i) “debt” means liability on a “claim,” and
(ii) “claim” means any (x) right to payment, whether or not such a right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or
unsecured or (y) right to an equitable remedy for breach of performance if such breach gives rise to a right
to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent,
matured or unmatured, disputed, undisputed, secured or unsecured.
“Specified Swap Agreement”: any Swap Agreement entered into by any Loan Party and any
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Qualified Counterparty (or any Person who was a Qualified Counterparty as of the Closing Date or as of
the date such Swap Agreement was entered into).
“Subordinated Debt Document”: any agreement, certificate, document or instrument executed or
delivered by any Loan Party or any of its respective Subsidiaries and evidencing Indebtedness of such Loan
Party or such Subsidiary which is either subordinated to the payment of the Obligations or the lien securing
such indebtedness is subordinated to the Administrative Agent’s Lien, in each case, in a manner approved
in writing by the Administrative Agent, and any renewals, modifications, or amendments thereof which are
approved in writing by the Administrative Agent.
“Subordinated Indebtedness”: Indebtedness of a Loan Party, the payment of which and/or the lien
securing such Indebtedness, is subordinated to the Obligations and/or the Administrative Agent’s Lien, as
applicable, pursuant to subordination terms (including payment, lien and remedies subordination terms, as
applicable) reasonably acceptable to the Administrative Agent.
“Subsidiary”: as to any Person, a corporation, partnership, limited liability company or other entity
of which shares of stock or other ownership interests having ordinary voting power (other than stock or
such other ownership interests having such power only by reason of the happening of a contingency) to
elect a majority of the board of directors or other managers of such corporation, partnership or other entity
are at the time owned, or the management of which is otherwise controlled, directly or indirectly through
one or more intermediaries, or both, by such Person. Unless otherwise qualified, all references to a
“Subsidiary” or to “Subsidiaries” in this Agreement shall refer to a Subsidiary or Subsidiaries of the Parent.
“SVB”: as defined in the preamble hereto.
“Swap Agreement”: any agreement with respect to any swap, hedge, forward, future or derivative
transaction or option or similar agreement (including without limitation, any Interest Rate Agreement)
involving, or settled by reference to, one or more rates, currencies, commodities, equity or debt instruments
or securities, or economic, financial or pricing indices or measures of economic, financial or pricing risk or
value or any similar transaction or any combination of these transactions; provided that no phantom stock
or similar plan providing for payments only on account of services provided by current or former directors,
officers, employees or consultants of the Borrowers and their Subsidiaries shall be deemed to be a “Swap
Agreement.” For the avoidance of doubt, a Permitted Bond Hedge Transaction shall not constitute a Swap
Agreement.
“Swap Termination Value”: in respect of any one or more Swap Agreements, after taking into
account the effect of any legally enforceable netting agreement relating to such Swap Agreements, (a) for
any date on or after the date such 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 Swap
Agreements, as determined based upon one or more mid-market or other readily available quotations
provided by any recognized dealer in such Swap Agreements (which may include a Qualified
Counterparty).
“Swingline Commitment”: the obligation of the Swingline Lender to make Swingline Loans
pursuant to Section 2.6 in an aggregate principal amount at any one time outstanding not to exceed
$5,000,000.
“Swingline Lender”: SVB, in its capacity as the lender of Swingline Loans.
“Swingline Loan Note”: a promissory note in the form of Exhibit G-2, as it may be amended,
27
supplemented or otherwise modified from time to time.
“Swingline Loans”: as defined in Section 2.6.
“Swingline Participation Amount”: as defined in Section 2.7(c).
“Synthetic Lease Obligation”: the monetary obligation of a Person under (a) a so-called synthetic,
off-balance sheet or tax retention lease or (b) an agreement for the use of property creating obligations that
do not appear on the balance sheet of such Person but which, upon the insolvency or bankruptcy of such
Person, would be characterized as the indebtedness of such Person (without regard to accounting treatment).
“Taxes”: all present or future taxes, levies, imposts, duties, deductions, withholdings (including
backup withholding), assessments, fees or other charges imposed by any Governmental Authority,
including any interest, additions to tax or penalties applicable thereto.
“Total Credit Exposure”: is, as to any Lender at any time, the unused Revolving Commitments
and Revolving Extensions of Credit of such Lender at such time.
“Total L/C Commitments”: at any time, the sum of all L/C Commitments at such time, as the same
may be reduced from time to time pursuant to Section 2.10 or 3.5(b). The initial amount of the Total L/C
Commitments on the Closing Date is $5,000,000.
“Total Revolving Commitments”: at any time, the aggregate amount of the Revolving
Commitments then in effect. The original amount of the Total Revolving Commitments is $60,000,000.
As of the Fourth Amendment Effective Date the amount of the Total Revolving Commitments is
$95,000,000. The L/C Commitment and the Swingline Commitment are each sublimits of the Total
Revolving Commitments.
“Total Revolving Extensions of Credit”: at any time, the aggregate amount of the Revolving
Extensions of Credit outstanding at such time.
“Trade Date”: as defined in Section 10.6(b)(i)(B).
“Transaction Report”: that certain report of transactions and schedule of collections, including
calculations of the Borrowing Base and the Recurring Revenue, a form of which has been provided by the
Administrative Agent to the Borrowers.
“Transferee”: any Eligible Assignee or Participant.
“Unfriendly Acquisition”: any acquisition that has not, at the time of the first public announcement
of an offer relating thereto, been approved by the board of directors (or other legally recognized governing
body) of the Person to be acquired; except that with respect to any acquisition of a non-U.S. Person, an
otherwise friendly acquisition shall not be deemed to be unfriendly if it is not customary in such jurisdiction
to obtain such approval prior to the first public announcement of an offer relating to a friendly acquisition.
“Uniform Commercial Code” or “UCC”: the Uniform Commercial Code (or any similar or
equivalent legislation) as in effect from time to time in the State of New York, or as the context may require,
any other applicable jurisdiction.
“United States” and “U.S.”: the United States of America.
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“USCRO”: the U.S. Copyright Office.
“USPTO”: the U.S. Patent and Trademark Office.
“U.S. Person”: any Person that is a “United States Person” as defined in Section 7701(a)(30) of
the Code.
“U.S. Tax Compliance Certificate”: as defined in Section 2.20(f).
“Withholding Agent”: as applicable, any of any applicable Loan Party and the Administrative
Agent, as the context may require.
1.2 Other Definitional Provisions.
(a) Unless otherwise specified therein, all terms defined in this Agreement shall have
the defined meanings when used in the other Loan Documents or any certificate or other document made
or delivered pursuant hereto or thereto.
(b) As used herein and in the other Loan Documents, and in any certificate or other
document made or delivered pursuant hereto or thereto, (i) accounting terms relating to any Group Member
not defined in Section 1.1 and accounting terms partly defined in Section 1.1, to the extent not defined,
shall have the respective meanings given to them under GAAP, (ii) the words “include,” “includes” and
“including” shall be deemed to be followed by the phrase “without limitation,” (iii) the word “incur” shall
be construed to mean incur, create, issue, assume, become liable in respect of or suffer to exist (and the
words “incurred” and “incurrence” shall have correlative meanings), (iv) 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, Capital Stock, securities, revenues, accounts, leasehold interests and
contract rights, and (v) references to agreements (including this Agreement) or other Contractual
Obligations shall, unless otherwise specified, be deemed to refer to such agreements or Contractual
Obligations as amended, supplemented, restated, amended and restated or otherwise modified from time to
time. Notwithstanding the foregoing clause (i), for purposes of determining compliance with any covenant
(including the computation of any financial covenant) contained herein, Indebtedness of any Group
Member shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects
of FASB ASC 825 on financial liabilities shall be disregarded.
(c) The words “hereof,” “herein” and “hereunder” and words of similar import, when
used in this Agreement, shall refer to this Agreement as a whole and not to any particular provision of this
Agreement. The word “will” shall be construed to have the same meaning and effect as the word “shall.”
Unless the context requires otherwise, (i) any reference herein to any Person shall be construed to include
such Person’s successors and assigns, (ii) 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, and
(iii) any reference to any law or regulation herein shall, unless otherwise specified, refer to such law or
regulation as amended, modified or supplemented from time to time.
(d) The meanings given to terms defined herein shall be equally applicable to both the
singular and plural forms of such terms. Whenever the context may require, any pronoun shall include the
corresponding masculine, feminine and neuter forms.
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AMOUNT AND TERMS OF REVOLVING COMMITMENTS
2.1 Reserved.
2.2 Reserved.
2.3 Reserved.
2.4 Revolving Commitments.
(a) Subject to the terms and conditions hereof, each Revolving Lender severally agrees
to make revolving credit loans (each, a “Revolving Loan” and, collectively, the “Revolving Loans”) to the
Borrowers from time to time during the Revolving Commitment Period in an aggregate principal amount
at any one time outstanding for each Revolving Lender which, when added to the sum of (i) such Revolving
Lender’s Revolving Percentage of any Swingline Loans then outstanding and (ii) such Revolving Lender’s
L/C Exposure, if any, at such time, does not exceed the amount of such Revolving Lender’s Revolving
Commitment; provided, that the Total Revolving Extensions of Credit outstanding at such time, after giving
effect to the making of such Revolving Loans, shall not exceed (x) the lesser of (i) the Total Revolving
Commitments in effect at such time and (ii) the Borrowing Base in effect at such time, less (y) Reserves
imposed by the Administrative Agent in its Permitted Discretion from time to time. During the Revolving
Commitment Period the Borrowers may use the Revolving Commitments by borrowing, prepaying the
Revolving Loans in whole or in part, and reborrowing, all in accordance with the terms and conditions
hereof.
(b) The Borrowers shall repay all outstanding Revolving Loans on the Revolving
Termination Date; provided, however, that during the existence of an Event of Default, the Revolving Loans
then outstanding shall be repaid from funds in the Cash Collateral Account in accordance with Section
6.3(c).
2.5 Procedure for Revolving Loan Borrowing. The Borrowers may borrow up to the
Available Revolving Commitment under the Revolving Commitments during the Revolving Commitment
Period on any Business Day; provided that the Borrowers shall give the Administrative Agent an
irrevocable Notice of Borrowing (which must be received by the Administrative Agent prior to 10:00 A.M.,
Pacific time one (1) Business Day prior to the requested Borrowing Date (provided that any such Notice of
Borrowing under the Revolving Facility to finance payments under Section 3.5(a) may be given not later
than 10:00 A.M., Pacific time, on the date of the proposed borrowing), in each such case specifying (i) the
amount of Revolving Loans to be borrowed, (ii) the requested Borrowing Date, and (iii) instructions for
remittance of the proceeds of the Loans to be borrowed. Except as provided in Sections 3.5(b) and 2.7(b),
each borrowing shall be in a principal amount of $500,000 or a whole multiple of $100,000 in excess thereof
(or, if the then aggregate Available Revolving Commitments are less than $1,000,000, such lesser amount).
In addition to such Notice of Borrowing, the Borrowers shall contemporaneously deliver to the
Administrative Agent a completed Transaction Report executed by a Responsible Officer, together with
such other supporting reports and information, including without limitation, cash receipts journals, and
accounts receivable aging reports, as the Administrative Agent may reasonably request. Upon receipt of
any such Notice of Borrowing and Transaction Report from the Borrowers, the Administrative Agent shall
promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro
rata share of each such borrowing available to the Administrative Agent for the account of the Borrowers
at the Revolving Loan Funding Office prior to 12:00 P.M., Pacific time, on the Borrowing Date requested
by the Borrowers in funds immediately available to the Administrative Agent. Such borrowing will then
be made available to the Borrowers by the Administrative Agent crediting such account as is designated in
writing to the Administrative Agent by the Borrowers with the aggregate of the amounts made available to
the Administrative Agent by the Revolving Lenders and in like funds as received by the Administrative
Agent or, if so specified in the Flow of Funds Agreement, the Administrative Agent shall wire transfer all
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or a portion of such aggregate amounts to the Existing Lender (for application against amounts then
outstanding under the Existing Credit Facility), in accordance with the Flow of Funds Agreement.
2.6 Swingline Commitment. Subject to the terms and conditions hereof, the Swingline Lender
agrees to make available a portion of the credit accommodations otherwise available to the Borrowers under
the Revolving Commitments from time to time during the Revolving Commitment Period by making swing
line loans (each a “Swingline Loan” and, collectively, the “Swingline Loans”) to the Borrowers; provided
that (a) the aggregate principal amount of Swingline Loans outstanding at any time shall not exceed the
Swingline Commitment then in effect, (b) the Borrowers shall not request, and the Swingline Lender shall
not make, any Swingline Loan if, after giving effect to the making of such Swingline Loan, the aggregate
amount of the Available Revolving Commitments would be less than zero, and (c) the Borrower shall not
use the proceeds of any Swingline Loan to refinance any then outstanding Swingline Loan. During the
Revolving Commitment Period, the Borrower may use the Swingline Commitment by borrowing, repaying
and reborrowing, all in accordance with the terms and conditions hereof. Swingline Loans shall be made
only in Dollars. To the extent not otherwise required by the terms hereof to be repaid prior thereto, the
Borrowers shall repay to the Swingline Lender the then unpaid principal amount of each Swingline Loan
on the Revolving Termination Date.
2.7 Procedure for Swingline Borrowing; Refunding of Swingline Loans.
(a) Whenever the Borrowers desire that the Swingline Lender make Swingline Loans,
the Borrowers shall give the Swingline Lender irrevocable telephonic or electronic notice (which notice
must be received by the Swingline Lender not later than 12:00 P.M., Pacific time, on the proposed
Borrowing Date) confirmed promptly in writing by a Notice of Borrowing, specifying (i) the amount to be
borrowed, (ii) the requested Borrowing Date (which shall be a Business Day during the Revolving
Commitment Period), and (iii) instructions for the remittance of the proceeds of such Loan. Each borrowing
under the Swingline Commitment shall be in an amount equal to $500,000 or a whole multiple of $100,000
in excess thereof. Promptly thereafter, on the Borrowing Date specified in a notice in respect of any
Swingline Loan, the Swingline Lender shall make available to the Borrowers an amount in immediately
available funds equal to the amount of such Swingline Loan by depositing such amount in the account
designated in writing to the Administrative Agent by the Borrowers (or, in the case of a Swingline Loan
made to finance the reimbursement of an L/C Disbursement as provided in Section 3.5(b), by remittance to
the Issuing Lender). Unless a Swingline Loan is sooner refinanced by the advance of a Revolving Loan
pursuant to Section 2.7(b), such Swingline Loan shall be repaid by the Borrowers no later than five (5)
Business Days after the advance of such Swingline Loan.
(b) The Swingline Lender, at any time and from time to time in its sole and absolute
discretion, may, on behalf of the Borrowers (which hereby irrevocably direct the Swingline Lender to act
on their behalf), on one (1) Business Day’s telephonic notice given by the Swingline Lender no later than
12:00 P.M., Pacific time, and promptly confirmed in writing, request each Revolving Lender to make, and
each Revolving Lender hereby agrees to make, a Revolving Loan, in an amount equal to such Revolving
Lender’s Revolving Percentage of the aggregate amount of such Swingline Loan (each a “Refunded
Swingline Loan”) outstanding on the date of such notice, to repay the Swingline Lender. Each Revolving
Lender shall make the amount of such Revolving Loan available to the Administrative Agent at the
Revolving Loan Funding Office in immediately available funds, not later than 10:00 A.M., Pacific time,
one (1) Business Day after the date of such written notice. The proceeds of such Revolving Loan shall
immediately be made available by the Administrative Agent to the Swingline Lender for application by the
Swingline Lender to the repayment of the Refunded Swingline Loan. The Borrowers irrevocably authorize
the Swingline Lender to charge the Borrowers’ accounts with the Administrative Agent (up to the amount
available in each such account) immediately to pay the amount of any Refunded Swingline Loan to the
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extent amounts received from the Revolving Lenders are not sufficient to repay in full such Refunded
Swingline Loan.
(c) If prior to the time that the Borrowers have repaid the Swingline Loans pursuant
to Section 2.7(a) or a Revolving Loan has been made pursuant to Section 2.7(b), one of the events described
in Section 8.1(f) shall have occurred or if for any other reason, as determined by the Swingline Lender in
its sole discretion, Revolving Loans may not be made as contemplated by Section 2.7(b), each Revolving
Lender shall, on the date such Revolving Loan was to have been made pursuant to the notice referred to in
Section 2.7(b) or on the date requested by the Swingline Lender (with at least one (1) Business Days’ notice
to the Revolving Lenders), purchase for cash an undivided participating interest in the then outstanding
Swingline Loans by paying to the Swingline Lender an amount (the “Swingline Participation Amount”)
equal to (i) such Revolving Lender’s Revolving Percentage times (ii) the sum of the aggregate principal
amount of the outstanding Swingline Loans that were to have been repaid with such Revolving Loans.
(d) Whenever, at any time after the Swingline Lender has received from any
Revolving Lender such Lender’s Swingline Participation Amount, the Swingline Lender receives any
payment on account of the Swingline Loans, the Swingline Lender will distribute to such Lender its
Swingline Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the
period of time during which such Lender’s participating interest was outstanding and funded and, in the
case of principal and interest payments, to reflect such Lender’s pro rata portion of such payment if such
payment is not sufficient to pay the principal of and interest on all Swingline Loans then due); provided
that in the event that such payment received by the Swingline Lender is required to be returned, such
Revolving Lender will return to the Swingline Lender any portion thereof previously distributed to it by the
Swingline Lender.
(e) Each Revolving Lender’s obligation to make the Loans referred to in
Section 2.7(b) and to purchase participating interests pursuant to Section 2.7(c) shall be absolute and
unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim,
recoupment, defense or other right that such Revolving Lender or the Borrowers may have against the
Swingline Lender, any Borrower or any other Person for any reason whatsoever, (ii) the occurrence of a
Default or an Event of Default or the failure to satisfy any of the other conditions specified in Section 5,
(iii) any adverse change in the condition (financial or otherwise) of the Borrowers, (iv) any breach of this
Agreement or any other Loan Document by the Borrowers, any other Loan Party or any other Revolving
Lender, or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the
foregoing.
2.8 Overadvances(a) If at any time or for any reason the amount of the Total Revolving
Extensions of Credit exceeds (x) the lesser of (i) the Total Revolving Commitments in effect at such time
and (ii) the Borrowing Base in effect at such time, less (y) Reserves imposed by the Administrative Agent
in its Permitted Discretion from time to time (any such excess, an “Overadvance”), the Borrower shall pay
on demand the full amount of such Overadvance to the Administrative Agent for application against the
Revolving Extensions of Credit in accordance with the terms hereof.
(b) Upon the occurrence and during the continuance of an Event of Default, the
Administrative Agent, in its sole discretion, may make Revolving Loans to the Borrowers on behalf of the
Revolving Lenders, so long as the aggregate amount of such Revolving Loans shall not exceed 10% of the
Borrowing Base, if the Administrative Agent, in its Permitted Discretion, deems that such Revolving Loans
are necessary or desirable (i) to protect all or any portion of the Collateral, (ii) to enhance the likelihood or
maximize the amount of repayment of the Loans and the other Obligations or (iii) to pay any other amount
chargeable to the Borrowers pursuant to this Agreement (such Revolving Loans, “Protective
Overadvances”); provided that (A) in no event shall the Total Revolving Extensions of Credit exceed the
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amount of the Total Revolving Commitments then in effect and (B) the Required Lenders may at any time
revoke the Administrative Agent’s authorization to make future Protective Advances (provided that any
existing Protective Overadvance shall not be subject to such revocation and any such revocation must be in
writing and shall become effective prospectively upon the Administrative Agent’s receipt thereof). Each
applicable Lender shall be obligated to advance to the Borrowers its Revolving Percentage of each
Protective Overadvance made in accordance with this Section 2.8(b). If Protective Overadvances are made
in accordance with the preceding sentence, then all Revolving Lenders shall be bound to make, or permit
to remain outstanding, such Protective Overadvances based upon their Revolving Percentages in
accordance with the terms of this Agreement. All Protective Overadvances shall be repaid by the Borrowers
on demand, shall be secured by the Collateral and shall bear interest as provided in this Agreement for
Revolving Loans generally.
2.9 Fees.
(a) Fee Letter. The Borrowers agrees to pay to the Administrative Agent the fees in the
amounts and on the dates as set forth in the Fee Letter and to perform any other obligations contained
therein.
(b) Commitment Fee. As additional compensation for the Total Revolving
Commitments, the Borrowers shall pay to the Administrative Agent for the account of the Lenders (other
than any Defaulting Lender), a fee for the Borrowers’ non-use of available funds under the Revolving
Facility (the “Commitment Fee”), payable quarterly in arrears on the fifth day of each calendar quarter
occurring after the Closing Date prior to the Revolving Termination Date, and on the Revolving
Termination Date, in an amount equal to the Commitment Fee Rate multiplied by the average unused
portion of the Total Revolving Commitments, as reasonably determined by the Administrative Agent. The
unused portion of the Total Revolving Commitments, for purposes of this calculation, shall equal the
difference between (i) the Total Revolving Commitments (as reduced from time to time), and (ii) the sum
of (A) the average for the period of the daily closing balance of the Revolving Loans outstanding, (B) the
aggregate undrawn amount of all Letters of Credit outstanding at such time, and (C) the aggregate amount
of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such
time. For the avoidance of doubt, the outstanding amount of any Swingline Loans shall not be counted
towards or considered usage of the Total Revolving Commitments for purposes of determining the
Commitment Fee.
(c) Fees Nonrefundable. All fees payable under this Section 2.9 shall be fully earned
on the date paid and nonrefundable.
(d) Increase in Fees. At any time that an Event of Default exists and is continuing,
the Borrowers shall pay interest on any overdue fees due under subsections (a) and (b) at a rate per annum
equal to 2.0% plus the rate applicable to Revolving Loans as provided in Section 2.15.
2.10
Termination or Reduction of Total Revolving Commitments; Total L/C
Commitments.
(a) Termination or Reduction of Total Revolving Commitments. The Borrowers shall
have the right, upon not less than three (3) Business Days’ written notice delivered to the Administrative
Agent, to terminate the Total Revolving Commitments or, from time to time, to reduce the amount of the
Total Revolving Commitments; provided that no such termination or reduction of the Total Revolving
Commitment shall be permitted if, after giving effect thereto and to any prepayments of the Revolving
Loans and Swingline Loans to be made on the effective date thereof the amount of the Total Revolving
Extensions of Credit then outstanding would exceed (x) the lesser of (i) the Total Revolving Commitments
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in effect at such time and (ii) the Borrowing Base in effect at such time, less (y) Reserves imposed by the
Administrative Agent in its Permitted Discretion from time to time. Any such reduction shall be in an
amount equal to $1,000,000, or a whole multiple in excess thereof (or, if the then Total Revolving
Commitments are less than $1,000,000, such lesser amount), and shall reduce permanently the Total
Revolving Commitments then in effect. Any reduction of the Total Revolving Commitments shall be
applied to the Revolving Commitments of each Lender according to its respective Revolving Percentage.
All fees accrued until the effective date of any termination of the Total Revolving Commitments shall be
paid on the effective date of such termination.
(b) Termination or Reduction of Total L/C Commitments. The Borrowers shall have
the right, upon not less than three (3) Business Days’ written notice delivered to the Administrative Agent,
to terminate the Total L/C Commitments available to the Borrowers or, from time to time, to reduce the
amount of the Total L/C Commitments available to the Borrowers; provided that, in any such case, no such
termination or reduction of the Total L/C Commitments shall be permitted if, after giving effect thereto, the
Total L/C Commitments shall be reduced to an amount that would result in the aggregate L/C Exposure
exceeding the Total L/C Commitments (as so reduced). Any such reduction shall be in an amount equal to
$1,000,000, or a whole multiple in excess thereof (or, if the then Total L/C Commitments are less than
$1,000,000, such lesser amount), and shall reduce permanently the Total L/C Commitments then in effect.
Any reduction of the Total L/C Commitments shall be applied to the L/C Commitments of each Lender
according to its respective L/C Percentage. All fees accrued until the effective date of any termination of
the Total L/C Commitments shall be paid on the effective date of such termination.
2.11 Optional Loan Prepayments.
The Borrowers may at any time and from time to time prepay the Loans, in whole or in part, without
premium or penalty, upon irrevocable notice delivered to the Administrative Agent no later than 10:00
A.M., Pacific time, one (1) Business Day prior thereto, which notice shall specify the date and amount of
the proposed prepayment; provided that if such notice of prepayment indicates that such prepayment is to
be funded with the proceeds of a refinancing, such notice of prepayment may be revoked if the financing is
not consummated. Upon receipt of any such notice the Administrative Agent shall promptly notify each
Lender thereof. If any such notice is given, subject to any permitted revocation of such notice, the amount
specified in such notice shall be due and payable on the date specified therein, together with accrued interest
to such date on the amount prepaid. Partial prepayments of Revolving Loans shall be in an aggregate
principal amount of $1,000,000 or a whole multiple thereof. Partial prepayments of Swingline Loans shall
be in an aggregate principal amount of $100,000 or a whole multiple thereof.
2.12 Incremental Facility.
(a) At any time during the Revolving Commitment Period, the Borrowers may request
(but subject to the conditions set forth in clause (b) below) that the Revolving Commitments be increased
by an amount not to exceed the Available Revolving Increase Amount (each such increase, an “Increase”);
provided that the Borrowers may not request an Increase on more than two occasions during the term of
this Agreement. No Lender shall be obligated to increase its Revolving Commitments in connection with
a proposed Increase. Any Increase shall be in an amount of at least $5,000,000 (or, if the Available
Revolving Increase Amount is less than $5,000,000, such remaining Available Revolving Increase
Amount) and integral multiples of $1,000,000 in excess thereof. Additionally, for the avoidance of doubt,
it is understood and agreed that in no event shall the aggregate amount of the Increases to the Revolving
Commitments exceed the Available Revolving Increase Amount during the term of the Agreement.
(b) Each of the following shall be conditions precedent to any Increase of the
Revolving Commitments in connection therewith:
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(i) any Increase shall be on the same terms (including the pricing, and
maturity date), as applicable, as, and pursuant to documentation applicable to, the Revolving Facility then
in effect;
Increase at least ten (10) Business Days prior to the requested funding date of such Increase;
(ii) the Borrowers shall have delivered an irrevocable written request for such
(iii) each Lender agreeing to such Increase, the Borrowers and the
Administrative Agent shall have signed an Increase Joinder (any Increase Joinder may, with the consent of
the Administrative Agent, the Borrowers and the Lenders agreeing to such Increase, effect such
amendments to this Agreement and the other Loan Documents as may be necessary or appropriate to
effectuate the provisions of this Section 2.12) and the Borrowers shall have executed any Notes requested
by any Lender in connection with the making of the Increase. Notwithstanding anything to the contrary in
this Agreement or in any other Loan Document, an Increase Joinder reasonably satisfactory to the
Administrative Agent, and the amendments to this Agreement effected thereby, shall not require the consent
of any Lender other than the Lender(s) agreeing to fund such Increase;
with respect to such Increase;
(iv) each of the conditions precedent set forth in Section 5.2 shall be satisfied
(v) after giving pro forma effect to such Increase and the use of proceeds
thereof, (A) no Default or Event of Default shall have occurred and be continuing at the time of such
Increase and (B) the Borrowers shall be in compliance with the then applicable financial covenants set forth
in Section 7.1 hereof as of the end of the most recently ended month for which financial statements are
required to be delivered prior to such Increase, and the Borrowers shall have delivered to the Administrative
Agent a Compliance Certificate evidencing compliance with the requirements of this clause (v);
Administrative Agent all fees required to be paid pursuant to the terms of the Fee Letter; and
(vi) in connection with such Increase, the Borrowers shall pay to
(vii) upon each Increase in accordance with this Section 2.12, all outstanding
Loans, participations hereunder in Letters of Credit and participations hereunder in Swingline Loans held
by each Lender shall be reallocated among the Lenders (including any newly added Lenders) in accordance
with the Lenders’ respective revised Revolving Percentages and L/C Percentages, pursuant to procedures
reasonably determined by the Administrative Agent in consultation with the Borrowers.
(a) Upon the effectiveness of any Increase, (i) all references in this Agreement and
any other Loan Document to the Revolving Loans shall be deemed, unless the context otherwise requires,
to include such Increase advanced pursuant to this Section 2.12 and (ii) all references in this Agreement
and any other Loan Document to the Revolving Commitments shall be deemed, unless the context
otherwise requires, to include the commitments to advance an amount equal to such Increase pursuant to
this Section 2.12.
(b) The Revolving Loans and Revolving Commitments established pursuant to this
Section 2.12 shall constitute Revolving Loans and Revolving Commitments under, and shall be entitled to
all the benefits afforded by, this Agreement and the other Loan Documents, and shall, without limiting the
foregoing, benefit equally and ratably from any guarantees and the security interests created by the Loan
Documents. The Borrowers shall take any actions reasonably required by Administrative Agent to ensure
and demonstrate that the Liens and security interests granted by the Loan Documents continue to be
perfected under the Code or otherwise after giving effect to the establishment of any such new Revolving
Commitments.
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2.13 Reserved.
2.14 Reserved2.15 Interest Rates and Payment Dates.
(a) Each Revolving Loan and each Swingline Loan shall bear interest at a rate per
annum equal to (i) the ABR plus (ii) the Applicable Margin.
(b) During the continuance of an Event of Default, at the request of the Required
Lenders, all outstanding Loans shall bear interest at a rate per annum equal to the rate that would otherwise
be applicable thereto pursuant to the foregoing provisions of this Section plus 2.00% (the “Default Rate”);
provided that the Default Rate shall apply to all outstanding Loans automatically and without any Required
Lender consent therefor upon the occurrence of any Event of Default arising under Section 8.1(a) or (f).
(c) Interest on the outstanding principal amount of each Loan shall be payable in
arrears on each Interest Payment Date; provided that interest accruing pursuant to Section 2.15(b) shall be
payable from time to time on demand.
2.16 Computation of Interest and Fees.
(a) Interest and fees payable pursuant hereto shall be calculated on the basis of a 360-
day year for the actual days elapsed, except that, with respect to Revolving Loans the rate of interest on
which is calculated on the basis of the Prime Rate, the interest thereon shall be calculated on the basis of a
365- (or 366-, as the case may be) day year for the actual days elapsed. Any change in the interest rate on
a Loan resulting from a change in the ABR shall become effective as of the opening of business on the day
on which such change becomes effective. The Administrative Agent shall as soon as practicable notify the
Borrowers and the relevant Lenders of the effective date and the amount of each such change in interest
rate.
(b) Each determination of an interest rate by the Administrative Agent pursuant to any
provision of this Agreement shall be conclusive and binding on the Borrowers and the Lenders in the
absence of manifest error. The Administrative Agent shall, at the request of the Borrowers, deliver to the
Borrowers a statement showing the quotations used by the Administrative Agent in determining any interest
rate pursuant to Section 2.16(a).
2.17 Reserved2.18 Pro Rata Treatment and Payments.
(a) Each borrowing by the Borrowers from the Lenders hereunder, each payment by
the Borrowers on account of any commitment fee and any reduction of the Revolving Commitments shall
be made pro rata according to the respective L/C Percentages or Revolving Percentages, as the case may
be, of the relevant Lenders.
(b) Each payment (including each prepayment) by the Borrowers on account of
principal of and interest on the Revolving Loans shall be made pro rata according to the respective
outstanding principal amounts of the Revolving Loans then held by the Revolving Lenders.
(c) All payments (including prepayments) to be made by the Borrowers hereunder,
whether on account of principal, interest, fees or otherwise, shall be made without condition or deduction
for any counterclaim, defense, recoupment or setoff and shall be made prior to 10:00 A.M., Pacific time,
on the due date thereof to the Administrative Agent, for the account of the Lenders, at the applicable
Revolving Loan Funding Office, in Dollars and in immediately available funds. The Administrative Agent
shall distribute such payments to the Lenders promptly upon receipt in like funds as received. Any payment
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received by the Administrative Agent after 10:00 A.M. Pacific time shall be deemed received on the next
succeeding Business Day and any applicable interest or fee shall continue to accrue. If any payment
hereunder becomes due and payable on a day other than a Business Day, such payment shall be extended
to the next succeeding Business Day. In the case of any extension of any payment of principal pursuant to
the preceding sentence, interest thereon shall be payable at the then applicable rate during such extension.
(d) Unless the Administrative Agent shall have been notified in writing by any Lender
prior to the date of any borrowing that such Lender will not make the amount that would constitute its share
of such borrowing available to the Administrative Agent, the Administrative Agent may assume that such
Lender is making such amount available to the Administrative Agent on such date in accordance with
Section 2, and the Administrative Agent may, in reliance upon such assumption, make available to the
Borrowers a corresponding amount. If such amount is not in fact made available to the Administrative
Agent by the required time on the Borrowing Date therefor, such Lender and the Borrowers severally agree
to pay to the Administrative Agent, on demand, such corresponding amount with interest thereon, for each
day from and including the date on which such amount is made available to the Borrowers but excluding
the date of payment to the Administrative Agent, at (i) in the case of a payment to be made by such Lender,
a rate equal to the greater of (A) the Federal Funds Effective Rate and (B) a rate determined by the
Administrative Agent in accordance with banking industry rules on interbank compensation, and (ii) in the
case of a payment to be made by the Borrowers, the rate per annum applicable to Revolving Loans under
the Revolving Facility. If the Borrowers and such Lender shall pay such interest to the Administrative
Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the
Borrowers the amount of such interest paid by the Borrowers for such period. If such Lender pays its share
of the applicable borrowing to the Administrative Agent, then the amount so paid shall constitute such
Lender’s Revolving Loan included in such borrowing. Any payment by the Borrowers shall be without
prejudice to any claim the Borrowers may have against a Lender that shall have failed to make such payment
to the Administrative Agent.
(e) Unless the Administrative Agent shall have received notice from the Borrowers
prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders
or the Issuing Lender hereunder that the Borrowers will not make such payment, the Administrative Agent
may assume that the Borrowers are making such payment on such date in accordance herewith and may, in
reliance upon such assumption, distribute to the Lenders or the Issuing Lender, as the case may be, the
amount due. In such event, if the Borrowers have not in fact made such payment, then each of the Lenders
or the Issuing Lender, 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 Lender, 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. Nothing
herein shall be deemed to limit the rights of Administrative Agent or any Lender against any Loan Party.
(f) If any Lender makes available to the Administrative Agent funds for any Loan to
be made by such Lender as provided in the foregoing provisions of this Section 2, and such funds are not
made available to the Borrowers by the Administrative Agent because the conditions to the applicable
extension of credit set forth in Section 5.1 or Section 5.2 are not satisfied or waived in accordance with the
terms hereof, the Administrative Agent shall return such funds (in like funds as received from such Lender)
to such Lender, without interest.
(g) The obligations of a Lender hereunder to (i) make Revolving Loans, (ii) to fund
its participations in L/C Disbursements in accordance with its respective L/C Percentage, (iii) to fund its
respective Swingline Participation Amount of any Swingline Loan, and (iv) to make payments pursuant to
Section 9.7, as applicable, are several and not joint. The failure of any Lender to make any such Loan, to
37
fund any such participation or to make any such payment under Section 9.7 on any date required hereunder
shall not relieve any other Lender of its corresponding obligation to do so on such date, and no Lender shall
be responsible for the failure of any other Lender to so make its Loan, to purchase its participation or to
make its payment under Section 9.7.
(h) Nothing herein shall be deemed to obligate any Lender to obtain the funds for any
Loan in any particular place or manner or to constitute a representation by any Lender that it has obtained
or will obtain the funds for any Loan in any particular place or manner.
(i) If at any time insufficient funds are received by and available to the Administrative
Agent to pay fully all amounts of principal, interest and fees then due hereunder, such funds shall be applied
(i) first, toward payment of interest, fees, Overadvances and Protective Overadvances then due hereunder,
ratably among the parties entitled thereto in accordance with the amounts of interest, fees, Overadvances
and Protective Overadvances then due to such parties, and (ii) second, toward payment of principal then
due hereunder, ratably among the parties entitled thereto in accordance with the amounts of principal then
due to such parties.
(j) If any Lender shall obtain any payment (whether voluntary, involuntary, through
the exercise of any right of set-off, or otherwise) on account of the principal of or interest on any Loan
made by it, its participation in the L/C Exposure or other obligations hereunder, as applicable (other than
pursuant to a provision hereof providing for non-pro rata treatment), in excess of its Revolving Percentage
or L/C Percentage, as applicable, of such payment on account of the Loans or participations obtained by all
of the Lenders, such Lender shall forthwith advise the Administrative Agent of the receipt of such payment,
and within five (5) Business Days of such receipt purchase (for cash at face value) from the other Revolving
Lenders or L/C Lenders, as applicable (through the Administrative Agent), without recourse, such
participations in the Revolving Loans made by them and/or participations in the L/C Exposure held by
them, as applicable, or make such other adjustments as shall be equitable, as shall be necessary to cause
such purchasing Lender to share the excess payment ratably with each of the other Lenders in accordance
with their respective Revolving Percentages or L/C Percentages, as applicable; provided, however, that if
all or any portion of such excess payment is thereafter recovered by or on behalf of the Borrowers from
such purchasing Lender, the purchase shall be rescinded and the purchase price restored to the extent of
such recovery, but without interest. The Borrowers agree that any Lender so purchasing a participation
from another Lender pursuant to this Section 2.18(j) may exercise all its rights of payment (including the
right of set-off) with respect to such participation as fully as if such Lender were the direct creditor of the
Borrowers in the amount of such participation. No documentation other than notices and the like referred
to in this Section 2.18(j) shall be required to implement the terms of this Section 2.18(j). The
Administrative Agent shall keep records (which shall be conclusive and binding in the absence of manifest
error) of participations purchased pursuant to this Section 2.18(j) and shall in each case notify the Revolving
Lenders or the L/C Lenders, as applicable, following any such purchase. The provisions of this
Section 2.18(j) shall not be construed to apply to (i) any payment made by or on behalf of the Borrowers
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), (ii) the application of Cash Collateral provided for in
Section 3.10, or (iii) any payment obtained by a Lender as consideration for the assignment of or sale of a
participation in any of its Loans or sub-participations in any L/C Exposure to any assignee or participant,
other than an assignment to the Borrowers or any Subsidiary thereof (as to which the provisions of this
Section shall apply). Each Borrower consents on behalf of itself and each other Loan Party to the foregoing
and agrees, to the extent it may effectively do so under applicable law, that any Lender acquiring a
participation pursuant to the foregoing arrangements may exercise against each Loan Party rights of setoff
and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of each
Loan Party in the amount of such participation.
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(k) Any amounts actually paid to or collected by the Administrative Agent pursuant
to Section 6.3(c) at any time during the existence of an Event of Default shall be applied by the
Administrative Agent to the Revolving Loans then outstanding and distributed by the Administrative Agent
to the Revolving Lenders, in each case, (i) in accordance with the Revolving Percentages of such Revolving
Lenders then in effect, and (ii) by no later than the date occurring three days after the date on which such
payments or proceeds are so received or collected by the Administrative Agent, with any remaining
amounts to be returned to the Borrower as specified in Section 6.3(c).
(l) Notwithstanding anything to the contrary in this Agreement, the Administrative
Agent may, in its discretion at any time or from time to time, without the Borrowers’ request and even if
the conditions set forth in Section 5.2 would not be satisfied, make a Revolving Loan in an amount equal
to the portion of the Obligations constituting overdue interest and fees, Swingline Loans and L/C
Disbursements that have not yet been reimbursed or converted into Revolving Loans from time to time due
and payable to itself, any Revolving Lender, the Swingline Lender or the Issuing Lender, and apply the
proceeds of any such Revolving Loan to those Obligations; provided that after giving effect to any such
Revolving Loan, the aggregate outstanding Revolving Loans will not exceed the Total Revolving
Commitments then in effect.
2.19 Requirements of Law.
(a) If the adoption of or any change in any Requirement of Law or in the interpretation
or application thereof or the compliance by any Lender with any request or directive (whether or not having
the force of law) from any central bank or other Governmental Authority made subsequent to the date
hereof:
(i) shall subject any Recipient to any Taxes (other than (A) Indemnified
Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C)
Connection Income Taxes) on its Loans, loan principal, letters of credit, commitments, or other obligations,
or its deposits, reserves, other liabilities or capital attributable thereto;
(ii) shall 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 or participated in by, any Lender; or
(iii) impose on any Lender any other condition, cost or expense (other than
Taxes) affecting this Agreement or Loans made by such Lender or any Letter of Credit or participation
therein;
and the result of any of the foregoing is to increase the cost to such Lender or such other Recipient of issuing
or participating in Letters of Credit, or to reduce any amount receivable or received by such Lender or other
Recipient hereunder in respect thereof (whether in respect of principal, interest or any other amount), then,
in any such case, upon the request of such Lender or other Recipient, the Borrowers shall promptly pay
such Lender or other Recipient, as the case may be, any additional amounts necessary to compensate such
Lender or other Recipient, as the case may be, for such increased cost or reduced amount receivable. If any
Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify
the Borrowers (with a copy to the Administrative Agent) of the event by reason of which it has become so
entitled.
(b) If any Lender determines that any change in any Requirement of Law affecting
such Lender or any lending office of such Lender or such Lender’s holding company, if any, regarding
capital or liquidity requirements, has or would have the effect of reducing the rate of return on such Lender’s
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capital or on the capital of such Lender’s holding company, if any, as a consequence of this Agreement, the
Revolving Commitments of such Lender or the Loans made by, or participations in Letters of Credit or
Swingline Loans held by, such Lender, or the Letters of Credit issued by the Issuing Lender, to a level
below that which such Lender or such Lender’s holding company could have achieved but for such change
in such Requirement of Law (taking into consideration such Lender’s policies and the policies of such
Lender’s holding company with respect to capital adequacy), then from time to time upon demand of such
Lender, the Borrowers will pay to such Lender or the Issuing Lender, as the case may be, such additional
amount or amounts as will compensate such Lender or the Issuing Lender or such Lender’s or Issuing
Lender’s holding company for any such reduction suffered.
(c) For purposes of this Agreement, (i) the Dodd-Frank Wall Street Reform and
Consumer Protection Act and all requests, rules, guidelines, or directives in connection therewith are
deemed to have gone into effect and been adopted after the date of this Agreement, and (ii) 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 any
Requirement of Law, regardless of the date enacted, adopted or issued.
(d) A certificate as to any additional amounts payable pursuant to paragraphs (a), (b),
or (c) of this Section submitted by any Lender to the Borrowers (with a copy to the Administrative Agent)
shall be conclusive in the absence of manifest error. The Borrowers shall pay such Lender the amount
shown as due on any such certificate within 10 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. Notwithstanding anything to the contrary in this Section 2.19, the
Borrowers shall not be required to compensate a Lender pursuant to this Section 2.19 for any amounts
incurred more than nine months prior to the date that such Lender notifies the Borrowers of such Lender’s
intention to claim compensation therefor; provided that if the circumstances giving rise to such claim have
a retroactive effect, then such nine-month period shall be extended to include the period of such retroactive
effect. The obligations of the Borrowers arising pursuant to this Section 2.19 shall survive the Discharge
of Obligations and the resignation of the Administrative Agent.
2.20 Taxes.
For purposes of this Section 2.20, the term ‘Lender” includes the Issuing Lender and the term
“applicable law” includes FATCA.
(a) Payments Free of Taxes. Any and all payments by or on account of any obligation
of any Loan Party under any Loan Document shall be made without deduction or withholding for any Taxes,
except as required by applicable law and the Borrowers shall, and shall cause each other Loan Party, to
comply with the requirements set forth in this Section 2.20. If any applicable law (as determined in the
good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax
from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled
to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the
relevant Governmental Authority in accordance with applicable law and, if such Tax is an Indemnified Tax,
then the sum payable by the applicable Loan Party shall be increased as necessary so that after such
deduction or withholding has been made (including such deductions and withholdings applicable to
additional sums payable under this Section 2.20) the applicable Recipient receives an amount equal to the
sum it would have received had no such deduction or withholding been made.
(b) Payment of Other Taxes. The Borrowers shall, and shall cause each other Loan
Party to, timely pay to the relevant Governmental Authority in accordance with applicable law, or at the
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option of the Administrative Agent timely reimburse it for the payment of, any Other Taxes applicable to
such Loan Party.
(c) Evidence of Payments. As soon as practicable after any payment of Taxes by any
Loan Party to a Governmental Authority pursuant to this Section 2.20, the Borrowers shall, or shall cause
such other Loan Party to, deliver to the Administrative Agent the original or a certified copy of a receipt
issued by such Governmental Authority evidencing such payment, a copy of the return reporting such
payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(d) Indemnification by Loan Parties. The Borrowers shall, and shall cause each other
Loan Party to, jointly and severally indemnify each Recipient, within 10 days after demand therefor, for
the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or
attributable to amounts payable under this Section 2.20) payable or paid by such Recipient or required to
be withheld or deducted from a payment to such Recipient and any reasonable expenses arising therefrom
or with respect thereto (including any recording and filing fees with respect thereto or resulting therefrom
and any liabilities with respect to, or resulting from, any delay in paying such Indemnified Taxes), whether
or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental
Authority. A certificate as to the amount of such payment or liability delivered to the Borrowers by a
Lender (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on
behalf of a Lender, shall be conclusive absent manifest error. If any Loan Party fails to pay any Taxes when
due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or
other required documentary evidence, such Loan Party shall indemnify the Administrative Agent and the
Lenders for any incremental taxes, interest or penalties that may become payable by the Administrative
Agent or any Lender as a result of any such failure.
(e) Indemnification by Lenders. Each Lender shall severally indemnify the
Administrative Agent, within 10 days after demand therefor, for (i) any Indemnified Taxes attributable to
such Lender (but only to the extent that any Loan Party has not already indemnified the Administrative
Agent for such Indemnified Taxes and without limiting the obligation of the Loan Parties to do so), (ii) any
Taxes attributable to such Lender’s failure to comply with the provisions of Section 10.6 relating to the
maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender, in each
case, that are payable or paid by the Administrative Agent in connection with any Loan Document, and any
reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or
legally imposed or asserted by the relevant Governmental Authority. 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 any Loan Document or otherwise payable by the
Administrative Agent to the Lender from any other source against any amount due to the Administrative
Agent under this paragraph (e).
(f) Status of Lenders.
(i) Any Lender that is entitled to an exemption from or reduction of
withholding Tax with respect to payments made under any Loan Document shall deliver to the Borrowers
and the Administrative Agent, at the time or times reasonably requested by the Borrowers or the
Administrative Agent, such properly completed and executed documentation reasonably requested by the
Borrowers or the Administrative Agent as will permit such payments to be made without withholding or at
a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrowers or the
Administrative Agent, shall deliver such other documentation prescribed by applicable law or reasonably
requested by the Borrowers or the Administrative Agent as will enable the Borrowers or the Administrative
Agent to determine whether or not such Lender is subject to backup withholding or information reporting
41
requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion,
execution and submission of such documentation (other than such documentation set forth in Sections
2.20(f)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if the Lender is not legally entitled to
complete, execute or deliver such documentation or, in the Lender’s reasonable judgment, such completion,
execution or submission would subject such Lender to any material unreimbursed cost or expense or would
materially prejudice the legal or commercial position of such Lender.
Borrower is a U.S. Person,
(ii) Without limiting the generality of the foregoing, in the event that any
(A) any Lender that is a U.S. Person shall deliver to the Borrowers
and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this
Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the
Administrative Agent), executed originals of IRS Form W-9 certifying that such Lender is exempt from
U.S. federal backup withholding tax;
(B) any Foreign Lender shall, to the extent it is legally entitled to do
so, deliver to the Borrowers and the Administrative Agent (in such number of copies as shall be requested
by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this
Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the
Administrative Agent), whichever of the following is applicable:
(1) in the case of a Foreign Lender claiming the benefits of
an income tax treaty to which the United States is a party (x) with respect to payments of interest under any
Loan Document, executed originals of IRS Form W-8BEN establishing an exemption from, or reduction
of, U.S. federal withholding Tax pursuant to the “interest” article of such tax treaty and (y) with respect to
any other applicable payments under any Loan Document, IRS Form W-8BEN establishing an exemption
from, or reduction of, U.S. federal withholding Tax pursuant to the “business profits” or “other income”
article of such tax treaty;
(2) executed originals of IRS Form W-8ECI;
(3) in the case of a Foreign Lender claiming the benefits of
the exemption for portfolio interest under Section 871(h) or Section 881(c) of the Code, (x) a certificate
substantially in the form of Exhibit F-1 to the effect that such Foreign Lender is not a “bank” within the
meaning of Section 881(c)(3)(A) of the Code, a “10 percent shareholder” of the Borrowers within the
meaning of Section 881(c)(3)(B) of the Code, or a “controlled foreign corporation” described in Section
881(c)(3)(C) of the Code (a “U.S. Tax Compliance Certificate”) and (y) executed originals of IRS Form
W-8BEN; or
(4) to the extent a Foreign Lender is not the beneficial owner,
executed originals of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN, a U.S.
Tax Compliance Certificate substantially in the form of Exhibit F-2 or Exhibit F-3, IRS Form W-9, and/or
other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender
is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio
interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in
the form of Exhibit F-4 on behalf of each such direct and indirect partner;
(C) any Foreign Lender shall, to the extent it is legally entitled to do
so, deliver to the Borrowers and the Administrative Agent (in such number of copies as shall be requested
by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this
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Agreement (and from time to time thereafter upon the reasonable request of the Borrowers or the
Administrative Agent), executed originals of any other form prescribed by applicable law as a basis for
claiming exemption from or a reduction in U.S. federal withholding Tax, duly completed, together with
such supplementary documentation as may be prescribed by applicable law to permit the Borrowers or the
Administrative Agent to determine the withholding or deduction required to be made; and
(D) if a payment made to a Lender under any Loan Document would
be subject to U.S. federal withholding Tax imposed by FATCA if such Lender were to fail to comply with
the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b)
of the Code, as applicable), such Lender shall deliver to the Borrowers and the Administrative Agent at the
time or times prescribed by law and at such time or times reasonably requested by the Borrowers 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 additional documentation reasonably requested by the Borrowers
or the Administrative Agent as may be necessary for the Borrowers and the Administrative Agent to comply
with their obligations under FATCA and to determine that such Lender has complied with such Lender’s
obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely
for purposes of this clause (D), “FATCA” shall include any amendments made to FATCA after the date of
this Agreement.
(iii) Each Lender agrees that if any form or certification it previously
delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification
or promptly notify the Borrowers and the Administrative Agent in writing of its legal inability to do so.
Each Foreign Lender shall promptly notify the Borrowers at any time it determines that it is no longer in a
position to provide any previously delivered certificate to the Borrowers (or any other form of certification
adopted by the U.S. taxing authorities for such purpose). Notwithstanding any other provision of this
paragraph, a Foreign Lender shall not be required to deliver any form pursuant to this paragraph that such
Foreign Lender is not legally able to deliver.
(g) Right to Contest Taxes; Treatment of Certain Refunds. If the Borrowers determine
in good faith that a reasonable basis exists for contesting any Taxes for which indemnification has been
demanded or additional amounts have been payable hereunder, the relevant Lender or the Administrative
Agent, as applicable, shall cooperate with the Borrowers in a reasonable challenge of such Taxes if so
requested by the Borrowers; provided that (i) such Lender or the Administrative Agent determines in its
reasonable discretion that it would not be prejudiced by cooperating in such challenge, (ii) the Borrowers
pay all related expenses of the Administrative Agent or such Lender, (iii) the Borrowers indemnify such
Lender or the Administrative Agent for any liabilities or other costs incurred by such party in connection
with such challenge, and (iv) the Borrowers indemnify the Administrative Agent or such Lender, as
applicable, for any indemnified Taxes or Other Taxes before any such contest. If any party determines, in
its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been
indemnified pursuant to this Section 2.20 (including by the payment of additional amounts pursuant to this
Section 2.20), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent
of indemnity payments made under this Section 2.20 with respect to the Taxes giving rise to such refund),
net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other
than any interest paid by the relevant Governmental Authority with respect to such refund). Such
indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the
amount paid over pursuant to this paragraph (g) (plus any penalties, interest or other charges imposed by
the relevant Governmental Authority) in the event that such indemnified party is required to repay such
refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (g), in
no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this
paragraph (g) the payment of which would place the indemnified party in a less favorable net after-Tax
position than the indemnified party would have been in if the Tax subject to indemnification and giving rise
43
to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or
additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to
require any indemnified party to make available its Tax returns (or any other information relating to its
Taxes that it deems confidential) to the indemnifying party or any other Person.
(h) Survival. Each party’s obligations under this Section 2.20 shall survive the
resignation or replacement of the Administrative Agent, any assignment of rights by, or the replacement of,
a Lender, and the Discharge of Obligations.
2.21 Reserved.
2.22 Change of Lending Office. Each Lender agrees that, upon the occurrence of any event
giving rise to the operation of Section 2.19(a), Section 2.19(b), Section 2.20(a) or Section 2.20(d) with
respect to such Lender, it will, if requested by the Borrowers, use commercially reasonable efforts (subject
to legal and regulatory restrictions) to designate a different lending office for funding or booking its Loans
affected by such event or to assign its rights and obligations hereunder to another of its offices, branches or
affiliates, in each case, with the object of avoiding the consequences of such event; provided that such
designation is made on terms that, in the reasonable judgment of such Lender, cause such Lender and its
lending office(s) to suffer no economic, legal or regulatory disadvantage; provided further that nothing in
this Section shall affect or postpone any of the obligations of the Borrower or the rights of any Lender
pursuant to Section 2.19(a), Section 2.19(b), Section 2.20(a) or Section 2.20(d). The Borrowers hereby
agree to pay all reasonable costs and expenses incurred by any Lender in connection with any such
designation or assignment made at the request of the Borrowers.
2.23 Substitution of Lenders. Upon the receipt by the Borrowers of any of the following (or in
the case of clause (a) below, if the Borrowers are required to pay any such amount), with respect to any
Lender (any such Lender described in clauses (a) through (c) below being referred to as an “Affected
Lender” hereunder):
(a) a request from a Lender for payment of Indemnified Taxes or additional amounts
under Section 2.20 or of increased costs pursuant to Section 2.19 (and, in any such case, such Lender has
declined or is unable to designate a different lending office in accordance with Section 2.22 or is a Non-
Consenting Lender);
(b) a notice from the Administrative Agent under Section 10.1(b) that one or more
Minority Lenders are unwilling to agree to an amendment or other modification approved by the Required
Lenders and the Administrative Agent; or
(c) notice from the Administrative Agent that a Lender is a Defaulting Lender;
then the Borrowers may, at their sole expense and effort, upon notice to the Administrative Agent and such
Affected Lender: (i) request that one or more of the other Lenders acquire and assume all or part of such
Affected Lender’s Loans and Revolving Commitments and all other Obligations owing to such Affected
Lender; or (ii) designate a replacement lending institution (which shall be an Eligible Assignee) to acquire
and assume all or a ratable part of such Affected Lender’s Loans and Revolving Commitments and all other
Obligations owing to such Affected Lender (provided that, for the avoidance of doubt, such replacement
lending institution shall not be a Disqualified Institution unless an Event of Default has occurred and is
continuing) (the replacing Lender or lender in (i) or (ii) being a “Replacement Lender”); provided,
however, that if the Borrowers elect to exercise such right with respect to any Affected Lender under clause
(a) or (b) of this Section 2.23, then the Borrowers shall be obligated to replace all Affected Lenders under
such clauses. The Affected Lender replaced pursuant to this Section 2.23 shall be required to assign and
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delegate, without recourse, all of its interests, rights and obligations under this Agreement and the related
Loan Documents to one or more Replacement Lenders that so agree to acquire and assume all or a ratable
part of such Affected Lender’s Loans and Revolving Commitments and all other Obligations owing to such
Affected Lender upon payment to such Affected Lender of an amount (in the aggregate for all Replacement
Lenders) equal to 100% of the outstanding principal of the Affected Lender’s Loans, accrued interest
thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents
from such Replacement Lenders (to the extent of such outstanding principal and accrued interest and fees)
or the Borrowers (in the case of all other amounts, including amounts under Section 2.21 hereof). Any such
designation of a Replacement Lender shall be effected in accordance with, and subject to the terms and
conditions of, the assignment provisions contained in Section 10.6 (with the assignment fee to be paid by
the Borrowers in such instance); provided that if such Affected Lender does not comply with Section 10.6
within ten (10) Business Days after the Borrowers’ request, compliance with Section 10.6 shall not be
required to effect such assignment, and, if such Replacement Lender is not already a Lender hereunder or
an Affiliate of a Lender or an Approved Fund, shall be subject to the prior written consent of the
Administrative Agent (which consent shall not be unreasonably withheld). Notwithstanding the foregoing,
with respect to any assignment pursuant to this Section 2.23, (a) in the case of any such assignment resulting
from a claim for compensation under Section 2.19 or payments required to be made pursuant to Section
2.20, such assignment shall result in a reduction in such compensation or payments thereafter; (b) such
assignment shall not conflict with applicable law and (c) in the case of any assignment resulting from a
Lender being a Minority Lender referred to in clause (b) of this Section 2.23, the applicable assignee shall
have consented to the applicable amendment, waiver or consent. Notwithstanding the foregoing, an
Affected Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result
of a waiver by such Affected Lender or otherwise, the circumstances entitling the Borrowers to require such
assignment and delegation cease to apply.
2.24 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 such Lender is no longer
a Defaulting Lender, to the extent permitted by applicable law:
(i) Waivers and Amendments. Such 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 10.1 and in the definition of Required Lenders.
(ii) Defaulting Lender Waterfall. Any payment of principal, interest, fees or
other amounts received by the Administrative Agent for the account of such Defaulting Lender (whether
voluntary or mandatory, at maturity, pursuant to Section 8 or otherwise, and including any amounts made
available to the Administrative Agent by such Defaulting Lender pursuant to Section 10.7), 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 such Defaulting Lender to the Administrative Agent hereunder; second, to the
payment on a pro rata basis of any amounts owing by such Defaulting Lender to the Issuing Lender or to
the Swingline Lender hereunder; third, to be held as Cash Collateral for the funding obligations of such
Defaulting Lender of any participation in any Swingline Loan or Letter of Credit; fourth, as the Borrowers
may request (so long as no Default or Event of Default exists), to the funding of any Loan in respect of
which such Defaulting Lender has failed to fund its portion thereof as required by this Agreement, as
determined by the Administrative Agent; fifth, if so determined by the Administrative Agent and the
Borrowers, to be held in a deposit account and released pro rata in order to (x) satisfy such Defaulting
Lender’s potential future funding obligations with respect to Loans under this Agreement, and (y) be held
as Cash Collateral for the future funding obligations of such Defaulting Lender of any participation in any
future Swingline Loans or Letter of Credit; sixth, to the payment of any amounts owing to any L/C Lender,
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the Issuing Lender or the Swingline Lender as a result of any judgment of a court of competent jurisdiction
obtained by any L/C Lender, the Issuing Lender or the Swingline Lender against such Defaulting Lender
as a result of such Defaulting Lender’s breach of its obligations under this Agreement; seventh, so long as
no Default or Event of Default has occurred and is continuing, to the payment of any amounts owing to the
Borrowers as a result of any judgment of a court of competent jurisdiction obtained by the Borrowers
against such Defaulting Lender as a result of such Defaulting Lender’s breach of its obligations under this
Agreement; and eighth, to such Defaulting Lender or as otherwise directed by a court of competent
jurisdiction; provided that if (A) such payment is a payment of the principal amount of any Loans or L/C
Advances in respect of which such Defaulting Lender has not fully funded its appropriate share and (B) such
Loans or L/C Advances were made at a time when the conditions set forth in Section 5.2 were satisfied or
waived, such payment shall be applied solely to pay the Loans of, and L/C Advances owed to, all non-
Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or L/C
Advances owed to, such Defaulting Lender until such time as all Loans and funded and unfunded
participations in L/C Advances and Swingline Loans are held by the Lenders pro rata in accordance with
the Revolving Commitments without giving effect to Section 2.24(a)(iv). 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 2.24(a)(ii) shall be deemed paid to
and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(iii) Certain Fees.
(A) No Defaulting Lender shall be entitled to receive any fee pursuant
to Section 2.9(b) for any period during which such Lender is a Defaulting Lender (and the Borrowers shall
not be required to pay any such fee that otherwise would have been required to have been paid to such
Defaulting Lender).
Letter of Credit Fees as provided in Section 3.3(d).
(B) Each Defaulting Lender shall be limited in its right to receive
(C) With respect to any Letter of Credit Fee not required to be paid
to any Defaulting Lender pursuant to clause (A) or (B) above, the Borrowers shall (x) pay to each Non-
Defaulting Lender that portion of any such Letter of Credit Fee otherwise payable to such Defaulting Lender
with respect to such Defaulting Lender’s participation in Letters of Credit or Swingline Loans that has been
reallocated to such Non-Defaulting Lender pursuant to clause (iv) below, (y) pay to the Issuing Lender and
to the Swingline Lender, as applicable, the amount of any such fee or Letter of Credit Fee, as applicable,
otherwise payable to such Defaulting Lender to the extent allocable to the Issuing Lender’s or the Swingline
Lender’s Fronting Exposure to such Defaulting Lender, and (z) not be required to pay the remaining amount
of any such fee or Letter of Credit Fee, as applicable.
(iv) Reallocation of Pro Rata Share to Reduce Fronting Exposure. During
any period in which there is a Defaulting Lender, for purposes of computing the amount of the obligation
of each non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit pursuant to
Section 3.4 or in Swingline Loans pursuant to Section 2.7(c), the L/C Percentage of each non-Defaulting
Lender of any such Letter of Credit and the Revolving Percentage of each non-Defaulting Lender of any
such Swingline Loan, as the case may be, shall be computed without giving effect to the Revolving
Commitment of such Defaulting Lender; provided that, (A) each such reallocation shall be given effect
only if, at the date the applicable Lender becomes a Defaulting Lender, no Event of Default has occurred
and is continuing; (B) the aggregate obligations of each non-Defaulting Lender to acquire, refinance or fund
participations in 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 plus the aggregate amount of that Lender’s L/C Percentage of then
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outstanding Letters of Credit and (C) the conditions set forth in Section 5.2 are satisfied at the time of such
reallocation (and, unless the Borrowers shall have otherwise notified the Administrative Agent at such time,
the Borrowers shall be deemed to have represented and warranted that such conditions are satisfied at such
time). No reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder
against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any
claim of a non-Defaulting Lender as a result of such non-Defaulting Lender’s increased exposure following
such reallocation.
(v) Cash Collateral, Repayment of Swingline Loans. If the reallocation
described in clause (iv) above cannot, or can only partially, be effected, the Borrowers shall, without
prejudice to any right or remedy available to them hereunder or under law and subject to Section 2.25,
(x) first, prepay Swingline Loans in an amount equal to the Swingline Lender’s Fronting Exposure, and
(y) second, Cash Collateralize the Issuing Lender’s Fronting Exposure in accordance with the procedures
set forth in Section 3.10.
(b) Defaulting Lender Cure. If the Borrowers, the Administrative Agent, the
Swingline Lender and the Issuing Lender 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), such Lender will, to the
extent applicable, purchase at par 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 respective Revolving Percentages and L/C Percentages, as applicable
(without giving effect to Section 2.24(a)(iv)), whereupon such 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 Borrowers while such 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 Lender will constitute a waiver or release of any claim of any party hereunder arising from such
Lender having been a Defaulting Lender.
(c) New Swingline Loans/Letters of Credit. So long as any Lender is a Defaulting
Lender, (i) the Swingline Lender shall not be required to fund any Swingline Loans unless it is satisfied
that it will have no Fronting Exposure after giving effect to such Swingline Loan and (ii) no Issuing Lender
shall be required to issue, extend, renew or increase any Letter of Credit unless it is satisfied that it will
have no Fronting Exposure in respect of Letters of Credit after giving effect thereto.
(d) Termination of Defaulting Lender. The Borrowers may terminate the unused
amount of the Revolving Commitment of any Revolving Lender that is a Defaulting Lender upon not less
than ten (10) Business Days’ prior notice to the Administrative Agent (which shall promptly notify the
Lenders thereof), and in such event the provisions of Section 2.24(a)(ii) will apply to all amounts thereafter
paid by the Borrowers for the account of such Defaulting Lender under this Agreement (whether on account
of principal, interest, fees, indemnity or other amounts); provided that (i) no Event of Default shall have
occurred and be continuing, and (ii) such termination shall not be deemed to be a waiver or release of any
claim the Borrowers, the Administrative Agent, the Issuing Lender, the Swingline Bank or any other Lender
may have against such Defaulting Lender.
2.25 Joint and Several Liability of the Borrowers.
(a) Each Borrower is accepting joint and several liability hereunder and under the
other Loan Documents in consideration of the financial accommodations to be provided by the Lenders
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under this Agreement, for the mutual benefit, directly and indirectly, of each Borrower and in consideration
of the undertakings of the other the Borrowers to accept joint and several liability for the Obligations.
(b) Each Borrower, jointly and severally, hereby irrevocably and unconditionally
accepts, not merely as a surety but also as a co-debtor, joint and several liability with the other the
Borrowers, with respect to the payment and performance of all of the Obligations (including any
Obligations arising under this Section 2.25), it being the intention of the parties hereto that all the
Obligations shall be the joint and several obligations of each Borrower without preferences or distinction
among them.
(c) If and to the extent that any Borrower shall fail to make any payment with respect
to any of the Obligations as and when due or to perform any of the Obligations in accordance with the terms
thereof, then in each such event the other Borrowers will make such payment with respect to, or perform,
such Obligations.
(d) The Obligations of each Borrower under the provisions of this Section 2.25
constitute the absolute and unconditional, full recourse Obligations of each Borrower enforceable against
each Borrower to the full extent of its properties and assets, irrespective of the validity, regularity or
enforceability of this Agreement or any other circumstances whatsoever.
(e) Except as otherwise expressly provided in this Agreement, each Borrower hereby
waives notice of acceptance of its joint and several liability, notice of any Loans made or Letters of Credit
issued under or pursuant to this Agreement, notice of the occurrence of any Default, Event of Default, or
of any demand for any payment under this Agreement, notice of any action at any time taken or omitted by
the Administrative Agent or Lenders under or in respect of any of the Obligations, any requirement of
diligence or to mitigate damages and, generally, to the extent permitted by applicable law, all demands,
notices and other formalities of every kind in connection with this Agreement (except as otherwise provided
in this Agreement). Each Borrower hereby assents to, and waives notice of, any extension or postponement
of the time for the payment of any of the Obligations, the acceptance of any payment of any of the
Obligations, the acceptance of any partial payment thereon, any waiver, consent or other action or
acquiescence by the Administrative Agent or Lenders at any time or times in respect of any default by any
Borrower in the performance or satisfaction of any term, covenant, condition or provision of this
Agreement, any and all other indulgences whatsoever by the Administrative Agent or Lenders in respect of
any of the Obligations, and the taking, addition, substitution or release, in whole or in part, at any time or
times, of any security for any of the Obligations or the addition, substitution or release, in whole or in part,
of any Borrower. Without limiting the generality of the foregoing, each Borrower assents to any other
action or delay in acting or failure to act on the part of the Administrative Agent or Lender with respect to
the failure by any Borrower to comply with any of its respective Obligations, including, without limitation,
any failure strictly or diligently to assert any right or to pursue any remedy or to comply fully with
applicable laws or regulations thereunder, which might, but for the provisions of this Section 2.25 afford
grounds for terminating, discharging or relieving any Borrower, in whole or in part, from any of its
Obligations under this Section 2.25, it being the intention of each Borrower that, so long as any of the
Obligations hereunder remain unsatisfied, the Obligations of each Borrower under this Section 2.25 shall
not be discharged except by performance and then only to the extent of such performance. The Obligations
of each Borrower under this Section 2.25 shall not be diminished or rendered unenforceable by any winding
up, reorganization, arrangement, liquidation, reconstruction or similar proceeding with respect to any
Borrower, the Administrative Agent or any Lender.
(f) Each Borrower represents and warrants to the Administrative Agent and Lenders
that such Borrower is currently informed of the financial condition of the Borrowers and of all other
circumstances which a diligent inquiry would reveal and which bear upon the risk of nonpayment of the
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Obligations. Each Borrower further represents and warrants to the Administrative Agent and Lenders that
such Borrower has read and understands the terms and conditions of the Loan Documents. Each Borrower
hereby covenants that such Borrower will continue to keep informed of the Borrowers’ financial condition,
the financial condition of other guarantors, if any, and of all other circumstances which bear upon the risk
of nonpayment or nonperformance of the Obligations.
(g) Each Borrower waives all rights and defenses arising out of an election of
remedies by the Administrative Agent or any Lender, even though that election of remedies, such as a
nonjudicial foreclosure with respect to security for a guaranteed obligation, has destroyed the
Administrative Agent’s or such Lender’s rights of subrogation and reimbursement against such Borrower
by the operation of Section 580(d) of the California Code of Civil Procedure or otherwise:
(h) Each Borrower waives all rights and defenses that such Borrower may have
because the Obligations are secured by real property at any time. This means, among other things:
without first foreclosing on any real or personal property Collateral pledged by the Borrowers.
(i) The Administrative Agent and Lenders may collect from such Borrower
consisting of real property pledged by the Borrowers:
(ii) If the Administrative Agent or any Lender forecloses on any Collateral
(A) The amount of the Obligations may be reduced only by the price
for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale
price.
Borrower even if the Administrative Agent or Lenders, by foreclosing on real property, has destroyed any
right such Borrower may have to collect from the other Borrowers.
(B) The Administrative Agent and Lenders may collect from such
This is an unconditional and irrevocable waiver of any rights and defenses such Borrower may have
because the Obligations are secured by real property. These rights and defenses include, but are not limited
to, any rights or defenses based upon Section 580a, 580b, 580d or 726 of the California Code of Civil
Procedure.
(i) The provisions of this Section 2.25 are made for the benefit of the Administrative
Agent, Lenders and their respective successors and assigns, and may be enforced by it or them from time
to time against any or all the Borrowers as often as occasion therefor may arise and without requirement on
the part of the Administrative Agent, any Lender, any successor or any assign first to marshal any of its or
their claims or to exercise any of its or their rights against any Borrower or to exhaust any remedies available
to it or them against any Borrower or to resort to any other source or means of obtaining payment of any of
the Obligations hereunder or to elect any other remedy. The provisions of this Section 2.25 shall remain in
effect until all of the Obligations shall have been paid in full or otherwise fully satisfied. If at any time, any
payment, or any part thereof, made in respect of any of the Obligations, is rescinded or must otherwise be
restored or returned by the Administrative Agent or any Lender upon the insolvency, bankruptcy or
reorganization of any Borrower, or otherwise, the provisions of this Section 2.25 will forthwith be reinstated
in effect, as though such payment had not been made.
(j) Each Borrower hereby agrees that it will not enforce any of its rights of
contribution or subrogation against any other Borrower with respect to any liability incurred by it hereunder
or under any of the other Loan Documents, any payments made by it to the Administrative Agent or Lenders
with respect to any of the Obligations or any collateral security therefor until such time as all of the
49
Obligations have been paid in full in cash. Any claim which any Borrower may have against any other
Borrower with respect to any payments to the Administrative Agent or Lender hereunder or under any other
Loan Documents are hereby expressly made subordinate and junior in right of payment, without limitation
as to any increases in the Obligations arising hereunder or thereunder, to the prior payment in full in cash
of the Obligations and, in the event of any insolvency, bankruptcy, receivership, liquidation, reorganization
or other similar proceeding under the laws of any jurisdiction relating to any Borrower, its debts or its
assets, whether voluntary or involuntary, all such Obligations shall be paid in full in cash before any
payment or distribution of any character, whether in cash, securities or other property, shall be made to any
other Borrower therefor. Notwithstanding anything to the contrary contained in this Section 2.25, no
Borrower shall exercise any rights of subrogation, contribution, indemnity, reimbursement or other similar
rights against, and shall not proceed or seek recourse against or with respect to any property or asset of, any
other Borrower (the “Foreclosed Borrower”), including after payment in full of the Obligations, if all or
any portion of the Obligations have been satisfied in connection with an exercise of remedies in respect of
the Capital Stock of such Foreclosed Borrower whether pursuant to the Security Documents or otherwise.
(k) Each Borrower hereby agrees that, after the occurrence and during the continuance
of any Default or Event of Default, the payment of any amounts due with respect to the indebtedness owing
by any Borrower to any other Borrower is hereby subordinated to the prior payment in full in cash of the
Obligations. Each Borrower hereby agrees that after the occurrence and during the continuance of any
Default or Event of Default, such Borrower will not demand, sue for or otherwise attempt to collect any
indebtedness of any other Borrower owing to such Borrower until the Obligations shall have been paid in
full in cash. If, notwithstanding the foregoing sentence, such Borrower shall collect, enforce or receive any
amounts in respect of such indebtedness, such amounts shall be collected, enforced and received by such
Borrower as trustee for the Administrative Agent, and such Borrower shall deliver any such amounts to the
Administrative Agent for application to the Obligations in accordance with the terms of this Agreement.
(l) Subject to the foregoing, to the extent that any Borrower shall, under this
Agreement as a joint and several obligor, repay any of the Obligations made to another Borrower hereunder
or other Obligations incurred directly and primarily by any other Borrower (an “Accommodation
Payment”), then the Borrower making such Accommodation Payment shall be entitled to contribution and
indemnification from, and be reimbursed by, each other Borrower in an amount, for each of such other
Borrower, equal to a fraction of such Accommodation Payment, the numerator of which fraction is such
other Borrower’s Allocable Amount and the denominator of which is the sum of the Allocable Amounts of
all of the Borrowers. As of any date of determination, the “Allocable Amount” of each Borrower shall be
equal to the maximum amount of liability for Accommodation Payments which could be asserted against
such Borrower hereunder without (a) rendering such Borrower “insolvent” within the meaning of Section
101(31) of the Bankruptcy Code, Section 2 of the Uniform Fraudulent Transfer Act (“UFTA”) or Section
2 of the Uniform Fraudulent Conveyance Act (“UFCA”), (b) leaving such Borrower with unreasonably
small capital or assets, within the meaning of Section 548 of the Bankruptcy Code, Section 4 of the UFTA,
or Section 5 of the UFCA, or (c) leaving such Borrower unable to pay its debts as they become due within
the meaning of Section 548 of the Bankruptcy Code or Section 4 of the UFTA, or Section 5 of the UFCA.
2.26 Notes. If so requested by any Lender by written notice to the Borrowers (with a copy to
the Administrative Agent), the Borrowers shall execute and deliver to such Lender (and/or, if applicable
and if so specified in such notice, to any Person who is an assignee of such Lender pursuant to Section 10.6)
(promptly after the Borrowers’ receipt of such notice) a Note or Notes to evidence such Lender’s Loans.
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SECTION 3
LETTERS OF CREDIT
3.1 L/C Commitment.
(a) Subject to the terms and conditions hereof, the Issuing Lender agrees to issue letters
of credit (“Letters of Credit”) for the account of the Borrowers on any Business Day during the Letter of
Credit Availability Period in such form as may reasonably be approved from time to time by the Issuing
Lender; provided that the Issuing Lender shall have no obligation to issue any Letter of Credit if, after
giving effect to such issuance, either (x) the L/C Exposure would exceed the Total L/C Commitments or
(y) the Available Revolving Commitments would be less than zero. Each Letter of Credit shall (i) be
denominated in Dollars or, in the sole discretion of the Issuing Lender with respect to any particular Letter
of Credit, a Foreign Currency and (ii) expire no later than the earlier of (x) the first anniversary of its date
of issuance and (y) the Letter of Credit Maturity Date, provided that any Letter of Credit with a one-year
term may provide for the renewal thereof for additional one-year periods (which shall in no event extend
beyond the date referred to in clause (y) above). For purposes of this Agreement, the stated amount of any
Letter of Credit issued in a Foreign Currency shall be converted into Dollars from time to time by the
Issuing Lender and upon any drawing under such Letter of Credit.
(b) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit
if:
Lender to exceed any limits imposed by, any applicable Requirement of Law;
(i) such issuance would conflict with, or cause the Issuing Lender or any L/C
(ii) any order, judgment or decree of any Governmental Authority or
arbitrator shall by its terms purport to enjoin or restrain the Issuing Lender from issuing, amending or
reinstating such Letter of Credit, or any law, rule or regulation applicable to the Issuing Lender or any
request, guideline or directive (whether or not having the force of law) from any Governmental Authority
with jurisdiction over the Issuing Lender shall prohibit, or request that the Issuing Lender refrain from, the
issuance, amendment, renewal or reinstatement of letters of credit generally or such Letter of Credit in
particular or shall impose upon the Issuing Lender with respect to such Letter of Credit any restriction,
reserve or capital requirement (for which the Issuing Lender is not otherwise compensated) not in effect on
the Closing Date, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which
was not applicable on the Closing Date and which the Issuing Lender in good faith deems material to it;
(iii) the Issuing Lender has received written notice from any Lender, the
Administrative Agent or any Borrower, at least one (1) Business Day prior to the requested date of issuance,
amendment, renewal or reinstatement of such Letter of Credit, that one or more of the applicable conditions
contained in Section 5.2 shall not then be satisfied (which notice shall contain a description of any such
condition asserted not to be satisfied);
(iv) any requested Letter of Credit is not in form and substance acceptable to
the Issuing Lender, or the issuance, amendment or renewal of a Letter of Credit shall violate any applicable
laws or regulations or any applicable policies of the Issuing Lender;
reinstatement of the stated amount after any drawing thereunder;
(v) such Letter of Credit contains any provisions providing for automatic
Lender, such Letter of Credit is in an initial face amount less than $100,000; or
(vi) except as otherwise agreed by the Administrative Agent and the Issuing
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(vii) any Lender is at that time a Defaulting Lender, unless the Issuing Lender
has entered into arrangements, including the delivery of Cash Collateral pursuant to Section 3.10,
satisfactory to the Issuing Lender (in its sole discretion) with the Borrowers or such Defaulting Lender to
eliminate the Issuing Lender’s actual or potential Fronting Exposure (after giving effect to
Section 2.24(a)(iv)) with respect to the Defaulting Lender arising from either the Letter of Credit then
proposed to be issued or such Letter of Credit and all other L/C Exposure as to which the Issuing Lender
has actual or potential Fronting Exposure, as it may elect in its sole discretion.
3.2 Procedure for Issuance of Letters of Credit. The Borrowers may from time to time request
that the Issuing Lender issue a Letter of Credit for the account of the Borrowers by delivering to the Issuing
Lender at its address for notices specified herein an Application therefor, completed to the satisfaction of
the Issuing Lender, and such other certificates, documents and other papers and information as the Issuing
Lender may request. Upon receipt of any Application, the Issuing Lender will process such Application
and the certificates, documents and other papers and information delivered to it in connection therewith in
accordance with its customary procedures and shall promptly issue the Letter of Credit requested thereby
(but in no event shall the Issuing Lender be required to issue any Letter of Credit earlier than three (3)
Business Days after its receipt of the Application therefor and all such other certificates, documents and
other papers and information relating thereto) by issuing the original of such Letter of Credit to the
beneficiary thereof or as otherwise may be agreed to by the Issuing Lender and the Borrowers. The Issuing
Lender shall furnish a copy of such Letter of Credit to the Borrowers promptly following the issuance
thereof. The Issuing Lender shall promptly furnish to the Administrative Agent, which shall in turn
promptly furnish to the Lenders, notice of the issuance of each Letter of Credit (including the amount
thereof).
3.3 Fees and Other Charges.
(a) The Borrowers agree to pay, with respect to each outstanding Letter of Credit
issued for the account of (or at the request of) the Borrowers, (i) a fronting fee of 0.125% per annum on the
daily amount available to be drawn under each such Letter of Credit to the Issuing Lender for its own
account (a “Letter of Credit Fronting Fee”), (ii) a letter of credit fee equal to the Applicable Margin relating
to Letters of Credit multiplied by the daily amount available to be drawn under each such Letter of Credit
on the drawable amount of such Letter of Credit to the Administrative Agent for the ratable account of the
L/C Lenders (determined in accordance with their respective L/C Percentages) (a “Letter of Credit Fee”),
and (iii) the Issuing Lender’s standard and reasonable fees with respect to the issuance, amendment, renewal
or extension of any Letter of Credit issued for the account of (or at the request of) the Borrowers or
processing of drawings thereunder (the fees in this clause (iii), collectively, the “Issuing Lender Fees”).
The Issuing Lender Fees shall be paid when required by the Issuing Lender, and the Letter of Credit
Fronting Fee and the Letter of Credit Fee shall be payable quarterly in arrears on the fifth day of each
calendar quarter occurring after the Closing Date and on the Letter of Credit Maturity Date (each, an “L/C
Fee Payment Date”) after the issuance date of such Letter of Credit. All Letter of Credit Fronting Fees and
Letter of Credit Fees shall be computed on the basis of the actual number of days elapsed in a year of 360
days.
(b) In addition to the foregoing fees, the Borrowers shall pay or reimburse the Issuing
Lender for such normal and customary costs and expenses as are incurred or charged by the Issuing Lender
in issuing, negotiating, effecting payment under, amending or otherwise administering any Letter of Credit.
(c) The Borrowers shall furnish to the Issuing Lender and the Administrative
Agent such other documents and information pertaining to any requested Letter of Credit issuance,
amendment or renewal, including any L/C-Related Documents, as the Issuing Lender or the Administrative
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Agent may reasonably require. This Agreement shall control in the event of any conflict with any L/C-
Related Document (other than any Letter of Credit).
(d) Any Letter of Credit Fees otherwise payable for the account of a Defaulting
Lender with respect to any Letter of Credit as to which such Defaulting Lender has not provided Cash
Collateral satisfactory to the Issuing Lender pursuant to Section 3.10 shall be payable, to the maximum
extent permitted by applicable law, to the other L/C Lenders in accordance with the upward adjustments in
their respective L/C Percentages allocable to such Letter of Credit pursuant to Section 2.24(a)(iv), with the
balance of such Letter of Credit Fees, if any, payable to the Issuing Lender for its own account.
(e) All fees payable pursuant to this Section 3.3 shall be fully-earned on the date paid
and shall not be refundable for any reason.
3.4 L/C Participations.
The Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Lender, and, to induce
the Issuing Lender to issue Letters of Credit, each L/C Lender irrevocably agrees to accept and purchase
and hereby accepts and purchases from the Issuing Lender, on the terms and conditions set forth below, for
such L/C Lender’s own account and risk an undivided interest equal to such L/C Lender’s L/C Percentage
in the Issuing Lender’s obligations and rights under and in respect of each Letter of Credit and the amount
of each draft paid by the Issuing Lender thereunder. Each L/C Lender agrees with the Issuing Lender that,
if a draft is paid under any Letter of Credit for which the Issuing Lender is not reimbursed in full by the
Borrowers pursuant to Section 3.5(a), such L/C Lender shall pay to the Issuing Lender upon demand at the
Issuing Lender’s address for notices specified herein an amount equal to such L/C Lender’s L/C Percentage
of the amount of such draft, or any part thereof, that is not so reimbursed. Each L/C Lender’s obligation to
pay such amount shall be absolute and unconditional and shall not be affected by any circumstance,
including (i) any setoff, counterclaim, recoupment, defense or other right that such L/C Lender may have
against the Issuing Lender, the Borrowers or any other Person for any reason whatsoever, (ii) the occurrence
of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in
Section 5.2, (iii) any adverse change in the condition (financial or otherwise) of the Borrowers, (iv) any
breach of this Agreement or any other Loan Document by the Borrowers, any other Loan Party or any other
L/C Lender, or (v) any other circumstance, happening or event whatsoever, whether or not similar to any
of the foregoing.
3.5 Reimbursement.
(a) If the Issuing Lender shall make any L/C Disbursement in respect of a Letter of
Credit, the Issuing Lender shall notify the Borrowers and the Administrative Agent thereof and the
Borrowers shall pay or cause to be paid to the Issuing Lender an amount equal to the entire amount of such
L/C Disbursement not later than (i) the immediately following Business Day if the Issuing Lender issues
such notice before 10:00 a.m. Pacific time on the date of such L/C Disbursement, or (ii) on the second
following Business Day if the Issuing Lender issues such notice at or after 10:00 a.m. Pacific time on the
date of such L/C Disbursement. Each such payment shall be made to the Issuing Lender at its address for
notices referred to herein in Dollars and in immediately available funds; provided that the Borrowers may,
subject to the conditions to borrowing set forth herein, request in accordance with Section 2.5 or Section
2.7(a) that such payment be financed with a Revolving Loan or a Swingline Loan, as applicable, in an
equivalent amount and, to the extent so financed, the Borrowers’ obligations to make such payment shall
be discharged and replaced by the resulting Revolving Loan or Swingline Loan.
(b) If the Issuing Lender shall not have received from the Borrowers the payment that
they are required to make pursuant to Section 3.5(a) with respect to a Letter of Credit within the time
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specified in such Section, the Issuing Lender will promptly notify the Administrative Agent of the L/C
Disbursement and the Administrative Agent will promptly notify each L/C Lender of such L/C
Disbursement and its L/C Percentage thereof, and each L/C Lender shall pay to the Issuing Lender upon
demand at the Issuing Lender’s address for notices specified herein an amount equal to such L/C Lender’s
L/C Percentage of such L/C Disbursement (and the Administrative Agent may apply Cash Collateral
provided for this purpose) and upon such payment pursuant to this paragraph to reimburse the Issuing
Lender for any L/C Disbursement, the Borrowers shall be required to reimburse the L/C Lenders for such
payments (including interest accrued thereon from the date of such payment until the date of such
reimbursement at the rate applicable to Revolving Loans plus 2% per annum) on demand; provided that if
at the time of and after giving effect to such payment by the L/C Lenders, the conditions to borrowings and
Revolving Loan Conversions set forth in Section 5.2 are satisfied, the Borrowers may, by written notice to
the Administrative Agent certifying that such conditions are satisfied and that all interest owing under this
paragraph has been paid, request that such payments by the L/C Lenders be converted into Revolving Loans
(a “Revolving Loan Conversion”), in which case, if such conditions are in fact satisfied, the L/C Lenders
shall be deemed to have extended, and the Borrowers shall be deemed to have accepted, a Revolving Loan
in the aggregate principal amount of such payment without further action on the part of any party; any
amount so paid pursuant to this paragraph shall, on and after the payment date thereof, be deemed to be
Revolving Loans for all purposes hereunder; provided that the Issuing Lender, at its option, may effectuate
a Revolving Loan Conversion regardless of whether the conditions to borrowings and Revolving Loan
Conversions set forth in Section 5.2 are satisfied.
3.6 Obligations Absolute. The Borrowers’ obligations under this Section 3 shall be absolute
and unconditional under any and all circumstances and irrespective of any setoff, counterclaim or defense
to payment that the Borrowers may have or have had against the Issuing Lender, any beneficiary of a Letter
of Credit or any other Person. The Borrowers also agree with the Issuing Lender that the Issuing Lender
shall not be responsible for, and the Borrowers’ obligations hereunder shall not be affected by, among other
things, the validity or genuineness of documents or of any endorsements thereon, even though such
documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the
Borrowers and any beneficiary of any Letter of Credit or any other party to which such Letter of Credit
may be transferred or any claims whatsoever of the Borrowers against any beneficiary of such Letter of
Credit or any such transferee. The Issuing Lender shall not be liable for any error, omission, interruption
or delay in transmission, dispatch or delivery of any message or advice, however transmitted, in connection
with any Letter of Credit, except for errors or omissions found by a final and nonappealable decision of a
court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of the
Issuing Lender. The Borrowers agree that any action taken or omitted by the Issuing Lender under or in
connection with any Letter of Credit or the related drafts or documents, if done in the absence of gross
negligence or willful misconduct, shall be binding on the Borrowers and shall not result in any liability of
the Issuing Lender to the Borrowers.
In addition to amounts payable as elsewhere provided in the Agreement, the Borrowers
hereby agree to pay and to protect, indemnify, and save Issuing Lender harmless from and against any and
all claims, demands, liabilities, damages, losses, costs, charges and expenses (including reasonable
attorneys’ fees and allocated costs of internal counsel) that the Issuing Lender may incur or be subject to as
a consequence, direct or indirect, of (A) the issuance of any Letter of Credit, or (B) the failure of Issuing
Lender or of any L/C Lender to honor a demand for payment under any Letter of Credit thereof as a result
of any act or omission, whether rightful or wrongful, of any present or future de jure or de facto government
or Governmental Authority, in each case other than to the extent solely as a result of the gross negligence
or willful misconduct of Issuing Lender or such L/C Lender (as finally determined by a court of competent
jurisdiction).
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3.7 Letter of Credit Payments. If any draft shall be presented for payment under any Letter of
Credit, the Issuing Lender shall promptly notify the Borrowers and the Administrative Agent of the date
and amount thereof. The responsibility of the Issuing Lender to the Borrowers in connection with any draft
presented for payment under any Letter of Credit shall, in addition to any payment obligation expressly
provided for in such Letter of Credit, be limited to determining that the documents (including each draft)
delivered under such Letter of Credit in connection with such presentment are substantially in conformity
with such Letter of Credit.
3.8 Applications. To the extent that any provision of any Application related to any Letter of
Credit is inconsistent with the provisions of this Section 3, the provisions of this Section 3 shall apply.
3.9 Interim Interest. If the Issuing Lender shall make any L/C Disbursement in respect of a
Letter of Credit, then, unless either the Borrowers shall have reimbursed such L/C Disbursement in full
within the time period specified in Section 3.5(a) or the L/C Lenders shall have reimbursed such L/C
Disbursement in full on such date as provided in Section 3.5(b), in each case the unpaid amount thereof
shall bear interest for the account of the Issuing Lender, for each day from and including the date of such
L/C Disbursement to but excluding the date of payment by the Borrowers, at the rate per annum that would
apply to such amount if such amount were a Revolving Loan; provided that the provisions of
Section 2.15(c) shall be applicable to any such amounts not paid when due.
3.10 Cash Collateral.
(a) Certain Credit Support Events. Upon the request of the Administrative Agent or
the Issuing Lender (i) if the Issuing Lender has honored any full or partial drawing request under any Letter
of Credit and such drawing has resulted in an L/C Advance by all the L/C Lenders that is not reimbursed
by the Borrowers or converted into a Revolving Loan pursuant to Section 3.5(b), or (ii) if, as of the Letter
of Credit Maturity Date, any L/C Exposure for any reason remains outstanding, the Borrowers shall, in each
case, immediately Cash Collateralize the then effective L/C Exposure in an amount equal to 105% (110%
in the case of any L/C Exposure in respect of any Letter of Credit denominated in a Foreign Currency) of
such L/C Exposure.
At any time that there shall exist a Defaulting Lender, within one (1) Business Day following the
request of the Administrative Agent or the Issuing Lender (with a copy to the Administrative Agent), the
Borrowers shall deliver to the Administrative Agent Cash Collateral in an amount sufficient to cover 105%
(110% in the case of any L/C Exposure in respect of any Letter of Credit denominated in a Foreign
Currency) of the Fronting Exposure relating to the Letters of Credit (after giving effect to
Section 2.24(a)(iv) and any Cash Collateral provided by such Defaulting Lender).
(b) Grant of Security Interest. All Cash Collateral (other than credit support not
constituting funds subject to deposit) shall be maintained in blocked, non-interest bearing deposit accounts
with the Administrative Agent. The Borrowers, and to the extent provided by any Lender or Defaulting
Lender, such Lender or Defaulting Lender, hereby grants to (and subjects to the control of) the
Administrative Agent, for the benefit of the Administrative Agent, the Issuing Lender and the L/C Lenders,
and agrees to maintain, a first priority security interest and Lien in all such Cash Collateral and in all
proceeds thereof, as security for the Obligations to which such Cash Collateral may be applied pursuant to
Section 3.10(c). If at any time the Administrative Agent determines that Cash Collateral is subject to any
right or claim of any Person other than the Administrative Agent or any Issuing Lender as herein provided,
or that the total amount of such Cash Collateral is less than 105% (110% in the case of any L/C Exposure
in respect of any Letter of Credit denominated in a Foreign Currency) of the applicable L/C Exposure,
Fronting Exposure and other Obligations secured thereby, the Borrowers or the relevant Lender or
Defaulting Lender, as applicable, will, promptly upon demand by the Administrative Agent, pay or provide
55
to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency
(after giving effect to any Cash Collateral provided by such Defaulting Lender).
(c) Application. Notwithstanding anything to the contrary contained in this
Agreement, Cash Collateral provided under any of this Section 3.10, Section 2.24 or otherwise in respect
of Letters of Credit shall be held and applied to the satisfaction of the specific L/C Exposure, 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 otherwise be provided for herein.
(d) Termination of Requirement. Cash Collateral (or the appropriate portion thereof)
provided to reduce Fronting Exposure in respect of Letters of Credit or other Obligations shall no longer
be required to be held as Cash Collateral pursuant to this Section 3.10 following (i) the elimination of the
applicable Fronting Exposure and other Obligations giving rise thereto (including by the termination of the
Defaulting Lender status of the applicable Lender), or (ii) a determination by the Administrative Agent and
the Issuing Lender that there exists excess Cash Collateral; provided, however, (A) 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 (B) that, subject to Section 2.24, the Person providing such Cash Collateral and the Issuing
Lender may agree that such Cash Collateral shall not be released but instead shall be held to support future
anticipated Fronting Exposure or other obligations, and provided further, that to the extent that such Cash
Collateral was provided by the Borrowers or any other Loan Party, such Cash Collateral shall remain subject
to any security interest and Lien granted pursuant to the Loan Documents.
3.11 Reserved.
3.12 Reserved.
3.13 Applicability of ISP. Unless otherwise expressly agreed by the Issuing Lender and the
Borrowers when a Letter of Credit is issued and subject to applicable laws, the Letters of Credit shall be
governed by and subject to the rules of the ISP.
SECTION 4
REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into this Agreement, to make the
initial Loans on the Closing Date and to make Loans and to issue the Letters of Credit thereafter, each
Borrower hereby jointly and severally represents and warrants to the Administrative Agent and each
Lender, as to themselves, each of their respective Subsidiaries and each other Loan Party, as applicable,
that:
4.1 Financial Condition.
(a) The Pro Forma Financial Statements have been prepared giving effect (as if such
events had occurred on such date in the case of the balance sheets and the beginning of the period presented
in the case of the statements of income and cash flows) to (i) the Loans to be made on the Closing Date and
the use of proceeds thereof, and (ii) the payment of fees and expenses in connection with the foregoing.
The Pro Forma Financial Statements have been prepared based on the information available to the
Borrowers as of the date of delivery thereof, and present fairly in all material respects on a pro forma basis
the estimated financial position of the Parent and its consolidated Subsidiaries as of December 31, 2014
assuming that the events specified in the preceding sentence had actually occurred at such date in the case
56
of the balance sheets and at the beginning of the period presented in the case of the statements of income
and cash flows
(b) The audited consolidated balance sheets of the Parent (or its predecessor) and its
Subsidiaries as of December 31, 2012 and December 31, 2013, and the related consolidated statements of
income and of cash flows for the fiscal years ended on such dates, reported on by and accompanied by an
unqualified report from Ernst & Young LLP, present fairly in all material respects the consolidated financial
condition of the Parent and its Subsidiaries as at such date, and the consolidated results of its operations
and its consolidated cash flows for the respective fiscal years then ended. The unaudited consolidated
balance sheet of the Parent and its Subsidiaries as at December 31, 2014, and the related unaudited
consolidated statements of income and cash flows for the three-month period ended on such date, present
fairly in all material respects the consolidated financial condition of the Parent and its Subsidiaries as at
such date, and the consolidated results of its operations and its consolidated cash flows for the three-month
period then ended (subject to normal year-end audit adjustments and the absence of footnotes). All such
financial statements, including the related schedules and notes thereto, have been prepared in accordance
with GAAP applied consistently throughout the periods involved (except with respect to audited financial
statements as approved by the aforementioned firm of accountants and disclosed therein) subject in the case
of unaudited financial statements to changes resulting from normal year-end adjustments and the absence
of footnotes. No Group Member has, as of the Closing Date, any material Guarantee Obligations,
contingent liabilities and liabilities for taxes, or any long-term leases or unusual forward or long-term
commitments, including any interest rate or foreign currency swap or exchange transaction or other
obligation in respect of derivatives, that are not reflected in the most recent financial statements referred to
in this paragraph. During the period from December 31, 2013 to and including the date hereof, there has
been no Disposition by any Group Member of any material part of its business or property.
4.2 No Change. Since December 31, 2013, there has been no development or event that has had
or would reasonably be expected to have a Material Adverse Effect.
4.3 Existence; Compliance with Law. Each Group Member (a) is duly organized, validly
existing and in good standing under the laws of the jurisdiction of its organization, (b) has the power and
authority, and the legal right, to own and operate its property, to lease the property it operates as lessee and
to conduct the business in which it is currently engaged, (c) is duly qualified as a foreign corporation or
other organization and in good standing under the laws of each jurisdiction where the failure to be so
qualified would reasonably be expected to have a Material Adverse Effect and (d) is in material compliance
with all Requirements of Law except in such instances in which (i) such Requirement of Law is being
contested in good faith by appropriate proceedings diligently conducted and the prosecution of such contest
would not reasonably be expected to result in a Material Adverse Effect, or (ii) the failure to comply
therewith, either individually or in the aggregate, would not reasonably be expected to have a Material
Adverse Effect.
4.4 Power, Authorization; Enforceable Obligations. Each Loan Party has the power and
authority, and the legal right, to make, deliver and perform the Loan Documents to which it is a party and,
in the case of the Borrowers, to obtain extensions of credit hereunder. Each Loan Party has taken all
necessary organizational action to authorize the execution, delivery and performance of the Loan
Documents to which it is a party and, in the case of the Borrowers, to authorize the extensions of credit on
the terms and conditions of this Agreement. No Governmental Approval or consent or authorization of,
filing with, notice to or other act by or in respect of, any other Person is required in connection with the
extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of
this Agreement or any of the Loan Documents, except (i) Governmental Approvals, consents,
authorizations, filings and notices which have been obtained or made and are in full force and effect and
the filing of a Form8-K with the SEC following the Closing Date and (ii) the filings referred to in
57
Section 4.19. Each Loan Document has been duly executed and delivered on behalf of each Loan Party
party thereto. This Agreement constitutes, and each other Loan Document upon execution will constitute,
a legal, valid and binding obligation of each Loan Party party thereto, enforceable against each such Loan
Party in accordance with its terms, except as enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or similar laws affecting the enforcement of creditors’ rights
generally and by general equitable principles (whether enforcement is sought by proceedings in equity or
at law).
4.5 No Legal Bar. The execution, delivery and performance of this Agreement and the other
Loan Documents, the issuance of Letters of Credit, the borrowings hereunder and the use of the proceeds
thereof will not violate any material Requirement of Law or any material Contractual Obligation of any
Group Member and will not result in, or require, the creation or imposition of any Lien on any of their
respective properties or revenues pursuant to any material Requirement of Law or any such material
Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law
or Contractual Obligation applicable to the Borrowers or any of their respective Subsidiaries would
reasonably be expected to have a Material Adverse Effect.
4.6 Litigation. No litigation, investigation or proceeding of or before any arbitrator or
Governmental Authority is pending or, to the knowledge of any Borrower, threatened by or against any
Group Member or against any of their respective properties or revenues (a) with respect to any of the Loan
Documents or any of the transactions contemplated hereby or thereby, or (b) that would reasonably be
expected to have a Material Adverse Effect.
4.7 No Default. No Group Member is in default under or with respect to any of its Contractual
Obligations in any respect that would reasonably be expected to have a Material Adverse Effect. No Default
or Event of Default has occurred and is continuing, nor shall either result from the making of a requested
credit extension.
4.8 Ownership of Property; Liens; Investments. Each Group Member has title in fee simple
to, or a valid leasehold interest in, all of its real property, and good title to, or a valid leasehold interest in,
all of its other property, and none of such property is subject to any Lien except as permitted by Section 7.3.
No Loan Party owns any Investment except as permitted by Section 7.8. The Collateral Information
Certificate sets forth a complete and accurate list of all real property owned and leased by each Loan Party
as of the Closing Date.
4.9 Intellectual Property. Each Group Member owns, or is licensed to use, all Intellectual
Property necessary for the conduct of its business as currently conducted. No claim has been asserted and
is pending by any Person challenging or questioning any Group Member’s use of any Intellectual Property
or the validity or effectiveness of any such Group Member’s Intellectual Property, nor does any Borrower
know of any valid basis for any such claim, unless such claim would not reasonably be expected to have a
Material Adverse Effect. To the knowledge of the Loan Parties, the use of Intellectual Property by each
Group Member, and the conduct of such Group Member’s business, as currently conducted, does not
infringe on or otherwise violate the rights of any Person, unless such infringement would not reasonably be
expected to have a Material Adverse Effect, and there are no claims pending or, to the knowledge of any
Borrower, threatened to such effect.
4.10 Taxes. Each Group Member has filed or caused to be filed all Federal, all income and all
other material state and other tax returns that are required to be filed and has paid all material taxes shown
to be due and payable on said returns or on any assessments made against it or any of its property and all
other material taxes, fees or other charges imposed on it or any of its property by any Governmental
Authority (other than any the amount or validity of which are currently being contested in good faith by
58
appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided
on the books of the relevant Group Member); no tax Lien has been filed (other than Liens permitted by
Section 7.3(a)), and, to the knowledge of each Borrower, no material claim is being asserted, with respect
to any such tax, fee or other charge.
4.11 Federal Regulations. No part of the proceeds of any Loans, and no other extensions of
credit hereunder, will be used (a) for “buying” or “carrying” any “margin stock” within the respective
meanings of each of the quoted terms under Regulation U as now and from time to time hereafter in effect
for any purpose that violates the provisions of the Regulation U of the Board or (b) for any purpose that
violates the provisions of the other regulations of the Board. If requested by any Lender or the
Administrative Agent, the Borrowers will furnish to the Administrative Agent and each Lender a statement
to the foregoing effect in conformity with the requirements of FR Form G-3 or FR Form U-1, as applicable,
referred to in Regulation U.
4.12 Labor Matters. Except as, in the aggregate, would not reasonably be expected to have a
Material Adverse Effect: (a) there are no strikes or other labor disputes against any Group Member pending
or, to the knowledge of the Borrowers, threatened; (b) hours worked by and payment made to employees
of each Group Member have not been in violation of the Fair Labor Standards Act or any other applicable
Requirement of Law dealing with such matters; and (c) all payments due from any Group Member on
account of employee health and welfare insurance have been paid or accrued as a liability on the books of
the relevant Group Member.
4.13 ERISA.
(a) Each Loan Party and each of its respective ERISA Affiliates are in compliance in
all material respects with all applicable provisions and requirements of ERISA with respect to each Pension
Plan, and have performed all their obligations under each Pension Plan;
(b) no ERISA Event has occurred or is reasonably expected to occur;
(c) each Loan Party and each of its respective ERISA Affiliates has met all applicable
requirements under the ERISA Funding Rules with respect to each Pension Plan, and no waiver of the
minimum funding standards under the ERISA Funding Rules has been applied for or obtained;
(d) to the extent applicable with respect to any Pension Plan, as of the most recent
valuation date for such Pension Plan, the funding target attainment percentage (as defined in Section
430(d)(2) of the Code) is at least 60%, and no Loan Party nor any of its respective ERISA Affiliates knows
of any facts or circumstances that could reasonably be expected to cause the funding target attainment
percentage to fall below 60% as of the most recent valuation date;
(e) as of the most recent valuation date for any Pension Plan, the amount of
outstanding benefit liabilities (as defined in Section 4001(a)(18) of ERISA), individually or in the aggregate
for all Pension Plans (excluding for purposes of such computation any Pension Plans with respect to which
assets exceed benefit liabilities), does not exceed $100,000;
(f) the execution and delivery of this Agreement and the consummation of the
transactions contemplated hereunder will not involve any transaction that is subject to the prohibitions of
Section 406 of ERISA or
to
Section 4975(c)(1)(A)-(D) of the Code;
in connection with which
imposed pursuant
taxes could be
59
(g) to the extent applicable with respect to any Pension Plan, all liabilities under such
Pension Plan are (i) funded to at least the minimum level required by law, (ii) provided for or recognized
in the financial statements most recently delivered to the Administrative Agent and the Lenders pursuant
hereto or (iii) estimated in the formal notes to the financial statements most recently delivered to the
Administrative Agent and the Lenders pursuant hereto; and;
(h) (i) no Loan Party is nor will any such Loan Party be a “plan” within the meaning
of Section 4975(e) of the Code; (ii) the respective assets of the Loan Parties do not and will not constitute
“plan assets” within the meaning of the United States Department of Labor Regulations set forth in 29
C.F.R. §2510.3-101; (iii) no Loan Party is nor will any such Loan Party be a “governmental plan” within
the meaning of Section 3(32) of ERISA; and (iv) transactions by or with any Loan Party are not and will
not be subject to state statutes applicable to such Loan Party regulating investments of fiduciaries with
respect to governmental plans.
4.14 Investment Company Act; Other Regulations No Loan Party is an “investment
company,” or a company “controlled” by an “investment company”, within the meaning of the Investment
Company Act of 1940, as amended. No Loan Party is subject to regulation under any Requirement of Law
(other than Regulation X of the Board), including the Federal Power Act, that may limit its ability to incur
Indebtedness or that may otherwise render all or any portion of the Obligations unenforceable.
4.15 Subsidiaries. Except as disclosed to the Administrative Agent by the Borrowers in writing
from time to time after the Closing Date, (a) Schedule 4.15 sets forth the name and jurisdiction of
organization of the Parent and each Subsidiary of the Parent and, as to each such Subsidiary, the percentage
of each class of Capital Stock owned by any Loan Party, and (b) there are no outstanding subscriptions,
options, warrants, calls, rights or other agreements or commitments (other than stock options granted to
employees or directors and directors’ qualifying shares) of any nature relating to any Capital Stock of the
Borrowers (other than the Parent) or any Subsidiary, except as may be created by the Loan Documents.
4.16 Use of Proceeds. The proceeds of the Revolving Loans shall be to refinance the obligations
of the Borrowers outstanding under the Existing Credit Facility, to pay related fees and expenses and for
general corporate purposes. All or a portion of the proceeds of the Swingline Loans and the Letters of
Credit, shall be used for general corporate purposes.
4.17 Environmental Matters. Except as, in the aggregate, would not reasonably be expected
to have a Material Adverse Effect:
(a) Except as disclosed on Schedule 4.17, the facilities and properties owned, leased
or operated by any Group Member (the “Properties”) do not contain, and, to the knowledge of the
Borrowers, have not previously contained, any Materials of Environmental Concern in amounts or
concentrations or under circumstances that constitute or have constituted a violation of, or could give rise
to liability under, any Environmental Law;
(b) no Group Member has received or is aware of any notice of violation, alleged
violation, non-compliance, liability or potential liability regarding environmental matters or compliance
with Environmental Laws with regard to any of the Properties or the business operated by any Group
Member (the “Business”), nor does any Borrower have knowledge or reason to believe that any such notice
will be received or is being threatened;
(c) no Group Member has transported or disposed of Materials of Environmental
Concern from the Properties in violation of, or in a manner or to a location that could give rise to liability
under, any Environmental Law, nor has any Group Member generated, treated, stored or disposed of
60
Materials of Environmental Concern at, on or under any of the Properties in violation of, or in a manner
that could give rise to liability under, any applicable Environmental Law;
(d) no judicial proceeding or governmental or administrative action is pending or, to
the knowledge of the Borrowers, threatened, under any Environmental Law to which any Group Member
is or will be named as a party with respect to the Properties or the Business, nor are there any consent
decrees or other decrees, consent orders, administrative orders or other orders, or other administrative or
judicial requirements outstanding under any Environmental Law with respect to the Properties or the
Business;
(e) to the knowledge of the Borrowers, there has been no release or threat of release
of Materials of Environmental Concern at or from the Properties arising from or related to the operations
of any Group Member or otherwise in connection with the Business, in violation of or in amounts or in a
manner that could give rise to liability under Environmental Laws;
(f) all operations of the Group Members at the Properties are in compliance, and have
in the last five years been in compliance, with all applicable Environmental Laws, and except as disclosed
on Schedule 4.17, to the knowledge of the Borrowers, there is no contamination at, under or about the
Properties or violation of any Environmental Law with respect to the Properties or the Business; and
(g) no Group Member has assumed any liability of any other Person under
Environmental Laws.
4.18 Accuracy of Information, Etc. No statement or information contained in this Agreement,
any other Loan Document or any other document, certificate or statement furnished by or on behalf of any
Loan Party to the Administrative Agent or the Lenders, or any of them, for use in connection with the
transactions contemplated by this Agreement or the other Loan Documents, contained as of the date such
statement, information, document or certificate was so furnished, any untrue statement of a material fact or
omitted to state a material fact necessary to make the statements contained herein or therein, in light of the
circumstances, not misleading in any material respect. The projections and pro forma financial information
contained in the materials referenced above are based upon good faith estimates and assumptions believed
by the Borrowers to be reasonable at the time made, it being recognized by the Lenders that such financial
information as it relates to future events is not to be viewed as fact and that actual results during the period
or periods covered by such financial information may differ from the projected results set forth therein by
a material amount and that no assurance can be given that any particular projected result will be realized.
There is no fact known to any Loan Party that would reasonably be expected to have a Material Adverse
Effect that has not been expressly disclosed herein, in the other Loan Documents or in any other documents,
certificates and statements furnished to the Administrative Agent and the Lenders for use in connection
with the transactions contemplated hereby and by the other Loan Documents.
4.19 Security Documents.
(a) The Guarantee and Collateral Agreement is effective to create in favor of the
Administrative Agent, for the ratable benefit of the Secured Parties, a legal, valid and enforceable security
interest in the Collateral described therein and the proceeds thereof. In the case of the Pledged Stock, if
any, described in the Guarantee and Collateral Agreement that are securities represented by stock
certificates or otherwise constituting certificated securities within the meaning of Section 8-102(a)(15) of
the UCC or the corresponding code or statute of any other applicable jurisdiction (“Certificated
Securities”), when certificates representing such Pledged Stock are delivered to the Administrative Agent,
and in the case of the other Collateral constituting personal property described in the Guarantee and
Collateral Agreement, when financing statements and other filings specified on Schedule 4.19(a) in
61
appropriate form are filed in the offices specified on Schedule 4.19(a), the Administrative Agent, for the
benefit of the Secured Parties, shall have a fully perfected Lien on, and security interest in, all right, title
and interest of the Loan Parties in such Collateral and the proceeds thereof, as security for the Obligations,
in each case prior and superior in right to any other Person (except, in the case of Collateral other than
Pledged Stock, Liens permitted by Section 7.3). As of the Closing Date, no Loan Party that is a limited
liability company or partnership has any Capital Stock that is a not Certificated Security.
(b) Any Mortgages delivered after the Closing Date pursuant to Section 6.12 will be,
upon execution, effective to create in favor of the Administrative Agent, for the benefit of the Secured
Parties, a legal, valid and enforceable Lien on the Mortgaged Properties described therein and proceeds
thereof, and when the Mortgages are filed in the offices for the applicable jurisdictions in which the
Mortgaged Properties are located, each such Mortgage shall constitute a fully perfected Lien on, and
security interest in, all right, title and interest of the Loan Parties in the Mortgaged Properties and the
proceeds thereof, as security for the Obligations (as defined in the relevant Mortgage), in each case prior
and superior in right to any other Person other than Liens permitted by Section 7.3.
4.20 Solvency; Fraudulent Transfer. Each Loan Party is, and after giving effect to the
incurrence of all Indebtedness, Obligations and obligations being incurred in connection herewith, will be,
Solvent. No transfer of property is being made by any Loan Party and no obligation is being incurred by
any Loan Party in connection with the transactions contemplated by this Agreement or the other Loan
Documents with the intent to hinder, delay, or defraud either present or future creditors of such Loan Party.
4.21 Regulation H. No Mortgage encumbers improved real property that is located in an area
that has been identified by the Secretary of Housing and Urban Development as an area having special
flood hazards and in which flood insurance has not been made available under the National Flood Insurance
Act of 1968.
4.22 Designated Senior Indebtedness. The Loan Documents and all of the Obligations have
been deemed “Designated Senior Indebtedness” or a similar concept thereto, if applicable, for purposes of
any other Indebtedness of the Loan Parties.
4.23 Reserved.
4.24 Insurance. All insurance maintained by the Loan Parties is in full force and effect, all
premiums have been duly paid, no Loan Party has received notice of violation or cancellation thereof, and
there exists no default under any requirement of such insurance. Each Loan Party maintains, with
financially sound and reputable insurance companies insurance on all its property in at least such amounts
and against at least such risks (but including in any event public liability, product liability and business
interruption) as are usually insured against in the same general area by companies engaged in the same or
a similar business.
4.25 No Casualty. No Loan Party has received any notice of, nor does any Loan Party have any
knowledge of, the occurrence or pendency or contemplation of any Casualty Event affecting all or any
material portion of its property.
4.26 Accounts Receivable.
All statements made and all unpaid balances appearing in all invoices, instruments and other
documents evidencing the Accounts are and shall be true and correct in all material respects and all such
invoices, instruments and other documents, and all of the Borrower’s books and records are genuine and in
all respects what they purport to be. All sales and other transactions underlying or giving rise to each
62
Account shall comply in all material respects with all applicable laws and governmental rules and
regulations. To the best of the Borrower’s knowledge, all signatures and endorsements on all documents,
instruments, and agreements relating to all Accounts are genuine, and all such documents, instruments and
agreements are legally enforceable in accordance with their terms.
4.27 Definition of “Knowledge”. Except as otherwise set forth herein, for purposes of the Loan
Documents, whenever a representation or warranty is made to the Borrowers’ knowledge or awareness, to
the “best of” the Borrowers’ knowledge, or with a similar qualification, knowledge or awareness means the
actual knowledge, after reasonable investigation, of any Responsible Officer.
4.28 Patriot Act. Each Loan Party is in compliance, in all material respects, with the (a) Trading
with the Enemy Act, as amended, and each of the foreign assets control regulations of the United States
Treasury Department (31 CFR, Subtitle B, Chapter V, as amended) and any other enabling legislation or
executive order relating thereto, and (b) the Patriot Act or the Bribery Act 2012. No part of the proceeds
of the Loans made hereunder will be used by any Loan Party or any of their Affiliates, directly or indirectly,
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, as amended. Each Loan Party and their respective directors, officers and, to the knowledge of the
Borrower, employees, agents, advisors and Affiliates is in compliance, in all material respects, with the
United States Foreign Corrupt Practices Act of 1977, as amended.
4.29 OFAC. No Loan Party nor any of its Subsidiaries is in violation of any of the country or
list based economic and trade sanctions administered and enforced by OFAC. No Loan Party nor any of
its Subsidiaries nor their respective directors, officers nor, to the knowledge of such Loan Party, employees,
agents, advisors and Affiliates (a) is a Sanctioned Person or a Sanctioned Entity, (b) has its assets located
in Sanctioned Entities, or (c) derives revenues from investments in, or transactions with Sanctioned Persons
or Sanctioned Entities. No proceeds of any Loan made hereunder will be used to fund any operations in,
finance any investments or activities in, or make any payments to, a Sanctioned Person or a Sanctioned
Entity. No Loan Party nor any of its Subsidiaries nor their respective directors, officers nor, to the
knowledge of such Loan Party, employees, agents, advisors and Affiliates (a) is a Sanctioned Person or a
Sanctioned Entity, (b) has its assets located in Sanctioned Entities, or (c) derives revenues from investments
in, or transactions with Sanctioned Persons or Sanctioned Entities.
SECTION 5
CONDITIONS PRECEDENT
5.1 Conditions to Initial Extension of Credit. The effectiveness of this Agreement and the
obligation of each Lender to make its initial extension of credit hereunder shall be subject to the satisfaction,
prior to or concurrently with the making of each such extension of credit on the Closing Date, of the
following conditions precedent:
(a) Loan Documents. The Administrative Agent shall have received each of the
following, each of which shall be in form and substance satisfactory to the Administrative Agent:
Borrower and each Lender listed on Schedule 1.1A;
(i) this Agreement, executed and delivered by the Administrative Agent, each
of the Loan Parties;
(ii) the Collateral Information Certificate, executed by a Responsible Officer
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by the Borrowers in favor of such Revolving Lender;
(iii) if required by any Revolving Lender, a Revolving Loan Note executed
by the Borrowers in favor of such Swingline Lender;
(iv) if required by the Swingline Lender, the Swingline Loan Note executed
Borrowers and each other Grantor named therein;
(v) the Guarantee and Collateral Agreement, executed and delivered by the
applicable Grantor related thereto;
(vi) each Intellectual Property Security Agreement, executed by the
(vii) Control Agreements with each of SVB and NBSC;
Loan Party party thereto;
(viii) each other Security Document, executed and delivered by the applicable
of the Parent ended on December 31, 2014;
(ix) a completed Compliance Certificate as of the last day of the fiscal quarter
(x) a completed Liquidity Report dated as of December 31, 2014;
(xi) a completed Transaction Report dated as of December 31, 2014; and
(xii) the Flow of Funds Agreement, executed by the Borrowers.
(b) Pro Forma Financial Statements; Financial Statements; Projections. The
Administrative Agent shall have received (i) the Pro Forma Financial Statements, (ii) audited consolidated
financial statements of the Parent (or its predecessor) as of December 31, 2012 and December 31, 2013,
(iii) unaudited consolidated financial statements of the Parent as of December 31, 2014 and for each fiscal
month ended thereafter and at least 15 days before the Closing Date, and (iv) forecasts prepared by
management of the Parent, each in form reasonably satisfactory to the Administrative Agent, of balance
sheets, income statements and cash flow statements on a monthly basis for each fiscal month during the
term of the Revolving Facility.
(c) Approvals. All Governmental Approvals and consents and approvals of, or notices
to, any other Person (including the holders of any Capital Stock issued by any Loan Party) required in
connection with the execution and performance of the Loan Documents and consummation of the other
transactions contemplated hereby, shall have been obtained and be in full force and effect.
(d) Secretary’s Certificates; Certified Operating Documents; Good Standing
Certificates. The Administrative Agent shall have received a certificate of each Loan Party, dated the
Closing Date and executed by the Secretary or Assistant Secretary of such Loan Party, substantially in the
form of Exhibit C, with appropriate insertions and attachments, including (i) the Operating Documents of
such Loan Party, (ii) the relevant board resolutions or written consents of such Loan Party adopted by such
Loan Party for the purposes of authorizing such Loan Party to enter into and perform the Loan Documents
to which such Loan Party is party and (iii) the names, titles, incumbency and signature specimens of those
representatives of such Loan Party who have been authorized by such resolutions and/or written consents
to execute Loan Documents on behalf of such Loan Party, (iv) a good standing certificate for each Loan
Party certified as of a recent date by the appropriate Governmental Authority of its respective jurisdiction
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of organization, and (v) certificates of qualification as a foreign corporation issued by each of North
Carolina, South Carolina, California and Oklahoma.
(e) Responsible Officer’s Certificates.
(i) The Administrative Agent shall have received a certificate signed by a
Responsible Officer of each Loan Party, dated as of the Closing Date, in form and substance reasonably
satisfactory to it, either (A) attaching copies of all consents, licenses and approvals required in connection
with the execution, delivery and performance by such Loan Party and the validity against such Loan Party
of the Loan Documents to which it is party, and such consents, licenses and approvals shall be in full force
and effect, or (B) stating that no such consents, licenses or approvals are so required.
(ii) The Administrative Agent shall have received a certificate signed by a
Responsible Officer of the Parent, dated as of the Closing Date and in form and substance reasonably
satisfactory to it, certifying (A) that the conditions specified in Sections 5.2(a) and (d) have been satisfied,
and (B) that there has been no event or circumstance since December 31, 2013, that has had or that would
reasonably be expected to have, either individually or in the aggregate, a Material Adverse Effect.
(f) Patriot Act. The Administrative Agent shall have received, prior to the Closing
Date, all documentation and other information required by Governmental Authorities under applicable
“know your customer” and anti-money-laundering rules and regulations, including the Patriot Act.
(g) Due Diligence Investigation. The Administrative Agent shall have completed a
due diligence investigation of the Parent and its Subsidiaries in scope, and with results, satisfactory to the
Administrative Agent and shall have been given such access to the management, records, books of account,
contracts and properties of the Parent and its Subsidiaries and shall have received such financial, business
and other information regarding each of the foregoing Persons and businesses as it shall have requested.
Without limiting the foregoing, the Administrative Agent shall have received a copy of the most recent
investment policy approved by the Parent’s board of directors.
(h) Reports. The Administrative Agent shall have received, in form and substance
satisfactory to it, all audits and certifications as it has reasonably requested.
(i) Existing Credit Facility, Etc. The Borrowers shall have provided notice to the
Existing Lender (in accordance with the terms of the Existing Credit Facility) of their intent to pay all
obligations of the Group Members outstanding under the Existing Credit Facility on the Closing Date, (B)
the Administrative Agent shall have received the Payoff Letter executed by the Existing Lender and the
Borrowers party to the Existing Credit Facility, (C) all obligations of the Group Members in respect of the
Existing Credit Facility shall, substantially contemporaneously with the funding of certain Loan proceeds
on the Closing Date directly to the Existing Lender as contemplated by Section 2.5 and the Flow of Funds
Agreement, have been paid in full, (D) the Administrative Agent shall be satisfied that all actions necessary
to terminate the agreements evidencing the obligations of the Group Members in respect of the Existing
Credit Facility and the Liens of the Existing Lender in the assets of the Group Members securing obligations
under the Existing Credit Facility shall have been, or substantially contemporaneously with the Closing
Date, shall be, taken, and (E) the Administrative Agent shall have received such other documents and
information related to the Existing Credit Facility and the refinancing thereof as it may request.
(j) Collateral Matters.
(i) Lien Searches. The Administrative Agent shall have received the results
of recent lien searches in each of the jurisdictions where any of the Loan Parties is formed or organized,
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and such searches shall reveal no liens on any of the assets of the Loan Parties except for Liens permitted
by Section 7.3, Liens to be discharged on or prior to the Closing Date, or Liens securing obligations of the
Group Members under the Existing Credit Facility, which Liens shall be discharged substantially
contemporaneously with the Closing Date pursuant to the Payoff Letter.
(ii) Pledged Stock; Stock Powers; Pledged Notes. The Administrative Agent
shall have received original versions of (A) the certificates representing the shares of Capital Stock pledged
to the Administrative Agent (for the ratable benefit of the Secured Parties) pursuant to the Guarantee and
Collateral Agreement, together with an undated stock power for each such certificate executed in blank by
a duly authorized officer of the pledgor thereof, and (B) each promissory note (if any) pledged to the
Administrative Agent (for the ratable benefit of the Secured Parties) pursuant to the Guarantee and
Collateral Agreement, endorsed (without recourse) in blank (or accompanied by an executed transfer form
in blank) by the pledgor thereof.
(iii) Filings, Registrations, Recordings, Agreements, Etc. Each document
(including any UCC financing statements, Intellectual Property Security Agreements, Deposit Account
Control Agreements, Securities Account Control Agreements, and a landlord access agreement for the
Borrowers’ headquarters location) required by the Loan Documents or under law or reasonably requested
by the Administrative Agent to be filed, executed, registered or recorded to create in favor of the
Administrative Agent (for the ratable benefit of the Secured Parties), a perfected Lien on the Collateral
described therein, prior and superior in right and priority to any Lien in the Collateral held by any other
Person (other than with respect to Liens expressly permitted by Section 7.3), shall have been executed (if
applicable) and delivered to the Administrative Agent in proper form for filing, registration or recordation.
(k) Insurance. The Administrative Agent shall have received insurance certificates
satisfying the requirements of Section 6.6 hereof and Section 5.2(b) of the Guaranty and Collateral
Agreement, together with evidence reasonably satisfactory to the Administrative Agent that the insurance
policies of each Loan Party have been endorsed for the purpose of naming the Administrative Agent (for
the ratable benefit of the Secured Parties) as an “additional insured” or “lender loss payee”, as applicable,
with respect to such insurance policies, in form and substance satisfactory to the Administrative Agent.
(l) Fees. The Lenders and the Administrative Agent shall have received all fees
required to be paid on or prior to the Closing Date (including pursuant to the Fee Letter), and all reasonable
and documented fees and expenses for which invoices have been presented (including the reasonable and
documented fees and expenses of legal counsel to the Administrative Agent) for payment on or before the
Closing Date. All such amounts will be paid with proceeds of Loans made on the Closing Date and will be
reflected in the Flow of Funds Agreement.
(m) Legal Opinions. The Administrative Agent shall have received the executed legal
opinion of Wyrick Robbins Yates & Ponton LLP, counsel to the Loan Parties, in form and substance
reasonably satisfactory to the Administrative Agent. Such legal opinion shall cover such matters incident
to the transactions contemplated by this Agreement and the other Loan Documents as the Administrative
Agent may reasonably require.
(n) Borrowing Notices. The Administrative Agent shall have received, in respect of
any Revolving Loans to be made on the Closing Date, a completed Notice of Borrowing executed by the
Borrowers and otherwise complying with the requirements of Section 2.5.
(o) Solvency Certificate. The Administrative Agent shall have received a Solvency
Certificate from the chief financial officer or treasurer of the Parent.
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(p) No Material Adverse Effect. There shall not have occurred since December 31,
2013 any event or condition that has had or would be reasonably expected to have, individually or in the
aggregate, a Material Adverse Effect.
(q) No Litigation. No litigation, investigation or proceeding of or before any arbitrator
or Governmental Authority is pending or, to the knowledge of any Group Member, threatened in writing,
relating to or arising out of the Loan Documents or the transactions contemplated hereby and thereby.
(r) Consistency. The final terms and conditions of the transactions contemplated by
the Loan Documents shall be (i) as described in the Engagement Letter, and otherwise consistent with the
description thereof provided to Administrative Agent in writing or (ii) otherwise reasonably satisfactory to
Administrative Agent and the Lenders.
For purposes of determining compliance with the conditions specified in this Section 5.1, each
Lender that has executed this Agreement shall be deemed to have consented to, approved or accepted or to
be satisfied with, each document or other matter either sent (or made available) by the Administrative Agent
to such Lender for consent, approval, acceptance or satisfaction, or required thereunder to be consented to
or approved by or acceptable or satisfactory to such Lender, unless an officer of the Administrative Agent
responsible for the transactions contemplated by the Loan Documents shall have received notice from such
Lender prior to the Closing Date specifying such Lender’s objection thereto and either such objection shall
not have been withdrawn by notice to the Administrative Agent to that effect on or prior to the Closing
Date or, if any extension of credit on the Closing Date has been requested, such Lender shall not have made
available to the Administrative Agent on or prior to the Closing Date such Lender’s Revolving Percentage
of such requested extension of credit.
5.2 Conditions to Each Extension of Credit. The agreement of each Lender to make any
extension of credit requested to be made by it hereunder on any date (including its initial Loans disbursed
on the Closing Date) is subject to the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the representations and warranties made
by each Loan Party in or pursuant to any Loan Document (i) that is qualified by materiality shall be true
and correct, and (ii) that is not qualified by materiality, shall be true and correct in all material respects, in
each case, on and as of such date as if made on and as of such date, except to the extent any such
representation and warranty expressly relates to an earlier date, in which case such representation and
warranty shall have been true and correct in all material respects as of such earlier date.
(b) Availability. With respect to any requests for any Revolving Extensions of Credit,
after giving effect to such Revolving Extension of Credit, the availability and borrowing limitations
specified in Section 2.4 shall be complied with.
(c) Notices of Borrowing; Transaction Report. The Administrative Agent shall have
received a Notice of Borrowing and a Transaction Report in connection with any such request for extension
of credit which complies with the requirements hereof.
(d) No Default. No Default or Event of Default shall have occurred and be continuing
as of or on such date or after giving effect to the extensions of credit requested to be made on such date.
Each borrowing by and issuance of a Letter of Credit on behalf of any Borrower hereunder shall
constitute a representation and warranty by the Borrowers as of the date of such extension of credit that the
conditions contained in this Section 5.2 have been satisfied.
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5.3 Post-Closing Conditions Subsequent. The Borrowers shall satisfy each of the conditions
subsequent to the Closing Date specified in this Section 5.3 to the reasonable satisfaction of the
Administrative Agent, in each case by no later than the date specified for such condition below (or such
other date as Administrative Agent shall agree in its sole discretion):
(a) Within thirty (30) days following the Closing Date, the Borrowers shall deliver the
landlord access agreements and bailee waivers set forth on Schedule 5.3 hereto as required pursuant to
Section 6.12(e) hereof.
SECTION 6
AFFIRMATIVE COVENANTS
Each Borrower hereby jointly and severally agrees that, at all times prior to the Discharge of
Obligations, each such Borrower shall, and, where applicable, shall cause each of its respective Subsidiaries
to:
6.1 Financial Statements. Furnish to the Administrative Agent, with sufficient copies for
distribution to each Lender:
(a) as soon as available, but in any event within 120 days after the end of each fiscal
year of the Parent (commencing with the fiscal year ending December 31, 2014), a copy of the audited
consolidated and consolidating balance sheet of the Parent and its consolidated Subsidiaries as at the end
of such fiscal year and the related audited consolidated and consolidating statements of income and of cash
flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year,
together with an unqualified opinion by an independent certified public accounting firm of nationally
recognized standing and reasonably acceptable to the Administrative Agent;
(b) as soon as available, but in any event not later than 35 days (provided that, for the
month ending January 31, 2016, such financial statements shall be due on or before March 25, 2016) after
the end of each month occurring during each fiscal year of the Parent, the unaudited consolidated and
consolidating balance sheet of the Parent and its consolidated Subsidiaries as at the end of such month and
the related unaudited consolidated and consolidating statements of income and of cash flows for such month
and the portion of the fiscal year through the end of such month, setting forth in each case in comparative
form the figures for the previous year, certified by a Responsible Officer of the Parent as being fairly stated
in all material respects (subject to normal year-end audit adjustments and the absence of footnotes).
(c) as soon as available, but in any event (i) within 90 days after the end of each fiscal
year of the Parent, the Parent’s annual report on form 10-K filed with the SEC, (ii) within 45 days after the
end of each fiscal quarter of the Parent, the Parent’s quarterly report on form 10-Q filed with the SEC, and
(iii) each form 8-K filing made by the Parent as and when filed with the SEC; provided that documents
required to be delivered pursuant to this Section 6.1(c) may be delivered electronically and if so, shall be
deemed to have been delivered on the date on which the Parent posts such documents, or provides a link
thereto, either: (x) on the Parent’s website on the Internet at the website address listed in Section 10.2; or
(y) when such documents are posted electronically on the Parent’s behalf on an internet or intranet website
to which each Lender and the Administrative Agent have access (whether a commercial, third-party website
or whether sponsored by the Administrative Agent), if any.
All such financial statements shall be complete and correct in all material respects and shall be
prepared in reasonable detail and in accordance with GAAP applied (except as approved by such
accountants or officer, as the case may be, and disclosed in reasonable detail therein) consistently
throughout the periods reflected therein and with prior periods, subject in the case of unaudited financial
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statements to changes resulting from normal year-end adjustments and the absence of footnotes.
6.2 Certificates; Reports; Other Information. Furnish to the Administrative Agent, for
distribution to each Lender:
(a) concurrently with the delivery of any financial statements pursuant to Section 6.1,
(i) a certificate of a Responsible Officer stating that, to the best of such Responsible Officer’s knowledge,
each Loan Party during such period has observed or performed all of its covenants and other agreements,
and satisfied every condition contained in this Agreement and the other Loan Documents to which it is a
party to be satisfied by it, and that such Responsible Officer has obtained no knowledge of any Default or
Event of Default except as specified in such certificate and (ii) in the case of all monthly, quarterly or annual
financial statements, (x) a Compliance Certificate containing all information and calculations reasonably
necessary for determining compliance by each Group Member with the provisions of this Agreement
referred to therein as of the last day of the month or fiscal year of the Parent, as the case may be, and (y) to
the extent not previously disclosed to the Administrative Agent, a description of any change in the
jurisdiction of organization of any Loan Party and a list of any registered Intellectual Property issued to or
acquired by any Loan Party since the date of the most recent report delivered pursuant to this clause (y) (or,
in the case of the first such report so delivered, since the Closing Date);
(b) as soon as available, and in any event no later than 60 days after the end of each
fiscal year of the Parent, a detailed consolidated budget for the following fiscal year (including a projected
consolidated balance sheet of the Parent and its Subsidiaries as of the end of each fiscal quarter of such
fiscal year, the related consolidated statements of projected cash flow, projected changes in financial
position and projected income and a description of the underlying assumptions applicable thereto), and, as
soon as available, significant revisions, if any, of such budget and projections with respect to such fiscal
year (collectively, the “Projections”), which Projections shall be commensurate with those provided to the
Parent’s board of directors;
(c) promptly, and in any event within five (5) Business Days after receipt thereof by
any Loan Party or any Subsidiary thereof, copies of each notice or other correspondence received from the
SEC (or comparable agency in any applicable non-U.S. jurisdiction) concerning any investigation or
possible investigation or other inquiry by such agency regarding financial or other operational results of
any Loan Party or any Subsidiary thereof (other than routine comment letters from the staff of the SEC
relating to the Parent’s filings with the SEC);
(d) within five days after the same are sent, copies of each annual report, proxy or
financial statement or other material report that the Parent sends to the holders of any class of the Parent’s
debt securities or public equity securities and, within five days after the same are filed, copies of all annual,
regular, periodic and special reports and registration statements which the Parent may file with the SEC
under Section 13 or 15(d) of the Exchange Act, or with any national securities exchange, and not otherwise
required to be delivered to the Administrative Agent pursuant hereto;
(e) upon request by the Administrative Agent, within five days after the same are sent
or received, copies of all correspondence, reports, documents and other filings with any Governmental
Authority regarding compliance with or maintenance of Governmental Approvals or Requirements of Law
or that would reasonably be expected to have a Material Adverse Effect on any of the Governmental
Approvals or otherwise on the operations of the Group Members;
(f) concurrently with each Notice of Borrowing and in any event within 35 days after
the end of each month, account receivable and account payable agings (by invoice date), a deferred revenue
schedule, and a Transaction Report summarizing and calculating (where applicable) the Borrowing Base,
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the Annualized Recurring Revenue Retention Rate, Recurring Revenue and Recurring Revenue Lost,
together with all key performance metrics related to such calculations;
(g) concurrently with the delivery of financial statements referred to in Section 6.1(b),
a Liquidity Report as of the last day of the month to which such financial statements relate;
(h) concurrently with the delivery of the financial statements referred to in
Section 6.1(a), a report of a reputable insurance broker with respect to the insurance coverage maintained
by the Borrowers pursuant to Section 6.6 and the terms of the Guarantee and Collateral Agreement, together
with any supplemental reports with respect thereto which the Administrative Agent may reasonably request;
and
(i) promptly, such additional financial and other information as the Administrative
Agent may from time to time reasonably request.
6.3 Accounts Receivable.
(a) Schedules and Documents Relating to Accounts. The Borrowers shall deliver to
the Administrative Agent the Transaction Reports required by Section 6.2, on the Administrative Agent’s
standard forms. If reasonably requested by the Administrative Agent, the Borrowers shall furnish the
Administrative Agent with copies of all contracts, orders, invoices, and other similar documents, and all
shipping instructions, delivery receipts, bills of lading, and other evidence of delivery, for any goods the
sale or disposition of which gave rise to the Accounts relating to such collections. In addition, the
Borrowers shall deliver to the Administrative Agent, upon its reasonable request therefor, the originals of
all instruments, chattel paper, security agreements, guarantees and other documents and property
evidencing or securing any Accounts, in the same form as received, with all necessary endorsements, and
copies of all credit memos.
(b) Disputes. The Borrowers shall promptly notify the Administrative Agent of all
disputes for which a claim has been filed in excess of $1,000,000 relating to Accounts included within
Recurring Revenue. The Borrowers may forgive (completely or partially), compromise, or settle any
Account for less than payment in full, or agree to do any of the foregoing at any time so long as (i) the
Borrowers do so in good faith, in a commercially reasonable manner, in the ordinary course of business, in
arm’s-length transactions, and reports the same to the Administrative Agent in the regular reports provided
to the Administrative Agent; (ii) no Default or Event of Default has occurred and is continuing at such time;
and (iii) after taking into account all such discounts, settlements and forgiveness, the Total Revolving
Extensions of Credit then outstanding will not exceed the Available Revolving Commitment then in effect.
(c) Collection of Accounts. The Borrowers shall have the right to collect all Accounts,
unless and until a Default or an Event of Default has occurred and is continuing. The Borrowers shall direct
all Account Debtors to deliver or transmit all proceeds of Accounts into a lockbox account, or via electronic
deposit capture into a “blocked account”, as specified by the Administrative Agent (either such account,
the “Cash Collateral Account”), which such Cash Collateral Account shall be subject to a Deposit Account
Control Agreement in form and substance satisfactory to the Administrative Agent. Whether or not an
Event of Default has occurred and is continuing, the Borrowers shall immediately deliver all payments on
and proceeds of Accounts to the Cash Collateral Account to be (i) prior to the occurrence and the
continuance of an Event of Default, at Borrower’s sole discretion (x) transferred to an account of the
Borrowers maintained at SVB or (y) applied immediately reduce the Obligations; and (ii) after the
occurrence and during the continuance of an Event of Default applied as described in Section 8.3.
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(d) Returns. Provided no Event of Default has occurred and is continuing, if any
Account Debtor returns any Inventory to any Borrower, such Borrower shall promptly (i) determine the
reason for such return, (ii) issue a credit memorandum to the Account Debtor in the appropriate amount,
and (iii) provide a copy of such credit memorandum to the Administrative Agent, upon request from the
Administrative Agent. In the event any attempted return occurs after the occurrence and during the
continuance of any Event of Default, such Borrower shall hold the returned Inventory in trust for the
Secured Parties, and immediately notify the Administrative Agent of the return of the Inventory.
(e) Verification. Following the occurrence and during the continuance of an Event of
Default, the Administrative Agent may, from time to time, verify directly with the respective Account
Debtors the validity, amount and other matters relating to the Accounts, either in the name of a Borrower
or the Administrative Agent or any of its Affiliates as the Administrative Agent may choose, and may notify
any Account Debtor of the Administrative Agent’s security interest in such Account.
(f) No Liability. The Administrative Agent shall not be responsible or liable for any
shortage or discrepancy in, damage to, or loss or destruction of, any goods, the sale or other disposition of
which gives rise to an Account, or for any error, act, omission, or delay of any kind occurring in the
settlement, failure to settle, collection or failure to collect any Account, or for settling any Account in good
faith for less than the full amount thereof, nor shall the Administrative Agent be deemed to be responsible
for any Borrower’s obligations under any contract or agreement giving rise to an Account. Nothing herein
shall, however, relieve the Administrative Agent from liability for its own gross negligence or willful
misconduct.
Payment of Obligations; Taxes.
(a) Pay, discharge or otherwise satisfy at or before maturity or before they become
delinquent, as the case may be, all its material obligations (including all material Taxes and material Other
Taxes imposed by law on an applicable Loan Party) of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings and reserves in conformity
with GAAP with respect thereto have been provided on the books of the relevant Group Member.
(b) File or cause to be filed all Federal and state income and all other material tax
returns that are required to be filed.
6.5 Maintenance of Existence; Compliance. (a) Except as otherwise permitted by Section 7.4,
(i) preserve, renew and keep in full force and effect its organizational existence, in the case of the
Borrowers, in any State of the United States or the District of Columbia, and (ii) unless the failure to do so
would not reasonably be expected to have a Material Adverse Effect, take all reasonable action to maintain
or obtain all Governmental Approvals and all other rights, privileges and franchises necessary in the normal
conduct of its business or necessary for the performance by such Person of its Obligations under any Loan
Document; (b) comply with all Contractual Obligations (including with respect to leasehold interests of the
Borrowers) and Requirements of Law except to the extent that failure to comply therewith could not, in the
aggregate, reasonably be expected to have a Material Adverse Effect; and (c) comply with all Governmental
Approvals, and any term, condition, rule, filing or fee obligation, or other requirement related thereto,
except to the extent that failure to do so would not reasonably be expected to have a Material Adverse
Effect. Without limiting the generality of the foregoing, the Parent shall, and shall cause each of its ERISA
Affiliates to: (1) maintain each Pension Plan in compliance in all material respects with the applicable
provisions of ERISA, the Code or other Federal or state law; (2) cause each Pension Plan to maintain its
qualified status under Section 401(a) of the Code; (3) make all required contributions to any Pension Plan;
(4) not become a party to any Multiemployer Plan; (5) to the extent applicable with respect to any Pension
Plan, ensure that all liabilities under such Pension Plan are either (x) funded to at least the minimum level
71
required by law or, if higher, to the level required by the terms governing such Pension Plan; (y) insured
with a reputable insurance company; or (z) provided for or recognized in the financial statements most
recently delivered to the Administrative Agent and the Lenders pursuant hereto; and (6) ensure that the
contributions or premium payments to or in respect of each Pension Plan are and continue to be promptly
paid at no less than the rates required under the rules of such Pension Plan and in accordance with the most
recent actuarial advice received in relation to such Pension Plan and applicable law.
6.6 Maintenance of Property; Insurance. (a) Keep all property useful and necessary in its
business in good working order and condition, ordinary wear and tear excepted and (b) maintain with
financially sound and reputable insurance companies insurance on all its property in at least such amounts
and against at least such risks as is customary for companies engaged in the same or a similar business. All
property policies shall have a lender’s loss payable endorsement showing the Administrative Agent as an
additional loss payee. All liability policies shall show, or have endorsements showing, the Administrative
Agent as an additional insured. All proceeds payable under any property policy shall, at the option of the
Administrative Agent, be payable to the Administrative Agent on account of the Obligations; provided,
however, that the Borrowers shall be entitled to retain and apply insurance proceeds of up to $100,000 per
occurrence to the repair or replacement of any property that is the subject of a claim under such policy.
6.7 Inspection of Property; Books and Records; Discussions. (a) Keep proper books of
records and account in which full, true and correct entries shall be made in order to enable its financial
statements to be prepared in conformity with GAAP and all Requirements of Law shall be made of all
dealings and transactions in relation to its business and activities and (b) at reasonable times on three (3)
Business Days’ notice (provided no notice is required if an Event of Default has occurred and is continuing),
permit the Administrative Agent, its agents and representatives and independent contractors of the
Administrative Agent to visit and inspect any of its properties and examine and make abstracts from any of
its books and records and to discuss the business, operations, properties and financial and other condition
of the Group Members with officers, directors and employees of the Group Members and with their
independent certified public accountants; provided that such inspections shall not be undertaken more
frequently once every twelve (12) months, unless an Event of Default has occurred and is continuing, in
which case such inspections and audits shall occur as often as the Administrative Agent shall reasonably
determine is necessary.
6.8 Notices. Give prompt written notice to the Administrative Agent of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual Obligation of any Group
Member that, if not cured would reasonably be expected to have a Material Adverse Effect; and (ii)
litigation, investigation or proceeding that may exist at any time between any Group Member and any
Governmental Authority that, if adversely determined, would reasonably be expected to have a Material
Adverse Effect;
(c) any litigation or proceeding to which a Group Member is a party (i) in which the
amount involved is $1,000,000 or more and not covered by insurance, (ii) in which injunctive or similar
relief is sought against any Group Member, or (iii) which relates to any Loan Document;
(d) (i) the occurrence of any of the following events affecting such Borrower or any
of its respective ERISA Affiliates (but in no event more than ten days after such event), the occurrence of
any of the following events, and shall provide the Administrative Agent with a copy of any notice with
respect to such event that may be required to be filed with a Governmental Authority and any notice
delivered by a Governmental Authority to such Borrower or any of its ERISA Affiliates with respect to
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such event, if such event would reasonably be expected to result in liability in excess of $250,000 to such
Borrower or any of its respective ERISA Affiliates: (A) an ERISA Event, (B) the adoption of any new
Pension Plan by such Borrower or any of its ERISA Affiliates, (C) the adoption of any amendment to a
Pension Plan, if such amendment will result in a material increase in benefits or unfunded benefit liabilities
(as defined in Section 4001(a)(18) of ERISA), or (D) the commencement of contributions by such Borrower
or any of its ERISA Affiliate to any Pension Plan that is subject to Title IV of ERISA or Section 412 of the
Code; and
(ii) to the extent applicable with respect to any Pension Plan, upon the
reasonable request of the Administrative Agent after the giving, sending or filing thereof, or the receipt
thereof, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) filed by
Loan Party or any of its respective ERISA Affiliates with the IRS with respect to such Pension Plan; and
(iii) all notices from a Multiemployer Plan sponsor concerning an ERISA Event
that would reasonably be expected to result in a liability in excess of $250,000 to such Borrower of any of
its ERISA Affiliates;
(e) any material change in accounting policies or financial reporting practices by any
Loan Party; and
(f) any development or event that has had or would reasonably be expected to have a
Material Adverse Effect.
Each notice pursuant to this Section 6.8 shall be accompanied by a statement of a Responsible
Officer of the Borrowers setting forth details of the occurrence referred to therein and stating what action
the relevant Group Member proposes to take with respect thereto.
6.9 Environmental Laws.
(a) Comply with all applicable Environmental Laws, and obtain and comply with and
maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable
Environmental Laws, except those the failure to obtain, comply with and maintain would not reasonably
be expected to have a Material Adverse Effect.
(b) Conduct and complete all investigations, studies, sampling and testing, and all
remedial, removal and other actions required of the Borrowers under Environmental Laws and promptly
comply in all material respects with all lawful orders and directives of all Governmental Authorities
regarding Environmental Laws, subject to the Borrowers’ right to challenge the applicability of any such
orders and directives in good faith.
6.10 Operating Accounts. Maintain its and its Subsidiaries’ primary depository and operating
accounts and securities accounts with SVB or with SVB’s Affiliates; provided that a portion of the operating
accounts and securities accounts of the Borrowers and their respective Subsidiaries’ may be maintained
with one or more of the Lenders or their Affiliates and the accounts listed on Schedule 6.10 may be
maintained with NBSC, subject in each case to a Control Agreement.
6.11 Audits. Without duplication of Section 6.7 hereof, at reasonable times, on three (3)
Business Days’ prior notice (provided that no notice shall be required if an Event of Default has occurred
and is continuing), the Administrative Agent, or its agents, shall have the right to inspect the Collateral and
perform field examinations, and the right to audit the Collateral and the Group Members’ business. The
foregoing inspections, audits and field examinations shall be at the Borrowers’ expense, and the charge
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therefor shall be $850 per person per day (or such higher amount as shall represent the Administrative
Agent’s then-current standard charge for the same or any third party expenses in connection with
performing such audit or field examination), plus reasonable out-of-pocket expenses. Such inspections,
field examinations and audits shall not be undertaken more frequently than once every twelve (12) months,
unless an Event of Default has occurred and is continuing, in which case such inspections and audits shall
occur as often as the Administrative Agent shall reasonably determine is necessary; provided that,
notwithstanding the foregoing, the Administrative Agent shall have the right to conduct one (1) additional
audit and field examination within 120 days following the Closing Date at the Borrowers’ expense that
shall not be included in the constraints on frequency set forth above. In the event the Borrowers and the
Administrative Agent schedule an audit more than ten (10) days in advance, and the Borrowers cancel or
seek to or reschedule the audit with less than seven (7) days written notice to the Administrative Agent
(without limiting any of the Administrative Agent’s rights or remedies) then the Borrowers shall pay the
Administrative Agent a fee of $1,000 plus any out-of-pocket expenses incurred by the Administrative Agent
to compensate the Administrative Agent for the anticipated costs and expenses of such cancellation or
rescheduling.
6.12 Additional Collateral, Etc.
(a) With respect to any property (to the extent included in the definition of Collateral)
acquired after the Closing Date by any Loan Party (other than (x) any property described in paragraph (b),
(c) or (d) below, and (y) any property subject to a Lien expressly permitted by Section 7.3(g)) as to which
the Administrative Agent, for the ratable benefit of the Secured Parties, does not have a perfected Lien,
promptly (and in any event within five (5) Business Days, or such longer period as the Administrative
Agent may agree in its sole discretion) (i) execute and deliver to the Administrative Agent such amendments
to the Guarantee and Collateral Agreement or such other documents as the Administrative Agent may
reasonably deem necessary or advisable to evidence that such Loan Party is a Guarantor and to grant to the
Administrative Agent, for the ratable benefit of the Secured Parties, a security interest in such property and
(ii) take all actions necessary or advisable in the opinion of the Administrative Agent to grant to the
Administrative Agent, for the ratable benefit of the Secured Parties, a perfected first priority (except as
expressly permitted by Section 7.3) security interest and Lien in such property, including the filing of
Uniform Commercial Code financing statements in such jurisdictions as may be required by the Guarantee
and Collateral Agreement or by law or as may be requested by the Administrative Agent.
(b) With respect to any fee interest in any real property having a value (together with
improvements thereof) of at least $1,000,000 acquired after the Closing Date by any Loan Party (other than
any such real property subject to a Lien expressly permitted by Section 7.3(g)), promptly (and in any event
within forty-five (45) days (or such longer period as the Administrative Agent may agree in its sole
discretion) of such request), to the extent requested by the Administrative Agent, (i) execute and deliver a
first priority (except for any Liens permitted by Section 7.3(g)) Mortgage, in favor of the Administrative
Agent, for the ratable benefit of the Secured Parties, covering such real property, (ii) if requested by the
Administrative Agent, provide the Lenders with (x) title and extended coverage insurance covering such
real property in an amount at least equal to the purchase price of such real property (or such other amount
as shall be reasonably specified by the Administrative Agent, not to exceed the fair market value of the real
property) as well as a current ALTA survey thereof, together with a surveyor’s certificate, and (y) any
consents or estoppels reasonably deemed reasonably necessary by the Administrative Agent in connection
with such Mortgage, each of the foregoing in form and substance reasonably satisfactory to the
Administrative Agent and (iii) if requested by the Administrative Agent, deliver to the Administrative
Agent legal opinions relating to the matters described above, which opinions shall be in form and substance,
and from counsel, reasonably satisfactory to the Administrative Agent. In connection with the foregoing,
no later than three (3) Business Days prior to the date on which a Mortgage is executed and delivered
pursuant to this Section 6.12, in order to comply with the Flood Laws, the Administrative Agent shall have
74
received the following documents (collectively, the “Flood Documents”): (A) a completed standard “life
of loan” flood hazard determination form (a “Flood Determination Form”), (B) if the improvement(s) to
the applicable improved real property is located in a special flood hazard area, a notification to the
applicable Loan Party (“Loan Party Notice”) and (if applicable) notification to the applicable Loan Party
that flood insurance coverage under the National Flood Insurance Program (“NFIP”) is not available
because the community does not participate in the NFIP, (C) documentation evidencing the applicable Loan
Party’s receipt of the Loan Party Notice (e.g., countersigned Loan Party Notice, return receipt of certified
U.S. Mail, or overnight delivery), and (D) if the Loan Party Notice is required to be given and, to the extent
flood insurance is required by any applicable Requirement of Law or any Lenders’ written regulatory or
compliance procedures and flood insurance is available in the community in which the property is located,
a copy of one of the following: the flood insurance policy, the applicable Loan Party’s application for a
flood insurance policy plus proof of premium payment, a declaration page confirming that flood insurance
has been issued, or such other evidence of flood insurance reasonably satisfactory to the Administrative
Agent (any of the foregoing being “Evidence of Flood Insurance”).
(c) With respect to any new direct or indirect Subsidiary (other than an Excluded
Foreign Subsidiary) created or acquired after the Closing Date by any Loan Party (including pursuant to a
Permitted Acquisition), promptly (and in any event within ten (10) Business Days) (i) execute and deliver
to the Administrative Agent such amendments to the Guarantee and Collateral Agreement as the
Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the ratable
benefit of the Secured Parties, a perfected first priority security interest and Lien in the Capital Stock of
such new Subsidiary that is owned directly or indirectly by such Loan Party, (ii) deliver to the
Administrative Agent such documents and instruments as may be reasonably required to grant, perfect,
protect and ensure the priority of such security interest, including but not limited to, the certificates
representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by
a duly authorized officer of the relevant Loan Party, (iii) cause such new Subsidiary (A) to become a party
to the Guarantee and Collateral Agreement, (B) to take such actions as are necessary or advisable in the
opinion of the Administrative Agent to grant to the Administrative Agent for the ratable benefit of the
Secured Parties a perfected first priority security interest and Lien in the Collateral described in the
Guarantee and Collateral Agreement, with respect to such Subsidiary, including the filing of Uniform
Commercial Code financing statements in such jurisdictions as may be required by the Guarantee and
Collateral Agreement or by law or as may be reasonably requested by the Administrative Agent and (C) to
deliver to the Administrative Agent a certificate of such Subsidiary, in a form reasonably satisfactory to the
Administrative Agent, with appropriate insertions and attachments, and (iv) if requested by the
Administrative Agent, deliver to the Administrative Agent legal opinions relating to the matters described
above, which opinions shall be in form and substance, and from counsel, reasonably satisfactory to the
Administrative Agent.
(d) With respect to any new Excluded Foreign Subsidiary created or acquired after the
Closing Date by any Loan Party, promptly (and in any event within ten (10) Business Days) (i) execute and
deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement, as the
Administrative Agent deems necessary or advisable to grant to the Administrative Agent, for the ratable
benefit of the Secured Parties, a perfected first priority security interest and Lien in the Capital Stock of
such new Excluded Foreign Subsidiary that is owned by any such Loan Party (provided that in no event
shall more than 66% of the total outstanding voting Capital Stock of any such new Excluded Foreign
Subsidiary be required to be so pledged), (ii) deliver to the Administrative Agent the certificates
representing such Capital Stock, together with undated stock powers, in blank, executed and delivered by
a duly authorized officer of the relevant Loan Party, and take such other action as may be necessary or, in
the opinion of the Administrative Agent, desirable to perfect the Administrative Agent’s security interest
therein, and (iii) if reasonably requested by the Administrative Agent, deliver to the Administrative Agent
75
legal opinions relating to the matters described above, which opinions shall be in form and substance, and
from counsel, reasonably satisfactory to the Administrative Agent.
(e) Each Loan Party shall use commercially reasonable efforts to obtain a landlord’s
agreement or bailee letter, as applicable, from the lessor of its headquarters location, from the lessor of each
data center of the Loan Parties, and from the lessor of or the bailee related to any other location where in
excess of $100,000 of Collateral is stored or located, which agreement or letter, in any such case, shall
contain a waiver or subordination of all Liens or claims that the landlord or bailee may assert against the
Collateral at that location, and shall otherwise be reasonably satisfactory in form and substance to the
Administrative Agent. After the Closing Date, no Collateral having a book value in excess of $100,000
shall be stored at any new location without the prior written consent of the Administrative Agent or unless
and until a reasonably satisfactory landlord agreement or bailee letter, as appropriate, shall first have been
obtained with respect to such location. Each Loan Party shall pay and perform its material obligations
under all leases and other agreements with respect to each leased location or public warehouse where any
Collateral is or may be located.
6.13 Use of Proceeds. Use the proceeds of each credit extension only for the purposes specified
in Section 4.16.
6.14 Licensee Consent.
Prior to entering into or becoming bound by any inbound Intellectual Property license or agreement
(other than over-the-counter software that is commercially available to the public), the breach or termination
of which would reasonably be expected to cause a Material Adverse Effect, the applicable Loan Party
shall: (a) provide written notice to the Administrative Agent of the material terms of such license or
agreement; and (b) to the extent reasonably requested by the Administrative Agent, obtain the consent of,
or waiver by, any person whose consent or waiver is necessary for (i) the applicable Loan Party’s interest
in such license or agreement to be deemed Collateral and for the Administrative Agent to have a security
interest in it that might otherwise be restricted by the terms of the applicable license or agreement, and (ii)
the Administrative Agent to have the ability in the event of a liquidation of any Collateral to dispose of
such Collateral in accordance with the Administrative Agent’s rights and remedies under this Agreement
and the other Loan Documents.
6.15 Designated Senior Indebtedness. Cause the Loan Documents and all of the Obligations
to be deemed “Designated Senior Indebtedness” or a similar concept thereto, if applicable, for purposes of
any other Indebtedness of the Loan Parties.
6.16 Further Assurances. Execute any further instruments and take such further action as the
Administrative Agent reasonably deems necessary to perfect, protect, ensure the priority of or continue the
Administrative Agent’s Lien on the Collateral or to effect the purposes of this Agreement.
SECTION 7
NEGATIVE COVENANTS
Each Borrower hereby jointly and severally agrees that, at all times prior to the Discharge of
Obligations, no Borrower shall, nor shall any Borrower permit any of its Subsidiaries to, directly or
indirectly:
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7.1 Financial Condition Covenants.
(a) Minimum Liquidity. Permit Liquidity at any time, as tested on the last day of each
month, to be less than $40,000,000; provided that, in connection with any calculation of Liquidity required
under this Section 7.1(a), at least $25,000,000 must consist of unrestricted cash and Cash Equivalents
(including short term marketable securities) satisfying the requirements of clause (i) of the definition of
Liquidity.
(b) Minimum Consolidated EBITDA. Permit Consolidated EBITDA for any quarter
specified below, as calculated on a trailing twelve (12) months basis, to be less than the correlative amount
specified below:
Quarter Ending
March 31, 2018
June 30, 2018
September 30, 2018
December 31, 2018
March 31, 2019
June 30, 2019
September 30, 2019
December 31, 2019
Minimum Consolidated EBITDA
for Applicable Trailing Twelve
Month Period
$(15,100,000)1
$(14,700,000)
$(10,300,000)
$(2,200,000)
$[*]
$[*]
$[*]
$[*]
7.2 Indebtedness. Create, issue, incur, assume, become liable in respect of or suffer to exist any
Indebtedness, except:
(a) Indebtedness of any Loan Party pursuant to any Loan Document;
(b) Indebtedness of (i) any Loan Party owing to any other Loan Party, and (ii) any
Group Member (which is not a Loan Party) to any other Group Member (which is not a Loan Party);
(c) Guarantee Obligations (i) of any Loan Party of the Indebtedness of any other Loan
Party; (ii) of any Group Member (which is not a Loan Party) of the Indebtedness of any Loan Party, or
(iii) by any Group Member (which is not a Loan Party) of the Indebtedness of any other Group Member
(which is not a Loan Party), provided that, in any case (i), (ii) or (iii), the Indebtedness so guaranteed is
otherwise permitted by the terms hereof;
(d) Indebtedness outstanding on the date hereof and listed on Schedule 7.2(d) and any
Permitted Refinancing Indebtedness in respect thereof;
1 [*] Confidential treatment requested; certain information omitted and filed separately with the SEC.
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(e) Indebtedness (including, without limitation, Capital Lease Obligations, including
any incurred in addition to those permitted pursuant to clause (d) above) secured by Liens permitted by
Section 7.3(g) in an aggregate principal amount not to exceed $20,000,000 at any one time outstanding and
any Permitted Refinancing Indebtedness in respect thereof);
(f) Subordinated Indebtedness;
(g) unsecured Indebtedness to trade creditors incurred in the ordinary course of
business;
(h) Indebtedness incurred as a result of endorsing negotiable instruments received in
the ordinary course of business
(i) unsecured Indebtedness of a type not described above of the Loan Parties and their
respective Subsidiaries in an aggregate principal amount, for all such Indebtedness taken together, not to
exceed $250,000 at any one time outstanding;
(j) obligations (contingent or otherwise) of the Loan Parties and their respective
Subsidiaries existing or arising under any Specified Swap Agreement, provided that such obligations are
(or were) entered into by such Person in accordance with Section 7.13 and not for purposes of speculation;
(k) to the extent constituting Indebtedness, building lease obligations, whether or not
reflected on the balance sheet of the Borrowers, provided that the aggregate outstanding amount of such
obligations does not exceed $180,000,000; and
(l) Indebtedness of a Person (other than a Loan Party or one of their respective
Subsidiaries which constituted a Subsidiary prior to the consummation of the applicable merger referenced
below) existing at the time such Person is merged with or into a Loan Party or a Subsidiary or becomes a
Subsidiary; provided that (i) such Indebtedness was not, in any case, incurred by such other Person in
connection with, or in contemplation of, such merger or acquisition, (ii) such merger or acquisition
constitutes a Permitted Acquisition, (iii) with respect to any such Person who becomes a Subsidiary,
(A) such Subsidiary is the only obligor in respect of such Indebtedness, and (B) to the extent such
Indebtedness is permitted to be secured hereunder, only the assets of such Subsidiary secure such
Indebtedness, and (iv) the aggregate amount of all such Indebtedness at any one time outstanding shall not
exceed $5,000,000; and
(m) obligations incurred in the ordinary course of business in respect of bids, tenders,
trade contracts, governmental contracts, statutory obligations, surety bonds, performance and return of
money bonds, performance and completion guarantees and other obligations of a like nature;
(n) up to $300,000,000 aggregate principal amount of Permitted Convertible
Indebtedness; and
(o) any Permitted Bond Hedge Transaction.
7.3 Liens. Create, incur, assume or suffer to exist any Lien upon any of its property, whether
now owned or hereafter acquired, except:
(a) Liens for Taxes not yet due or that are being contested in good faith by appropriate
proceedings; provided that adequate reserves with respect thereto are maintained on the books of the
applicable Group Member in conformity with GAAP;
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(b) carriers’, warehousemen’s, landlord’s, mechanics’, materialmen’s, repairmen’s or
other like Liens arising in the ordinary course of business that are not overdue for a period of more than 30
days or that are being contested in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers’ compensation, unemployment
insurance and other social security legislation;
(d) deposits to secure the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of business (other than for indebtedness or any
Liens arising under ERISA);
(e) easements, rights-of-way, restrictions and other similar encumbrances incurred in
the ordinary course of business that, in the aggregate, are not substantial in amount and that do not in any
case materially detract from the value of the property subject thereto or materially interfere with the ordinary
conduct of the business of the applicable Group Member;
(f) Liens in existence on the date hereof listed on Schedule 7.3(f); provided that (i) no
such Lien is spread to cover any additional property after the Closing Date, (ii) the amount of Indebtedness
secured or benefitted thereby is not increased, (iii) the direct or any contingent obligor with respect thereto
is not changed, and (iv) any renewal or extension of the obligations secured thereby is permitted by
Section 7.2(d);
(g) Liens securing Indebtedness incurred pursuant to Section 7.2(e) to finance the
acquisition, improvement or construction of fixed or capital assets; provided that (i) such Liens shall be
created substantially simultaneously with the acquisition, improvement or construction of such fixed or
capital assets, (ii) such Liens do not at any time encumber any property other than the property financed by
such Indebtedness, and (iii) the amount of Indebtedness secured thereby is not increased;
(h) Liens created pursuant to the Security Documents;
(i) any interest or title of a lessor or licensor under any lease or license entered into by
a Group Member in the ordinary course of its business and covering only the assets so leased or licensed;
(j) judgment Liens that do not constitute a Default or an Event of Default under
Section 8.1(h) of this Agreement;
(k) bankers’ Liens, rights of setoff and other similar Liens existing solely with respect
to cash, Cash Equivalents, securities, commodities and other funds on deposit in one or more accounts
maintained by a Group Member, in each case arising in the ordinary course of business in favor of banks,
other depositary institutions, securities or commodities intermediaries or brokerages with which such
accounts are maintained securing amounts owing to such banks or financial institutions with respect to cash
management and operating account management or are arising under Section 4-208 or 4-210 of the UCC
on items in the course of collection;
(l) Liens on property of a Person existing at the time such Person is acquired by,
merged into or consolidated with a Loan Party or becomes a Subsidiary of a Loan Party or acquired by a
Loan Party; provided that (i) such Liens were not created in contemplation of such acquisition, merger,
consolidation or Investment, (ii) such Liens do not extend to any assets other than those of such Person,
and (iii) the applicable Indebtedness secured by such Lien is permitted under Section 7.2;
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(m) the replacement, extension or renewal of any Lien permitted by clause (l) above
upon or in the same property theretofore subject thereto or the replacement, extension or renewal (without
increase in the amount or change in any direct or contingent obligor) of the Indebtedness secured thereby;
(n) non-exclusive licenses of Intellectual Property granted to third parties in the
ordinary course of business and licenses of Intellectual Property that could not result in a legal transfer of
title of the licensed property that may be exclusive in respects other than territory and that may be exclusive
as to territory only as to discreet geographical areas outside the United States; and
(o) Liens arising from precautionary UCC financing statements filed under any lease
solely covering such leased items.
7.4 Fundamental Changes. Enter into any merger, consolidation or amalgamation, or liquidate,
wind up or dissolve itself (or suffer any liquidation or dissolution), or Dispose of all or substantially all of
its property or business, except that:
(a) any Subsidiary of a Loan Party may be merged or consolidated with or into a Loan
Party (provided that such Loan Party shall be the continuing or surviving Person);
(b) any Subsidiary of the Parent may Dispose of any or all of its assets (i) pursuant to
any liquidation or other transaction that results in the assets of such Subsidiary being transferred to a
Borrower or any other Loan Party, or (ii) pursuant to a Disposition permitted by Section 7.5; and
(c) any Investment expressly permitted by Section 7.8 may be structured as a merger,
consolidation or amalgamation.
7.5 Disposition of Property. Dispose of any of its property, whether now owned or hereafter
acquired, except:
(a) Dispositions of obsolete or worn out property in the ordinary course of business;
(b) Dispositions of Inventory in the ordinary course of business;
(c) Dispositions permitted by clause (i) of Section 7.4(b);
(d) the sale or issuance of the Capital Stock of any Subsidiary of the Parent (i) to a
Borrower or any other Loan Party, or (ii) in connection with any transaction that does not result in a Change
of Control;
(e) the use or transfer of money, cash or Cash Equivalents in a manner that is not
prohibited by the terms of this Agreement or the other Loan Documents;
(f) the licensing of Intellectual Property as permitted in Section 7.3(n);
(g) the Disposition of property (i) by any Loan Party to any other Loan Party, and
(ii) by any Group Member (which is not a Loan Party) to any other Group Member;
(h) Dispositions of property subject to a Casualty Event;
(i) leases or subleases of Real Property;
(j) source code escrow arrangements in the ordinary course of business;
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(k) the sale or discount without recourse of accounts receivable arising in the ordinary
course of business in connection with the compromise or collection thereof; provided that any such sale or
discount is undertaken in accordance with Section 6.3(b);
(l) any abandonment, cancellation, non-renewal or discontinuance of use or
maintenance of Intellectual Property (or rights relating thereto) of any Group Member that the Borrowers
determine in good faith is desirable in the conduct of its business and not materially disadvantageous to the
interests of the Lenders;
(m) Dispositions of other property having a fair market value not to exceed $1,000,000
in the aggregate for any fiscal year of the Parent, provided that at the time of any such Disposition, no Event
of Default shall have occurred and be continuing or would result from such Disposition; and
(n) payments permitted under Section 7.6, Investments permitted under Section 7.7,
and Liens permitted under Section 7.3; and
(o) the unwinding of any Permitted Bond Hedge Transaction.
provided, however, that any Disposition made pursuant to this Section 7.5 shall be made in good
faith on an arm’s length basis and, other than with respect to Dispositions permitted under clauses (a), (c),
(g), (h) and (l) above, for fair value.
7.6 Restricted Payments. Make any payment or prepayment of principal of, premium, if any,
or interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance),
sinking fund, settlement, conversion or similar payment with respect to, any Permitted Convertible
Indebtedness, Permitted Bond Hedge Transaction, earn-out payment, seller debt or deferred purchase
payments, declare or pay any dividend (other than dividends payable solely in common stock of the Person
making such dividend) on, or make any payment on account of, or set apart assets for a sinking or other
analogous fund for, the purchase, redemption, defeasance, retirement or other acquisition of, any Capital
Stock of any Group Member, whether now or hereafter outstanding, or make any other distribution in
respect thereof, either directly or indirectly, whether in cash or property or in obligations of any Group
Member (collectively, “Restricted Payments”), except that, so long as no Event of Default shall have
occurred and be continuing at the time of any action described below or would result therefrom:
(a) any Group Member may (i) make Restricted Payments to any Borrower and (ii)
declare and make dividends which are payable solely in the common Capital Stock of such Group Member;
(b) each Loan Party may purchase common Capital Stock or common Capital Stock
options from present or former officers, employees or consultants of any Group Member pursuant to stock
repurchase agreements; provided that no Default or Event of Default then exists or would result therefrom
and the aggregate amount of payments made under this clause (b) shall not exceed $750,000 during any
fiscal year of the Borrower; and
(c) the Loan Parties may make earn-out payments, payments on account of seller debt
and deferred purchase payments so long as both before and after giving effect to such payments, no Event
of Default has occurred and is continuing, and the Loan Parties are in pro forma compliance with the
financial covenants set forth in Section 7.1 hereof;
(d) Parent may (A) convert or exchange any Permitted Convertible Indebtedness in
accordance with its terms into common stock of Parent and make a payment of cash in lieu of fractional
shares of common stock deliverable upon any such conversion or exchange, (B) make regularly scheduled
81
interest payments in respect of Permitted Convertible Indebtedness, (C) deliver cash in connection with any
conversion or exchange of Permitted Convertible Indebtedness in an aggregate amount since the date of the
indenture governing such Permitted Convertible Indebtedness not to exceed the sum of (i) the principal
amount of such Permitted Convertible Indebtedness plus (ii) any payments received by Parent pursuant to
the exercise, settlement or termination of any related Permitted Bond Hedge Transaction; provided that
after giving pro forma effect to such Restricted Payment, (1) the Borrower shall be in compliance with the
then applicable financial covenants set forth in Section 7.1 hereof as of the end of the most recently ended
quarter for which financial statements are required to be delivered prior to such Restricted Payment, and
the Borrower shall have delivered to the Administrative Agent a certificate in form and substance
reasonably satisfactory to the Administrative Agent evidencing compliance with the requirements of this
clause (C), and (2) immediately before and after giving effect to such Restricted Payment, the Loan Parties
shall have Liquidity of at least $50,000,000, (D) make any required payments of cash upon the required
repurchase (including a required repurchase in connection with the redemption of Permitted Convertible
Indebtedness upon satisfaction of a condition related to the stock price of Parent’s common stock) or
required repayment of Permitted Convertible Indebtedness, in each case, in an amount that does not exceed
the principal amount thereof plus accrued interest; provided that after giving pro forma effect to such
Restricted Payment, (1) the Borrower shall be in compliance with the then applicable financial covenants
set forth in Section 7.1 hereof as of the end of the most recently ended quarter for which financial statements
are required to be delivered prior to such Restricted Payment, and the Borrower shall have delivered to the
Administrative Agent a certificate in form and substance reasonably satisfactory to the Administrative
Agent evidencing compliance with the requirements of this clause (D), and (2) immediately before and after
giving effect to such Restricted Payment, the Loan Parties shall have Liquidity of at least $50,000,000, and
(E) make any repurchases or exchanges of Permitted Convertible Indebtedness for cash, shares of Parent’s
common stock or any combination of cash and shares of Parent’s common stock that are not required
pursuant to the terms of such Permitted Convertible Indebtedness where the aggregate amount of such cash
does not exceed the principal amount thereof plus accrued interest plus cash in lieu of fractional shares of
common stock; provided that after giving pro forma effect to such Restricted Payment, (1) the Borrower
shall be in compliance with the then applicable financial covenants set forth in Section 7.1 hereof as of the
end of the most recently ended quarter for which financial statements are required to be delivered prior to
such Restricted Payment and the Borrower shall have delivered to the Administrative Agent a certificate in
form and substance reasonably satisfactory to the Administrative Agent evidencing compliance with the
requirements of this clause (E), and (2) immediately before and after giving effect to such Restricted
Payment, Liquidity shall not be less than $50,000,000; and
(e) Parent may (x) make any payments in connection with the entry into a Permitted
Bond Hedge Transaction on the closing date of any Permitted Convertible Indebtedness with the proceeds
of such Permitted Convertible Indebtedness and (y) acquire common stock of Parent upon exercise and
settlement or termination of any Permitted Bond Hedge Transaction, in each case, in accordance with the
terms of the agreement governing such Permitted Bond Hedge Transaction.
7.7 Consolidated Capital Expenditures. Make or commit to make any Consolidated Capital
Expenditure, except Consolidated Capital Expenditures made by the Group Members in the ordinary course
of business and not exceeding during any fiscal year, for all such Consolidated Capital Expenditures of all
of the Group Members taken together, the amount set forth below opposite such fiscal year:
Fiscal Year
2015 fiscal year
2016 fiscal year
Consolidated Capital Expenditures
$16,500,000
$21,000,000
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2017 fiscal year
2018 fiscal year
2019 fiscal year
$19,000,000
$22,000,000
$24,000,000
; provided that (i) any such amount that is not expended in the fiscal year for which it is permitted may be
carried over for expenditure in the next succeeding fiscal year only and (ii) Consolidated Capital
Expenditures made pursuant to this Section 7.7 during any fiscal year shall be deemed made, first, in respect
of amounts carried over from the prior fiscal year pursuant to clause (i) above and, second, in respect of
amounts permitted for such fiscal year as provided above.
7.8 Investments. Make any advance, loan, extension of credit (by way of guarantee or
otherwise) or capital contribution to, or purchase any Capital Stock, bonds, notes, debentures or other debt
securities of, or any assets constituting a business unit of, or make any other investment in, any Person (all
of the foregoing, “Investments”), except:
(a) extensions of trade credit in the ordinary course of business;
(b) (i) Investments in cash and Cash Equivalents and (ii) Investments permitted by the
Parent’s board-approved investment policy, a copy of which has been provided to the Administrative Agent
(as the same may be amended from time to time, so long as (x) such amendment is approved by the Parent’s
board of directors; and (y) promptly, and in any event within five (5) Business Days after approval, a copy
of such amendment is provided to the Administrative Agent);
(c) Guarantee Obligations permitted by Section 7.2;
(d) (i) travel advances and employee relocation loans and other employee loans and
advances in the ordinary course of business in an aggregate amount not to exceed $250,000 at any time,
and (ii) loans to employees, officers or directors relating to the purchase of equity securities of the Parent
or its Subsidiaries pursuant to employee stock purchase plans or agreements approved by the Parent’s board
of directors in an aggregate amount not to exceed $500,000 in any fiscal year;
(e) intercompany Investments by any Group Member in a Loan Party;
(f) Investments in the ordinary course of business consisting of endorsements of
negotiable instruments for collection or deposit;
(g) Investments received in the ordinary course of business in connection with credit
extensions to customers or in settlement of amounts due to any Group Member effected in the ordinary
course of business or owing to such Group Member as a result of Insolvency Proceedings involving an
Account Debtor or upon the foreclosure or enforcement of any Lien in favor of such Group Member;
(h) (i) Investments constituting Permitted Acquisitions, and (ii) Investments held by any
Person as of the date such Person is acquired in connection with a Permitted Acquisition, provided that (A)
such Investments were not made, in any case, by such Person in connection with, or in contemplation of,
such Permitted Acquisition, and (B) with respect to any such Person which becomes a Subsidiary as a result
of such Permitted Acquisition, such Subsidiary remains the only holder of such Investment;
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(i) in addition to Investments otherwise expressly permitted by this Section, Investments
by the Group Members the aggregate amount of all of which Investments (valued at cost) does not exceed
$50,000 outstanding at any time;
(j) deposits made to secure the performance of leases, licenses or contracts in the
ordinary course of business, and other deposits made in connection with the incurrence of Liens permitted
under Section 7.3;
(k) promissory notes and other non-cash consideration received in connection with
Dispositions permitted by Section 7.5; and
(l) purchases or other acquisitions by any Group Member of the Capital Stock in a Person
that, upon the consummation thereof, will be a Subsidiary (including as a result of a merger or
consolidation) or all or substantially all of the assets of, or assets constituting one or more business units
of, any Person (each, a “Permitted Acquisition”); provided that, with respect to each such purchase or other
acquisition:
(i) the newly-created or acquired Subsidiary (or assets acquired in connection
with an asset sale) shall be (x) in the same or a related line of business as that conducted by the Borrowers
on the date hereof, or (y) in a business that is ancillary to and in furtherance of the line of business as that
conducted by the Borrowers on the date hereof;
in all material respects in accordance with all Requirements of Law;
(ii) all transactions related to such purchase or acquisition shall be consummated
(iii) no Loan Party shall, as a result of or in connection with any such purchase
or acquisition, assume or incur any direct or contingent liabilities (whether relating to environmental, tax,
litigation or other matters) that, as of the date of such purchase or acquisition, would reasonably be expected
to result in a Material Adverse Effect;
Days’ prior written notice of any such purchase or acquisition;
(iv) the Borrowers shall give the Administrative Agent at least ten (10) Business
(v) the Borrowers shall provide to the Administrative Agent as soon as available
but in any event not later than five (5) Business Days after the execution thereof, a copy of any executed
purchase agreement or similar agreement with respect to any such purchase or acquisition;
(vi) any such newly-created or acquired Subsidiary, or the Loan Party that is the
acquirer of assets in connection with an asset acquisition, shall comply with the requirements of Section
6.12, except to the extent compliance with Section 6.12 is prohibited by pre-existing Contractual
Obligations or Requirements of Law binding on such Subsidiary or its properties;
(A) Liquidity shall equal or exceed $30,000,000 as of the date the definitive
agreements relating to any such acquisition or other purchase are executed (after giving effect, on a pro
forma basis, to the consummation of such acquisition or other purchase);
(vii) (x) immediately before and immediately after giving effect to any such
purchase or other acquisition, no Default or Event of Default shall have occurred and be continuing and (y)
immediately before and immediately after giving effect to such purchase or other acquisition, the Borrowers
shall be in compliance with each of the covenants set forth in Section 7.1, based upon financial statements
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delivered to the Administrative Agent which give effect, on a pro forma basis, to such acquisition or other
purchase;
(viii) the Borrowers shall not, based upon the knowledge of the Borrowers as of
the date any such acquisition or other purchase is consummated, reasonably expect such acquisition or other
purchase to result in an Event of Default under Section 8.1(c), at any time during the term of this Agreement,
as a result of a breach of any of the financial covenants set forth in Section 7.1;
purchase or acquisition other than Indebtedness permitted by the terms of Section 7.2(k);
(ix) no Indebtedness is assumed or incurred in connection with any such
Acquisition;
(x) such purchase or acquisition shall not constitute an Unfriendly
(xi) (A) the aggregate amount of the cash consideration paid by such Group
Member in connection with any particular Permitted Acquisition shall not exceed $5,000,000, and (B) the
aggregate amount of the cash consideration paid by all Group Members in connection with all such
Permitted Acquisitions consummated from and after the Closing Date shall not exceed $10,000,000;
(xii) each such Permitted Acquisition is of a Person organized under the laws of
the United States and engaged in business activities primarily conducted within the United States and in
which the Borrowers are permitted to engage pursuant to Section 7.17; and
(xiii) the Borrowers shall have delivered to the Administrative Agent, at least
five Business Days prior to the date on which any such purchase or other acquisition is to be consummated
(or such later date as is agreed by the Administrative Agent in its sole discretion), a certificate of a
Responsible Officer of the Parent, in form and substance reasonably satisfactory to the Administrative
Agent, certifying that all of the requirements set forth in this Section 7.8(l) have been satisfied or will be
satisfied on or prior to the consummation of such purchase or other acquisition; and
(m) (m) Investments existing on the date hereof and listed on Schedule 7.8(m), but
excluding any increases in the amounts thereof following the Closing Date; and
(n) the purchase of any Permitted Bond Hedge Transaction by Parent and, subject to
Section 7.6, the performance of its obligations thereunder.
7.9 ERISA. The Borrowers shall not, and shall not permit any of their respective ERISA
Affiliates to: (a) terminate any Pension Plan so as to result in any material liability to such Person or any
of such Person’s ERISA Affiliates, (b) permit to exist any ERISA Event, or any other event or condition,
which presents the risk of a material liability to any of their respective ERISA Affiliates, (c) make a
complete or partial withdrawal (within the meaning of ERISA Section 4201) from any Multiemployer Plan
so as to result in any material liability to such Person or any of their respective ERISA Affiliates, (d) enter
into any new Pension Plan or modify any existing Pension Plan so as to increase its obligations thereunder
which could result in any material liability to any such Person or any of its respective ERISA Affiliates,
(e) permit the present value of all nonforfeitable accrued benefits under any Pension Plan (using the
actuarial assumptions utilized by the PBGC upon termination of a Pension Plan) materially to exceed the
fair market value of Pension Plan assets allocable to such benefits, all determined as of the most recent
valuation date for each such Pension Plan, or (f) engage in any transaction which would cause any obligation,
or action taken or to be taken, hereunder (or the exercise by the Administrative Agent or any Lender of any
of its rights under this Agreement, any Note or the other Loan Documents) to be a non-exempt (under a
statutory or administrative class exemption) prohibited transaction under ERISA or Section 4975 of the Code.
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7.10 Optional Payments and Modifications of Certain Preferred Stock and Debt
Instruments. (a) Amend, modify, waive or otherwise change, or consent or agree to any amendment,
modification, waiver or other change to, any of the terms of the Preferred Stock, if any (i) that would move
to an earlier date the scheduled redemption date or increase the amount of any scheduled redemption
payment or increase the rate or move to an earlier date any date for payment of dividends thereon or (ii)
that would be otherwise materially adverse to any Lender or any other Secured Party; or (b) amend, modify,
waive or otherwise change, or consent or agree to any amendment, modification, waiver or other change
to, any of the terms of any Indebtedness permitted by Section 7.2 (other than Indebtedness pursuant to any
Loan Document) that would shorten the maturity or increase the amount of any payment of principal thereof
or the rate of interest thereon or shorten any date for payment of interest thereon or that would be otherwise
materially adverse to any Lender or any other Secured Party.
7.11 Transactions with Affiliates. Enter into any transaction, including any purchase, sale,
lease or exchange of property, the rendering of any service or the payment of any management, advisory or
similar fees, with any Affiliate (other than any other Loan Party) unless such transaction is (a) otherwise
permitted under this Agreement, (b) in the ordinary course of business of the relevant Group Member, and
(c) upon fair and reasonable terms no less favorable to the relevant Group Member than it would obtain in
a comparable arm’s length transaction with a Person that is not an Affiliate.
7.12 Sale Leaseback Transactions. Enter into any Sale Leaseback Transaction unless (a) the
Disposition of the applicable property subject to such Sale Leaseback Transaction is permitted under
Section 7.5, and (b) any Liens in the property of any Loan Party incurred in connection with any such Sale
Leaseback Transaction are permitted under Section 7.3.
7.13 Swap Agreements. Enter into any Swap Agreement, except Specified Swap Agreements
which are (a) entered into by a Group Member to (a1) hedge or mitigate risks to which such Group Member
has actual exposure (other than those in respect of Capital Stock), or (b2) effectively cap, collar or exchange
interest rates (from fixed to floating rates or vice versa, from one floating rate to another floating rate or
otherwise) with respect to any interest-bearing liability or investment of such Group Member, or (b) a
Permitted Bond Hedge Transaction.
7.14 Accounting Changes. Make any change in its (a) accounting policies or reporting
practices, except as required by GAAP, or (b) fiscal year.
7.15 Negative Pledge Clauses. Enter into or suffer to exist or become effective any agreement
that prohibits or limits the ability of any Loan Party to create, incur, assume or suffer to exist any Lien upon
any of its property or revenues, whether now owned or hereafter acquired, to secure its Obligations under
the Loan Documents to which it is a party, other than (a) this Agreement and the other Loan Documents,
(b) any agreements governing any purchase money Liens or Capital Lease Obligations otherwise permitted
hereby (in which case, any prohibition or limitation shall only be effective against the assets financed
thereby), (c) customary restrictions on the assignment of leases, licenses and other agreements, and (d) any
agreement in effect at the time any Subsidiary becomes a Subsidiary of a Loan Party, so long as such
agreement was not entered into solely in contemplation of such Person becoming a Subsidiary or, in any
such case, that is set forth in any agreement evidencing any amendments, restatements, supplements,
modifications, extensions, renewals and replacements of the foregoing, so long as such amendment,
restatement, supplement, modification, extension, renewal or replacement applies only to such Subsidiary
and does not otherwise expand in any material respect the scope of any restriction or condition contained
therein.
7.16 Clauses Restricting Subsidiary Distributions. Enter into or suffer to exist or become
effective any consensual encumbrance or restriction on the ability of any Loan Party and any of their
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respective Subsidiaries to (a) make Restricted Payments in respect of any Capital Stock of such Subsidiary
held by, or to pay any Indebtedness owed to, any other Group Member, (b) make loans or advances to, or
other Investments in, any other Group Member, or (c) transfer any of its assets to any other Group Member,
except for such encumbrances or restrictions existing under or by reason of (i) any restrictions existing
under the Loan Documents, (ii) any restrictions with respect to a Subsidiary imposed pursuant to an
agreement that has been entered into in connection with a Disposition permitted hereby of all or
substantially all of the Capital Stock or assets of such Subsidiary, (iii) customary restrictions on the
assignment of leases, licenses and other agreements, (iv) restrictions of the nature referred to in Section
7.15(b) above under agreements governing purchase money liens or Capital Lease Obligations otherwise
permitted hereby which restrictions are only effective against the assets financed thereby or (v) any
agreement in effect at the time any Subsidiary becomes a Subsidiary of a Borrower, so long as such
agreement applies only to such Subsidiary, was not entered into solely in contemplation of such Person
becoming a Subsidiary or in each case that is set forth in any agreement evidencing any amendments,
restatements, supplements, modifications, extensions, renewals and replacements of the foregoing, so long
as such amendment, restatement, supplement, modification, extension, renewal or replacement does not
expand in any material respect the scope of any restriction or condition contained therein.
7.17 Lines of Business. Enter into any business, either directly or through any Subsidiary,
except for those businesses in which the Borrowers and their respective Subsidiaries are engaged on the
date of this Agreement or that are reasonably related, ancillary or incidental thereto.
7.18 Designation of other Indebtedness. Designate any Indebtedness or indebtedness other
than the Obligations as “Designated Senior Indebtedness” or a similar concept thereto, if applicable.
7.19 Certification of Certain Capital Stock. Take any action to certificate any Capital Stock
having been pledged to the Administrative Agent (for the ratable benefit of the Secured Parties) which was
uncertificated at the time so pledged, in any such case, without first obtaining the Administrative Agent’s
prior written consent to do so and undertaking to the reasonable satisfaction of the Administrative Agent
all such actions as may reasonably be requested by the Administrative Agent to continue the perfection of
its Liens (held for the ratable benefit of the Secured Parties) in any such newly certificated Capital Stock.
7.20 Amendments to Organizational Agreements and Material Contracts. (a) Amend or
permit any amendments to any Loan Party’s organizational documents; or (b) amend or permit any
amendments to, or terminate or waive any provision of, any material Contractual Obligation, in each such
case if such amendment, termination, or waiver would be adverse to Administrative Agent or the Lenders
in any material respect.
7.21 Use of Proceeds. Use the proceeds of any extension of credit hereunder, whether directly
or indirectly, and whether immediately, incidentally or ultimately, to (a) purchase or carry margin stock
(within the meaning of Regulation U of the Board) or to extend credit to others for the purpose of purchasing
or carrying margin stock or to refund indebtedness originally incurred for such purpose, in each case in
violation of, or for a purpose which violates, or would be inconsistent with, Regulation T, U or X of the
Board, or (b) finance an Unfriendly Acquisition.
7.22 Subordinated Indebtedness.
(a) Amendments. Amend, modify, supplement, waive compliance with, or consent to
noncompliance with, any Subordinated Debt Document, unless the amendment, modification, supplement,
waiver or consent (i) does not adversely affect the Loan Parties’ ability to pay and perform each of their
respective Obligations at the time and in the manner set forth herein and in the other Loan Documents and
is not otherwise materially adverse to the Administrative Agent and the Lenders, and (ii) is in compliance
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with the subordination provisions therein and any subordination agreement with respect thereto in favor of
the Administrative Agent and the Lenders.
(b) Payments. Make any payment or prepayment of principal of, premium, if any, or
interest on, or redemption, purchase, retirement, defeasance (including in-substance or legal defeasance),
sinking fund or similar payment with respect to, any Subordinated Indebtedness, except as permitted by the
subordination provisions in the applicable Subordinated Debt Documents and any subordination agreement
with respect thereto in favor of the Administrative Agent and the Lenders.
7.23 Anti-Terrorism Laws. Conduct, deal in or engage in or permit any Affiliate or agent of
any Loan Party within its control to conduct, deal in or engage in any of the following activities: (a) conduct
any business or engage in any transaction or dealing with any person blocked pursuant to Executive Order
No. 13224 (“Blocked Person”), including the making or receiving any contribution of funds, goods or
services to or for the benefit of any Blocked Person; (b) deal in, or otherwise engage in any transaction
relating to, any property or interests in property blocked pursuant to Executive Order No. 13224; or (c)
engage in on conspire to engage in any transaction that evades or avoids, or has the purpose of evading or
avoiding, or attempts to violate, any of the prohibitions set forth in Executive Order No. 13224 or the Patriot
Act. The Borrowers shall deliver to the Administrative Agent and the Lenders any certification or other
evidence reasonably requested from time to time by the Administrative Agent or any Lender confirming
the Borrower's compliance with this Section 7.23.
SECTION 8
EVENTS OF DEFAULT
8.1 Events of Default. The occurrence of any of the following shall constitute an Event of
Default:
(a) the Borrowers shall fail to pay any amount of principal or interest on any Loan when
due in accordance with the terms hereof (including Section 2.8); or the Borrowers shall fail to pay fees or
any other amount payable hereunder or under any other Loan Document (other than those relating to Bank
Services), within three (3) Business Days after any such amount becomes due in accordance with the terms
hereof, or the Borrowers shall fail to pay any Obligations relating to Bank Services within ten (10) days
after such Obligations become due in accordance with the terms thereof; or
(b) any representation or warranty made or deemed made by any Loan Party herein or
in any other Loan Document or that is contained in any certificate, document or financial or other statement
furnished by it at any time under or in connection with this Agreement or any such other Loan Document
(i) if qualified by materiality, shall be incorrect or misleading when made or deemed made, or (ii) if not
qualified by materiality, shall be incorrect or misleading in any material respect when made or deemed
made; or
(c) (i) any Loan Party shall default in the observance or performance of any agreement
contained in Section 2.8, Section 5.3, Section 6.1 (other than clause (c) thereof), Section 6.2, Section 6.3(c),
clause (i) or (ii) of Section 6.5(a), Section 6.6(b), Section 6.8(a), Section 6.10, Section 6.11 or Section 7 of
this Agreement, (ii) any Loan Party shall default in the observance or performance of any agreement
contained in Section 6.1(c) and such default shall continue unremedied for a period of five (5) Business
Days thereafter, or (iii) an “Event of Default” under and as defined in any Security Document shall have
occurred and be continuing; or
(d) any Loan Party shall default in the observance or performance of any other
agreement contained in this Agreement or any other Loan Document to which it is party (other than as
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provided in paragraphs (a) through (c) of this Section), and such default shall continue unremedied for a
period of 10 days thereafter; provided, however, that if the default cannot by its nature be cured within the
ten (10) day period or cannot after diligent attempts by the Borrowers be cured within such ten (10) day
period, and such default is likely to be cured within a reasonable time, then the Borrowers shall have an
additional period (which shall not in any case exceed thirty (30) days) to attempt to cure such default, and
within such reasonable time period the failure to cure the default shall not be deemed an Event of Default
(but no Revolving Credit Extensions shall be made during such cure period); or
(e) (1) any Group Member shall (i) default in making any payment of any principal of
any Indebtedness (including any Guarantee Obligation, but excluding the Loans) on the scheduled or
original due date with respect thereto; or (ii) default in making any payment of any interest on any such
Indebtedness beyond the period of grace, if any, provided in the instrument or agreement under which such
Indebtedness was created; (iii) default in making any payment or delivery under any such Indebtedness
constituting a Swap Agreement beyond the period of grace, if any, provided in such Swap Agreement; or
(iv) default in the observance or performance of any other agreement or condition relating to any such
Indebtedness or contained in any instrument or agreement evidencing, securing or relating thereto which
such default is not cured within any applicable cure period, or any other event shall occur or condition exist,
the effect of which default or other event or condition is to (x) cause, or to permit the holder or beneficiary
of, or, in the case of any such Indebtedness constituting a Swap Agreement, counterparty under, such
Indebtedness (or a trustee or agent on behalf of such holder, beneficiary, or counterparty) to cause, with the
giving of notice if required, such Indebtedness to become due prior to its stated maturity or (in the case of
any such Indebtedness constituting a Guarantee Obligation) to become payable or (in the case of any such
Indebtedness constituting a Swap Agreement) to be terminated, or (y) to cause, with the giving of notice if
required, any Group Member to purchase or redeem or make an offer to purchase or redeem such
Indebtedness prior to its stated maturity; provided that, unless such Indebtedness constitutes a Specified
Swap Agreement, a default, event or condition described in clause (i), (ii), (iii), or (iv) of this paragraph
(e) shall not at any time constitute an Event of Default unless, at such time, one or more defaults, events or
conditions of the type described in clauses (i), (ii), (iii), and (iv) of this paragraph (e) shall have occurred
with respect to Indebtedness the outstanding principal amount (and, in the case of Swap Agreements, other
than Specified Swap Agreements, the Swap Termination Value) of which, individually or in the aggregate
of all such Indebtedness, exceeds in the aggregate $500,000 and the holder(s) of such Indebtedness have
not delivered a waiver in writing to the applicable Group Member with respect to such default, event or
condition; provided, further, that this clause (e)(1) shall not apply to (x) any early payment requirement or
unwinding or termination with respect to any Permitted Bond Hedge Transaction, or satisfaction of any
condition giving rise to or permitting the foregoing, in accordance with the terms thereof, so long as, in any
such case, Parent is not the “defaulting party” (or substantially equivalent term) under the terms of such
Permitted Bond Hedge Transaction, (y) any event that permits conversion or exchange of Permitted
Convertible Indebtedness (whether into cash, shares of common stock in Parent or any combination thereof)
that is not the result of a breach or default by a Group Member of the terms of an agreement governing such
Permitted Convertible Indebtedness or (z) any conversion or exchange of Permitted Convertible
Indebtedness (whether into cash, shares of common stock in Parent or any combination thereof) that is not
the result of a breach or default by a Group Member of the terms of an agreement governing such Permitted
Convertible Indebtedness; or (2) any default or event of default (however designated) shall occur with
respect to any Subordinated Indebtedness of any Group Member and such default or event of default has
not been waived in writing by the holder thereof; or
(f) (i) any Group Member shall commence any case, proceeding or other action
(a) under any Debtor Relief Law seeking to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization, arrangement, adjustment, winding-up,
liquidation, dissolution, composition or other relief with respect to it or its debts, or (b) seeking appointment
of a receiver, trustee, custodian, conservator, judicial manager or other similar official for it or for all or
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any substantial part of its assets, or any Group Member shall make a general assignment for the benefit of
its creditors; or (ii) there shall be commenced against any Group Member any case, proceeding or other
action of a nature referred to in clause (i) above that (a) results in the entry of an order for relief or any such
adjudication or appointment, or (b) remains undismissed, undischarged or unbonded for a period of 60 days
(provided that, during such 60 day period, no Loans shall be advanced or Letters of Credit issued
hereunder); or (iii) there shall be commenced against any Group Member any case, proceeding or other
action seeking issuance of a warrant of attachment, execution, distraint or similar process against all or any
substantial part of its assets that results in the entry of an order for any such relief that shall not have been
vacated, discharged, or stayed or bonded pending appeal within 60 days from the entry thereof (provided
that, during such 60 day period, no Loans shall be advanced or Letters of Credit issued hereunder); or
(iv) any Group Member shall take any action in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or (iii) above; or (v) any Group Member shall
generally not, or shall be unable to, or shall admit in writing its inability to, pay its debts as they become
due; or
(g) There shall occur one or more ERISA Events which individually or in the aggregate
results in or otherwise is associated with liability of any Loan Party or any ERISA Affiliate thereof in excess
of $250,000 during the term of this Agreement; or there exists an amount of unfunded benefit liabilities (as
defined in Section 4001(a)(18) of ERISA), individually or in the aggregate for all Pension Plans (excluding
for purposes of such computation any Pension Plans with respect to which assets exceed benefit liabilities)
which exceeds $250,000; or
(h) There is entered against any Group Member (i) one or more final judgments or orders
for the payment of money or fines or penalties issued by any Governmental Authority involving in the
aggregate a liability (not paid or fully covered by insurance as to which the relevant insurance company has
acknowledged coverage) of $500,000 or more, or (ii) one or more non-monetary final judgments that have,
or would reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect and,
in either case (i) or (ii), (A) enforcement proceedings are commenced by any creditor or any such
Governmental Authority, as applicable, upon such judgment, order, penalty or fine, as applicable, or
(B) such judgment, order, penalty or fine, as applicable, shall not have been vacated, discharged, stayed or
bonded, as applicable, pending appeal within 45 days from the entry or issuance thereof; or
(i) (i) any of the Security Documents shall cease, for any reason, to be in full force
and effect (other than pursuant to the terms thereof), or any Loan Party shall so assert, or any Lien created
by any of the Security Documents shall cease to be enforceable and of the same effect and priority purported
to be created thereby; or
all or any material part of its business; or
(ii) any court order enjoins, restrains or prevents a Loan Party from conducting
(j) the guarantee contained in Section 2 of the Guarantee and Collateral Agreement shall
cease, for any reason, to be in full force and effect or any Loan Party shall so assert; or
(k) a Change of Control shall occur; or
(l) any of the Governmental Approvals shall have been (i) revoked, rescinded,
suspended, modified in an adverse manner or not renewed in the ordinary course for a full term or
(ii) subject to any decision by a Governmental Authority that designates a hearing with respect to any
applications for renewal of any of the Governmental Approvals or that could result in the Governmental
Authority taking any of the actions described in clause (i) above, and such decision or such revocation,
rescission, suspension, modification or nonrenewal (A) has, or would reasonably be expected to have, a
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Material Adverse Effect, or (B) materially adversely affects the legal qualifications of any Group Member
to hold any material Governmental Approval in any applicable jurisdiction and such revocation, rescission,
suspension, modification or nonrenewal could reasonably be expected to materially adversely affect the
status of or legal qualifications of any Group Member to hold any material Governmental Approval in any
other jurisdiction; or
(m) Any Loan Document not otherwise referenced in Section 8.1(i) or (j), at any time
after its execution and delivery and for any reason other than as expressly permitted hereunder or
thereunder, ceases to be in full force and effect; or any Loan Party contests in any manner the validity or
enforceability of any Loan Document; or any Loan Party denies that it has any or any further liability or
obligation under any Loan Document to which it is a party, or purports to revoke, terminate or rescind any
such Loan Document; or
(n) a Material Adverse Effect shall occur.
8.2 Remedies upon Event of Default. If any Event of Default occurs and is continuing, the
Administrative Agent shall, at the request of, or may, with the consent of, the Required Lenders, take any
or all of the following actions:
(a) if such event is an Event of Default specified in clause (i) or (ii) of paragraph (f) of
Section 8.1 with respect to any Borrower, the Revolving Commitments shall immediately terminate
automatically and the Loans (with accrued interest thereon) and all other amounts owing under this
Agreement and the other Loan Documents shall automatically immediately become due and payable, and
(b) if such event is any other Event of Default, any of the following actions may be taken:
(i) with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the
Required Lenders, the Administrative Agent shall, by notice to the Borrowers state that no further
extensions of credit shall be funded by the Lenders hereunder, and/or declare the Revolving Commitments,
the Swingline Commitments and the L/C Commitments to be terminated forthwith, whereupon the
Revolving Commitments, the Swingline Commitments and the L/C Commitments shall immediately
terminate; (ii) with the consent of the Required Lenders, the Administrative Agent may, or upon the request
of the Required Lenders, the Administrative Agent shall, by notice to the Borrowers, declare the Loans
(with accrued interest thereon) and all other amounts owing under this Agreement and the other Loan
Documents to be due and payable forthwith, whereupon the same shall immediately become due and
payable; (iii) any Qualified Counterparty or Bank Services Provider may terminate any Specified Swap
Agreement or other Bank Services Agreement then outstanding; and (iv) the Administrative Agent may
exercise on behalf of itself, the Lenders and the Issuing Lender all rights and remedies available to it, the
Lenders and the Issuing Lender under the Loan Documents. With respect to all Letters of Credit with
respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to
this paragraph, the Borrowers shall Cash Collateralize an amount equal to 105% (110% in the case of any
L/C Exposure in respect of any Letter of Credit denominated in a Foreign Currency) of the aggregate then
undrawn and unexpired amount of such Letters of Credit. Amounts so Cash Collateralized shall be applied
by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused
portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be
applied to repay other Obligations of the Borrowers hereunder and under the other Loan Documents in
accordance with Section 8.3. In addition, (x) the Borrowers shall also Cash Collateralize the full amount
of any Swingline Loans then outstanding, and (y) to the extent elected by the applicable Bank Services
Provider, the Borrowers shall also Cash Collateralize the amount of any Obligations in respect of Bank
Services then outstanding. After all such Letters of Credit and Bank Services Agreements shall have been
terminated, expired or fully drawn upon, as applicable, and all amounts drawn under any such Letters of
Credit shall have been reimbursed in full and all other Obligations of the Borrowers and the other Loan
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Parties (including any such Obligations arising in connection with Bank Services) shall have been paid in
full, the balance, if any, of the funds having been so Cash Collateralized shall be returned to the Borrowers
(or such other Person as may be lawfully entitled thereto). Except as expressly provided above in this
Section, presentment, demand, protest and all other notices of any kind are hereby expressly waived by the
Borrowers.
8.3 Application of Funds. After the exercise of remedies provided for in Section 8.2, any
amounts received by the Administrative Agent on account of the Obligations shall be applied by the
Administrative Agent in the following order:
First, to the payment of that portion of the Obligations constituting fees, indemnities,
expenses and other amounts (other than principal and interest but including any Collateral-Related
Expenses, fees, charges and disbursements of counsel to the Administrative Agent and amounts payable
under Sections 2.19 and 2.20) payable to the Administrative Agent in its capacity as such (including interest
thereon);
Second, to payment of that portion of the Obligations constituting fees, indemnities and
other amounts (other than principal, interest and Letter of Credit Fees) payable to the Lenders and the
Issuing Lender (including any Letter of Credit Fronting Fees, Issuing Lender Fees and the reasonable fees,
charges and disbursements of counsel to the respective Lenders and the Issuing Lender and amounts payable
under Sections 2.19 and 2.20), in each case, ratably among them in proportion to the respective amounts
described in this clause Second payable to them;
Third, to payment of that portion of the Obligations constituting accrued and unpaid Letter
of Credit Fees and interest on the Loans and L/C Disbursements which have not yet been converted into
Swingline Loans or Revolving Loans, in each case, ratably among them in proportion to the respective
amounts described in this clause Third payable to them;
Fourth, to payment of that portion of the Obligations constituting unpaid principal of the
Loans and L/C Disbursements which have not yet been converted into Revolving Loans, in each case,
ratably among them in proportion to the respective amounts described in this clause Fourth held by them;
Fifth, to the Administrative Agent for the account of the Issuing Lender, to Cash
Collateralize that portion of the L/C Exposure comprised of the aggregate undrawn amount of Letters of
Credit pursuant to Section 3.10;
Sixth, if so elected by the applicable Bank Services Provider or applicable Qualified
Counterparty, to the Administrative Agent for the ratable account of each Bank Services Provider and
Qualified Counterparty, to repay or Cash Collateralize Obligations arising in connection with Bank Services
and Specified Swap Agreements that are then due and payable;
Seventh, to the payment of all other Obligations of the Loan Parties that are then due and
payable to the Administrative Agent and the other Secured Parties on such date, in each case, ratably among
them in proportion to the respective aggregate amounts of all such Obligations owing to the Administrative
Agent and the other Secured Parties on such date; and
Last, the balance, if any, after all of the Obligations have been indefeasibly paid in full
(excluding, for this purpose, any Obligations which have been Cash Collateralized in accordance with the
terms hereof), to the Borrowers or as otherwise required by Law.
Subject to Sections 2.24(a), 3.4, 3.5 and 3.10, amounts used to Cash Collateralize the aggregate
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undrawn amount of Letters of Credit pursuant to clause Fifth above shall be applied to satisfy drawings
under such Letters of Credit as they occur. If any amount remains on deposit as Cash Collateral for Letters
of Credit 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.
SECTION 9
THE ADMINISTRATIVE AGENT
9.1 Appointment and Authority.
(a) Each of the Lenders hereby appoints SVB to act on its behalf as the Administrative
Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take
such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the
terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto.
(b) The provisions of Section 9 are solely for the benefit of the Administrative Agent,
the Lenders and the Issuing Lender, and neither the Borrowers nor any other Loan Party shall have rights
as a third party beneficiary of any of such provisions. The Administrative Agent shall not have any duties
or responsibilities to any Lender or any other Person, except those expressly set forth herein and in the other
Loan Documents, or any fiduciary relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this Agreement or any other Loan
Document or otherwise exist against the Administrative Agent. It is understood and agreed that the use of
the term “agent” herein or in any other Loan Documents (or any other similar term) with reference to the
Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations
arising under agency doctrine of any applicable law. Instead such term is used as a matter of market custom,
and is intended to create or reflect only an administrative relationship between contracting parties.
(c) The Administrative Agent shall also act as the collateral agent under the Loan
Documents, and the Issuing Lender and each of the other Lenders (in their respective capacities as a Lender
and, as applicable, Qualified Counterparty or Bank Services Provider) hereby (i) authorize the
Administrative Agent to enter into all other Loan Documents, as applicable, including the Guarantee and
Collateral Agreement and any other Security Documents, and (ii) appoint and authorize the Administrative
Agent to act as the agent of the Secured Parties for purposes of acquiring, holding and enforcing any and
all Liens on Collateral granted by any of the Loan Parties to secure any of the Obligations, together with
such powers and discretion as are reasonably incidental thereto. The Administrative Agent, as collateral
agent and any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant
to Section 9.2 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 Section 9 and Section
10 (including Section 9.7, as though such co-agents, sub-agents and attorneys-in-fact were the collateral
agent under the Loan Documents) as if set forth in full herein with respect thereto. Without limiting the
generality of the foregoing, the Administrative Agent is further authorized on behalf of all the Lenders,
without the necessity of any notice to or further consent from the Lenders, from time to time to take any
action, or permit any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent to
take any action, with respect to any Collateral or the Loan Documents which may be necessary to perfect
and maintain perfected the Liens upon any Collateral granted pursuant to any Loan Document.
9.2 Delegation of Duties. The Administrative Agent may perform any and all of its duties and
exercise its rights and powers hereunder or under any other Loan Document by or through any one or more
sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may
perform any and all of its duties and exercise its rights and powers by or through their respective Related
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Parties. The exculpatory provisions of this Section shall apply to any such sub-agent and to the Related
Parties of the Administrative Agent and any such sub-agent. The Administrative Agent shall not be
responsible for the negligence or misconduct of any sub-agents except to the extent that a court of competent
jurisdiction determines in a final and nonappealable judgment that the Administrative Agent acted with
gross negligence or willful misconduct in the selection or monitoring of such sub-agents.
9.3 Exculpatory Provisions. The Administrative Agent shall have no duties or obligations
except those expressly set forth herein and in the other Loan Documents, and its duties hereunder and
thereunder shall be administrative in nature. Without limiting the generality of the foregoing, the
Administrative Agent shall not:
(a) be subject to any fiduciary or other implied duties, regardless of whether any Default
or any Event of Default has occurred and is continuing;
(b) 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 is required to exercise as directed in writing 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), as applicable; 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, including for the avoidance of doubt any action that may
be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture,
modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law; and
(c) except as expressly set forth herein and in the other Loan Documents, have any duty
to disclose, and the Administrative Agent shall not be liable for the failure to disclose, any information
relating to the Borrowers or any of their Affiliates that is communicated to or obtained by any Person
serving as the Administrative Agent or any of its Affiliates in any capacity.
The Administrative Agent shall not be liable for any action taken or not taken by it (i) 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 Sections 8.2 and 10.1), or (ii) in the absence of its own gross negligence or
willful misconduct as determined by a court of competent jurisdiction by final and nonappealable judgment.
The Administrative 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 conditions set forth herein or therein or the occurrence of any
Default or Event of Default, (iv) the validity, enforceability, effectiveness or genuineness of this
Agreement, any other Loan Document or any other agreement, instrument or document or (v) the
satisfaction of any condition set forth in Section 5.1, Section 5.2 or elsewhere herein, other than to confirm
receipt of items expressly required to be delivered to the Administrative Agent.
9.4 Reliance by Administrative Agent. The Administrative 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 to be genuine and to have been signed, sent or otherwise
authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to
it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any
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liability for relying thereon. In determining compliance with any condition hereunder to the making of a
Loan, or the issuance, extension, renewal or increase of a Letter of Credit, that by its terms must be fulfilled
to the satisfaction of a Lender, the Administrative Agent may presume that such condition is satisfactory to
such Lender unless the Administrative Agent shall have received notice to the contrary from such Lender
prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may
consult with legal counsel (who may be counsel for any of the Loan Parties), 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. The Administrative Agent may deem and treat the
payee of any Note as the owner thereof for all purposes unless a written notice of assignment, negotiation
or transfer thereof shall have been filed with the Administrative Agent. The Administrative Agent shall be
fully justified in failing or refusing to take any action under this Agreement or any other Loan Document
unless it shall first receive such advice or concurrence of the Required Lenders (or such other number or
percentage of Lenders as shall be provided for herein or in the other Loan Documents) as it deems
appropriate or it shall first be indemnified to its satisfaction by the Lenders against any and all liability and
expense that may be incurred by it by reason of taking or continuing to take any such action. The
Administrative Agent shall in all cases be fully protected in acting, or in refraining from acting, under this
Agreement and the other Loan Documents in accordance with a request of the Required Lenders (or such
other number or percentage of Lenders as shall be provided for herein or in the other Loan Documents),
and such request and any action taken or failure to act pursuant thereto shall be binding upon the Lenders
and all future holders of the Loans.
9.5 Notice of Default. The Administrative Agent shall not be deemed to have knowledge or
notice of the occurrence of any Default or Event of Default unless the Administrative Agent has received
notice in writing from a Lender or the Borrowers referring to this Agreement, describing such Default or
Event of Default and stating that such notice is a “notice of default.” In the event that the Administrative
Agent receives such a notice, the Administrative Agent shall promptly give notice thereof to the Lenders.
The Administrative Agent shall take such action with respect to such Default or Event of Default as shall
be directed by the Required Lenders (or, if so specified by this Agreement, all Lenders); provided that
unless and until the Administrative Agent shall have received such directions, the Administrative Agent
may (but shall not be obligated to) take such action or refrain from taking such action with respect to such
Default or Event of Default as it shall deem advisable in the best interests of the Lenders.
9.6 Non-Reliance on Administrative Agent and Other Lenders. Each Lender expressly
acknowledges that neither the Administrative Agent nor any of its officers, directors, employees, agents,
attorneys in fact or affiliates has made any representations or warranties to it and that no act by the
Administrative Agent hereafter taken, including any review of the affairs of a Group Member or any
affiliate of a Group Member, shall be deemed to constitute any representation or warranty by the
Administrative Agent to any Lender. Each Lender represents to the Administrative Agent that it has,
independently and without reliance upon the Administrative 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
appraisal of and investigation into the business, operations, property, financial and other condition and
creditworthiness of the Group Members and their affiliates and made its own credit analysis and decision
to make its Loans hereunder and enter into this Agreement. Each Lender also agrees that it will,
independently and without reliance upon the Administrative Agent or any other Lender or any of their
Related Parties, and based on such documents and information as it shall deem appropriate at the time,
continue to make its own credit analysis, appraisals and decisions in taking or not taking action under or
based upon this Agreement, the other Loan Documents or any related agreement or any document furnished
hereunder or thereunder, and to make such investigation as it deems necessary to inform itself as to the
business, operations, property, financial and other condition and creditworthiness of the Group Members
and their affiliates. Except for notices, reports and other documents expressly required to be furnished to
the Lenders by the Administrative Agent hereunder, the Administrative Agent shall have no duty or
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responsibility to provide any Lender with any credit or other information concerning the business,
operations, property, condition (financial or otherwise), prospects or creditworthiness of any Group
Member or any Affiliate of a Group Member that may come into the possession of the Administrative Agent
or any of its officers, directors, employees, agents, attorneys in fact or affiliates.
9.7 Indemnification. Each of the Lenders agrees to indemnify each of the Administrative
Agent, the Issuing Lender and the Swingline Lender and each of its Related Parties in its capacity as such
(to the extent not reimbursed by the Borrowers or any other Loan Party pursuant to any Loan Document
and without limiting the obligation of the Borrowers or any other Loan Party to do so) according to its
Revolving Percentage in effect on the date on which indemnification is sought under this Section 9.7 (or,
if indemnification is sought after the date upon which the Revolving Commitments shall have terminated
and the Loans shall have been paid in full, in accordance with its Revolving Percentage immediately prior
to such date), from and against any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever that may at any time (whether
before or after the payment of the Loans) be imposed on, incurred by or asserted against the Administrative
Agent or such other Person in any way relating to or arising out of, the Revolving Commitments, this
Agreement, any of the other Loan Documents or any documents contemplated by or referred to herein or
therein or the transactions contemplated hereby or thereby or any action taken or omitted by the
Administrative Agent or such other Person under or in connection with any of the foregoing and any other
amounts not reimbursed by the Borrowers or such other Loan Party; provided that no Lender shall be liable
for the payment of any portion of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements to the extent found by a final and nonappealable decision
of a court of competent jurisdiction to have resulted from the Administrative Agent’s or such other Person’s
gross negligence or willful misconduct, and that with respect to such unpaid amounts owed to any Issuing
Lender or Swingline Lender solely in its capacity as such, only the Revolving Lenders shall be required to
pay such unpaid amounts, such payment to be made severally among them based on such Revolving
Lenders’ Revolving Percentage (determined as of the time that the applicable unreimbursed expense or
indemnity payment is sought). The agreements in this Section 9.7 shall survive the payment of the Loans
and all other amounts payable hereunder.
9.8 Agent in Its Individual Capacity. The Person serving as the Administrative 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 the term “Lender” or “Lenders” shall,
unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as
the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept
deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity
for and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate
thereof as if such Person were not the Administrative Agent hereunder and without any duty to account
therefor to the Lenders.
9.9 Successor Administrative Agent.
(a) The Administrative Agent may at any time give notice of its resignation to the
Lenders and the Borrowers. If the Administrative Agent at any time shall resign or if the office of the
Administrative Agent shall become vacant for any other reason, the Required Lenders, with the consent of
the Borrowers (which consent shall not be unreasonably withheld or delayed and shall not be required at
any time that an Event of Default is continuing under Section 8.1(a) or (f)) shall, by written instrument,
appoint a successor Administrative Agent. Such successor Administrative Agent shall thereupon become
the Administrative Agent hereunder, as applicable, and the Administrative Agent shall deliver or cause to
be delivered to any successor Administrative Agent such documents of transfer and assignment as such
successor Administrative Agent may reasonably request. If no such successor shall have been so appointed
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by the Required Lenders and shall have accepted such appointment within 30 days after the retiring
Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required
Lenders) (the “Resignation Effective Date”), then the retiring Administrative Agent may (but shall not be
obligated to), on behalf of the Lenders, appoint a successor Administrative Agent that is a Lender at such
time or that meets the qualifications for an Eligible Assignee hereunder. Whether or not a successor has
been appointed, such resignation shall become effective in accordance with such notice on the Resignation
Effective Date. Any resignation by SVB as Administrative Agent pursuant to this Section 9.9 shall also
constitute its resignation as the Issuing Lender and Swingline Lender. Upon the acceptance of a successor’s
appointment as Administrative Agent hereunder, (i) such successor shall succeed to and become vested
with all of the rights, powers, privileges and duties of the retiring Issuing Lender and Swingline Lender, (ii)
the retiring Issuing Lender and Swingline Lender shall be discharged from all of their respective duties and
obligations hereunder and under the other Loan Documents, and (iii) the successor Issuing Lender shall
issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such
succession or make other arrangements satisfactory to the retiring Issuing Lender to effectively assume the
obligations of the retiring Issuing Lender with respect to such Letters of Credit.
(b) If the Person serving as Administrative Agent is a Defaulting Lender pursuant to
clause (d) of the definition thereof, the Required Lenders may, to the extent permitted by applicable law,
by notice in writing to the Borrowers and such Person remove such Person as Administrative Agent and,
with the consent of the Borrowers (which consent shall not be unreasonably withheld or delayed and shall
not be required at any time that an Event of Default is continuing under Section 8.1(a) or (f)), appoint a
successor. If no such successor shall have been so appointed by the Required Lenders and shall have
accepted such appointment within 30 days (or such earlier day as shall be agreed by the Required Lenders)
(the “Removal Effective Date”), then such removal shall nonetheless become effective in accordance with
such notice on the Removal Effective Date.
(c) With effect from the Resignation Effective Date or the Removal Effective Date (as
applicable) (i) the retiring or removed Administrative Agent 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 on behalf of the Secured Parties under any of the Loan Documents, the
retiring or removed Administrative Agent shall continue to hold such collateral security until such time as
a successor Administrative Agent is appointed and such collateral security is assigned to such successor
Administrative Agent) and (ii) except for any indemnity payments owed to the retiring or removed
Administrative Agent, 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 directly, until such time, if
any, as the Required Lenders appoint a successor Administrative Agent as provided for above in this
Section. Upon the acceptance of a successor’s appointment as Administrative Agent hereunder, such
successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the
retiring or removed Administrative Agent (other than any rights to indemnity payments owed to the retiring
or removed Administrative Agent), and the retiring or removed Administrative Agent 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 Section). The fees payable by the Borrowers to a successor
Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between
the Borrowers and such successor. After the retiring or removed Administrative Agent’s resignation or
removal hereunder and under the other Loan Documents, the provisions of Section 9 and Section 10.5 shall
continue in effect for the benefit of such retiring or removed Administrative 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 or removed Administrative Agent was acting as the Administrative Agent.
9.10 Collateral and Guaranty Matters. The Lenders authorize the Administrative Agent, at
its option and in its discretion,
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(a) to release any Lien on any Collateral or other property granted to or held by the
Administrative Agent under any Loan Document (i) upon the Discharge of Obligations, (ii) that is sold or
otherwise disposed of or to be sold or otherwise disposed of as part of or in connection with any sale or
other disposition permitted hereunder or under any other Loan Document, or (iii) subject to Section 10.1,
if approved, authorized or ratified in writing by the Required Lenders;
(b) to subordinate any Lien on any Collateral or other property granted to or held by the
Administrative Agent under any Loan Document to the holder of any Lien on such property that is permitted
by Sections 7.3(g) and (i); and
(c) to release any Guarantor from its obligations under the Guarantee and Collateral
Agreement if such Person ceases to be a Subsidiary as a result of a transaction permitted under the Loan
Documents.
(d) Upon request by the Administrative Agent at any time, the Required Lenders will
confirm in writing the Administrative Agent’s authority to release or subordinate its interest in particular
types or items of property, or to release any Guarantor from its obligations under the Guaranty pursuant to
this Section 9.10.
(e) The Administrative Agent shall not be responsible for or have a duty to ascertain or
inquire into any representation or warranty regarding the existence, value or collectability of the Collateral,
the existence, priority or perfection of the Administrative Agent’s Lien thereon, or any certificate prepared
by any Loan Party in connection therewith, nor shall the Administrative Agent be responsible or liable to
the Lenders for any failure to monitor or maintain any portion of the Collateral.
9.11 Administrative Agent May File Proofs of Claim. In case of the pendency of any
proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Loan Party, the
Administrative Agent (irrespective of whether the principal of any Loan or Obligation in respect of any
Letter of Credit shall then be due and payable as herein expressed or by declaration or otherwise and
irrespective of whether the Administrative Agent shall have made any demand on the Borrowers) shall be
entitled and empowered (but not obligated), by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and interest owing
and unpaid in respect of the Loans, Obligations in respect of any Letter of Credit and all other Obligations
that are owing and unpaid and to file such other documents as may be necessary or advisable to have the
claims of the Lenders and the Administrative Agent (including any claim for the reasonable compensation,
expenses, disbursements and advances of the Lenders and the Administrative Agent and their respective
agents and counsel and all other amounts due the Lenders and the Administrative Agent under Sections 2.9
and 10.5) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any
such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such
judicial proceeding is hereby authorized by each Lender to make such payments to the Administrative
Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly
to the Lenders, to pay to the Administrative Agent 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 Sections 2.9 and 10.5.
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Nothing contained herein shall be deemed to authorize the Administrative Agent to authorize or
consent to or accept or adopt on behalf of any Lender any plan of reorganization, arrangement, adjustment
or composition affecting the Obligations or the rights of any Lender to authorize the Administrative Agent
to vote in respect of the claim of any Lender in any such proceeding.
9.12 Reports and Financial Statements.
Each Bank Services Provider agrees to furnish to the Administrative Agent at such frequency as
the Administrative Agent may reasonably request with a summary of all Obligations in respect of Bank
Services due or to become due to such Bank Services Provider. In connection with any distributions to be
made hereunder, the Administrative Agent shall be entitled to assume that no amounts are due to any Bank
Services Provider unless the Administrative Agent has received written notice thereof from such Bank
Services Provider and if such notice is received, the Administrative Agent shall be entitled to assume that
the only amounts due to such Bank Services Provider on account of Bank Services is the amount set forth
in such notice.
To the extent that a notice, report or other written communication delivered or made available
pursuant to any Loan Document is delivered or made available solely to the Administrative Agent, then the
Administrative Agent shall promptly deliver or make available to the Lenders, in the manner prescribed in
Section 10.2(b), all such notices, reports, and other written communications.
9.13 No Other Duties, Etc.
Anything herein to the contrary notwithstanding, the “Documentation Agent” listed on the cover
page hereof shall have no powers, duties or responsibilities under this Agreement or any of the other Loan
Documents, except in its capacity as a Lender hereunder.
9.14 Survival.
This Section 9 shall survive the Discharge of Obligations.
SECTION 10
MISCELLANEOUS
10.1 Amendments and Waivers.
(a) Neither this Agreement, nor any other Loan Document (other than any L/C Related
Document, any Specified Swap Agreement and any Bank Services Agreement), nor any terms hereof or
thereof may be amended, supplemented or modified except in accordance with the provisions of this
Section 10.1. The Required Lenders and each Loan Party that is party to the relevant Loan Document may,
or, with the written consent of the Required Lenders, the Administrative Agent and each Loan Party that is
party to the relevant Loan Document may, from time to time, (i) enter into written amendments,
supplements or modifications hereto and to the other Loan Documents for the purpose of adding any
provisions to this Agreement or the other Loan Documents or changing in any manner the rights of the
Lenders or of the Loan Parties hereunder or thereunder or (ii) waive, on such terms and conditions as the
Required Lenders or the Administrative Agent, as the case may be, may specify in such instrument, any of
the requirements of this Agreement or the other Loan Documents or any Default or Event of Default and
its consequences; provided that no such waiver and no such amendment, supplement or modification shall
(A) forgive the principal amount or extend the final scheduled date of maturity of any Loan, reduce the
stated rate of any interest or fee payable hereunder (except that any amendment or modification of defined
terms used in the financial covenants in this Agreement shall not constitute a reduction in the rate of interest
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or fees for purposes of this clause (A)) or waive, postpone or extend the scheduled date of any payment
thereof, or alter the amount or expiration date of any Lender’s Revolving Commitment, in each case without
the written consent of each Lender directly affected thereby; (B) eliminate or reduce the voting rights of
any Lender under this Section 10.1 without the written consent of such Lender; (C) amend the definition of
Required Lenders, consent to the assignment or transfer by the Borrowers of any of their respective rights
and obligations under this Agreement and the other Loan Documents, except as provided in Sections 9.10
and 10.16 release all or substantially all of the Collateral or release any of the Guarantors from their
obligations under the Guarantee and Collateral Agreement, in each case without the written consent of all
Lenders; (D) amend, modify or waive the pro rata requirements of Section 2.18 in a manner that adversely
affects Revolving Lenders without the written consent of each Revolving Lender or amend, modify or
waive the pro rata requirements of Section 2.18 in a manner that adversely affects the L/C Lenders without
the written consent of each L/C Lender; (E) amend, modify or waive any provision of Section 9 without
the written consent of the Administrative Agent; (F) amend, modify or waive any provision of Section 2.6
or 2.7 without the written consent of the Swingline Lender; (G) amend, modify or waive any provision of
Section 3 without the written consent of the Issuing Lender; or (H)(i) amend or modify the application of
payments set forth in Section 8.3 in a manner that adversely affects Revolving Lenders without the written
consent of the Revolving Lenders, (ii) amend or modify the application of payments set forth in Section 8.3
in a manner that adversely affects the L/C Lenders without the written consent of the L/C Lenders, or (iii)
amend or modify the application of payments provisions set forth in Section 8.3 in a manner that adversely
affects the Issuing Lender, any Bank Services Provider or any Qualified Counterparty, as applicable,
without the written consent of the Issuing Lender, Bank Services Provider or each such Qualified
Counterparty, as applicable. Any such waiver and any such amendment, supplement or modification shall
apply equally to each of the Lenders and shall be binding upon the Loan Parties, the Lenders, the
Administrative Agent, the Issuing Lender, each Bank Services Provider, each Qualified Counterparty, and
all future holders of the Loans. In the case of any waiver, the Loan Parties, the Lenders and the
Administrative Agent shall be restored to their former position and rights hereunder and under the other
Loan Documents, and any Default or Event of Default waived shall be deemed to be cured during the period
such waiver is effective; but no such waiver shall extend to any subsequent or other Default or Event of
Default, or impair any right consequent thereon. Notwithstanding the foregoing, the Issuing Lender may
amend any of the L/C Documents without the consent of the Administrative Agent or any other Lender.
Notwithstanding anything to the contrary herein, 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 Revolving 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 or each affected Lender that by its
terms affects any Defaulting Lender disproportionately adversely relative to other affected Lenders shall
require the consent of such Defaulting Lender.
(b) Notwithstanding anything to the contrary contained in Section 10.1(a) above, in the
event that any Borrower or any other Loan Party, as applicable, requests that this Agreement or any of the
other Loan Documents, as applicable, be amended or otherwise modified in a manner which would require
the consent of all of the Lenders and such amendment or other modification is agreed to by the Borrowers
and/or such other Loan Party, as applicable, the Required Lenders and the Administrative Agent, then, with
the consent of the Borrowers and/or such other Loan Party, as applicable, the Administrative Agent and the
Required Lenders, this Agreement or such other Loan Document, as applicable, may be amended without
the consent of the Lender or Lenders who are unwilling to agree to such amendment or other modification
(each, a “Minority Lender”), to provide for:
(i) the termination of the Commitments of each such Minority Lender;
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Minority Lender by one or more Replacement Lenders pursuant to the provisions of Section 2.23; and
(ii) the assumption of the Loans and Revolving Commitments of each such
(iii) the payment of all interest, fees and other obligations payable or accrued in
favor of each Minority Lender and such other modifications to this Agreement or to such Loan Documents
as the Borrowers, the Administrative Agent and the Required Lenders may determine to be appropriate in
connection therewith.
(c)Notwithstanding any provision herein to the contrary but subject to the proviso in
Section 10.1(a), this Agreement may be amended (or amended and restated) with the written consent of the
Required Lenders, the Administrative Agent and the Borrowers (i) to add one or more additional credit or
term loan facilities to this Agreement and to permit all such additional extensions of credit and all related
obligations and liabilities arising in connection therewith and from time to time outstanding thereunder to
share ratably (or on a basis subordinated to the existing facilities hereunder) in the benefits of this
Agreement and the other Loan Documents with the obligations and liabilities from time to time outstanding
in respect of the existing facilities hereunder, and (ii) in connection with the foregoing, to permit, as deemed
appropriate by the Administrative Agent and approved by the Required Lenders, the Lenders providing
such additional credit facilities to participate in any required vote or action required to be approved by the
Required Lenders. For the avoidance of doubt, no Lender shall be required to participate in any such
additional credit or term loan facility or be deemed a Defaulting Lender in the event that such Lender does
not approve any such additional credit or term loan facility.
(d) Notwithstanding any provision herein to the contrary, any Bank Services Agreement
or Specified Swap Agreement may be amended or otherwise modified by the parties thereto in accordance
with the terms thereof without the consent of the Administrative Agent or any Lender.
10.2 Notices.
(a) All notices, requests and demands to or upon the respective parties hereto to be
effective shall be in writing (including by facsimile or electronic mail), and, unless otherwise expressly
provided herein, shall be deemed to have been duly given or made when delivered, or three (3) Business
Days after being deposited in the mail, postage prepaid, or sent via reputable overnight courier, or, in the
case of facsimile or electronic mail notice, when received, addressed as follows in the case of the Borrowers
and the Administrative Agent, and as set forth in an administrative questionnaire delivered to the
Administrative Agent in the case of the Lenders, or to such other address as may be hereafter notified by
the respective parties hereto:
Borrowers:
Benefitfocus, Inc.
100 Benefitfocus Way
Charleston, South Carolina 29492
Attention: Milt Alpern, Chief Financial
Officer and Paris Cavic, General Counsel
Facsimile No.: 843-849-6062
Telephone No.:
Telephone No.: (Paris Cavic)
E-Mail:
E-Mail:
Website address: www.benefitfocus.com
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Administrative Agent:
with a copy to:
with a copy to:
Wyrick Robbins Yates & Ponton LLP
4101 Lake Boone Trail, Suite 300
Raleigh, NC 27607
Attention: Carolyn Minshall
Facsimile No.:
Silicon Valley Bank
3353 Peachtree Road
NE Tower, Suite M-10
Atlanta, GA 30326
Attention: Andy Kirk
Facsimile No.:
E-Mail:
Riemer & Braunstein, LLP
3 Center Plaza
Boston, Massachusetts 02108
Attn.: Charles W. Stavros, Esq.
Facsimile No.:
E-mail:
(b) Notices and other communications to the Lenders hereunder may be delivered or
furnished by electronic communications (including email and Internet websites) pursuant to procedures
approved by the Administrative Agent and each Lender; provided that the foregoing shall not apply to
notices to any Lender pursuant to Section 2 unless otherwise agreed by the Administrative Agent and the
applicable Lender. The Administrative Agent or the Borrowers may, in their discretion, agree to accept
notices and other communications to them hereunder by electronic communications pursuant to procedures
approved by it; provided that approval of such procedures may be limited to particular notices or
communications. Unless the Administrative Agent otherwise prescribes, (a) notices and other
communications sent to an email address shall be deemed received upon the sender’s receipt of an
acknowledgment from the intended recipient (such as by the “return receipt requested” function, as
available, return email or other written acknowledgment); and (b) notices or communications posted to an
Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at
its email address as described in the foregoing clause (a) of notification that such notice or communication
is available and identifying the website address therefor; provided that, for both clauses (a) and (b), 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.
(c) Any party hereto may change its address or facsimile number for notices and other
communications hereunder by notice to the other parties hereto.
• o Each Loan Party agrees that the Administrative Agent may, but shall not be
obligated to, make the Communications (as defined below) available to the Issuing Lender and the other
Lenders by posting the Communications on Debt Domain, Intralinks, Syndtrak or a substantially similar
electronic transmission system (the “Platform”).
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(ii) the Platform is provided “as is” and “as available.” The Agent Parties (as
defined below) do not warrant the adequacy of the Platform and expressly disclaim liability for errors or
omissions in the Communications. No warranty of any kind, express, implied or statutory, including,
without limitation, 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 any Agent Party in connection
with the Communications or the Platform. In no event shall the Administrative Agent or any of its Related
Parties (collectively, the “Agent Parties”) have any liability to the Borrowers or the other 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 any Borrower’s, any Loan Party’s or the Administrative Agent’s transmission of
communications through the Platform. “Communications” means, collectively, any notice, demand,
communication, information, document or other material provided by or on behalf of any Loan Party
pursuant to any Loan Document or the transactions contemplated therein which is distributed to the
Administrative Agent, any Lender or the Issuing Lender by means of electronic communications pursuant
to this Section, including through the Platform.
10.3 No Waiver; Cumulative Remedies. No failure to exercise and no delay in exercising, on
the part of the Administrative Agent or any Lender, any right, remedy, power or privilege hereunder or
under the other Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise
of any right, remedy, power or privilege hereunder preclude any other or further exercise thereof or the
exercise of any other right, remedy, power or privilege. NONE OF THE ADMINISTRATIVE AGENT
OR ANY LENDER SHALL BE DEEMED TO HAVE WAIVED ANY OF ITS RESPECTIVE RIGHTS
UNDER THIS AGREEMENT OR UNDER ANY OTHER LOAN DOCUMENT UNLESS SUCH
WAIVER IS EXPRESSED IN WRITING AND SIGNED BY THE ADMINISTRATIVE AGENT, THE
REQUIRED LENDERS, OR ALL LENDERS, AS APPLICABLE. The rights, remedies, powers and
privileges herein provided are cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
10.4 Survival of Representations and Warranties. All representations and warranties made
hereunder, in the other Loan Documents and in any document, certificate or statement delivered pursuant
hereto or in connection herewith shall survive the execution and delivery of this Agreement and the making
of the Loans and other extensions of credit hereunder.
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10.5 Expenses; Indemnity; Damage Waiver.
(a) Costs and Expenses. The Borrowers shall pay (i) all reasonable out-of-pocket
expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges
and disbursements of counsel for the Administrative Agent), in connection with the syndication of the
Revolving Facility, the preparation, negotiation, execution, delivery and administration of this Agreement
and the other Loan Documents, or any amendments, modifications or waivers of the provisions hereof or
thereof (whether or not the transactions contemplated hereby or thereby shall be consummated but subject
to the limitations set forth in the Engagement Letter), (ii) all reasonable out-of-pocket expenses incurred by
the Issuing Lender in connection with the issuance, amendment, renewal or extension of any Letter of Credit
or any demand for payment thereunder, and (iii) all out-of-pocket expenses incurred by the Administrative
Agent or any Lender (including the reasonable fees, charges and disbursements of one primary counsel for
the Administrative Agent and the Lenders (and additional counsel in the case of any conflict among the
Administrative Agent and the Lenders)) in connection with the enforcement or protection of their rights
(A) in connection with this Agreement and the other Loan Documents, including their rights under this
Section, or (B) in connection with the Loans made or Letters of Credit issued or participated in hereunder,
including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in
respect of such Loans or Letters of Credit.
indemnify
The Borrowers shall
(b) Indemnification by
the
the Borrowers.
Administrative Agent (and any sub-agent thereof), each Lender (including the Issuing 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 losses, claims, damages, liabilities and related
reasonable and documented or invoiced (in reasonable detail) out-of-pocket expenses (including the
reasonable fees, charges and disbursements of any counsel for any Indemnitee) incurred by any Indemnitee
or asserted against any Indemnitee by any Person (including the Borrowers or any other Loan Party) other
than such Indemnitee and its Related Parties arising out of, in connection with, or as a result of (i) the
execution or delivery of this Agreement, any other Loan Document or any agreement or instrument
contemplated hereby or thereby, the performance by the parties hereto of their respective obligations
hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby, (ii) any
Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the
Issuing Lender to honor a demand for payment under a Letter of Credit if the documents presented in
connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual
or alleged presence or release of Materials of Environmental Concern on or from any property owned or
operated by the Borrowers or any of their Subsidiaries, or any Environmental Liability related in any way
to the Borrowers or any of their Subsidiaries, or (iv) any actual or prospective claim, litigation, investigation
or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether
brought by a third party or by a Borrower or any other Loan Party, and regardless of whether any Indemnitee
is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent
that such losses, claims, damages, liabilities or related expenses (x) are determined by a court of competent
jurisdiction by final and nonappealable judgment to have resulted from the gross negligence, willful
misconduct or violation of law of or by such Indemnitee or (y) result from a claim brought by a Borrower
or any other Loan Party against an Indemnitee for breach in bad faith of such Indemnitee's obligations
hereunder or under any other Loan Document, if such Borrower or such Loan Party has obtained a final
and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction.
This Section 10.5(b) shall not apply with respect to Taxes other than any Taxes that represent losses, claims,
damages, etc. arising from any non-Tax claim.
(c) Reimbursement by Lenders. To the extent that the Borrowers or any other Loan
Party pursuant to any other Loan Document for any reason fail indefeasibly to pay any amount required
under paragraph (a) or (b) of this Section to be paid by them to the Administrative Agent (or any sub-agent
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thereof), the Issuing Lender, the Swingline Lender or any Related Party of any of the foregoing, each Lender
severally agrees to pay to the Administrative Agent (or any such sub-agent), the Issuing Lender, the
Swingline Lender or such Related Party, 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 based on each
Lender’s share of the Total Credit Exposure at such time) of such unpaid amount (including any such unpaid
amount in respect of a claim asserted by such Lender); provided that with respect to such unpaid amounts
owed to the Issuing Lender or the Swingline Lender solely in its capacity as such, only the Revolving
Lenders shall be required to pay such unpaid amounts, such payment to be made severally among them
based on such Revolving Lenders’ Revolving Percentage (determined as of the time that the applicable
unreimbursed expense or indemnity payment is sought) and provided further, 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 (or any such sub-agent), the Issuing Lender or the Swingline
Lender in its capacity as such, or against any Related Party of any of the foregoing acting for the
Administrative Agent (or any such sub-agent), the Issuing Lender or the Swingline Lender in connection
with such capacity. The obligations of the Lenders under this paragraph (c) are subject to the provisions of
Sections 2.4 and 2.20(e).
(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by applicable
law, no Borrower shall assert, and each such Person hereby waives, any claim of such Person against any
Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed
to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other
Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby
or thereby, any Loan or Letter of Credit, or the use of the proceeds thereof. No Indemnitee referred to in
paragraph (b) above shall be liable for any damages arising from the use by unintended recipients of any
information or other materials distributed by it through telecommunications, electronic or other information
transmission systems in connection with this Agreement or the other Loan Documents or the transactions
contemplated hereby or thereby.
(e) Payments. All amounts due under this Section shall be payable promptly after
demand therefor.
(f) Survival. Each party’s obligations under this Section shall survive the resignation of
the Administrative Agent, the Issuing Lender and the Swingline Lender, the replacement of any Lender,
the termination of the Loan Documents, the termination of the Revolving Commitments and the Discharge
of Obligations.
1.06 Successors and Assigns; Participations and Assignments.
(a) Successors and Assigns Generally. 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, except that no Loan Party may assign or otherwise transfer any of its rights or obligations
hereunder without the prior written consent of the Administrative Agent and each Lender, and no Lender
may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in
accordance with the provisions of paragraph (b) of this Section, (ii) by way of participation in accordance
with the provisions of paragraph (d) of this Section, or (iii) by way of pledge or assignment of a security
interest subject to the restrictions of paragraph (f) of this Section (and any other attempted assignment or
transfer by any party hereto 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, Participants to the extent provided in paragraph (d) of this Section and, to the extent
expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders)
any legal or equitable right, remedy or claim under or by reason of this Agreement.
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(b) Assignments by Lenders. Any Lender may at any time assign to one or more
assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its
Revolving Commitments and the Loans at the time owing to it); provided that any such assignment shall
be subject to the following conditions:
(i) Minimum Amounts.
(A) in the case of an assignment of the entire remaining amount of the
assigning Lender’s Revolving Commitment and/or the Loans at the time owing to it or contemporaneous
assignments to related Approved Funds that equal at least the amount specified in paragraph (b)(i)(B) of
this Section in the aggregate or in the case of an assignment to a Lender, an Affiliate of a Lender or an
Approved Fund, no minimum amount need be assigned; and
(B) in any case not described in paragraph (b)(i)(A) of this Section, the
aggregate amount of the Revolving Commitments (which for this purpose includes Loans outstanding
thereunder) or, if the Revolving Commitment is not then in effect, the principal outstanding balance of the
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 or, if “Trade
Date” is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than
$5,000,000, unless each of the Administrative Agent and, so long as no Default or Event of Default has
occurred and is continuing, the Borrowers otherwise consent (each such consent not to be unreasonably
withheld or delayed).
(ii) Proportionate Amounts. 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
with respect to the Loans and/or the Revolving Commitments assigned.
Lender except to the extent required by paragraph (b)(i)(B) of this Section and, in addition:
(iii) Required Consents. No consent shall be required for any assignment by a
(A) the consent of the Borrowers (such consent not to be unreasonably
withheld or delayed) shall be required unless (x) a Default or an Event of Default has occurred and is
continuing at the time of such assignment, or (y) such assignment is to a Lender, an Affiliate of a Lender
or an Approved Fund; provided that the Borrowers shall be deemed to have consented to any such
assignment unless they shall object thereto by written notice to the Administrative Agent within five
Business Days after having received notice thereof; and
(B) the consent of the Administrative Agent (such consent not to be
unreasonably withheld or delayed) shall be required for assignments if such assignment is to a Person that
is not a Lender, an Affiliate of such Lender or an Approved Fund with respect to such Lender.
(iv) Assignment and Assumption. The parties to each assignment shall execute
and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and
recordation fee of $3,500; provided that the Administrative Agent may, in its sole discretion, elect to waive
such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall
deliver to the Administrative Agent any such administrative questionnaire as the Administrative Agent may
request.
(v) No Assignment to Certain Persons. No such assignment shall be made to
(A) a Loan Party or any of a Loan Party’s Affiliates or Subsidiaries or (B) to any Defaulting Lender or any
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of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the
foregoing Persons described in this clause (B).
has occurred and is continuing, no such assignment shall be made to any Disqualified Institution.
(vi) No Assignment to Disqualified Institutions. So long as no Event of Default
a natural Person.
(vii) No Assignment to Natural Persons. No such assignment shall be made to
(viii) Certain Additional Payments. 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 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 Borrowers 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, the Issuing Lender, the Swingline Lender and each other Lender hereunder (and
interest accrued thereon), and (y) 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 Revolving 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.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to paragraph (c) of this
Section, from and after the effective date specified in each Assignment and Assumption, the assignee
thereunder shall be a party to this Agreement 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 Sections 2.19, 2.20 and 10.5 with
respect to facts and circumstances occurring prior to the effective date of such assignment; provided, that
except to the extent otherwise expressly agreed by the affected parties, no assignment by a 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. Any assignment or transfer by a Lender of rights or obligations under
this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as
a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (d) of
this Section.
(c)
Register. The Administrative Agent, acting solely for this purpose as an agent of
the Borrowers, shall maintain at one of its offices in California 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
Revolving Commitments of, and principal amounts (and stated interest) of the Loans 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 Borrowers, the Administrative Agent 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. The Register shall be available for inspection by the Borrowers and any
Lender, at any reasonable time and from time to time upon reasonable prior notice.
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(d)
Participations. Any Lender may at any time, without the consent of, or notice to,
the Borrowers or the Administrative Agent, sell participations to any Person (other than a natural Person or
any Loan Party or any of any Loan Party’s Affiliates or Subsidiaries) (each, a “Participant”) in all or a
portion of such Lender’s rights and/or obligations under this Agreement (including all or a portion of its
Revolving Commitments and/or the Loans owing to it); provided that (i) such Lender’s obligations under
this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties
hereto for the performance of such obligations, and (iii) the Borrowers, the Administrative Agent, the
Issuing Lender 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. For the avoidance of doubt,
each Lender shall be responsible for the indemnities under Sections 2.20(e) and 9.7 with respect to any
payments made by such Lender to its Participant(s).
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 this Agreement and to approve any amendment,
modification or waiver of any provision of this Agreement; 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 which affects such Participant and for which the consent of such Lender is required
(as described in Section 10.1). Each Borrower agrees that each Participant shall be entitled to the benefits
of Sections 2.19 and 2.20 (subject to the requirements and limitations therein, including the requirements
under Section 2.20(f) (it being understood that the documentation required under Section 2.20(f) shall be
delivered to such Participant)) to the same extent as if it were a Lender and had acquired its interest by
assignment pursuant to paragraph (b) of this Section; provided that such Participant (A) agrees to be subject
to the provisions of Section 2.23 as if it were an assignee under paragraph (b) of this Section; and (B) shall
not be entitled to receive any greater payment under Sections 2.19 or 2.20, with respect to any participation,
than its participating Lender would have been entitled to receive, except to the extent such entitlement to
receive a greater payment results from a change in any Requirement of Law that occurs after the Participant
acquired the applicable participation. Each Lender that sells a participation agrees, at the Borrowers’
request and expense, to use reasonable efforts to cooperate with the Borrowers to effectuate the provisions
of Section 2.23 with respect to any Participant. To the extent permitted by law, each Participant also shall
be entitled to the benefits of Section 10.7 as though it were a Lender; provided that such Participant agrees
to be subject to Section 2.18(j) as though it were a Lender. Each Lender that sells a participation shall,
acting solely for this purpose as an agent of the Borrowers, 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 the Loan Documents (the “Participant Register”); provided that no
Lender shall have any obligation to disclose all or any portion of the Participant Register (including the
identity of any Participant or any information relating to a Participant’s interest in any commitments, loans,
letters of credit or its other obligations under any Loan Document) to any Person except to the extent that
such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is
in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the
Participant Register shall be conclusive absent manifest error, 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. For the avoidance of doubt, the Administrative
Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant
Register.
(e) Certain Pledges. Any Lender may 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; provided that no such pledge or
assignment shall release such 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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(f) Notes. The Borrowers, upon receipt by the Borrowers of written notice from the
relevant Lender, agrees to issue Notes to any Lender requiring Notes to facilitate transactions of the type
described in Section 10.6.
(g) Representations and Warranties of Lenders. Each Lender, upon execution and
delivery hereof or upon succeeding to an interest in the Revolving Commitments or Loans, as the case may
be, represents and warrants as of the Closing Date or as of the effective date of the applicable Assignment
and Assumption that (i) it is an Eligible Assignee; (ii) it has experience and expertise in the making of or
investing in commitments, loans or investments such as the Revolving Commitments and Loans; and (iii)
it will make or invest in its Revolving Commitments and Loans for its own account in the ordinary course
of its business and without a view to distribution of such Revolving Commitments and Loans within the
meaning of the Securities Act or the Exchange Act, or other federal securities laws (it being understood
that, subject to the provisions of this Section 10.6, the disposition of such Revolving Commitments and
Loans or any interests therein shall at all times remain within its exclusive control).
10.7 Adjustments; Set-off.
(a) Except to the extent that this Agreement expressly provides for payments to be
allocated to a particular Lender, if any Lender (a “Benefitted Lender”) shall, at any time after the Loans
and other amounts payable hereunder shall immediately become due and payable pursuant to Section 8.2,
receive any payment of all or part of the Obligations owing to it, or receive any Collateral in respect thereof
(whether voluntarily or involuntarily, by set-off, pursuant to events or proceedings of the nature referred to
in Section 8.1(f), or otherwise), in a greater proportion than any such payment to or Collateral received by
any other Lender, if any, in respect of the Obligations owing to such other Lender, such Benefitted Lender
shall purchase for cash from the other Lenders a participating interest in such portion of the Obligations
owing to each such other Lender, or shall provide such other Lenders with the benefits of any such
Collateral, as shall be necessary to cause such Benefitted Lender to share the excess payment or benefits of
such Collateral ratably with each of the Lenders; provided that if all or any portion of such excess payment
or benefits is thereafter recovered from such Benefitted Lender, such purchase shall be rescinded, and the
purchase price and benefits returned, to the extent of such recovery, but without interest.
(b) Upon (i) the occurrence and during the continuance of any Event of Default and (ii)
obtaining the prior written consent of the Administrative Agent or the Required Lenders, each Lender and
each of its Affiliates is hereby authorized at any time and from time to time, without prior notice to the
Borrowers or any other Loan Party, any such notice being expressly waived by each Borrower and each
other Loan Party, to the fullest extent permitted by applicable law, to set off and apply any and all deposits
(general or special, time or demand, provisional or final), in any currency, at any time held or owing, and
any other credits, indebtedness, claims or obligations, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or owing by such Lender, its
Affiliates or any branch or agency thereof to or for the credit or the account of any Borrower or any other
Loan Party, as the case may be, against any and all of the obligations of the Borrowers or such other Loan
Party now or hereafter existing under this Agreement or any other Loan Document to such Lender or its
Affiliates, irrespective of whether or not such Lender or Affiliate shall have made any demand under this
Agreement or any other Loan Document and although such obligations of the Borrowers or such other Loan
Party may be contingent or unmatured or are owed to a branch, office or Affiliate of such Lender different
from the branch, office or Affiliate holding such deposit or obligated on such indebtedness; provided, that
in the event that any Defaulting Lender or any of its Affiliates shall exercise any such right of setoff, (x) all
amounts so set off shall be paid over immediately to the Administrative Agent for further application in
accordance with the provisions of Section 2.23 and, pending such payment, shall be segregated by such
Defaulting Lender or Affiliate thereof from its other funds and deemed held in trust for the benefit of the
Administrative Agent and the Lenders, and (y) the Defaulting Lender shall provide promptly to the
109
Administrative Agent a statement describing in reasonable detail the Obligations owing to such Defaulting
Lender or Affiliate thereof as to which it exercised such right of setoff. Each Lender agrees to notify the
Borrowers and the Administrative Agent promptly after any such setoff and application made by such
Lender or any of its Affiliates; provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of each Lender and its Affiliates under this Section 10.7 are in
addition to other rights and remedies (including other rights of set-off) which such Lender or its Affiliates
may have.
10.8 Payments Set Aside. To the extent that any payment or transfer by or on behalf of the
Borrowers is made to the Administrative Agent or any Lender, or the Administrative Agent or any Lender
exercises its right of setoff, and such payment or transfer or the proceeds of such setoff or any part thereof
is subsequently invalidated, declared to be fraudulent or preferential, set aside or required (including
pursuant to any settlement entered into by the Administrative Agent or such Lender in its discretion) to be
repaid to a trustee, receiver or any other party, in connection with any Insolvency Proceeding or otherwise,
then (a) to the extent of such recovery, the obligation or part thereof originally intended to be satisfied shall
be revived and continued in full force and effect as if such payment had not been made or such setoff had
not occurred, and (b) each Lender severally agrees to pay to the Administrative Agent upon demand its
applicable share (without duplication) of any amount so recovered from or repaid by the Administrative
Agent, plus interest thereon from the date of such demand to the date such payment is made at a rate per
annum equal to the Federal Funds Effective Rate from time to time in effect. This Section 10.8 shall survive
the Discharge of Obligations.
10.9 Interest Rate Limitation. Notwithstanding anything to the contrary contained in any Loan
Document, the interest paid or agreed to be paid under the Loan Documents shall not exceed the maximum
rate of non-usurious interest permitted by applicable law (the “Maximum Rate”). If the Administrative
Agent or any Lender shall receive interest in an amount that exceeds the Maximum Rate, the excess interest
shall be applied to the principal of the Loans or, if it exceeds such unpaid principal, refunded to the
Borrowers. In determining whether the interest contracted for, charged, or received by the Administrative
Agent or a Lender exceeds the Maximum Rate, such Person may, to the extent permitted by applicable law,
(a) characterize any payment that is not principal as an expense, fee, or premium rather than interest, (b)
exclude voluntary prepayments and the effects thereof, and (c) amortize, prorate, allocate, and spread in
equal or unequal parts the total amount of interest throughout the contemplated term of the Obligations
hereunder.
10.10 Counterparts; Electronic Execution of Assignments.
(a) This Agreement may be executed by one or more of the parties to this Agreement on
any number of separate counterparts, and all of said counterparts taken together shall be deemed to
constitute one and the same instrument. Delivery of an executed signature page of this Agreement by
facsimile or other electronic mail transmission shall be effective as delivery of a manually executed
counterpart hereof. A set of the copies of this Agreement signed by all the parties shall be lodged with the
Borrowers and the Administrative Agent.
(b) The words “execution,” “signed,” “signature,” and words of like import in any
Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in
electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually
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.
110
10.11 Severability. Any provision of this Agreement that is prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability
without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. Without
limiting the foregoing provisions of this Section 10.11, if and to the extent that the enforceability of any
provisions in this Agreement relating to Defaulting Lenders shall be limited under or in connection with
any Insolvency Proceeding, as determined in good faith by the Administrative Agent or the Issuing Lender,
as applicable, then such provisions shall be deemed to be in effect only to the extent not so limited.
10.12 Integration. This Agreement and the other Loan Documents represent the entire
agreement of the Borrowers, the other Loan Parties, the Administrative Agent and the Lenders with respect
to the subject matter hereof and thereof, and there are no promises, undertakings, representations or
warranties by the Administrative Agent or any Lender relative to the subject matter hereof not expressly
set forth or referred to herein or in the other Loan Documents.
10.13 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS
OF THE PARTIES UNDER THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK. This
Section 10.13 shall survive the Discharge of Obligations.
10.14 Submission to Jurisdiction; Waivers. Each Borrower hereby irrevocably and
unconditionally:
(a) submits to the exclusive jurisdiction of the State and Federal courts in the Southern
District of the State of New York; provided that nothing in this Agreement shall be deemed to operate to
preclude the Administrative Agent or any Lender from bringing suit or taking other legal action in any other
jurisdiction to realize on the Collateral or any other security for the Obligations, or to enforce a judgment
or other court order in favor of Administrative Agent or such Lender. Borrower expressly submits and
consents in advance to such jurisdiction in any action or suit commenced in any such court, and each
Borrower hereby waives any objection that it may have based upon lack of personal jurisdiction, improper
venue, or forum non conveniens and hereby consents to the granting of such legal or equitable relief as is
deemed appropriate by such court. Each Borrower hereby waives personal service of the summons,
complaints, and other process issued in such action or suit and agrees that service of such summons,
complaints, and other process may be made by registered or certified mail addressed to the Borrowers at
the addresses set forth in Section 10.2 of this Agreement and that service so made shall be deemed
completed upon the earlier to occur of the Borrowers’ actual receipt thereof or three (3) Business Days after
deposit in the U.S. mails, proper postage prepaid;
(b) WAIVES, TO THE EXTENT PERMITTED BY APPLICABLE LAW, ITS
RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION ARISING OUT OF OR
BASED UPON THIS AGREEMENT, THE OTHER LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY
AND ALL OTHER CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR THE
PARTIES TO ENTER INTO THIS AGREEMENT. EACH PARTY HAS REVIEWED THIS
WAIVER WITH ITS COUNSEL; and
(c) waives, to the maximum extent not prohibited by law, any right it may have to claim
or recover in any legal action or proceeding referred to in this Section any special, exemplary, punitive or
consequential damages.
This Section 10.14 shall survive the Discharge of Obligations.
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10.15 Acknowledgements. Each Borrower hereby acknowledges that:
(a) it has been advised by counsel in the negotiation, execution and delivery of this
Agreement and the other Loan Documents;
(b) none of the Administrative Agent nor any Lender has any fiduciary relationship with
or duty to the Borrowers arising out of or in connection with this Agreement or any of the other Loan
Documents, and the relationship between the Administrative Agent and Lenders, on one hand, and the
Borrowers, on the other hand, in connection herewith or therewith is solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan Documents or otherwise exists
by virtue of the transactions contemplated hereby among the Lenders or among the Borrowers and the
Lenders.
10.16 Releases of Guarantees and Liens.
(a) Notwithstanding anything to the contrary contained herein or in any other Loan
Document, the Administrative Agent is hereby authorized by each Lender (without requirement of notice
to or consent of any Lender except as expressly required by Section 10.1) to take any action requested by
the Borrowers having the effect of releasing any Collateral or Guarantee Obligations (1) to the extent
necessary to permit consummation of any transaction not prohibited by any Loan Document or that has
been consented to in accordance with Section 10.1 or (2) under the circumstances described in
Section 10.16(b) below.
(b) Upon the Discharge of Obligations, the Collateral shall be released from the Liens
created by the Security Documents, and the Security Documents and all obligations (other than those
expressly stated to survive such termination) of the Administrative Agent and each Loan Party under the
Security Documents shall terminate, all without delivery of any instrument or performance of any act by
any Person.
10.17 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent
and each Lender agrees to maintain the confidentiality of the Information (as defined below), except that
Information may be disclosed (a) to its Affiliates and to its Related Parties (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 and will so agree to comply with such instructions and
the requirements of this Section 10.17); (b) to the extent required or requested by any regulatory authority
purporting to have jurisdiction over such Person or its Related Parties (including any self-regulatory
authority, such as the National Association of Insurance Commissioners); (c) to the extent required by
applicable laws or regulations or by any subpoena or similar legal process, upon the request or demand of
any Governmental Authority, in response to any order of any court or other Governmental Authority or as
may otherwise be required pursuant to any Requirement of Law or if requested or required to do so in
connection with any litigation or similar proceeding; (d) to any other party hereto; (e) in connection with
the exercise of any remedies hereunder or under any other Loan Document or any action or proceeding
relating to this Agreement or any other Loan Document or the enforcement of rights hereunder or
thereunder; (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 and
obligations under this Agreement, or (ii) any actual or prospective party (or its Related Parties) to any Swap
Agreement under which payments are to be made by reference to the Borrowers and their obligations, this
Agreement or payments hereunder; (g) on a confidential basis to (i) any rating agency in connection with
rating the Borrowers or their Subsidiaries or the Revolving Facility or (ii) the CUSIP Service Bureau or any
similar agency in connection with the issuance and monitoring of CUSIP numbers with respect to the
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Revolving Facility; (h) with the consent of the Borrowers; or (i) to the extent such Information (x) becomes
publicly available other than as a result of a breach of this Section, or (y) becomes available to the
Administrative Agent, any Lender or any of their respective Affiliates on a non-confidential basis from a
source other than the Borrowers.
In the event that the Administrative Agent or any Lender is required or receives a demand to
disclose under subparagraph (b) (excluding regulatory audits of the Lenders’ loan portfolios in the ordinary
course of business that do not subject the Borrowers to requests for disclosure under the Freedom of
Information Act or the Physician Payments Sunshine Act or otherwise require the public disclosure of
confidential Information) or (c) of the preceding paragraph, it will use reasonable efforts to promptly notify
the Borrowers thereof, to the extent permitted under applicable law, in order to enable the Borrowers to
seek a protective order or other appropriate remedy. In the event that no such protective order or other
remedy is obtained, the Administrative Agent or such Lender agrees that it shall furnish only that portion
of the Information that it is advised by counsel is required by law. The Administrative Agent and each
Lender shall comply with the restrictions imposed by the United States securities laws on the purchase or
sale of securities by any person who has received material, non-public information from the issuer of such.
Notwithstanding anything herein to the contrary, any party to this Agreement (and any employee,
representative, or other agent of any party to this Agreement) may disclose to any and all persons, without
limitation of any kind, the tax treatment and tax structure of the transactions contemplated by this
Agreement and all materials of any kind (including opinions or other tax analyses) that are provided to it
relating to such tax treatment and tax structure. However, any such information relating to the tax treatment
or tax structure is required to be kept confidential to the extent necessary to comply with any applicable
federal or state securities laws.
For purposes of this Section, “Information” means all information received from the Borrowers or
any of their Subsidiaries relating to the Borrowers or any of their Subsidiaries or any of their respective
businesses, other than any such information that is available to the Administrative Agent or any Lender on
a non-confidential basis prior to disclosure by the Borrowers or any of their Subsidiaries; provided that, in
the case of information received from the Borrowers or any of their Subsidiaries after the date hereof, such
information is clearly identified at the time of delivery as confidential. Any Person required to maintain
the confidentiality of Information as provided in this Section shall be considered to have complied with its
obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of
such Information as such Person would accord to its own confidential information.
10.18 Automatic Debits. With respect to any principal, interest, fee, or any other cost or
expense (including reasonable attorney costs of one primary counsel to the Administrative Agent and the
Lenders payable by the Borrowers hereunder) due and payable to the Administrative Agent or any Lender
under the Loan Documents, the Borrowers hereby irrevocably authorize the Administrative Agent to debit
any deposit account of the Borrowers maintained with the Administrative Agent (and the Administrative
Agent agrees to provide the Borrowers an invoice or loan statement, as applicable, with respect to such
amount; provided that any such invoice with respect to an amount to be debited outside the ordinary course
(including audit fees and legal fees and expenses) shall be provided prior to such debit) in an amount such
that the aggregate amount debited from all such deposit accounts does not exceed such principal, interest,
fee or other cost or expense. If there are insufficient funds in such deposit accounts to cover the amount
then due, such debits will be reversed (in whole or in part, in the Administrative Agent’s sole discretion)
and such amount not debited shall be deemed to be unpaid. No such debit under this Section 10.18 shall
be deemed a set-off.
10.19 Judgment Currency. If, for the purposes of obtaining judgment in any court, it is
necessary to convert a sum due hereunder or any other Loan Document in one currency into another
113
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 each Borrower and each other Loan
Party in respect of any such sum due from it to the Administrative Agent or any Lender hereunder or under
any other Loan Document 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 such Lender, as the case may be, of any sum adjudged to
be so due in the Judgment Currency, the Administrative Agent or such Lender, as the case may be, 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 any Lender from any Borrower or any other Loan Party in the Agreement
Currency, such Borrower and each other Loan Party agrees, as a separate obligation and notwithstanding
any such judgment, to indemnify the Administrative Agent or such Lender, as the case may be, against such
loss. If the amount of the Agreement Currency so purchased is greater than the sum originally due to the
Administrative Agent or any Lender in such currency, the Administrative Agent or such Lender, as the case
may be, agrees to return the amount of any excess to such Borrower or other Loan Party, as applicable (or
to any other Person who may be entitled thereto under applicable law).
10.20 Patriot Act. Each Lender and the Administrative Agent (for itself and not on behalf of
any other party) hereby notifies the Borrowers that, pursuant to the requirements of the Patriot Act, it is
required to obtain, verify and record information that identifies each Borrower, which information includes
the names and addresses and other information that will allow such Lender or the Administrative Agent, as
applicable, to identify each Borrower in accordance with the Patriot Act. Each Borrower will, and will
cause each of its respective Subsidiaries to, provide, to the extent commercially reasonable or required by
any Requirement of Law, such information and take such actions as are reasonably requested by the
Administrative Agent or any Lender to assist the Administrative Agent and the Lenders in maintaining
compliance with the Patriot Act.
10.21 Termination. This Agreement (other than Sections 2.19, 2.20, 9, 10.5, 10.8, 10.13 and
10.14) shall terminate upon the occurrence of the Discharge of Obligations.
[Remainder of page left blank intentionally]
114
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed
and delivered by their proper and duly authorized officers as of the day and year first above written.
BORROWERS:
BENEFITFOCUS, INC.
as a Borrower
By:
Name:
Title:
BENEFITFOCUS.COM, INC.
as a Borrower
By:
Name:
Title:
BENEFIT INFORMATICS, INC.
as a Borrower
By:
Name:
Title:
Signature Page to Credit Agreement
BENEFITSTORE, INC.
as a Borrower
By:
Name:
Title:
2
ADMINISTRATIVE AGENT:
SILICON VALLEY BANK,
as the Administrative Agent
By:
Name:
Title:
Section Page 2 to Credit Agreement
DOCUMENTATION AGENT:
COMERICA BANK,
as the Documentation Agent
By:
Name:
Title:
2
Exhibit A – Conformed Credit Agreement
LENDERS:
SILICON VALLEY BANK,
as Issuing Lender, Swingline Lender and as a Lender
By:
Name:
Title:
COMERICA BANK,
as a Lender
By:
Name:
Title:
SQUARE 1PACIFIC WESTERN BANK,
as a Lender
By:
Name:
Title: By:
SCHEDULE 1.1A
REVOLVING COMMITMENTS
AND REVOLVING PERCENTAGES
REVOLVING COMMITMENTS
Lender
Revolving Commitment
Revolving Percentage
Silicon Valley Bank
$30,500,000.00
50.833333333%
Signature Page 3 to Credit Agreement
Lender
Revolving Commitment
Revolving Percentage
Comerica Bank
Square 1 Bank
Total
$17,250,000.00
$12,250,000.00
$60,000,000.00
28.750000000%
20.416666667%
100.000000000%
(which is a sublimit of, and not in addition to, the Revolving Commitments)
L/C COMMITMENTS
Lender
L/C Commitments
L/C Percentage
Silicon Valley Bank
Total
$5,000,000
$5,000,000
100.000000000%
100.000000000%
SWINGLINE COMMITMENT
(which is a sublimit of, and not in addition to, the Revolving Commitments)
Lender
Swingline Commitment
Exposure Percentage
Silicon Valley Bank
Total
$5,000,000
$5,000,000
100.000000000%
100.000000000%
SCHEDULE 4.15
SUBSIDIARIES
SCHEDULE 4.17
ENVIRONMENTAL MATTERS
SCHEDULE 4.19(a)
FINANCING STATEMENTS AND OTHER FILINGS
sf-3126410
SCHEDULE 6.10
NBSC BANK ACCOUNTS
SCHEDULE 7.2(d)
EXISTING INDEBTEDNESS
SCHEDULE 7.3(f)
EXISTING LIENS
sf-3126410
Exhibit A – Conformed Credit Agreement
SCHEDULE 7.8(M)
EXISTING INVESTMENTS
GOLDMAN SACHS LENDING PARTNERS LLC,
as a Lender
By
Name:
Title:
2042849.8
2042849.11
sf-3126410
5
Exhibit 10.25
BENEFITFOCUS.COM, INC.
EMPLOYMENT AGREEMENT
THIS AGREEMENT (the “Agreement”), is made and entered into this 1st day of December 2015, by and
between: Benefitfocus.com, Inc., having its principal place of business at 100 Benefitfocus Way,
Charleston, SC 29492, (hereinafter referred to as “Benefitfocus”) and James Restivo whose present
address is: 159 Pembrooke Circle, Phoenixville, PA 19460 (hereinafter referred to as the “Associate”).
1.
2.
3.
4.
5.
Employment. Benefitfocus hereby agrees to employ the Associate in the capacity of Chief
Technology Officer, upon the terms and conditions set out herein, and the Associate accepts
such employment.
Term. The term of this Agreement shall begin on January 18, 2016. The Associate understands
and acknowledges that employment is “at will” and is terminable at any time at the will of
Benefitfocus or the Associate, notwithstanding any other provisions of this Agreement, including
Section 19 hereof. This Agreement shall remain in force until terminated at the will of either
party or as described in Section 19 of this Agreement.
Duties. The Associate shall perform, for Benefitfocus, the duties set out in the attached Exhibit
A entitled “Job Description,” which is incorporated herein and made a part of this Agreement,
along with those other duties as may be assigned to Associate from time to time by Benefitfocus’
Chief Executive Officer or his designee.
Compensation. The Associate’s compensation shall be paid in accordance with that outlined in
Exhibit B entitled “Compensation Program,” which is incorporated herein and made a part
hereof.
Extent of Services. The Associate shall devote his entire time, attention, and energies to
Benefitfocus’ business and shall not, during the term of this Agreement, be engaged in any other
business activity that conflicts with, or takes the Associate’s time or attention away from, the
Associate’s work for Benefitfocus, whether or not such business activity is pursued for gain,
profit or other pecuniary advantage. The Associate further agrees that he or she will perform all
of the duties assigned to the Associate to the best of his or her ability and in a manner
satisfactory to Benefitfocus, that he or she will truthfully and accurately maintain all records,
preserve all such records, and make all such reports as Benefitfocus may require; that he or she
will fully account for all money and all of the property of Benefitfocus of which the Associate
may have custody and will pay over and deliver the same whenever and however the Associate
may be directed to do so.
22242.38-863702 v2 6
6.
Expenses. Benefitfocus agrees to reimburse the Associate for travel and other expenses incurred
while conducting business on behalf of Benefitfocus as long as they are reasonable and approved
by Benefitfocus and comply with government regulations covering such expenses for business
purposes. Such expenses will be stated on a Benefitfocus furnished expense form, have required
receipts, be signed by the Associate, and sent to Benefitfocus for approval and reimbursement,
all in accordance with Benefitfocus’ reimbursement policies and procedures as may be in effect
from time to time.
7.
Covenant Not to Disclose Trade Secrets and Confidential Information.
a.
b.
As an employee of Benefitfocus, the Associate will be exposed to “Trade Secrets” and
“Confidential Business Information” (as those terms are defined below). “Trade Secrets”
shall mean information or data of or about Benefitfocus or any affiliated entity, including,
but not limited to, technical or non-technical data, formulas, patterns, compilations,
programs, devices, methods, techniques, drawings, processes, financial data, financial
plans, products plans, or lists of actual or potential customers, clients, distributors, or
licensees, that: (i) derive economic value, actual or potential, from not being generally
known to, and not being readily ascertainable by proper means by, other persons who
can obtain economic value from their disclosure or use; and (ii) are the subject of efforts
that are reasonable under the circumstances to maintain their secrecy. To the extent that
the foregoing definition is inconsistent with a broader definition of “trade secret” under
applicable law, the latter definition shall govern for purposes of interpreting the
Associate’s obligations under this Agreement. Except as required to perform his or her
obligations under this Agreement or except with Benefitfocus’ prior written permission,
the Associate shall not use, redistribute, market, publish, disclose or divulge to any other
person or entity any Trade Secrets of Benefitfocus. The Associate’s obligations under this
provision shall remain in force (during or after the Term) for so long as such information
or data shall continue to constitute a “trade secret” under applicable law. The Associate
agrees to cooperate with any and all confidentiality requirements of Benefitfocus and the
Associate shall immediately notify Benefitfocus of any unauthorized disclosure or use of
any Trade Secrets of which the Associate becomes aware.
The Associate agrees to maintain in strict confidence and, except as necessary to perform
his or her duties for Benefitfocus, not to use or disclose any Confidential Business
Information at any time, during the term of his or her employment or for a period of one
(1) year after the Associate’s last date of employment, so long as the pertinent data or
information remains Confidential Business
Information. “Confidential Business
Information” shall mean any non-public Information of a competitively sensitive or
personal nature, other than Trade Secrets, acquired by the Associate, directly or
indirectly, in connection with the Associate’s employment (including his or her
employment with Benefitfocus prior to the date of this Agreement), including (without
limitation) oral and written information concerning Benefitfocus or its affiliates relating
to financial position and results of operations (revenues, margins, assets, net income,
etc.), annual and long-range business plans, marketing plans and methods, account
invoices, oral or written customer information, and personnel information. Confidential
Business Information also includes information recorded in manuals, memoranda,
projections, minutes, plans, computer programs, and records, whether or not legended
or otherwise identified by Benefitfocus and its affiliates as Confidential Business
22242.38-863702 v2 7
c.
d.
e.
Information, as well as information which is the subject of meetings and discussions and
not so recorded; provided, however, that Confidential Business Information shall not
include information that is generally available to the public, other than as a result of
disclosure, directly or indirectly, by the Associate, or that was available to the Associate
on a non-confidential basis prior to its disclosure to the Associate.
Without limiting any of the foregoing, Associate acknowledges that Trade Secrets and
Confidential Business Information exist in all formats in which information is preserved,
including electronic, print, or any other form, and that each term includes all originals,
copies, notes, or other reproductions or replicas thereof.
Upon termination of employment, the Associate shall leave with Benefitfocus all Trade
Secrets, Confidential Business Information, and any other business records relating to
Benefitfocus and its affiliates including, without limitation, all contracts, calendars, and
other materials or business records concerning its business or customers, including all
physical, electronic, and computer copies thereof, whether or not the Associate prepared
such materials or records himself, and Associate shall retain no copies of any such
materials. In addition, upon termination of employment, Associate will immediately
return to Benefitfocus all other property whatsoever of Benefitfocus in his possession or
under his control. If requested, Associate shall certify in writing to Benefitfocus that no
such materials are in his possession.
As set forth above, the Associate shall not disclose Trade Secrets or Confidential Business
Information. However, nothing in this Section 7 shall prevent the Associate from (i)
disclosing Trade Secrets or Confidential Business Information pursuant to a court order
or court-issued subpoena, so long as the Associate first notifies Benefitfocus of said order
or subpoena in sufficient time to allow Benefitfocus to seek an appropriate protective
order, and provided that Associate only discloses such information as he or she is actually
required to disclose, or (ii) from reporting violations of law to any governmental agency
or entity, or otherwise making disclosures that are protected under a whistleblower any
law. The Associate agrees that if he or she receives any formal or informal discovery
request, court order, or subpoena requesting that the Associate disclose Trade Secrets or
Confidential Business Information, he or she will immediately notify Benefitfocus and
provide Benefitfocus with a copy of said request, court order, or subpoena.
8.
Covenant Not to Solicit Customers.
a.
The Associate covenants and agrees that during his or her employment and for a period
of one (1) year following the date of termination of the Associate’s employment with
Benefitfocus, for any reason, whether by the Associate or Benefitfocus, the Associate shall
not (except on behalf of or with the prior written consent of Benefitfocus) either directly
or indirectly, on the Associate’s own behalf or in the service or on behalf of others, (i)
solicit, divert or appropriate to or for a Competing Business (as defined below), or (ii)
attempt to solicit, divert, or appropriate to or for a Competing Business, any person or
entity that was a customer or prospective customer of Benefitfocus on the date of
termination and with whom the Associate had direct material contact within six months
of the Associate’s last date of employment. For purposes of this Agreement, the term
22242.38-863702 v2 8
9.
10.
“Competing Business” shall mean the business of offering human resource management
and benefit administration services to companies via a Web-based system.
b.
The Associate recognizes and acknowledges that Benefitfocus’ customers and the specific
needs of such customers are essential to the success of its business and its continued
goodwill and that its customer list and customer information constitute a property
interest of Benefitfocus, having been developed by Benefitfocus at great effort and
expense.
Covenant Not to Solicit Employees/Consultants. The Associate covenants and agrees that during
his or her employment and for a period of one (1) year following the date of termination of the
Associate’s employment with Benefitfocus, for any reason, whether by Associate or Benefitfocus,
Associate will not, either directly or indirectly, on the Associate’s own behalf or in the service or
on behalf of others, (i) solicit, divert, or hire away, or (ii) attempt to solicit, divert, or hire away
any employee of or consultant to Benefitfocus or any of its affiliates engaged or experienced in
the Business (as defined herein), regardless of whether the employee or consultant is full-time or
temporary, the employment or engagement is pursuant to written agreement, or the
employment is for a determined period or is at will. For purposes of this Agreement, the term
“Business” shall mean the business of offering human resource management and benefit
administration services to companies via a Web-based system.
Covenant Not to Compete. The Associate covenants and agrees that during his or her
employment and for a period of one (1) year following the termination of the Associate’s
employment with Benefitfocus (by either party and regardless of the reason for such termination),
Associate will not, hold a position based in or with responsibility for all or part of the Restricted
Territory (as defined below), with any Competing Business (as defined above) whether as
employee, consultant, or otherwise, in which Associate will have duties, or will perform or be
expected to perform services for such Competing Business, that is or are the same as or
substantially similar to the position held by Associate or those duties or services actually
performed by Associate for Benefitfocus within the twelve (12) month period immediately
preceding the termination of Associate’s employment with Benefitfocus, or in which Associate
will use or disclose or be reasonably expected to use or disclose any confidential or proprietary
information of Benefitfocus for the purpose of providing, or attempting to provide, such
Competing Business with a competitive advantage with respect to the Business. As used herein,
“Restricted Territory” means the United States of America, it being understood that Benefitfocus’
business is nationwide in scope, provided, however, that if a court of competent jurisdiction
determines that the foregoing definition is too broad to be enforced under applicable law, then
the parties agree that “Restricted Territory” will mean any State, province, or similar political
subdivision to which Associate directed, or in which Associate performed, employment-related
activities on behalf of Benefitfocus at the time of, or during the twelve (12) month period prior
to, the termination of Associate’s employment with Benefitfocus for any reason.
11.
Covenants are Independent. The covenants on the part of the Associate contained in paragraphs
7, 8, 9 and 10 hereof, as well as in each subsection thereof, shall each be construed as agreements
independent of each other and of any other provision in this Agreement and the unenforceability
of one shall not affect the remaining covenants.
22242.38-863702 v2 9
12.
13.
14.
15.
16.
17.
18.
19.
20.
21.
Consideration. The Associate acknowledges and agrees that valid consideration has been given
to the Associate by Benefitfocus in return for the promises of the Associate set forth herein,
including the promise of additional compensation to which the Associate was not entitled prior
to the execution of this Agreement.
Extension of Periods. Each of the time periods described in this Agreement shall be automatically
extended by any length of time during which the Associate is in breach of the corresponding
covenant contained herein. The provisions of this Agreement shall continue in full force and effect
throughout the duration of the extended periods.
Reasonable Restraint. It is agreed by the parties that the foregoing covenants in this Agreement
are necessary for the legitimate business interests of Benefitfocus and impose a reasonable
restraint on the Associate in light of the activities and Business of Benefitfocus on the date of the
execution of this Agreement.
Notices. Any notice required or desired to be given under this Agreement shall be given in writing,
sent by certified mail, return receipt requested, to his or her residence as shown in the records of
Benefitfocus in the case of the Associate, or to its principal place of business, in the case of
Benefitfocus.
Waiver of Breach. The waiver by Benefitfocus of a breach of any provision of this Agreement by
the Associate shall not operate or be construed as a waiver of any subsequent breach by the
Associate. No waiver shall be valid unless in writing and signed by Benefitfocus.
Assignment. The Associate acknowledges that the services to be rendered by the Associate are
unique and personal. Accordingly, the Associate may not assign any of his or her rights or delegate
any of his or her duties or obligations under this Agreement. The rights and obligations of
Benefitfocus under this Agreement shall inure to the benefit of and shall be binding upon the
successors and assigns of Benefitfocus. The Associate agrees that this Agreement, and the
covenants contained herein, may be assigned by Benefitfocus to any successor company.
Paid Time Off. Associate will be eligible to receive paid time off in accordance with Benefitfocus’
paid time off policies as detailed in its Associate Handbook, the provisions of which are subject to
change on a prospective basis.
Termination. Either party may terminate this Agreement at any time, with or without cause. In
the event that Associate chooses to resign his employment, Benefitfocus requests fourteen (14)
days written notice to Benefitfocus. In such event, no severance allowance shall be paid to the
Associate; but the Associate shall continue (if agreed to by Benefitfocus) to render his services
and shall be paid his regular compensation up to the date of termination.
Entire Agreement; Amendment. This Agreement contains the entire understanding of the parties
with respect to the subject matter hereof and supersedes all prior agreements (whether written
or oral and whether express or implied) between the parties to the extent related to such subject
matter. It may be changed only by an Agreement in writing, signed by the parties hereto.
Governing Law; Jurisdiction and Venue. This Agreement, and all transactions contemplated
hereby, shall be governed by, construed and enforced in accordance with the laws of the State of
South Carolina. The parties agree that any action or dispute regarding this Agreement shall be
22242.38-863702 v2 10
22.
23.
24.
25.
filed exclusively in a court having subject matter jurisdiction located in Charleston County, State
of South Carolina, and the parties waive any objection to personal jurisdiction or venue in such
courts.
Work Facilities. The Associate shall be provided with such other facilities and services as are
suitable to the Associate’s position and appropriate for the performance of his or her duties. In
the case of an Associate performing the sales duties and located remote to the main office, it is
expected that the Associate will maintain some form of office at his or her residence, which
contains the necessary equipment to perform the assigned duties.
Severability. To the extent that any provision or language of this Agreement is deemed
unenforceable, by virtue of the scope of the business activity prohibited or the length of time the
activity is prohibited, Benefitfocus and Associate agree that this Agreement shall be enforced to
the fullest extent permissible under the laws and public policies of the State of South Carolina.
Remedies for Breach. The Associate recognizes and agrees that a breach by the Associate of any
covenant contained in this Agreement would cause immeasurable and irreparable harm to
Benefitfocus. In the event of a breach or threatened breach of any covenant contained herein,
Benefitfocus shall be entitled to temporary and permanent injunctive relief, restraining the
Associate from violating or threatening to violate any covenant contained herein, as well as all
costs and fees incurred by Benefitfocus, including attorneys’ fees, as a result of the Associate’s
breach or threatened breach of the covenant. Benefitfocus and the Associate agree that the relief
described herein is in addition to such other and further relief as may be available to Benefitfocus
at equity or by law. Nothing herein shall be construed as prohibiting Benefitfocus from pursuing
any other remedies available to it for such breach or threatened breach, including the recovery
of damages from the Associate.
Additional Representations and Warranties of Associate. Indemnification by Associate. The
Associate acknowledges and agrees that: (i) the covenants contained in this Agreement are the
essence of this Agreement; (ii) the Associate has received good, adequate and valuable
consideration for each of these covenants; (iii) each of these covenants is reasonable and
necessary to protect and preserve the interests and properties of Benefitfocus; (iv) each of these
covenants in this Agreement is separate, distinct and severable not only from the other covenants
but also from the remaining provisions of this Agreement; (v) the unenforceability of any
covenants or agreements shall not affect the validity or enforceability of any of the other
covenants or agreements or any other provision or provisions of this Agreement; and (vi) if the
covenants herein shall ever be deemed to exceed the time, activity, or geographic limitations
permitted by applicable law, then such provisions shall be and hereby are reformed to the
maximum time, activity, or geographical limitations permitted by applicable law. The Associate
represents and warrants that his acceptance of employment with Benefitfocus and the
performance of his duties hereunder will not conflict with, or result in a violation of, a breach of,
or a default under any contract, agreement, or understanding to which he is a party or is otherwise
bound, including any non-solicitation, non-competition, or other similar covenant or agreement
of a prior employer. In the event that Associate’s former employer or business associate makes
a claim against Benefitfocus relating to Associate’s employment, Associate shall, at his own
expense, defend and indemnify Benefitfocus from and against any and all allegations, threats,
claims, suits, and proceedings brought by Associate’s former employer or business associate
22242.38-863702 v2 11
arising out of a prior employment or shareholder agreement, including any applicable non-
solicitation, non-competition, or other similar covenant or agreement of a prior employer.
26.
At-Will Employment. THE ASSOCIATE UNDERSTANDS AND AGREES THAT THIS AGREEMENT
SHALL IN NO WAY IMPOSE UPON BENEFITFOCUS ANY OBLIGATION TO EMPLOY THE ASSOCIATE
OR TO CONTINUE THE ASSOCIATE’S EMPLOYMENT FOR ANY LENGTH OF TIME. THE
EMPLOYMENT OR CONTINUATION OF EMPLOYMENT BY BENEFITFOCUS IS, AND AT ALL TIMES
SHALL REMAIN, IN THE ABSOLUTE DISCRETION OF BENEFITFOCUS, WHICH EMPLOYMENT MAY
BE TERMINATED BY THE ASSOCIATE OR BENEFITFOCUS AT WILL.
[Signature Page Follows]
22242.38-863702 v2 12
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on this 1st day of December
2015.
Signed, sealed and delivered in the presence of:
BENEFITFOCUS
/s/ Leslie Jones /s/ Ray August
Witness Benefitfocus.com, Inc.
By: Ray August
Leslie Jones Its: President & COO
Witness name printed
ASSOCIATE
/s/ Margaret St. Pierre /s/ James P. Restivo
Witness Signature
Margaret St. Pierre James Restivo
Witness name printed Print name
22242.38-863702 v2 13
EXHIBIT A
Chief Technology Officer Job Description
This position is responsible to serve as the Chief Technical Officer and to collaborate with the
Benefitfocus business leaders in the process to define the Company's technology vision, strategy,
delivery effectiveness, customer experience and insight into the key technologies the company should
be evaluating for the future. The CTO is a key technical advisor to the CEO and President and has the
responsibility to provide thoughtful objective advice and timely updates as to the effectiveness of the
company’s current and future technical direction, capabilities, methodologies and operations. It is also
expected that the CTO will have the business acumen to participate in the formation of the corporate
strategy and budget as well as weigh in on other business issues that affect the executive management
team. The CTO will be expected to provide a technical opinion on acquisitions and work with other
members of the executive leadership team in evaluating potential acquisitions.
Key Responsibilities
• Develop technology strategic objectives, as well as policies and operating plans:
o Establish vision and goals that ties with overall Company direction and adapts goals
based on changes in Benefitfocus' strategy.
o Ensure that plans and policies are understood and administered by the functional
management team.
o Establish operational strategies by evaluating trends; establishing critical
measurements; determining production, productivity, quality, and customer-service
strategies; designing systems; accumulating resources; resolving problems;
implementing change.
o Work closely with the CEO, President and the rest of the Executive Leadership Team,
and the Business Units
•
•
The CTO must be considered a thought leader in the fields of technology that are important to
Benefitfocus' success. He or she must routinely demonstrate this in both internal and external
thought leadership activities.
The CTO role is both an external and internal facing role:
o External: The CTO should work with the company’s Chief Commercial Officer to
position themselves at appropriate conferences to articulate the value of Benefitfocus
products. He/she will work with customers and prospects to discuss
the company’s technology strategy, and broad technology directions as appropriate.
•
•
Internal: The CTO should view this role as a service provider to the following
constituencies:
o The Senior Vice President of Product Strategy
o The Senior Vice President of Engineering
Perform annual analysis of expense needs. Develop operating budget. Manage and track
expenditures to plan on a monthly basis.
• Drive R&D software innovation and development efforts by maintaining an understanding
•
of the competitive landscape.
Ensure common technology architecture and services across Benefitfocus’ products where
appropriate.
22242.32-863702 v2
Exhibit A & B to Employment Agreement
•
•
•
•
•
•
Engage various departments and contribute in the investigation of new technologies to
ensure the R&D Technology group's direction meets the Company's requirement of
software product leadership.
Conduct presentations to peers, teams and senior management on potential new
technologies/products.
Interact with senior management in ensuring that proprietary technologies, as well as
third party sources of technology, are optimally implemented in the products.
Provide insight and alerts to the management team on broad strategic and tactical
assessments of product technology in the marketplace, including opportunities and
threats.
Lead a specialized team of advanced technologists within the Technology organization.
Represent the Company in development discussions with major customers.
EXHIBIT B
Benefitfocus.com, Inc.
Compensation Program for James Restivo
22242.32-863702 v2
Exhibit A & B to Employment Agreement
Exhibit B to Employment Agreement dated December 1, 2015.
1. Salary: As compensation for services rendered by the Associate, Benefitfocus shall pay a salary
of $12,500 per pay period (which annualizes to $300,000), payable in accordance with
Benefitfocus’ customary payroll practices as in effect from time to time. All compensation paid
to Associate shall be subject to withholding for such federal, state and local taxes as Benefitfocus
determines are required to be withheld pursuant to applicable law.
2. Annual Review: Annual salary reviews will occur on or around the annual budget process for
Benefitfocus.
3. Annual Bonus Opportunity: You are eligible to participate in the Benefitfocus management
incentive bonus program at the CTO level, which is up to 50% of your base pay, subject to
adoption by the Board of Directors from time to time, depending on achievement of annual
performance targets. The targets for achieving the Bonus will be the same company targets set
for the entire Executive Management Team as adjusted at the beginning of each year. In
general, you must be employed by Benefitfocus on the date on which a bonus is paid in order
to earn and receive the bonus.
4. Initial Restricted Stock Unit Award: In accordance with the Benefitfocus.com, Inc. 2012 Stock
Plan, you will receive a Benefitfocus stock grant award in the amount of 15,000 restricted stock
units, subject to approval by the board of directors. You will be receiving the formal Annual
Award Grant Notice and accompanying documentation at the next quarterly grant date. This
grant will have a four-year vesting period, and will be subject to the terms of an RSU award
agreement between you and Benefitfocus.
5. Annual Restricted Stock Unit Bonus: You will be eligible to receive an annual RSU award of up to
100% of your base salary, subject to approval by the Board of Directors. These RSU awards will
have a four-year vesting period, and will be subject to the terms of an RSU award agreement
between you and Benefitfocus.
6. Housing & Relocation Reimbursement: The Company will work with you and support your
family’s relocation to the Charleston area. The Company will provide reimbursement for housing
in the area during your transition and will also provide an allowance for the moving expenses as
described herein. The Company will reimburse the Associate up to a maximum of $2000 per
month, up to 3 months, for purposes of temporary housing in the Charleston, SC area. The
Company will reimburse the Associate up to a maximum of $15,000 for moving expenses. The
Employer follows IRS accountable plan moving reimbursement guidelines (refer to IRS
Publication 521). The Associate will need to submit receipts for any direct moving expenses
incurred, the balance will be paid to the Associate as ordinary wages. Should Associate
terminate employment with Benefitfocus by resignation, or is terminated for Cause by the
Company within Twenty Four (24) months of hire, Associate will be obligated to repay all
housing and relocation expenses to Benefitfocus.
7. Relocation Assistance. In accordance with the Benefitfocus Travel & Entertainment Policy
attached hereto, Benefitfocus agrees to reimburse Associate for pre-approved and documented
expenses associated with a maximum of two house hunting trips conducted within 45 days of
Associate’s start date, including reasonable airfare, hotel, and meal expenses for Associate and
one companion. In accordance with the Benefitfocus Travel & Entertainment Policy, Associate
22242.32-863702 v2
Exhibit A & B to Employment Agreement
will be reimbursed for airfare, hotel expenses for up to a maximum of two nights for each trip,
and personal meals for Associate and one companion. Reimbursements will be issued after
Associate’s start date with Company.
8. Normal Hours of Work: Full time executive positions are expected to work the amount of time
needed to meet or exceed all job duties and performance expectations as assigned by the
President and CEO.
9. Benefits: You are eligible for all Benefitfocus associate benefit programs including but not limited
to Health Insurance, Life Insurance, Disability Insurance, 401(k) Retirement Program, and more,
subject to the terms and conditions of such programs. Nothing in this Agreement or
Compensation Program alters or limits Benefitfocus’ rights to modify or terminate any such
programs in its sole discretion.
10. Paid Time Off and Paid Holidays: Your paid time off will follow the company schedule, as outlined
in the benefit summary.
11. Severance: In the event that Benefitfocus terminates your employment without Cause, as
defined herein, at any time then upon your execution of a general release of claims satisfactory
to Benefitfocus within the time allowed for execution, which release is not revoked by you
during any revocation period allowed by law, Benefitfocus will provide you with the following
severance benefits salary continuation for a period of six (6) months at your then-current rate
of base salary.
The severance benefits will be payable to you beginning on the sixtieth (60th) day following the
termination of your employment, provided that Benefitfocus, in its sole discretion, may begin
the payments earlier.
For purposes of this document, you will receive the same severance benefits as upon a
termination without Cause if you notify Benefitfocus of your decision to terminate your
employment with Benefitfocus within three (3) months of the occurrence of either of the
following: (i) a material decrease to your base salary or targeted annual bonus without your
consent to an amount less than the then current amount immediately preceding the decrease,
or (ii) a material diminution of your authority, job duties, or responsibilities without your
consent.
As used herein, “Cause” shall mean a determination by Benefitfocus’ board of directors of any
of the following: (i) your violation of any applicable material law or regulation respecting the
business of Benefitfocus; (ii) your commission of a felony or a crime involving moral turpitude;
(iii) any act of dishonesty, fraud or misrepresentation in relation to your duties to Benefitfocus,
(iv) failure to perform in any material respect your duties hereunder after twenty (20) days
written notice and an opportunity to cure such failure and a reasonable opportunity to present
to Benefitfocus’ board of directors your position regarding any dispute relating to the existence
of such failure; (v) your failure to attempt in good faith to implement a clear and reasonable
directive from Benefitfocus’ board of directors or to comply with any of Benefitfocus’ policies
and procedures which failure is material and occurs after written notice from Benefitfocus’
board of directors; (vi) any act of gross misconduct which is materially and demonstrably
injurious to Benefitfocus; or, (vii) your breach of fiduciary responsibility.
22242.32-863702 v2
Exhibit A & B to Employment Agreement
12. Application of Internal Revenue Code Section 409A: All provisions of this Agreement will be
interpreted in a manner consistent with Section 409A of the Internal Revenue Code and the
regulations and other guidance thereunder and any state law of similar effect (collectively
“Section 409A”). Notwithstanding anything to the contrary set forth herein, any payments and
benefits provided under this Exhibit B that constitute “deferred compensation” within the
meaning of Section 409A will not commence in connection with your termination of
employment unless and until you have also incurred a “separation from service” (as such term
is defined in Treasury Regulation Section 1.409A-1(h), unless Benefitfocus reasonably
determines that such amounts may be provided to you without causing you to incur the
additional 20% tax under Section 409A. The parties intend that each installment of the
severance benefits payments provided for above is a separate “payment” for purposes of
Treasury Regulation Section 1.409A-2(b)(2)(i). For avoidance of doubt, the parties intend that
payments of the severance benefits satisfy, to the greatest extent possible, the exemptions from
the application of Section 409A provided under Treasury Regulation Sections 1.409A-1(b)(4),
1.409A-1(b)(5), and 1.409A-1(b)(9). However, if Benefitfocus determines that the severance
benefits constitute “deferred compensation” under Section 409A and you are, on the
termination of service, a “specified employee” of Benefitfocus, as such term is defined in Section
409A, then, solely to the extent necessary to avoid the incurrence of the adverse personal tax
consequences under Section 409A, the timing of the severance benefit payments will be delayed
until the earlier to occur of: (i) the date that is six months and one day after your separation
from service, or (ii) the date of your death (such applicable date, the “Specified Employee Initial
Payment Date”), and Benefitfocus will (A) pay you a lump sum amount equal to the sum of the
severance benefits payments that you would otherwise have received through the Specified
Employee Initial Payment Date if the commencement of the payment of the severance benefits
had not been so delayed pursuant to this paragraph, and (B) commence paying the balance of
the severance benefits in accordance with the applicable payment schedules set forth in this
Agreement.
Signed and delivered in this 21 day of Dec. , 2015 in the presence of:
BENEFITFOCUS ASSOCIATE
/s/ Ray August /s/ James P. Restivo
Signature Signature
Ray August, President & COO James Restivo
Name/Title Name Printed
22242.32-863702 v2
Exhibit A & B to Employment Agreement
Benefitfocus, Inc.,
A Delaware corporation
List of subsidiaries
Exhibit 21.1
•
•
Benefitfocus.com, Inc.
BenefitStore, Inc.
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the following registration statements:
(1) Registration Statement (Form S-8 No. 333-211904) pertaining to the Benefitfocus, Inc.
2016 Employee Stock Purchase Plan,
(2) Registration Statement (Form S-8 No. 333-192278) pertaining to the 2012 Stock Plan,
as amended, and the Amended and Restated 2000 Stock Option Plan of Benefitfocus,
Inc., and
(3) Registration Statement (Form S-8 No. 333-218633) pertaining to the Benefitfocus, Inc.
Amended and Restated 2012 Stock Plan;
of our reports dated February 26, 2019, with respect to the consolidated financial statements
and schedule of Benefitfocus, Inc. included in this Annual Report (Form 10-K) for the year
ended December 31, 2018.
/s/ Ernst & Young LLP
Raleigh, North Carolina
February 26, 2019
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.1
I, Raymond A. August, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a)
(b)
(c)
(d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on
such evaluation; and
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which
are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 26, 2019
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
CERTIFICATION PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
Exhibit 31.2
I, Jonathon E. Dussault, certify that:
1.
I have reviewed this Annual Report on Form 10-K of Benefitfocus, Inc. (the registrant);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with
respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in
this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures
(as defined in Exchange Act Rules 13a–15(e) and 15d–15(e)) and internal control over financial reporting (as defined in Exchange Act
Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed
under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions
about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such
evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s
most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the
equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s
internal control over financial reporting.
Date: February 26, 2019
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In accordance with 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Raymond A. August,
President and Chief Executive Officer (principal executive officer) of Benefitfocus, Inc. (the “registrant”), and Jonathon E. Dussault,
Chief Financial Officer (principal financial and accounting officer) of the registrant, each hereby certifies that, to the best of their
knowledge:
1. The registrant’s Annual Report on Form 10-K for the year ended December 31, 2018, to which this Certification is attached as
Exhibit 32.1 (the “Report”), fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of
1934, as amended; and
2. The information contained in the Report fairly presents, in all material respects, the financial condition of the registrant at the end of
the period covered by the Report and results of operations of the registrant for the periods covered by the Report.
Date: February 26, 2019
/s/ Raymond A. August
Raymond A. August
President and Chief Executive Officer
(Principal executive officer)
/s/ Jonathon E. Dussault
Jonathon E. Dussault
Chief Financial Officer
(Principal financial and accounting officer)