EnerNOC, Inc.
ENERNOC INC (Form: 10-Q, Received: 05/08/2012 15:58:23)
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2012

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: 001-33471

 

 

EnerNOC, Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   87-0698303
(State or Other Jurisdiction of   (IRS Employer
Incorporation or Organization)   Identification No.)
101 Federal Street  
Suite 1100  
Boston, Massachusetts   02110
(Address of Principal Executive Offices)   (Zip Code)

(617) 224-9900

(Registrant’s Telephone Number, Including Area Code)

 

 

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   x     No   ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes   x     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨   (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x

There were 28,561,050 shares of the registrant’s common stock, $0.001 par value per share, outstanding as of May 4, 2012.

 

 

 


Table of Contents

EnerNOC, Inc.

Index to Form 10-Q

 

         Page  

Part I — Financial Information

  

Item 1.

  Financial Statements   
  Unaudited Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011      3   
  Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011      4   
  Unaudited Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2012 and 2011      5   
  Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011      6   
  Notes to Unaudited Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk      37   

Item 4.

  Controls and Procedures      38   

Part II — Other Information

  

Item 1.

  Legal Proceedings      38   

Item 1A

  Risk Factors      38   

Item 6.

  Exhibits      39   
  Signatures      40   
  Exhibit Index   

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except par value and share data)

 

     March 31, 2012     December 31, 2011  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 80,830     $ 87,297  

Restricted cash

     14,412       158  

Trade accounts receivable, net of allowance for doubtful accounts of $186 and $192 at March 31, 2012 and December 31, 2011, respectively

     28,575       24,525  

Unbilled revenue

     25,757       64,448  

Prepaid expenses, deposits and other current assets

     16,319       26,723  
  

 

 

   

 

 

 

Total current assets

     165,893       203,151  

Property and equipment, net of accumulated depreciation of $55,435 and $51,400 at March 31, 2012 and December 31, 2011, respectively

     35,876       36,636  

Goodwill

     79,524       79,213  

Customer relationship intangible assets, net

     25,958       26,993  

Other definite-lived intangible assets, net

     5,117       5,524  

Deposits and other assets

     5,404       4,291  
  

 

 

   

 

 

 

Total assets

   $ 317,772     $ 355,808  
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities

    

Accounts payable

   $ 1,360     $ 2,335  

Accrued capacity payments

     41,287       58,332  

Accrued payroll and related expenses

     7,013       11,937  

Accrued expenses and other current liabilities

     6,636       6,107  

Accrued performance adjustments

     6,127       6,045  

Deferred revenue

     17,491       12,556  
  

 

 

   

 

 

 

Total current liabilities

     79,914       97,312  

Long-term liabilities

    

Deferred acquisition consideration

     508       500  

Accrued acquisition contingent consideration, long term

     365       336  

Deferred tax liability

     3,020       2,646  

Deferred revenue, long-term

     9,230       6,810  

Other liabilities

     518       464  
  

 

 

   

 

 

 

Total long-term liabilities

     13,641       10,756  

Commitments and contingencies (Notes 6 and 7)

     —          —     

Stockholders’ equity

    

Undesignated preferred stock, $0.001 par value; 5,000,000 shares authorized; no shares issued

     —          —     

Common stock, $0.001 par value; 50,000,000 shares authorized, 28,488,283 and 27,306,548 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively

     28       27  

Additional paid-in capital

     333,607       329,817  

Accumulated other comprehensive loss

     (556     (955

Accumulated deficit

     (108,862     (81,149
  

 

 

   

 

 

 

Total stockholders’ equity

     224,217       247,740  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 317,772     $ 355,808  
  

 

 

   

 

 

 

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except share and per share data)

 

     Three Months Ended March 31,  
     2012     2011  

Revenues:

    

DemandSMART

   $ 17,723     $ 25,816  

EfficiencySMART, SupplySMART, CarbonSMART and other

     6,727       5,946  
  

 

 

   

 

 

 

Total revenues

     24,450       31,762  

Cost of revenues

     18,562       19,201  
  

 

 

   

 

 

 

Gross profit

     5,888       12,561  

Operating expenses:

    

Selling and marketing

     12,430       11,587  

General and administrative

     17,724       16,313  

Research and development

     3,804       3,232  
  

 

 

   

 

 

 

Total operating expenses

     33,958       31,132  
  

 

 

   

 

 

 

Loss from operations

     (28,070     (18,571

Other income, net

     1,233       128  

Interest expense

     (480     (163
  

 

 

   

 

 

 

Loss before income tax

     (27,317     (18,606

Provision for income tax

     (396     (666
  

 

 

   

 

 

 

Net loss

   $ (27,713   $ (19,272
  

 

 

   

 

 

 

Loss per common share

    

Basic

   $ (1.06   $ (0.76
  

 

 

   

 

 

 

Diluted

   $ (1.06   $ (0.76
  

 

 

   

 

 

 

Weighted average number of common shares outstanding

    

Basic

     26,251,322       25,248,650  
  

 

 

   

 

 

 

Diluted

     26,251,322       25,248,650  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS

(in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Net loss

   $ (27,713   $ (19,272

Foreign currency translation adjustments

     399       1  
  

 

 

   

 

 

 

Comprehensive loss

   $ (27,314   $ (19,271
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EnerNOC, Inc.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 

     Three Months Ended March 31,  
     2012     2011  

Cash flows from operating activities

    

Net loss

   $ (27,713   $ (19,272

Adjustments to reconcile net loss to net cash used in operating activities:

    

Depreciation

     4,274       3,625  

Amortization of acquired intangible assets

     1,836       1,152  

Stock-based compensation expense

     3,378       3,482  

Impairment of equipment

     90       110  

Unrealized foreign exchange transaction (gain) loss

     (651     132  

Deferred taxes

     372       335  

Non-cash interest expense

     164       9  

Accretion of fair value of deferred purchase price consideration related to acquisition

     8       73  

Accretion of fair value of contingent purchase price consideration related to acquisition

     22       —     

Other, net

     3       6  

Changes in operating assets and liabilities, net of effects of acquisitions:

    

Accounts receivable, trade

     (3,981     (2,920

Unbilled revenue

     38,692       43,021  

Prepaid expenses and other current assets

     (501     (3,444

Other assets

     (1,406     22  

Other noncurrent liabilities

     52       (13

Deferred revenue

     7,328       1,134  

Accrued capacity payments

     (17,116     (24,897

Accrued payroll and related expenses

     (4,593     (3,278

Accounts payable, accrued performance adjustments and accrued expenses and other current liabilities

     (446     (4,965
  

 

 

   

 

 

 

Net cash used in operating activities

     (188     (5,688

Cash flows from investing activities

    

Payments made for acquisition of businesses, net of cash acquired

     —          (41,047

Payments made for contingent consideration related to acquisitions

     —          (1,500

Purchases of property and equipment

     (3,553     (3,464

Change in restricted cash and deposits

     (2,649     (5

Change in long-term assets

     (111  
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,313     (46,016

Cash flows from financing activities

    

Proceeds from exercises of stock options

     64       1,040  

Repayment of borrowings and payments under capital leases

     —          (10
  

 

 

   

 

 

 

Net cash provided by financing activities

     64       1,030  

Effects of exchange rate changes on cash and cash equivalents

     (30     (100
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (6,467     (50,774

Cash and cash equivalents at beginning of period

     87,297       153,416  
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 80,830     $ 102,642  
  

 

 

   

 

 

 

Non-cash financing and investing activities

    

Issuance of common stock in connection with acquisitions, including earn out payments

   $ —        $ 15,132  
  

 

 

   

 

 

 

Issuance of common stock in satisfaction of bonuses

   $ 350     $ 440  
  

 

 

   

 

 

 

Deferred acquisition consideration

   $ —        $ 3,925  
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EnerNOC, Inc.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(in thousands, except share and per share data)

1. Description of Business and Basis of Presentation

Description of Business

EnerNOC, Inc. (the Company) is a service company that was incorporated in Delaware on June 5, 2003. The Company operates in a single segment providing clean and intelligent energy management applications, services and products for the smart grid, which include comprehensive demand response, data-driven energy efficiency, energy price and risk management, and enterprise carbon management applications, services and products. The Company’s energy management applications, services and products enable cost effective energy management strategies for its commercial, institutional and industrial end-users of energy (C&I customers) and its electric power grid operator and utility customers by reducing real-time demand for electricity, increasing energy efficiency, improving energy supply transparency, and mitigating carbon emissions. The Company uses its Network Operations Center (NOC) and comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. To date, the Company has received substantially all of its revenues from electric power grid operators and utilities, who make recurring payments to the Company for managing demand response capacity that it shares with its C&I customers in exchange for those C&I customers reducing their power consumption when called upon.

The Company builds on its position as a leading demand response services provider by using its NOC and energy management application platform to deliver a portfolio of additional energy management applications and services to new and existing C&I, electric power grid operator and utility customers. These additional energy management applications and services include its EfficiencySMART, SupplySMART and CarbonSMART applications and services, and certain other products. EfficiencySMART is its data-driven energy efficiency suite that includes commissioning and retro-commissioning authority services, energy consulting and engineering services, a persistent commissioning application and an enterprise energy management application for managing energy across a portfolio of sites. SupplySMART is its energy price and risk management application that provides its C&I customers located in restructured or deregulated markets throughout the United States with the ability to more effectively manage the energy supplier selection process, including energy supply product procurement and implementation, budget forecasting, and utility bill information management. CarbonSMART is its enterprise carbon management application that supports and manages the measurement, tracking, analysis, reporting and management of greenhouse gas emissions. The Company’s products include its wireless technology solutions for energy management and demand response related to its leading energy management applications and the acquisition of M2M Communications Corporation (M2M) in January 2011.

Basis of Consolidation

The unaudited condensed consolidated financial statements of the Company include the accounts of its wholly-owned subsidiaries and have been prepared in conformity with accounting principles generally accepted in the United States (GAAP). Intercompany transactions and balances are eliminated upon consolidation.

Subsequent Events Consideration

The Company considers events or transactions that occur after the balance sheet date but prior to the issuance of the financial statements to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. Subsequent events have been evaluated as required.

In April 2012, the Company replaced a $13,500 letter of credit that was issued by a certain financial institution, which was collateralized with $14,175 of cash held by that financial institution, included in restricted cash in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2012. The new letter of credit was issued under the Company’s $50,000 amended and restated senior secured revolving credit facility pursuant to a credit agreement with Silicon Valley Bank (SVB) (2012 credit facility). As a result, the $14,175 of cash is no longer restricted.

 

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In May 2012, the Company was required to provide financial assurance in connection with its capacity bid in a certain open market bidding program. The Company provided this financial assurance utilizing approximately $45,000 of its available cash on hand and a $7,000 letter of credit issued under the 2012 credit facility. Based on the Company’s prior experience with this certain open market bidding program, the Company currently expects that it will recover a portion of this cash and letter of credit during the second quarter of 2012.

There were no other material recognizable subsequent events recorded or requiring disclosure in the unaudited condensed consolidated financial statements as of and for the three months ended March 31, 2012.

Use of Estimates in Preparation of Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to SEC rules and regulations. In the opinion of the Company’s management, the unaudited condensed consolidated financial statements and notes have been prepared on the same basis as the audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, and include all adjustments (consisting of normal, recurring adjustments) necessary for the fair presentation of the Company’s financial position at March 31, 2012 and statements of operations and statements of cash flows for the three months ended March 31, 2012 and 2011. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for any other interim period or the entire fiscal year ending December 31, 2012.

The preparation of these unaudited condensed consolidated financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to revenue recognition, allowance for doubtful accounts, valuations and purchase price allocations related to business combinations, fair value of deferred acquisition consideration, fair value of accrued acquisition contingent consideration, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of the Company’s net deferred tax assets and related valuation allowance.

Although the Company regularly assesses these estimates, actual results could differ materially. Changes in estimates are recorded in the period in which they become known. The Company bases its estimates on historical experience and various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from management’s estimates if these results differ from historical experience or other assumptions prove not to be substantially accurate, even if such assumptions are reasonable when made.

The Company is subject to a number of risks similar to those of other companies of similar and different sizes both inside and outside of its industry, including, but not limited to, rapid technological changes, competition from similar energy management applications, services and products provided by larger companies, customer concentration, government regulations, market or program rule changes, protection of proprietary rights and dependence on key individuals.

Foreign Currency Translation

Foreign currency translation adjustments are recorded as a component of other comprehensive income and included in accumulated other comprehensive loss within stockholders’ equity. Gains arising from transactions denominated in foreign currencies and the remeasurement of certain intercompany receivables and payables are included in other income, net in the unaudited condensed consolidated statements of operations and were $1,144 and $86 for the three months ended March 31, 2012 and 2011, respectively. The significant increase in foreign exchange gains arising from transactions denominated in foreign currencies for the three months ended March 31, 2012 as compared to the comparable period of 2011 is due to the significant increase of foreign denominated intercompany receivables held by the Company from one of its Australian subsidiaries primarily as a result of the funding provided to complete the acquisition of Energy Response Holdings Pty Ltd (Energy Response) and the weakening of the United States dollar as compared to the Australian dollar during the three months ended March 31, 2012. During the three months ended March 31, 2012, $17,468 ($16,400 Australian) of the intercompany receivable from the Company’s Australian subsidiary was settled resulting in a realized gain of $494. During the three months ended March 31, 2011, there were no material realized gains or losses incurred related to transactions denominated in foreign currencies. As of March 31, 2012, the Company had an intercompany receivable from its Australian subsidiary that is denominated in Australian dollars and not deemed to be of a “long-term investment” nature totaling $18,307 ($17,625 Australian).

 

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In addition, a portion of the funding provided by the Company to one of its Australian subsidiaries to complete the acquisition of Energy Response was deemed to be of a “long-term investment nature” and therefore, the resulting translation adjustments are being recorded as a component of stockholders’ equity within accumulated other comprehensive loss. As of March 31, 2012, the intercompany funding that is denominated in Australian dollars and deemed to be of a “long-term investment” nature totaled $21,671 ($20,364 Australian).

Comprehensive Loss

Comprehensive loss is defined as the change in equity of a business enterprise during a period resulting from transactions and other events and circumstances from non-owner sources. As of March 31, 2012 and 2011, accumulated other comprehensive loss was comprised solely of cumulative foreign currency translation adjustments. The Company presents its components of other comprehensive loss, net of related tax effects, which have not been material to date.

Software Development Costs

Software development costs of $658 and $837 for the three months ended March 31, 2012 and 2011, respectively, have been capitalized in accordance with Accounting Standard Codification (ASC) 350-40 (ASC 350-40),  Internal-Use Software  (formerly American Institute of Certified Public Accountants (AICPA) Statement of Position (SOP) 98-1,  Software Developed or Obtained for Internal Use).  The capitalized amount was included as software in property and equipment at March 31, 2012 and December 31, 2011. Amortization of capitalized internal use software costs was $1,075 and $842 for the three months ended March 31, 2012 and 2011, respectively. Accumulated amortization of capitalized internal use software costs was $12,222 and $11,147 as of March 31, 2012 and December 31, 2011, respectively.

Impairment of Property and Equipment

During the three months ended March 31, 2012, the Company identified an impairment indicator related to certain demand response equipment as a result of the removal of such equipment from service during the three months ended March 31, 2012. As a result of this impairment indicator, the Company performed an impairment test during the three months ended March 31, 2012 and recognized an impairment charge of $90 during the three months ended March 31, 2012, representing the difference between the carrying value and fair market value of the demand response equipment, which is included in cost of revenues in the accompanying unaudited condensed consolidated statements of operations. The fair market value was determined utilizing Level 3 inputs, as defined by ASC 820,  Fair Value Measurements and Disclosures  (ASC 820), based on the projected future cash flows discounted using the estimated market participant rate of return for this type of asset.

As of March 31, 2012, approximately $1,505 of the Company’s generation equipment is utilized in open market demand response programs. The recoverability of the carrying value of this generation equipment is largely dependent on the rates that the Company is compensated for its committed capacity within these programs. These rates represent market rates and can fluctuate based on the supply and demand of capacity. Although these market rates are established up to three years in advance of the service delivery, these market rates have not yet been established for the entire remaining useful life of this generation equipment. In performing its impairment analysis, the Company estimates the expected future market rates based on current existing market rates and trends. A decline in the expected future market rates of 10% by itself would not result in an impairment charge related to this generation equipment.

Industry Segment Information

The Company operates in the following major geographic areas as noted in the below chart. The “All other” designation includes Australia, New Zealand and the United Kingdom. Revenues are based upon customer location, and internationally totaled $3,019 and $4,858 for the three months ended March 31, 2012 and 2011, respectively.

 

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Revenues by geography as a percentage of total revenues are as follows:

 

     Three Months Ended March 31,  
     2012     2011  

United States

     88     85

Canada

     8       15  

All other

     4       *   
  

 

 

   

 

 

 

Total

     100     100
  

 

 

   

 

 

 

 

  * Represents less than 1% of total revenues.

As of March 31, 2012 and December 31, 2011, the long-lived assets related to the Company’s international subsidiaries were not material to the accompanying unaudited condensed consolidated financial statements taken as a whole.

2. Intangible Assets and Goodwill

Definite-Lived Intangible Assets

The following table provides the gross carrying amount and related accumulated amortization of intangible assets as of March 31, 2012 and December 31, 2011:

            As of March 31, 2012     As of December 31, 2011  
     Weighted Average
Amortization
Period (in years)
     Gross
Carrying
Amount
     Accumulated
Amortization
    Gross
Carrying
Amount
     Accumulated
Amortization
 

Customer relationships

     4.86      $ 32,694      $ (6,736   $ 32,279      $ (5,286
     

 

 

    

 

 

   

 

 

    

 

 

 

Total customer relationship intangible assets

        32,694        (6,736     32,279        (5,286

Customer contracts

     5.00        4,217        (2,110     4,217        (2,007

Employment agreements and non-compete agreements

     2.00        1,727        (811     1,726        (707

Software

     0.21        120        (113     120        (103

Developed technology

     2.57        2,301        (679     2,297        (517

Trade name

     1.91        575        (254     575        (225

Patents

     7.93        180        (36     180        (32
     

 

 

    

 

 

   

 

 

    

 

 

 

Total other definite-lived intangible assets

        9,120        (4,003     9,115        (3,591
     

 

 

    

 

 

   

 

 

    

 

 

 

Total

      $ 41,814      $ (10,739   $ 41,394      $ (8,877
     

 

 

    

 

 

   

 

 

    

 

 

 

The change in intangible assets from December 31, 2011 to March 31, 2012 was due to foreign currency translation adjustments. Amortization expense related to intangible assets amounted to $1,836 and $1,152 for three months ended March 31, 2012 and 2011, respectively. Amortization expense for developed technology, which was $161 and $131 for the three months ended March 31, 2012 and 2011, respectively, is included in cost of revenues in the accompanying unaudited condensed consolidated statements of operations. Amortization expense for all other intangible assets is included as a component of operating expenses in the accompanying unaudited condensed consolidated statements of operations. The intangible asset lives range from one to ten years and the weighted average remaining life was 4.59 years at March 31, 2012. Estimated amortization is $5,561, $7,326, $6,504, $4,681, $4,100 and $2,903 for 2012, 2013, 2014, 2015, 2016 and thereafter, respectively.

Goodwill

During the three months ended March 31, 2012, as a result of the decline in the Company’s market capitalization as well as a regulatory ruling with respect to one of the Company’s significant customer arrangements which may impact the Company’s future operating results, the Company determined that indicators of a potential impairment existed with respect to its all other operations reporting unit, which represents all of the Company’s operations with the exception of its Australia and New Zealand operations, requiring the first step of an interim goodwill impairment test as of March 31, 2012. The Company completed the first step of the goodwill impairment test as of March 31, 2012 using a consistent methodology with its previous annual goodwill impairment test and determined that the fair value of its all other operations reporting unit exceeded the net assets of that reporting unit. As a result, the Company concluded that no goodwill impairment existed as of March 31, 2012.

 

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A prolonged continued decline in the Company’s market capitalization may result in the performance of additional interim goodwill impairment tests, which may result in a goodwill impairment charge.

The following table shows the change of the carrying amount of goodwill from December 31, 2011 to March 31, 2012:

 

Balance at December 31, 2011

   $ 79,213  

Purchase price adjustment related to Energy Response (1)

     34  

Foreign currency translation impact

     277  
  

 

 

 

Balance at March 31, 2012

   $ 79,524  
  

 

 

 

 

  (1) Based on new information gathered about facts and circumstances that existed as of the acquisition date related to a pre-acquisition liability, the Company reflected this additional liability as part of its purchase accounting resulting in a decrease of net tangible assets acquired and a corresponding increase to goodwill.

3. Net Loss Per Share

A reconciliation of basic and diluted share amounts for the three months ended March 31, 2012 and 2011 are as follows (in thousands):

 

     Three Months Ended March 31,  
       2012      2011  

Basic weighted average common shares outstanding

     26,251        25,249  

Weighted average common stock equivalents

     —           —     
  

 

 

    

 

 

 

Diluted weighted average common shares outstanding

     26,251        25,249  
  

 

 

    

 

 

 

Weighted average anti-dilutive shares related to:

     

Stock options

     1,551        2,018  

Nonvested restricted shares

     1,277        412  

Restricted stock units

     190        324  

Escrow shares

     337        280  

In the reporting period in which the Company has reported net income, anti-dilutive shares consist of those common stock equivalents that have either an exercise price above the average stock price for the quarter or the common stock equivalent’s related average unrecognized stock compensation expense is sufficient to “buy back” the entire amount of shares. In those reporting periods in which the Company has a net loss, anti-dilutive shares consist of the impact of those number of shares that would have been dilutive had the Company had net income plus the number of common stock equivalents that would be anti-dilutive had the Company had net income.

The Company excludes the shares issued in connection with restricted stock awards from the calculation of basic weighted average common shares outstanding until such time as those shares vest. In addition, in connection with certain of the Company’s business combinations, the Company has issued shares that were held in escrow upon closing of the applicable business combination. The Company excludes shares held in escrow from the calculation of basic weighted average common shares outstanding where the release of such shares is contingent upon an event and not solely subject to the passage of time. The 254,654 shares related to a component of the deferred purchase price consideration from the acquisition of M2M, which are not subject to adjustment as the issuance of such shares is not subject to any contingency, are included in both the basic and diluted weighted average common shares outstanding amounts.

4. Disclosure of Fair Value of Financial Instruments

The Company’s financial instruments mainly consist of cash and cash equivalents, restricted cash, accounts receivable, accounts payable and debt obligations. The carrying amounts of the Company’s cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair value due to the short-term nature of these instruments. At March 31, 2012 and at December 31, 2011, the Company had no outstanding debt obligations. For additional information regarding the 2012 credit facility, see Note 6.

 

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5. Fair Value Measurements

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at March 31, 2012:

 

     Fair Value Measurement at March 31, 2012 Using  
     Totals      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Unobservable
Inputs (Level  3)
 

Assets:

           

Money market funds (1)

   $ 36,107      $ 36,107      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred acquisition consideration (2)

     508        —           —           508  

Accrued acquisition contingent consideration (2)

     365        —           —           365  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 873      $ —         $ —         $ 873  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.
  (2) Deferred acquisition consideration and accrued acquisition contingent consideration, which are liabilities, that were the result of the Company’s acquisition of M2M and Energy Response, respectively, represent the only assets or liabilities that the Company measures and records at fair value on a recurring basis using significant unobservable inputs (Level 3). The increase in fair value for the three months ended March 31, 2012 of $37 is due to the increase in the liabilities as a result of the amortization of the applicable discounts related to the time value of money of $30 and changes in exchange rates. There have been no changes with respect to the probability or timing of payment subsequent to December 31, 2011.

The table below presents the balances of assets and liabilities measured at fair value on a recurring basis at December 31, 2011:

 

     Fair Value Measurement at December 31, 2011 Using  
     Totals      Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
     Significant
Other
Observable
Inputs (Level 2)
     Unobservable
Inputs (Level  3)
 

Assets:

           

Money market funds (1)

   $ 51,841      $ 51,841      $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Deferred acquisition consideration (2)

     500        —           —           500  

Accrued acquisition contingent consideration (2)

     336        —           —           336  
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 836      $ —         $ —         $ 836  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

  (1) Included in cash and cash equivalents in the accompanying consolidated balance sheets.
  (2) Deferred acquisition consideration and accrued acquisition contingent consideration, which are liabilities, that were the result of the Company’s acquisition of M2M and Energy Response, respectively, represent the only assets or liabilities that the Company measures and records at fair value on a recurring basis using significant unobservable inputs (Level 3).

With respect to assets measured at fair value on a non-recurring basis, which would be impaired long-lived assets, refer to Note 1 for discussion of the determination of fair value of these assets.

At March 31, 2012, the Company had restricted cash of approximately $14,219 collateralizing certain outstanding letters of credit and $193 collateralizing certain other commitments. In April 2012, the Company replaced a letter of credit from a financial institution that the Company was required to collateralize with $14,175 of cash with a letter of credit that was issued under the 2012 credit facility. As a result, the $14,175 of cash became unrestricted.

 

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6. Financing Arrangements

In April 2011, the Company and one of its subsidiaries entered into a $75,000 senior secured revolving credit facility pursuant to a credit agreement, which was subsequently amended in June 2011, November 2011 and December 2011 (the 2011 credit facility), with SVB and one other financial institution. In March 2012, the Company and one of its subsidiaries entered into the 2012 credit facility under which SVB became the sole lender, the Company’s borrowing limit was decreased from $75,000 to $50,000 and certain of its financial covenant compliance requirements were modified or eliminated. The material changes in the 2012 credit facility to the Company’s monthly and quarterly financial covenants included:

 

   

a decrease in the Company’s quarterly financial covenant related to minimum earnings levels and a change in the calculation, which is now based on earnings before depreciation and amortization expense, interest expense, provision for income taxes, stock-based compensation expense, rent expense, certain impairment charges and certain other non-cash charges over a trailing twelve month period;

 

   

amendment to the Company’s monthly financial covenant related to maintenance of a minimum specified ratio of current assets to current liabilities reducing the Company’s required minimum of unrestricted cash from $50,000 to $30,000 for certain periods; and

 

   

elimination of the quarterly financial covenant related to maintenance of a minimum specified fixed charge coverage ratio.

The 2012 credit facility also decreased the letter of credit fee charged in connection with the issuance or renewal of letters of credit for the Company’s account from 2.125 % to 2.0%.

Subject to continued compliance with the covenants contained in the 2012 credit facility, the full amount of the 2012 credit facility may be available for issuances of letters of credit and up to $5,000 of the 2012 credit facility may be available for swing line loans. The interest on revolving loans under the 2012 credit facility will accrue, at the Company’s election, at either (i) the Eurodollar Rate with respect to the relevant interest period plus 2.00% or (ii) the ABR (defined as the highest of (x) the “prime rate” as quoted in the  Wall Street Journal , (y) the Federal Funds Effective Rate plus 0.50% and (z) the Eurodollar Rate for a one-month interest period plus 1.00%) plus 1.00%. The Company expenses the interest and letter of credit fees incurred under the 2012 credit facility, as applicable, in the period incurred. The obligations under the 2012 credit facility are secured by all domestic assets of the Company and several of its subsidiaries, excluding the Company’s foreign subsidiaries. The 2012 credit facility terminates and all amounts outstanding thereunder are due and payable in full on April 15, 2013. The Company incurred financing costs of $543 in connection with the 2011 credit facility, which were deferred and were being amortized to interest expense over the term of the 2011 credit facility, or through April 15, 2013. In connection with the 2012 credit facility, the Company incurred financing costs of $111 which were deferred and are being amortized to interest expense over the term of the 2012 credit facility. As a result of the 2012 credit facility, during the three months ended March 31, 2012, in addition to the amortization of deferred financing costs, the Company expensed $98, or 33%, of the remaining initial deferred financing costs related to the 33% reduction in the available borrowing limit.

The 2012 credit facility contains customary terms and conditions for credit facilities of this type, including, among other things, restrictions on the ability of the Company and its subsidiaries to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, make certain acquisitions, pay dividends or make distributions on, or repurchase, the Company’s common stock, consolidate or merge with other entities, or undergo a change in control. In addition, the Company is required to meet certain monthly and quarterly financial covenants customary with this type of credit facility.

The 2012 credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, SVB may accelerate the Company’s obligations under the 2012 credit facility. If the Company is determined to be in default then any amounts outstanding under the 2012 credit facility would become immediately due and payable and the Company would be required to collateralize with cash any outstanding letters of credit up to 105% of the amounts outstanding.

As of March 31, 2012, the Company was in compliance with all of its covenants under the 2012 credit facility, including all financial covenants. The Company believes that it is reasonably assured that it will comply with the financial covenants under the 2012 credit facility for the foreseeable future.

As of March 31, 2012, the Company had no borrowings, but had outstanding letters of credit totaling $25,480 under the 2012 credit facility, and outstanding letters of credit of $13,542 with another financial institution, which was collateralized with $14,219 of restricted cash. As of March 31, 2012, the Company had $24,520 available under the 2012 credit facility for future borrowings or issuances of additional letters of credit.

 

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In May 2012, the Company was required to provide financial assurance in connection with its capacity bid in a certain open market bidding program. The Company provided this financial assurance utilizing approximately $45,000 of its available cash on hand and a $7,000 letter of credit issued under the 2012 credit facility. Based on the Company’s prior experience with this certain open market bidding program, the Company currently expects that it will recover a portion of this cash and these letters of credit during the second quarter of 2012.

7. Commitments and Contingencies

The Company is contingently liable under outstanding letters of credit for $39,022. As of March 31, 2012 and December 31, 2011, the Company had restricted cash balances of $14,412 and $158, respectively, which relate to amounts to collateralize certain obligations to vendors, collateralize outstanding letters of credit and cover financial assurance requirements in certain of the programs in which the Company participates.

The Company is subject to performance guarantee requirements under certain utility and electric power grid operator customer contracts and open market bidding program participation rules, which may be secured by cash or letters of credit. Performance guarantees as of March 31, 2012 were $41,580 and included deposits held by certain customers of $2,558 at March 31, 2012. These amounts primarily represent up-front payments required by utility and electric power grid operator customers as a condition of participation in certain demand response programs and to ensure that the Company will deliver its committed capacity amounts in those programs. If the Company fails to meet its minimum committed capacity requirements, a portion or all of the deposit may be forfeited. The Company assessed the probability of default under these customer contracts and open market bidding programs and has determined the likelihood of default and loss of deposits to be remote. In addition, under certain utility and electric power grid operator customer contracts, if the Company does not achieve the required performance guarantee requirements, the customer can terminate the arrangement and the Company would potentially be subject to termination penalties. Under these arrangements, the Company defers all fees received up to the amount of the potential termination penalty until the Company has concluded that it can reliably determine that the potential termination penalty will not be incurred or the termination penalty lapses. As of March 31, 2012, the Company had no remaining deferred fees that were included in deferred revenue. As of March 31, 2012, the maximum termination penalty that the Company is subject to under these arrangements, which the Company has not deemed probable of incurring, is approximately $7,432.

As of March 31, 2012 and December 31, 2011, the Company has accrued for $6,127 and $6,045, respectively, of performance adjustments related to fees received for its participation in a demand response program in the accompanying consolidated balance sheets. The Company believes that it is probable that these fees will need to be re-paid to the electric power grid operator in fiscal 2012 as a result of the Company not delivering all of its MW obligations under this demand response program.

The Company is currently involved in an ongoing matter related to a review of certain fees received under a contractual arrangement. This matter is still in its initial stages and no claim has currently been asserted. As a result, the Company does not currently believe it is probable that a loss has been incurred and therefore, no amounts have been accrued related to this matter. However, the Company has determined that it is reasonably possible that the Company may incur a loss related to this matter. The potential amount of such a loss is not currently estimable, however, the Company’s management believes it could be more than insignificant.

The Company typically grants customers a limited warranty that guarantees that its hardware will substantially conform to current specifications for one year from the delivery date. Based on the Company’s operating history, the liability associated with product warranties has been determined to be nominal.

8. Stock-Based Compensation

Stock Options

During the three months ended March 31, 2012 and 2011, the Company issued 44,871 shares and 18,211 shares of its common stock, respectively, to certain executives to satisfy a portion of the Company’s bonus obligations to those individuals. The Company’s Amended and Restated 2007 Employee, Director and Consultant Stock Plan (the 2007 Plan) provides for an annual increase to the shares issuable under the 2007 Plan by an amount equal to the lesser of 520,000 shares or an amount determined by the Company’s board of directors. As of March 31, 2012, 1,271,275 shares were available for future grant under the 2007 Plan.

The fair value of options granted was estimated at the date of grant using the following weighted average assumptions:

 

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     Three Months Ended March 31,  
     2012     2011  

Risk-free interest rate

     2.01     3.4

Vesting term, in years

     2.22       2.22  

Expected annual volatility

     80      80

Expected dividend yield

     —       —  

Exit rate pre-vesting

     8.0     7.3

Exit rate post-vesting

     14.06     14.06

Volatility measures the amount that a stock price has fluctuated or is expected to fluctuate during a period. The Company calculates volatility using a component of implied volatility and historical volatility to determine the value of share-based payments. The risk-free interest rate is the rate available as of the option date on zero-coupon United States government issues with a term equal to the expected life of the option. The Company has not paid dividends on its common stock in the past and does not plan to pay any dividends in the foreseeable future. In addition, the terms of the Credit Facility preclude the Company from paying dividends. During the three months ended March 31, 2012, the Company updated its estimated exit rate pre-vesting and post-vesting applied to options, restricted stock and restricted stock units based on an evaluation of demographics of its employee groups and historical forfeitures for these groups in order to determine its option valuations as well as its stock-based compensation expense. The changes in estimates of the volatility, exit rate pre-vesting and exit rate post-vesting did not have a material impact on the Company’s stock-based compensation expense recorded in the accompanying unaudited condensed consolidated statements of operations for the three months ended March 31, 2012.

The components of stock-based compensation expense are disclosed below:

 

     Three Months Ended March 31,  
     2012      2011  

Stock option expense

   $ 594      $ 1,781  

Restricted stock and restricted stock units

     2,784        1,701  
  

 

 

    

 

 

 

Total

   $ 3,378      $ 3,482  
  

 

 

    

 

 

 

Stock-based compensation is recorded in the accompanying statements of operations, as follows:

 

     Three Months Ended March 31,  
     2012      2011  

Selling and marketing expenses

   $ 1,054      $ 1,043  

General and administrative expenses

     2,010        2,168  

Research and development expenses

     314        271  
  

 

 

    

 

 

 

Total

   $ 3,378      $ 3,482  
  

 

 

    

 

 

 

The stock-based compensation expense related to share-based payments to non-employees was not material for the three months ended March 31, 2012 and 2011. The Company recognized no material income tax benefit from share-based compensation arrangements during the three months ended March 31, 2012 and 2011. In addition, no material compensation cost was capitalized during the three months ended March 31, 2012 and 2011.

The following is a summary of the Company’s stock option activity during the three months ended March 31, 2012:

 

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     Three Months Ended March 31, 2012  
     Number of
Shares

Underlying
Options
    Exercise
Price Per
Share
     Weighted-
Average
Exercise  Price

Per Share
     Aggregate
Intrinsic
Value
 

Outstanding at December 31, 2011

     1,611,391     $ 0.17 - $48.06       $ 15.35      $ 4,195 (2) 

Granted

     2,500          9.38     

Exercised

     (118,037        0.54      $ 913 (3) 

Cancelled

     (56,160        24.50     
  

 

 

         

Outstanding at March 31, 2012

     1,439,694     $ 0.17 - $48.06         16.19      $ 1,364 (4) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average remaining contractual life in years: 4.6

          

Exercisable at end of period

     1,200,324     $ 0.17 - $48.06       $ 14.72      $ 1,361 (4) 
  

 

 

   

 

 

    

 

 

    

 

 

 

Weighted average remaining contractual life in years: 4.3

          

Vested or expected to vest at March 31, 2012 (1)

     1,422,736     $ 0.17 - $48.06       $ 16.09      $ 1,364 (4) 
  

 

 

   

 

 

    

 

 

    

 

 

 

 

  (1) This represents the number of vested options as of March 31, 2012 plus the number of unvested options expected to vest as of March 31, 2012 based on the unvested options outstanding at March 31, 2012, adjusted for the estimated forfeiture rate of 8.0%.
  (2) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on December 31, 2011 of $10.87 and the exercise price of the underlying options.
  (3) The aggregate intrinsic value was calculated based on the positive difference between the fair value of the Company’s common stock on the applicable exercise dates and the exercise price of the underlying options.
  (4) The aggregate intrinsic value was calculated based on the positive difference between the estimated fair value of the Company’s common stock on March 31, 2012 of $7.20 and the exercise price of the underlying options.

Additional Information About Stock Options

 

     Three Months Ended March 31,  
     2012      2011  
    

In thousands, except share

and per share amounts

 

Total number of options granted during the period

     2,500        16,350  

Weighted-average fair value per share of options granted

   $ 5.73      $ 13.30  

Total intrinsic value of options exercised(1)

   $ 913      $ 2,261  

 

  (1) Represents the difference between the market price at exercise and the price paid to exercise the options.

Of the stock options outstanding as of March 31, 2012, 1,428,201 options were held by employees and directors of the Company and 11,493 options were held by non-employees. For outstanding unvested stock options related to employees as of March 31, 2012, the Company had $3,227 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.9 years. There were no material unvested non-employee options as of March 31, 2012.

Restricted Stock and Restricted Stock Units

For non-vested restricted stock and restricted stock units subject to service-based vesting conditions outstanding as of March 31, 2012, the Company had $9,469 of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.3 years. For non-vested restricted stock subject to performance-based vesting conditions outstanding that were probable of vesting as of March 31, 2012, the Company had $7,921 of unrecognized stock-based compensation expense, which

 

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is expected to be recognized over a weighted average period of 1.7 years. For non-vested restricted stock subject to outstanding performance-based vesting conditions that were not probable of vesting as of March 31, 2012, the Company had $1,833 of unrecognized stock-based compensation expense. If and when any additional portion of the awards is deemed probable to vest, the Company will reflect the effect of the change in estimate in the period of change by recording a cumulative catch-up adjustment to retroactively apply the new estimate.

Restricted Stock

The following table summarizes the Company’s restricted stock activity during the three months ended March 31, 2012:

 

     Number of
Shares
    Weighted Average
Grant Date Fair
Value Per Share
 

Nonvested at December 31, 2011

     1,141,643     $ 15.31 (1) 

Granted

     1,005,460       7.63  

Vested

     (163,695     16.04  

Cancelled

     (51,361     15.75  
  

 

 

   

Nonvested at March 31, 2012

     1,932,047     $ 11.24  
  

 

 

   

 

  (1) This reflects the change in the grant date fair value as a result of the modification that occurred in March 2012 resulting in a remeasurement of the fair value of the awards granted in December 2011.

 

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All shares underlying awards of restricted stock are restricted in that they are not transferable until they vest. Restricted stock typically vests ratably over a four-year period from the date of issuance, with certain exceptions. Included in the above table are 8,500 shares of restricted stock granted to certain non-executive employees and 43,793 shares of restricted stock granted to certain members of the Company’s board of directors during the three months ended March 31, 2012 that were immediately vested.

The fair value of restricted stock where vesting is solely based on service vesting condition is expensed ratably over the vesting period. With respect to restricted stock where vesting contains certain performance-based vesting conditions, the fair value is expensed based on the accelerated attribution method as prescribed by ASC 718,  Stock Compensation (ASC 718) over the vesting period. During the three months ended March 31, 2012, the Company granted 908,142 shares of nonvested restricted stock to certain executives and non-executive employees that contain performance-based vesting conditions and these awards will vest in equal installments in 2013 and 2014 if the performance conditions are achieved. If the employee who received the restricted stock leaves the Company prior to the vesting date for any reason, the shares of restricted stock will be forfeited and returned to the Company.

In November 2011, the Company’s board of directors approved a plan to include performance-based stock awards as part of the annual non-executive bonus plan. In December 2011, 283,334 shares were issued under the 2007 Plan with a fair value of $2,700 and these awards will vest in equal installments in 2013 and 2014 if the performance conditions are achieved. Through December 31, 2011, the Company determined that no awards were probable of vesting and as a result, no stock-based compensation expense related to these awards was recorded through December 31, 2011. In March 2012, the performance conditions were modified and the Company determined that the modified performance conditions were probable of being achieved. As the performance-based stock awards were improbable of vesting prior to the modification of the performance conditions, the original grant date fair value is no longer used to measure compensation cost for the award. The fair value of these awards was re-measured as of the modification date resulting in a new grant-date fair value of $2,132 after accounting for cancelled grants due to employee terminations. As these awards were probable of vesting as of March 31, 2012 and a portion of the service period had lapsed, the Company recorded a cumulative catch-up adjustment of stock-based compensation expense during the three months ended March 31, 2012 as required by ASC 718.

Additional Information About Restricted Stock

 

     Three Months Ended March 31,  
     2012      2011  
     In thousands, except share and per
share amounts
 

Total number of shares of restricted stock granted during the period

     1,005,460        374,781  

Weighted average fair value per share of restricted stock granted

   $ 7.63      $ 20.07  

Total number of shares of restricted stock vested during the period

     163,695        30,908  

Total fair value of shares of restricted stock vested during the period

   $ 1,482      $ 623  

Restricted Stock Units

The following table summarizes the Company’s restricted stock unit activity during the three months ended March 31, 2012:

 

           Weighted Average  
     Number of     Grant Date Fair  
     Shares     Value Per Share  

Nonvested at December 31, 2011

     229,020     $ 26.75  

Granted

     —          —     

Vested

     (64,728     26.99  

Cancelled

     (22,500     28.59  
  

 

 

   

Nonvested at March 31, 2012

     141,792     $ 26.34  
  

 

 

   

 

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Additional Information About Restricted Stock Units

 

     Three Months Ended
March 31,
 
     2012      2011  
     In thousands, except share and per  
     share amounts  

Total number of shares of restricted stock units vested during the period

     64,728        64,728  

Total fair value of shares of restricted stock units vested during the period

   $ 645      $ 1,178  

9. Income Taxes

The Company accounts for income taxes in accordance with ASC 740,  Income Taxes  (ASC 740), which is the asset and liability method for accounting and reporting income taxes. Under ASC 740, deferred tax assets and liabilities are recognized based on temporary differences between the financial reporting and income tax bases of assets and liabilities using statutory rates. In addition, ASC 740 requires a valuation allowance against net deferred tax assets if, based upon the available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.

ASC 740 also provides criteria for the recognition, measurement, presentation and disclosures of uncertain tax positions. A tax benefit from an uncertain tax position may be recognized if it is “more likely than not” that the position is sustainable based solely on its technical merits. As of March 31, 2012 and December 31, 2011, the Company had no material unrecognized tax benefits.

In accordance with ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. Generally, if an enterprise has an ordinary loss for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the enterprise will record an interim period tax benefit based on applying the estimated annual effective tax rate to the ordinary loss as long as the tax benefits are realized during the year or recognizable as a deferred tax asset as of the end of the year. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate than the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. The Company has determined that it is currently unable to make a reliable estimate of its annual effective tax rate as of March 31, 2012 due to unusual sensitivity to the rate as it relates to the current forecasted fiscal 2012 U.S. ordinary loss. As a result, the Company recorded a tax provision for the three months ended March 31, 2012 based on its actual effective tax rate for three months ended March 31, 2012. The tax provision recorded for the three months ended March 31, 2012 was $396 and represented the following:

 

   

estimated foreign taxes resulting from guaranteed profit allocable to the Company’s foreign subsidiaries, which have been determined to be limited-risk service providers acting on behalf of the U.S. parent for tax purposes, for which there are no tax net operating loss carryforwards;

 

   

amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature.

If the Company is able to make a reliable estimate of its annual effective tax rate as of June 30, 2012, then as required by ASC 740, the Company will utilize that rate to provide for income taxes on a current year-to-date basis which could result in a significant benefit from income taxes being recorded during the three months ended June 30, 2012. If the Company continues to be unable to make a reliable estimate of its annual effective tax rate as of June 30, 2012, the Company expects to follow a consistent methodology as applied for the three months ended March 31, 2012 and record a provision for income taxes for the three months ended June 30, 2012.

The Company reviews all available evidence to evaluate the recovery of deferred tax assets, including the recent history of accumulated losses in all tax jurisdictions over the last three years, as well as its ability to generate income in future periods. As of March 31, 2012, due to the uncertainty related to the ultimate use of the Company’s deferred income tax assets, the Company has provided a full valuation allowance on all of its U.S. deferred tax assets.

10. Concentrations of Credit Risk

The following presents the Company’s significant customers. With respect to ISO-New England, Inc. (ISO-NE), PJM Interconnection (PJM), Tennessee Valley Authority (TVA), and Ontario Power Authority (OPA), these customers are regional electric

 

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power grid operator customers, which are comprised of multiple utilities and were formed to control the operation of a regional power system, coordinate the supply of electricity, and establish fair and efficient markets. No other customers comprised more than 10% of consolidated revenues during the either the three months ended March 31, 2012 or the three months ended March 31, 2011.

 

     Three Months Ended March 31,  
     2012     2011  
     Revenues      % of  Total
Revenues
    Revenues      % of  Total
Revenues
 

ISO-NE

     6,285        26     11,719        37

TVA

     2,414        10     2,731        9

OPA

     2,023        8     4,683        15

Accounts receivable from PJM was approximately 28% and 30% of the accounts receivable balance at March 31, 2012 and December 31, 2011, respectively. Other than PJM, Tennessee Valley Authority was the only additional customer that comprised 10% or more of the accounts receivable balance at December 31, 2011, which represented 13% of such accounts receivable balance. There were no additional customers that represented 10% or more of the accounts receivable balance at March 31, 2012.

Unbilled revenue related to PJM was $25,682 and $64,099 at March 31, 2012 and December 31, 2011, respectively. There was no significant unbilled revenue for any other customers at March 31, 2012 and December 31, 2011.

Deposits and restricted cash consist of funds to secure performance under certain contracts and open market bidding programs with electric power grid operator and utility customers. Deposits held by these customers were $2,558 and $14,281 at March 31, 2012 and December 31, 2011, respectively. Restricted cash to secure letters of credit was $14,219 and $0 at March 31, 2012 and December 31, 2011, respectively. Restricted cash to secure certain other commitments was $193 and $158 at March 31, 2012 and December 31, 2011, respectively.

11. Legal Proceedings

The Company is subject to legal proceedings, claims and litigation arising in the ordinary course of business. The Company does not expect the ultimate costs to resolve these matters to have a material adverse effect on its consolidated financial condition, results of operations or cash flows.

12. Recent Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued ASU No. 2011-11, “ Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”  (ASU No. 2011-11). The amendments in this ASU require an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect that the adoption of ASU No. 2011-11 will have a significant, if any, impact on its consolidated financial statements.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, as well as our audited financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, as filed with the Securities and Exchange Commission, or the SEC, on March 15, 2012 and as amended on April 17, 2012, or our 2011 Form 10-K. This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Without limiting the foregoing, the words “may,” “will,” “should,” “could,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue,” “target” and variations of those terms or the negatives of those terms and similar expressions are intended to identify forward-looking statements. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections and the beliefs and assumptions of our management including, without limitation, our expectations regarding our results of operations, operating expenses and the sufficiency of our cash for future operations. We assume no obligation to revise or update any such forward-looking statements. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain important factors, including those set forth below under this Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” Part II, Item 1A — “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q, as well as in our 2011 Form 10-K. You should carefully review those factors and also carefully review the risks outlined in other documents that we file from time to time with the SEC.

Overview

We are a leading provider of energy management applications, services and products for the smart grid, which include comprehensive demand response, data-driven energy efficiency, energy price and risk management and enterprise carbon management applications, services and products. Our energy management applications, services and products enable cost effective energy management strategies for commercial, institutional and industrial end-users of energy, which we refer to as our C&I customers, and our electric power grid operator and utility customers by reducing real-time demand for electricity, increasing energy efficiency, improving energy supply transparency, and mitigating carbon emissions.

We believe that we are the largest demand response service provider to C&I customers. As of March 31, 2012, we managed approximately 8,000 megawatts, or MW, of demand response capacity across a C&I customer base of approximately 5,300 accounts and over 12,500 sites throughout multiple electric power grids. Demand response is an alternative to traditional power generation and transmission infrastructure projects that enables electric power grid operators and utilities to reduce the likelihood of service disruptions, such as brownouts and blackouts, during periods of peak electricity demand and otherwise manage the electric power grid during short-term imbalances of supply and demand or during periods when energy prices are high. We use our Network Operations Center, or NOC, and comprehensive demand response application, DemandSMART, to remotely manage and reduce electricity consumption across a growing network of C&I customer sites, making demand response capacity available to electric power grid operators and utilities on demand while helping C&I customers achieve energy savings, improved financial results and environmental benefits. To date, we have received substantially all of our revenues from electric power grid operators and utilities, who make recurring payments to us for managing demand response capacity that we share with our C&I customers in exchange for those C&I customers reducing their power consumption when called upon.

In providing our demand response services, we match obligation, in the form of MW that we agree to deliver to our utility and grid operator customers, with supply, in the form of MW that we are able to curtail from the electric power grid through our arrangements with C&I customers. We occasionally reallocate our obligation through open market bidding programs, supplemental demand response programs, auctions or other similar capacity arrangements, open program registrations and bilateral contracts to account for changes in supply and demand forecasts in order to achieve more favorable pricing opportunities. We increase our ability to curtail demand from the electric power grid by deploying a sales team to contract with our C&I customers and by installing our equipment at these customers’ sites to connect them to our network. When we are called upon by our utility or grid operator customers to deliver MW, we use our DemandSMART application to dispatch this network to meet the demands of these utility and grid operator customers. We refer to the above activities as managing our portfolio of demand response capacity.

We build on our position as a leading demand response services provider by using our NOC and energy management application platform to deliver a portfolio of additional energy management applications, services and products to new and existing C&I, electric power grid operator and utility customers. These additional energy management applications, services and products include our EfficiencySMART, SupplySMART, and CarbonSMART applications and services, and certain wireless energy

 

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management products. EfficiencySMART is our data-driven energy efficiency suite that includes commissioning and retro-commissioning authority services, energy consulting and engineering services, a persistent commissioning application and an enterprise energy management application for managing energy across a portfolio of sites. SupplySMART is our energy price and risk management application that provides our C&I customers located in restructured or deregulated markets throughout the United States with the ability to more effectively manage the energy supplier selection process, including energy supply product procurement and implementation, budget forecasting, and utility bill management. CarbonSMART is our enterprise carbon management application that supports and manages the measurement, tracking, analysis, reporting and management of greenhouse gas emissions. Our wireless energy management products are designed to ensure that our C&I customers can connect their equipment remotely and access meter data securely, and include both cellular modems and an agricultural specific wireless technology solution acquired as part of our acquisition of M2M Communications Corporation, or M2M, in January 2011.

Since inception, our business has grown substantially. We began by providing demand response services in one state in 2003 and have expanded to providing our portfolio of energy management applications, services and products in several regions throughout the United States, as well as internationally in Australia, Canada, New Zealand and the United Kingdom.

Significant Recent Developments

In January 2012, PJM Interconnection, or PJM, a grid operator customer, proposed the immediate implementation of certain proposed market rules regarding the measurement and verification of demand response resources in the PJM capacity market. We refer to this as the PJM proposal. We subsequently filed a protest requesting that the Federal Energy Regulatory Commission, or FERC, reject the PJM proposal as unjust and unreasonable for failure to meet the conditions set forth in a prior FERC order on this topic and to establish an interim settlement mechanism that protects the reasonable reliance expectations of demand response suppliers through the 2014-15 delivery year. We also requested that FERC order PJM to keep current settlement practices in place for the 2012-13 delivery year and require PJM to propose an alternative mechanism that complies with FERC’s directives from the prior FERC order through the 2014-2015 delivery year. Subsequent to our protest filing, additional filings were made by certain parties interested in the outcome of this matter. In February 2012, FERC issued an order substantially accepting the PJM proposal, which resulted in the immediate implementation of PJM’s proposed market rule changes regarding capacity compliance measurement and verification. As a result, our future PJM revenues and profit margins will be significantly reduced and our future results of operations and financial condition will be negatively impacted. These impacts may be offset by our future growth in MW under management in the PJM market and effective management of our portfolio of demand response capacity.

On February 27, 2012, Timothy Weller, our Chief Financial Officer and Treasurer, notified us that he was resigning in order to pursue another professional opportunity. Mr. Weller continued his employment as Chief Financial Officer and Treasurer in order to assist us with this transition, which has now terminated.

On March 14, 2012, we amended and restated our existing credit facility with Silicon Valley Bank, or SVB, and one other financial institutional. For additional details, see “Liquidity and Capital Resources – Credit Facility Borrowings.”

Revenues and Expense Components

Revenues

We derive recurring revenues from the sale of our energy management applications, services and products. We do not recognize any revenues until persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed or determinable, and we deem collection to be reasonably assured.

Our revenues from our demand response services primarily consist of capacity and energy payments, including ancillary services payments. We derive revenues from demand response capacity that we make available in open market programs and pursuant to contracts that we enter into with electric power grid operators and utilities. In certain markets, we enter into contracts with electric power grid operators and utilities, generally ranging from three to 10 years in duration, to deploy our demand response services. We refer to these contracts as utility contracts.

Where we operate in open market programs, our revenues from demand response capacity payments may vary month-to-month based upon our enrolled capacity and the market payment rate. Where we have a utility contract, we receive periodic capacity payments, which may vary monthly or seasonally, based upon enrolled capacity and predetermined payment rates. Under both open market programs and utility contracts, we receive capacity payments regardless of whether we are called upon to reduce demand for electricity from the electric power grid, and we recognize revenue over the applicable delivery period, even where payments are made over a different period. We generally demonstrate our capacity either through a demand response event or a measurement and

 

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verification test. This demonstrated capacity is typically used to calculate the continuing periodic capacity payments to be made to us until the next demand response event or measurement and verification test establishes a new demonstrated capacity amount. In most cases, we also receive an additional payment for the amount of energy usage that we actually curtail from the grid during a demand response event. We refer to this as an energy payment.

As program rules may differ for each open market program in which we participate and for each utility contract, we assess whether or not we have met the specific service requirements under the program rules and recognize or defer revenues as necessary. We recognize demand response capacity revenues when we have provided verification to the electric power grid operator or utility of our ability to deliver the committed capacity under the open market program or utility contract. Committed capacity is verified through the results of an actual demand response event or a measurement and verification test. Once the capacity amount has been verified, the revenues are recognized and future revenues become fixed or determinable and are recognized monthly over the performance period until the next demand response event or measurement and verification test. In subsequent demand response events or measurement and verification tests, if our verified capacity is below the previously verified amount, the electric power grid operator or utility customer will reduce future payments based on the adjusted verified capacity amounts. Under certain utility contracts and open market program participation rules, our performance and related fees are measured and determined over a period of time. If we can reliably estimate our performance for the applicable performance period, we will reserve the entire amount of estimated penalties that will be incurred, if any, as a result of estimated underperformance prior to the commencement of revenue recognition. If we are unable to reliably estimate the performance and any related penalties, we defer the recognition of revenues until the fee is fixed or determinable. Any changes to our original estimates of net revenues are recognized as a change in accounting estimate in the earliest reporting period that such a change is determined.

We defer incremental direct costs incurred related to the acquisition or origination of a utility contract or open market program in a transaction that results in the deferral or delay of revenue recognition. As of March 31, 2012 and December 31, 2011, there were no incremental direct costs deferred. During the three months ended March 31, 2012 and 2011, we capitalized $2.5 million and $2.3 million, respectively, of production and generation equipment costs. We believe that this accounting treatment appropriately matches expenses with the associated revenue.

As of March 31, 2012, we had approximately 8,000 MW under management in our demand response network, meaning that we had entered into definitive contracts with our C&I customers representing approximately 8,000 MW of demand response capacity. In determining our MW under management in the seasonal demand response programs in which we participate, we typically count the maximum determinable amount of curtailable load for a C&I customer site over a trailing twelve-month period as the MW under management for that C&I customer site. However, the trailing period could be longer in certain programs under which significant rule changes have occurred or under which we do not have enough obligation to enroll all of our MW in a given program period, but have enough obligation in a future program period to enroll those MW again. We generally begin earning revenues from our MW under management within approximately one month from the date on which we enable the MW, or the date on which we can reduce the MW from the electricity grid if called upon to do so. The most significant exception is the PJM forward capacity market, which is a market from which we derive a substantial portion of our revenues. Because PJM operates on a June to May program-year basis, a MW that we enable after June of each year may not begin earning revenue until June of the following year. This results in a longer average revenue recognition lag time in our C&I customer portfolio from the point in time when we consider a MW to be under management to when we actually earn revenues from that MW. Certain other markets in which we currently participate, such as the ISO New England, Inc., or ISO-NE, market, or choose to participate in the future operate or may operate in a manner that could create a delay in recognizing revenue from the MW that we enable in those markets. Additionally, not all of our MW under management may be enrolled in a demand response program or may earn revenue in a given program period or year based on the way that we manage our portfolio of demand response capacity.

In the PJM open market program in which we participate, the program year operates on a June to May basis and performance is measured based on the aggregate performance during the months of June through September. As a result, fees received for the month of June could potentially be subject to adjustment or refund based on performance during the months of July through September. Based on the changes to certain program rules, we have concluded that we no longer have the ability to reliably estimate the amount of fees potentially subject to adjustment or refund until the performance period ends on September 30 th of each year. Therefore, on a prospective basis, all demand response capacity revenues related to our participation in the PJM open market program will be recognized at the end of the performance period, or during the three months ended September 30 th of the applicable year. As a result of the fact that the period during which we are required to perform (June through September) is shorter than the period over which we receive payments under the program (June through May), a portion of the revenues that have been earned is recorded and accrued as unbilled revenue. Our unbilled revenue of $25.7 million from PJM at March 31, 2012 will be billed and collected through June 2012. In addition, in accordance with our policy to capitalize direct and incremental costs associated with deferred revenues to the extent that such costs are realizable, we will capitalize the associated cost of our payments to C&I customers for the month of June and expense such capitalized costs when the associated deferred revenues are recognized. We will evaluate the direct and incremental costs for recoverability prior to capitalization.

In February 2012, FERC issued an order substantially accepting the PJM proposal, which resulted in the immediate implementation of PJM’s proposed market rule changes regarding capacity compliance measurement and verification. As a result, our future PJM revenues and profit margins will be significantly reduced and our future results of operations and financial condition will be negatively impacted. These impacts may be offset by our future growth in MW under management in the PJM market and effective management of our portfolio of demand response capacity.

 

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Revenues generated from open market sales to ISO-NE, a grid operator customer, accounted for 26% and 37% of our total revenues for the three months ended March 31, 2012 and 2011, respectively. In addition, revenues generated from our utility contract with Tennessee Valley Authority, or TVA, accounted for 10% and 9% of our total revenues for the three months ended March 31, 2012 and 2011, respectively. In addition, revenues generated from our utility contract with Ontario Power Authority, or OPA, accounted for 9% and 15% of our total revenues for the three months ended March 31, 2012 and 2011, respectively. No other individual customer accounted for more than 10% of our consolidated revenues during the three months ended March 31, 2012 or March 31, 2011.

In addition to demand response revenues, we generally receive either a subscription-based fee, consulting fee or a percentage savings fee for arrangements under which we provide our other energy management applications and services, specifically our EfficiencySMART, SupplySMART and CarbonSMART applications and services, and certain other wireless energy management products. Revenues derived from these offerings were $6.7 million and $5.9 million for the three months ended March 31, 2012 and 2011, respectively.

Our revenues have historically been higher in our second and third fiscal quarters compared to other quarters in our fiscal year due to seasonality related to the demand response market. As a result of our change in our ability to estimate performance in the PJM open market program, our revenues for the second quarter of the fiscal year ending December 31, 2012, or fiscal 2012, will be lower than our revenues for the second quarter of the fiscal year ended December 31, 2011, or fiscal 2011, as all PJM revenues related to this open market program will be recognized during the third quarter of fiscal 2012.

Cost of Revenues

Cost of revenues for our demand response services primarily consists of amounts owed to our C&I customers for their participation in our demand response network and are generally recognized over the same performance period as the corresponding revenue. We enter into contracts with our C&I customers under which we deliver recurring cash payments to them for the capacity they commit to make available on demand. We also generally make an energy payment when a C&I customer reduces consumption of energy from the electric power grid during a demand response event. The equipment and installation costs for our devices located at our C&I customer sites, which monitor energy usage, communicate with C&I customer sites and, in certain instances, remotely control energy usage to achieve committed capacity are capitalized and depreciated over the lesser of the remaining estimated customer relationship period or the estimated useful life of the equipment, and this depreciation is reflected in cost of revenues. We also include in cost of revenues our amortization of acquired developed technology, amortization of capitalized internal-use software costs related to our DemandSMART application, the monthly telecommunications and data costs we incur as a result of being connected to C&I customer sites, and our internal payroll and related costs allocated to a C&I customer site. Certain costs, such as equipment depreciation and telecommunications and data costs, are fixed and do not vary based on revenues recognized. These fixed costs could impact our gross margin trends during interim periods. Cost of revenues for our EfficiencySMART, SupplySMART and CarbonSMART applications and services and certain other wireless energy management products include our amortization of capitalized internal-use software costs related to those applications, services and products, third party services, equipment costs, equipment depreciation, and the wages and associated benefits that we pay to our project managers for the performance of their services.

Gross Profit and Gross Margin

Gross profit consists of our total revenues less our cost of revenues. Our gross profit has been, and will be, affected by many factors, including (a) the demand for our energy management applications, services and products, (b) the selling price of our energy management applications, services and products, (c) our cost of revenues, (d) the way in which we manage, or are permitted to manage by the relevant electric power grid operator or utility, our portfolio of demand response capacity, (e) the introduction of new energy management applications, services and products, (f) our demand response event performance and (g) our ability to open and enter new markets and regions and expand deeper into markets we already serve. Our outcomes in negotiating favorable contracts with our C&I customers, as well as with our electric power grid operator and utility customers, the effective management of our portfolio of demand response capacity and our demand response event performance are the primary determinants of our gross profit and gross margin.

 

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Operating Expenses

Operating expenses consist of selling and marketing, general and administrative, and research and development expenses. Personnel-related costs are the most significant component of each of these expense categories. We grew from 570 full-time employees at March 31, 2011 to 630 full-time employees at March 31, 2012 primarily as a result of our acquisition of Energy Response Holdings Pty Ltd, or Energy Response, in July 2011. We expect to continue to hire employees to support our growth for the foreseeable future. In addition, we incur significant up-front costs associated with the expansion of the number of MW under our management, which we expect to continue for the foreseeable future. We expect our overall operating expenses to increase in absolute dollar terms for the foreseeable future as we grow our MW under management, further increase our headcount and expand the development of our energy management applications, services and products. In addition, amortization expense from intangible assets acquired in future acquisitions could potentially increase our operating expenses in future periods.

Selling and Marketing

Selling and marketing expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, related to our sales and marketing organization, (b) commissions, (c) travel, lodging and other out-of-pocket expenses, (d) marketing programs such as trade shows and (e) other related overhead. Commissions are recorded as an expense when earned by the employee. We expect an increase in selling and marketing expenses in absolute dollar terms for the foreseeable future as we further increase the number of sales professionals and, to a lesser extent, increase our marketing activities.

General and Administrative

General and administrative expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards and bonuses, related to our executive, finance, human resource, information technology and operations organizations, (b) facilities expenses, (c) accounting and legal professional fees, (d) depreciation and amortization and (e) other related overhead. We expect general and administrative expenses to continue to increase in absolute dollar terms for the foreseeable future as we invest in infrastructure to support our continued growth.

Research and Development

Research and development expenses consist primarily of (a) salaries and related personnel costs, including costs associated with share-based payment awards, related to our research and development organization, (b) payments to suppliers for design and consulting services, (c) costs relating to the design and development of new energy management applications, services and products, and enhancement of existing energy management applications, services and products, (d) quality assurance and testing and (e) other related overhead. During the three months ended March 31, 2012 and 2011, we capitalized software development costs of $0.6 million and $0.8 million, respectively, and the amount is included as software in property and equipment at March 31, 2012. We expect research and development expenses to increase in absolute dollar terms for the foreseeable future as we develop new technologies.

Stock-Based Compensation

We account for stock-based compensation in accordance with Accounting Standards Codification, or ASC, 718, Stock Compensation . As such, all share-based payments to employees, including grants of stock options, restricted stock and restricted stock units, are recognized in the statement of operations based on their fair values as of the date of grant. During the three months ended March 31, 2012, in lieu of a portion of cash bonuses related to our 2012 and 2013 bonus plans, we granted 908,142 shares of nonvested restricted stock to certain executives and non-executive employees that contain performance-based vesting conditions. These awards will vest in equal installments in 2013 and 2014 if the performance conditions are achieved. If the employee who received the restricted stock leaves the company prior to the vesting date for any reason, the shares of restricted stock will be forfeited and returned to us. In addition, in December 2011, we granted 283,334 shares of nonvested restricted stock to certain non-executive employees that contained performance-based vesting conditions in lieu of a portion of cash bonuses related to our 2012 and 2013 bonus plan. The performance conditions associated with the December 2011 grant were modified during the three months ended March 31, 2012. As a result of these grants of nonvested restricted stock, we anticipate that stock-based compensation expense will increase with a corresponding decrease in cash compensation expense.

For the three months ended March 31, 2012 and 2011, we recorded expenses of approximately $3.4 million and $3.5 million, respectively, in connection with share-based payment awards to employees and non-employees. With respect to option grants through March 31, 2012, a future expense of non-vested options of approximately $3.2 million is expected to be recognized over a weighted

 

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average period of 1.9 years. For non-vested restricted stock and restricted stock units subject to service-based vesting conditions outstanding as of March 31, 2012, we had $9.5 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 2.3 years. For non-vested restricted stock subject to performance-based vesting conditions outstanding and that were probable of vesting as of March 31, 2012, we had $7.9 million of unrecognized stock-based compensation expense, which is expected to be recognized over a weighted average period of 1.7 years. For non-vested restricted stock subject to outstanding performance-based vesting conditions that were not probable of vesting as of March 31, 2012, we had $1.8 million of unrecognized stock-based compensation expense. If and when any additional portion of our outstanding equity awards is deemed probable to vest, we will reflect the effect of the change in estimate in the period of change by recording a cumulative catch-up adjustment to retroactively apply the new estimate.

Other Income and Expense, Net

Other income and expense consist primarily of gain or loss on transactions designated in currencies other than our or our subsidiaries’ functional currency, interest income earned on cash balances, and other non-operating income and expense. We historically have invested our cash in money market funds, treasury funds, commercial paper, and municipal bonds.

Interest Expense

Interest expense primarily consists of fees associated with our $50.0 million senior secured revolving credit facility pursuant to an amended and restated credit agreement with SVB, which we refer to as the 2012 credit facility. Interest expense also consists of fees associated with issuing letters of credit and other financial assurances.

Consolidated Results of Operations

Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31, 2011

Revenues

The following table summarizes our revenues for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

     Three Months Ended March 31,      Dollar
Change
    Percentage
Change
 
     2012      2011       

Revenues:

          

DemandSMART

   $ 17,723      $ 25,816      $ (8,093     (31.3 )% 

EfficiencySMART, SupplySMART, CarbonSMART and Other

     6,727        5,946        781       13.1
  

 

 

    

 

 

    

 

 

   

Total

   $ 24,450      $ 31,762      $ (7,312     (23.0 )% 
  

 

 

    

 

 

    

 

 

   

For the three months ended March 31, 2012, our DemandSMART revenues decreased by $8.1 million, or 31%, as compared to the three months ended March 31, 2011. The decrease in our DemandSMART revenues was primarily attributable to changes in the following existing operating areas (dollars in thousands):

 

     Revenue Decrease :  
     March 31, 2011 to
March 31, 2012
 

ISO-NE

   $ (5,428

OPA

     (2,660

Other (1)

     (5
  

 

 

 

Total decreased DemandSMART revenues

   $ (8,093
  

 

 

 

 

  (1) The amounts included in this category relate to net change in revenues in various demand response programs, none of which are individually material.

 

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The decrease in DemandSMART revenues during the three months ended March 31, 2012 as compared to the same period in 2011 was primarily due to decreased energy payments as a result of fewer demand response events, as well as less favorable pricing and a decrease in enrolled MW in our ISO-NE programs. The decrease in DemandSMART revenues during the three months ended March 31, 2012 as compared to the same period in 2011 was also due to a decrease in revenues recognized under our utility contract with OPA, or the OPA contract, which was amended to modify certain refund provisions during the three months ended March 31, 2011. As a result of the amendment to the OPA contract, we concluded that we could reliably estimate the fees potentially subject to refund as of March 31, 2011, and therefore, during the three months ended March 31, 2011, we recorded revenues under the OPA contract totaling $3.0 million that had been previously deferred and for which the corresponding cost of revenues were recorded in prior periods. There was no similar recognition of deferred revenues under the OPA contract during the three months ended March 31, 2012.

In addition, the decrease in DemandSMART revenues was attributable to the finalization of performance related to a certain California demand response program for which we had earned additional revenues recorded during the three months ended March 31, 2011 related to our performance during the year ended December 31, 2010 and for which the corresponding cost of revenues were recorded in 2010. There was no similar transaction during the three months ended March 31, 2012. Also contributing to the decrease in revenues during the three months ended March 31, 2012 as compared to the same period in 2011 was a decrease in market rates in certain of our open market programs, which was partially offset by an increase in our MW under management in certain of our other demand response programs.

For the three months ended March 31, 2012, our EfficiencySMART, SupplySMART and CarbonSMART applications and services and other revenues increased by $0.8 million primarily as a result of recognizing a full quarter of revenues during the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 related to our acquisitions of Global Energy Partners, Inc., or Global Energy, and M2M that occurred during the three months ended March 31, 2011. The increase was also due to an increase in EfficiencySMART customers.

We currently expect our total revenues to decrease for fiscal 2012 as compared to fiscal 2011, primarily due to an expected decrease in revenues derived from the PJM market. This expected decrease is due to a decline in enrolled MW in the PJM market, a decline in MW obligation in a particular zone within the PJM market, a decline in PJM prices during fiscal 2012 as compared to fiscal 2011 and the implementation of PJM’s proposed market rule changes regarding capacity compliance measurement and verification. Until PJM prices return to more historic levels, we expect our revenues derived from the PJM market to decrease as a percentage of total annual revenues. We expect that this decrease will be partially offset as we further increase our MW under management in our other operating regions, enroll new C&I customers in our demand response programs, expand the sales of our EfficiencySMART, SupplySMART and CarbonSMART applications and services and other services and products to our new and existing C&I customers, and pursue more favorable pricing opportunities with our C&I customers.

In addition, the discontinuance of PJM’s Interruptible Load for Reliability program, beginning in June 2012, will reduce the flexibility that we currently have to manage our portfolio of demand response capacity in the PJM market and will negatively impact our future revenues.

Gross Profit and Gross Margin

The following table summarizes our gross profit and gross margin percentages for our energy management applications, services and products for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

Three Months Ended March 31,  
2012     2011  
Gross Profit      Gross Margin     Gross Profit      Gross Margin  
$ 5,888        24.1   $ 12,561        39.5

 

 

    

 

 

   

 

 

    

 

 

 

Our gross profit decreased during the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to the decrease in our revenues, as well as the recognition of significant previously deferred revenues in connection with the OPA contract and a certain California demand response program in which we participated during the three months ended March 31, 2011, for which we recognized the cost of such revenues in prior periods.

Our gross margin decreased during the three months ended March 31, 2012 as compared to the same period in 2011 primarily due to the recognition of revenues during the three months ended March 31, 2011 in connection with the OPA contract and a California demand response program in which we participated, for which we recognized the cost of such revenues in previous periods.

 

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The decrease in gross margin was also partially a result of less favorable pricing in ISO-NE, which was not entirely offset by lower payments to our C&I customers.

We currently expect that our gross margin for fiscal 2012 will be similar to our gross margin for fiscal 2011 due to the management of our portfolio of demand response capacity offsetting a decrease in MW enrolled in the PJM market, a decrease in PJM prices in fiscal 2012 as compared to fiscal 2011, which will not be entirely offset by lower payments to our C&I customers, and the implementation of PJM’s proposed market rule changes regarding capacity compliance measurement and verification. We also expect that our gross margin for the three months ending September 30, 2012 will be the highest gross margin among our four quarterly reporting periods in fiscal 2012, consistent with our gross margin pattern in fiscal 2011, due to seasonality related to the demand response industry.

Operating Expenses

The following table summarizes our operating expenses for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

     Three Months Ended March 31,      Percentage
Change
 
     2012      2011     

Operating Expenses:

        

Selling and marketing

   $ 12,430      $ 11,587        7.3

General and administrative

     17,724        16,313        8.6

Research and development

     3,804        3,232        17.7
  

 

 

    

 

 

    

Total

   $ 33,958      $ 31,132        9.1
  

 

 

    

 

 

    

In certain forward capacity markets in which we choose to participate, such as PJM, we may enable our C&I customers, meaning we may install our equipment at a C&I customer site to allow for the curtailment of MW from the electric power grid, up to twelve months in advance of enrolling the C&I customer in a particular program. This market feature creates a longer average revenue recognition lag time across our C&I customer portfolio from the point in time when we consider a MW to be under management to when we actually earn revenues from that MW. Because we incur operational expenses, including salaries and related personnel costs, at the time of enablement, there has been a trend of incurring operating expenses associated with enabling our C&I customers in advance of recognizing the corresponding revenues.

The increase in payroll and related costs within our operating expenses during the three months ended March 31, 2012 as compared to the same period in 2011 was primarily driven by an increase in headcount, from 570 full-time employees at March 31, 2011 to 630 full-time employees at March 31, 2012, primarily as a result of our acquisition of Energy Response in July 2011. This increase was partially offset by a decrease in expected cash bonuses for fiscal 2012 as we granted certain restricted stock awards in lieu of a portion of cash bonuses, which awards will vest only if certain performance conditions are achieved. The expense related to these restricted stock awards is recorded as a component of stock-based compensation expense.

Selling and Marketing Expenses

 

     Three Months Ended March 31,      Percentage
Change
 
     2012      2011     

Payroll and related costs

   $ 8,373      $ 7,649        9.5

Stock-based compensation

     1,054        1,043        1.1

Other

     3,003        2,895        3.7
  

 

 

    

 

 

    

Total

   $ 12,430      $ 11,587        7.3
  

 

 

    

 

 

    

The increase in selling and marketing expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to an increase in payroll and related costs resulting from the increase in the number of selling and marketing full-time employees from 179 at March 31, 2011 to 202 at March 31, 2012. This increase was offset by a decrease in expected cash bonuses for fiscal 2012 as a portion of those bonuses will be settled in shares of our common stock and therefore is recorded in stock-based compensation expense.

 

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The increase in stock-based compensation for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to the expense related to a portion of the expected cash bonuses for fiscal 2012 that will be settled in shares of our common stock and is therefore recorded as a component of stock-based compensation expense. This increase was offset by a reversal of stock-based compensation expense due to forfeitures of a greater number of stock-based awards.

The increase in other selling and marketing expenses for the three months ended March 31, 2012 as compared to the three months ended March 31, 2011 was due to a $0.2 million increase attributable to the allocation of company-wide costs based on headcount due to the increase in the number of selling and marketing full-time employees, offset by a $0.1 million decrease in amortization due to the impairment of intangible assets during the third quarter of 2011.

General and Administrative Expenses

 

     Three Months Ended March 31,      Percentage
Change
 
     2012      2011     

Payroll and related costs

   $ 9,272      $ 9,517        (2.6 )% 

Stock-based compensation

     2,010        2,168        (7.3 )% 

Other

     6,442        4,628        39.2
  

 

 

    

 

 

    

Total

   $ 17,724      $ 16,313        8.6
  

 

 

    

 

 

    

The increase in general and administrative expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily driven by non-compensation related expenses. The increase in other general and administrative expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily attributable to an increase in amortization expense of $0.9 million as a result of our acquisition of Energy Response in July 2011. The increase was also due to a $0.5 million increase in technology and communications expenses due to software licensing and a $0.7 million increase in professional services expenses due to an increase in legal expenses. This increase was offset by a $0.3 million decrease in finance charges due to fees related to an arrangement that was terminated in late 2011.

The decrease in payroll and related costs for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to a decrease in bonus expense. Although headcount increased from 318 at March 31, 2011 to 349 at March 31, 2012, bonus expense decreased during that period due to a portion of the expected cash bonuses for fiscal 2012 that will be settled in shares of our common stock resulting in the expense being recorded in stock-based compensation expense.

The decrease in stock-based compensation for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to a reversal of stock-based compensation expense related to the forfeiture of stock-based awards that were granted to our former chief financial officer, as well as fully-vested stock awards granted to our board of directors with a lower grant-date fair value in the three months ended March 31, 2012 than the same amount of stock-based awards granted during the three months ended March 31, 2011. This decrease was offset by an increase in stock-based compensation related to a portion of the expected cash bonuses for fiscal 2012 that will be settled in shares of our common stock, which is recorded as a component of stock-based compensation expense.

Research and Development Expenses

 

     Three Months Ended March 31,      Percentage
Change
 
     2012      2011     

Payroll and related costs

   $ 2,253      $ 1,755        28.4

Stock-based compensation

     314        271        15.9

Other

     1,237        1,206        2.6
  

 

 

    

 

 

    

Total

   $ 3,804      $ 3,232        17.7
  

 

 

    

 

 

    

 

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The increase in research and development expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily driven by the costs associated with an increase in the number of research and development full-time employees from 73 at March 31, 2011 to 79 at March 31, 2012, as well as an increase in salary rates per full-time employee. This increase was offset by a decrease in the expense related to a portion of the expected cash bonuses for fiscal 2012 that will be settled in shares of our common stock, resulting in the expense being recorded in stock-based compensation expense.

The increase in stock-based compensation for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily due to the expense related to a portion of the expected cash bonuses for fiscal 2012 that will be settled in shares of our common stock and is therefore recorded as a component of stock-based compensation expense.

The increase in other research and development expenses for the three months ended March 31, 2012 compared to the three months ended March 31, 2011 was primarily related to a $0.1 million increase in technology and communications related to software licenses and fees used in the development of our energy management applications, services and products and a $0.1 million increase related to the allocation of company-wide costs based on headcount due to the increase in the number of research and development full-time employees. This increase was offset by a $0.2 million decrease in professional services expense related to fewer consultants utilized as compared to the prior period.

Other Income, Net

Other income, net for the three months ended March 31, 2012 was $1.2 million as compared to other income, net of $0.1 for the three months ended March 31, 2011. The increase in other income, net was due to foreign exchange gains related to intercompany receivables held by the U.S. parent denominated in Australian dollars.

Income Taxes

The tax provision recorded for the three months ended March 31, 2012 was $0.4 million and represented the following:

 

   

estimated foreign taxes resulting from guaranteed profit allocable to our foreign subsidiaries, which have been determined to be limited-risk service providers acting on behalf of the U.S. parent for tax purposes, for which there are no tax net operating loss carryforwards, and

 

   

amortization of tax deductible goodwill, which generates a deferred tax liability that cannot be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature.

In accordance with ASC 740, Income Taxes, or ASC 740, each interim period is considered an integral part of the annual period and tax expense is measured using an estimated annual effective tax rate. An enterprise is required, at the end of each interim reporting period, to make its best estimate of the annual effective tax rate for the full fiscal year and use that rate to provide for income taxes on a current year-to-date basis. Generally, if an enterprise has an ordinary loss for the year to date at the end of an interim period and anticipates ordinary income for the fiscal year, the enterprise will record an interim period tax benefit based on applying the estimated annual effective tax rate to the ordinary loss as long as the tax benefits are realized during the year or recognizable as a deferred tax asset as of the end of the year. However, if an enterprise is unable to make a reliable estimate of its annual effective tax rate then the actual effective tax rate for the year-to-date may be the best estimate of the annual effective tax rate. We have determined that we are currently unable to make a reliable estimate of our annual effective tax rate as of March 31, 2012 due to unusual sensitivity to the rate as it relates to the current forecasted fiscal 2012 U.S. ordinary loss. As a result, we recorded a tax provision for the three months ended March 31, 2012 based on our actual effective tax rate for that period.

If we are able to make a reliable estimate of our annual effective tax rate as of June 30, 2012, then, as required by ASC 740, we will utilize that rate to provide for income taxes on a current year-to-date basis, which could result in a significant benefit from income taxes being recorded during the three months ending June 30, 2012. If we continue to be unable to make a reliable estimate of our annual effective tax rate as of June 30, 2012, we expect to follow a consistent methodology as applied for the three months ended March 31, 2012 and record a provision for income taxes for the three months ending June 30, 2012.

We reviewed all available evidence to evaluate the recovery of deferred tax assets, including the recent history of accumulated losses in all tax jurisdictions over the last three years, as well as our ability to generate income in future periods. As of March 31, 2012, due to the uncertainty related to the ultimate use of our deferred income tax assets, we have provided a full valuation allowance on all of our U.S. deferred tax assets.

 

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For the three months ended March 31, 2011, due to the fact that we had determined that we could not make a reliable estimate of our annual effective rate at March 31, 2011, we recorded an income tax provision of $0.7 million based on the estimated foreign taxes resulting from guaranteed profit allocable to our foreign subsidiaries, which were determined to be limited-risk service providers acting on behalf of the U.S. parent for tax purposes, for which there were no tax net operating loss carryforwards, and amortization of tax deductible goodwill, which generated a deferred tax liability that could not be offset by net operating losses or other deferred tax assets since its reversal is considered indefinite in nature.

Liquidity and Capital Resources

Overview

We have generated significant cumulative losses since inception. As of March 31, 2012, we had an accumulated deficit of $108.9 million. As of March 31, 2012, our principal sources of liquidity were cash and cash equivalents totalling $80.8 million, a decrease of $6.5 million from the December 31, 2011 balance of $87.3 million. In April 2011, we and one of our subsidiaries entered into a $75.0 million senior secured revolving credit facility pursuant to a credit agreement with SVB and one other financial institution, which was subsequently amended in June 2011, November 2011 and December 2011, and which we refer to as the 2011 credit facility. In March 2012, we and one of our subsidiaries entered into the 2012 credit facility, which replaced the 2011 credit facility and under which SVB became the sole lender, our borrowing limit was decreased from $75.0 million to $50.0 million and certain of the financial covenant compliance requirements were modified or eliminated. See “-Credit Facility Borrowings” below. As of March 31, 2012, we were contingently liable for $ 25.5 million in connection with outstanding letters of credit under the 2012 credit facility and were contingently liable for $13.5 million in connection with outstanding letters of credit with another financial institution which was collateralized with $14.2 million of restricted cash held by that financial institution. As of March 31, 2012 and December 31, 2011, we had restricted cash balances of $14.2 million and $0.2 million, respectively, which relate to amounts to collateralize unused outstanding letters of credit and cover financial assurance requirements in certain of the programs in which we participate. At March 31, 2012 and December 31, 2011, our excess cash was primarily invested in money market funds.

We believe our existing cash and cash equivalents at March 31, 2012, our anticipated net cash flows from operating activities and amounts available under the 2012 credit facility will be sufficient to meet our anticipated cash needs, including investing activities, for at least the next 12 months. Our future working capital requirements will depend on many factors, including, without limitation, the rate at which we sell certain of our energy management applications, services and products to electric power grid operators and utilities and the increasing rate at which letters of credit or security deposits are required by those electric power grid operators and utilities, the introduction and market acceptance of new energy management applications, services and products, the expansion of our sales and marketing and research and development activities, and the geographic expansion of our business operations. To the extent that our cash and cash equivalents, our anticipated net cash flows from operating activities and amounts available under the 2012 credit facility are insufficient to fund our future activities or planned future acquisitions, we may be required to raise additional funds through bank credit arrangements or public or private equity or debt financings. We also may raise additional funds in the event we determine in the future to effect one or more acquisitions of businesses, technologies or products. In addition, we may elect to raise additional funds even before we need them if the conditions for raising capital are favorable. Accordingly, we have filed a shelf registration statement with the SEC to register shares of our common stock and other securities for sale, giving us the opportunity to raise additional capital when needed or otherwise considered appropriate at prices and on terms to be determined at the time of any such offerings. We currently have the ability to sell approximately $62.1 million of our securities under our shelf registration statement. Any equity or equity-linked financing could be dilutive to existing stockholders. In the event we require additional cash resources, we may not be able to obtain bank credit arrangements or effect any equity or debt financing on terms acceptable to us or at all.

Cash Flows

The following table summarizes our cash flows for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

     Three Months Ended March 31,  
     2012     2011  

Cash flows used in operating activities

   $ (188   $ (5,688

Cash flows used in investing activities

     (6,313     (46,016

Cash flows provided by financing activities

     64       1,030  

Effects of exchange rate changes on cash

     (30     (100
  

 

 

   

 

 

 

Net change in cash and cash equivalents

   $ (6,467   $ (50,774
  

 

 

   

 

 

 

 

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Cash Flows Used in Operating Activities

Cash used in operating activities primarily consists of net loss adjusted for certain non-cash items including depreciation and amortization, stock-based compensation expenses, and the effect of changes in working capital and other activities.

Cash used in operating activities for the three months ended March 31, 2012 was $0.2 million and consisted of net loss of $27.7 million, offset by $9.5 million of non-cash items, primarily consisting of depreciation and amortization, deferred taxes, stock-based compensation charges and non-cash interest expense, as well as $18.0 million of net cash provided by working capital and other activities. Cash provided by working capital and other activities consisted of an increase of $7.3 million in deferred revenue and a decrease of $38.7 million in unbilled revenues relating to the PJM demand response market. These amounts were offset by cash used in working capital and other activities consisting of a decrease of accrued capacity payments of $17.1 million, the majority of which was related to the PJM demand response market, a decrease of $4.6 million in accrued payroll and related expenses, a decrease of $0.5 million in accounts payable, accrued performance adjustments and accrued expenses due to the timing of payments, an increase of $4.0 million in accounts receivable due to the timing of cash receipts under the programs in which we participate, and an increase in prepaid expenses and other current assets and other assets of $0.5 million and $1.4 million, respectively, primarily related to direct and incremental capitalized customer costs where the associated revenues have been deferred.

Cash used in operating activities for the three months ended March 31, 2011 was $5.7 million and consisted of net loss of $19.3 million, offset by $8.9 million of non-cash items, primarily consisting of depreciation and amortization, deferred taxes, stock-based compensation charges and impairment of property and equipment, as well as $4.7 million of net cash provided by working capital and other activities. Cash provided by working capital and other activities consisted of an increase of $1.1 million in deferred revenue and a decrease of $43.0 million in unbilled revenues relating to the PJM demand response market. These amounts were offset by cash used in working capital and other activities consisting of a decrease of $3.3 million in accrued payroll and related expenses, a decrease of $5.0 million in accounts payable and accrued expenses due to the timing of payments, a decrease of accrued capacity payments of $24.9 million, the majority of which was related to the PJM demand response market, an increase in prepaid expenses and other assets of $3.3 million and an increase of $2.9 million in accounts receivable due to the timing of cash receipts under the programs in which we participate.

Cash Flows Used in Investing Activities

Cash used in investing activities for the three months ended March 31, 2012 was $6.3 million. During the three months ended March 31, 2012, we incurred $3.6 million in capital expenditures primarily related to the purchase of office equipment and demand response equipment and other miscellaneous capital expenditures. In addition, during the three months ended March 31, 2012, our restricted cash and deposits increased by $2.6 million due to a $14.3 million increase in restricted cash to collateralize a $13.5 million letter of credit, offset by a $11.7 million decrease in deposits related to the financial assurance requirements for our demand response programs in Australia, which were previously collateralized with cash and for which a letter of credit was issued under the 2012 credit facility during the three months ended March 31, 2012.

Cash used in investing activities for the three months ended March 31, 2011 was $46.0 million. During the three months ended March 31, 2011, we acquired Global Energy for a purchase price of $26.7 million, of which $19.9 million was paid in cash, M2M for a purchase price of $29.9 million, of which $17.6 million was paid in cash, and DMT Energy Pty Ltd for a purchase price of $5.2 million, of which $3.9 million was paid in cash. Additionally, our cash investments included the cash portion of the acquisition contingent consideration for Cogent Energy, Inc., or Cogent, of $1.5 million. Our principal cash investments during the three months ended March 31, 2011 related to capitalizing internal use software costs used to build out and expand our energy management applications and services and purchases of property and equipment. During the three months ended March 31, 2011, we also incurred $3.5 million in capital expenditures primarily related to the purchase of office equipment and demand response equipment and other miscellaneous expenditures.

Cash Flows Provided by Financing Activities

Cash provided by financing activities was $0.1 million and $1.0 million for the three months ended March 31, 2012 and 2011, respectively, and consisted primarily of proceeds that we received from exercises of options to purchase shares of our common stock during those periods.

 

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Credit Facility Borrowings

In April 2011, we and one of our subsidiaries entered into the 2011 credit facility with SVB and one other financial institution. In March 2012, we and one of our subsidiaries entered into the 2012 credit facility, under which SVB became the sole lender, our borrowing limit was decreased from $75.0 million to $50.0 million and certain of our financial covenant compliance requirements were modified or eliminated. The material changes in the 2012 credit facility to our monthly and quarterly financial covenants included:

 

   

a decrease in the quarterly financial covenant related to minimum earnings levels and a change in the calculation, which is now based on earnings before depreciation and amortization expense, interest expense, provision for income taxes, stock-based compensation expense, rent expense, certain impairment charges and certain other non-cash charges over a trailing twelve month period;

 

   

amendment to our monthly financial covenant related to maintenance of a minimum specified ratio of current assets to current liabilities reducing the required minimum of unrestricted cash from $50.0 million to $30.0 million for certain periods; and

 

   

elimination of the quarterly financial covenant related to maintenance of a minimum specified fixed charge coverage ratio.

The 2012 credit facility also decreased the letter of credit fee charged in connection with the issuance or renewal of letters of credit for our account from 2.125 % to 2.0%.

Subject to continued compliance with the covenants contained in the 2012 credit facility, the full amount of the 2012 credit facility may be available for issuances of letters of credit and up to $5.0 million of the 2012 credit facility may be available for swing line loans. The interest on revolving loans under the 2012 credit facility will accrue, at our election, at either (i) the Eurodollar Rate with respect to the relevant interest period plus 2.00% or (ii) the ABR (defined as the highest of (x) the “prime rate” as quoted in the  Wall Street Journal , (y) the Federal Funds Effective Rate plus 0.50% and (z) the Eurodollar Rate for a one-month interest period plus 1.00%) plus 1.00%. We expense the interest and letter of credit fees incurred under the 2012 credit facility, as applicable, in the period incurred. The obligations under the 2012 credit facility are secured by all of our domestic assets and the domestic assets of several of our subsidiaries, excluding our foreign subsidiaries. The 2012 credit facility terminates and all amounts outstanding thereunder are due and payable in full on April 15, 2013. We incurred financing costs of $0.5 million in connection with the 2011 credit facility, which were deferred and were being amortized to interest expense over the term of the 2011 credit facility, or through April 15, 2013. In connection with the 2012 credit facility, we incurred financing costs of $0.1 million which were deferred and are being amortized to interest expense over the term of the 2012 credit facility. As a result of the 2012 credit facility, during the three months ended March 31, 2012, in addition to the amortization of deferred financing costs, we expensed $0.1 million, or 33%, of the remaining initial deferred financing costs related to the 33% reduction in the available borrowing limit.

The 2012 credit facility contains customary terms and conditions for credit facilities of this type, including, among other things, restrictions on our ability and the ability of our subsidiaries to incur additional indebtedness, create liens, enter into transactions with affiliates, transfer assets, make certain acquisitions, pay dividends or make distributions on, or repurchase our common stock, consolidate or merge with other entities, or undergo a change in control. In addition, we are required to meet certain monthly and quarterly financial covenants customary with this type of credit facility. The 2012 credit facility contains customary events of default, including for payment defaults, breaches of representations, breaches of affirmative or negative covenants, cross defaults to other material indebtedness, bankruptcy and failure to discharge certain judgments. If a default occurs and is not cured within any applicable cure period or is not waived, SVB may accelerate our obligations under the 2012 credit facility. If we are determined to be in default then any amounts outstanding under the 2012 credit facility would become immediately due and payable and we would be required to collateralize any outstanding letters of credit with cash in an amount up to 105% of the amounts outstanding.

As of March 31, 2012, we were in compliance with all of our covenants under the 2012 credit facility, including all financial covenants. We are reasonably assured that we will comply with the financial covenants under the 2012 credit facility for the foreseeable future. As of March 31, 2012, we had no borrowings, but had outstanding letters of credit totaling $ 25.5 million under the 2012 credit facility. As of March 31, 2012, we had $24.5 million available under the 2012 credit facility for future borrowings or issuances of additional letters of credit, and outstanding letters of credit of $13.5 million with another financial institution, which was collateralized with by $14.2 million of restricted cash.

 

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In April 2012, we replaced a $13.5 million letter of credit from a financial institution which was collateralized with $14.2 million of cash held by that financial institution, included in restricted cash in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2012, with a letter of credit that was issued under the 2012 credit facility. As a result, the $14.2 million of cash is no longer restricted.

In May 2012, we were required to provide financial assurance in connection with our capacity bid in a certain open market bidding program. We provided this financial assurance utilizing approximately $45.0 million of our available cash on hand and a $7.0 million letter of credit issued under the 2012 credit facility. Based on our prior experience with this certain open market bidding program, we currently expect that we will recover a portion of this cash and these letters of credit during the second quarter of 2012.

Capital Spending

We have made capital expenditures primarily for general corporate purposes to support our growth and for equipment installation related to our business. Our capital expenditures totaled $3.6 million and $3.5 million during the three months ended March 31, 2012 and 2011, respectively. As we continue to grow, we expect our capital expenditures for fiscal 2012 to increase as compared to fiscal 2011.

Contractual Obligations

As of March 31, 2012, the contractual obligations disclosure contained in our 2011 Form 10-K has not materially changed.

Off-Balance Sheet Arrangements

As of March 31, 2012, we did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, changes in our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. We have issued letters of credit in the ordinary course of our business in order to participate in certain demand response programs. As of March 31, 2012, we had outstanding letters of credit totaling $25.5 million under the 2012 credit facility and outstanding letters of credit of $13.5 million with another financial institution, which was collateralized with by $14.2 million of restricted cash. For information on these commitments and contingent obligations, see “Liquidity and Capital Resources – Credit Facility Borrowings” above and Note 7 to our unaudited condensed consolidated financial statements contained herein.

Critical Accounting Policies and Use of Estimates

The discussion and analysis of our financial condition and results of operations are based upon our interim unaudited condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to revenue recognition for multiple element arrangements, allowance for doubtful accounts, valuations and purchase price allocations related to business combinations, expected future cash flows including growth rates, discount rates, terminal values and other assumptions and estimates used to evaluate the recoverability of long-lived assets and goodwill, estimated fair values of intangible assets and goodwill, amortization methods and periods, certain accrued expenses and other related charges, stock-based compensation, contingent liabilities, tax reserves and recoverability of our net deferred tax assets and related valuation allowance. We base our estimates on historical experience and various other assumptions that are believed to be reasonable under the circumstances. Actual results could differ from these estimates if past experience or other assumptions do not turn out to be substantially accurate. Any differences may have a material impact on our financial condition and results of operations.

The critical accounting estimates used in the preparation of our financial statements that we believe affect our more significant judgments and estimates used in the preparation of our interim condensed consolidated financial statements presented in this Quarterly Report on Form 10-Q are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in the notes to the consolidated financial statements included in our 2011 Form 10-K. There have been no material changes to our critical accounting policies or estimates during the three months ended March 31, 2012.

Recent Accounting Pronouncements

Disclosures about Offsetting Assets and Liabilities

In December 2011, the Financial Accounting Standards Board, or FASB, issued ASU No. 2011-11, “ Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities,” or ASU 2011-11. ASU 2011-11 requires an entity to disclose information about

 

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offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. An entity is required to apply ASU 2011-11 for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by ASU 2011-11 retrospectively for all comparative periods presented. We do not expect that the adoption of ASU 2011-11 will have a significant, if any, impact on our consolidated financial statements.

Additional Information

Non-GAAP Financial Measures

To supplement our consolidated financial statements presented on a GAAP basis, we disclose certain non-GAAP measures that exclude certain amounts, including non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow. These non-GAAP measures are not in accordance with, or an alternative for, generally accepted accounting principles in the United States.

The GAAP measure most comparable to non-GAAP net income (loss) is GAAP net income (loss); the GAAP measure most comparable to non-GAAP net income (loss) per share is GAAP net income (loss) per share; the GAAP measure most comparable to adjusted EBITDA is GAAP net income (loss); and the GAAP measure most comparable to free cash flow is cash flows from operating activities. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measure are included below.

Use and Economic Substance of Non-GAAP Financial Measures Used by EnerNOC

Management uses these non-GAAP measures when evaluating our operating performance and for internal planning and forecasting purposes. Management believes that such measures help indicate underlying trends in our business, are important in comparing current results with prior period results, and are useful to investors and financial analysts in assessing our operating performance. For example, management considers non-GAAP net income or loss to be an important indicator of our overall performance because it eliminates certain of the more significant effects of our acquisitions and related activities and non-cash compensation expenses. In addition, management considers adjusted EBITDA to be an important indicator of our operational strength and performance of our business and a good measure of our historical operating trend. Moreover, management considers free cash flow to be an indicator of our operating trend and performance of our business.

The following is an explanation of the non-GAAP measures that we utilize, including the adjustments that management excluded as part of the non-GAAP measures for the three months ended March 31, 2012 and 2011, respectively, as well as reasons for excluding these individual items:

 

   

Management defines non-GAAP net income (loss) as net income (loss) before expenses related to stock-based compensation and amortization expenses related to acquisition-related intangible assets, net of related tax effects.

 

   

Management defines adjusted EBITDA as net income (loss), excluding depreciation, amortization, stock-based compensation, interest, income taxes and other income (expense). Adjusted EBITDA eliminates items that represent certain of the more significant effects of our acquisitions and related activities, that are not part of our core operations or do not require a cash outlay, such as stock-based compensation. Adjusted EBITDA also excludes depreciation, which is based on our estimate of the useful life of tangible assets. These estimates could vary from actual performance of the asset, are based on historic cost incurred to build out our deployed network and may not be indicative of current or future capital expenditures.

 

   

Management defines free cash flow as net cash provided by (used in) operating activities less capital expenditures. Management defines capital expenditures as purchases of property and equipment, which includes capitalization of internal-use software development costs.

Material Limitations Associated with the Use of Non-GAAP Financial Measures

Non-GAAP net income (loss), non-GAAP net income (loss) per share, adjusted EBITDA and free cash flow may have limitations as analytical tools. The non-GAAP financial information presented here should be considered in conjunction with, and not as a substitute for or superior to, the financial information presented in accordance with GAAP and should not be considered measures of our liquidity. There are significant limitations associated with the use of non-GAAP financial measures. Further, these measures may differ from the non-GAAP information, even where similarly titled, used by other companies and therefore should not be used to compare our performance to that of other companies.

 

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Table of Contents

Non-GAAP Net Loss and Non-GAAP Net Loss per Share

Net loss for the three months ended March 31, 2012 was $27.7 million, or $1.06 per basic and diluted share, compared to a net loss of $19.3 million, or $0.76 per basic and diluted share, for the three months ended March 31, 2011. Excluding stock-based compensation charges and amortization of expenses related to acquisition-related assets, net of tax effects, non-GAAP net loss for the three months ended March 31, 2012 was $22.5 million, or $0.86 per basic and diluted share, compared to a non-GAAP net loss of $14.6 million, or $0.58 per basic and diluted share, for the three months ended March 31, 2011. The reconciliation of non-GAAP net loss to GAAP net loss is set forth below:

 

     Three Months Ended March 31,  
     2012     2011  
    

(In thousands, except share and

per share data)

 

GAAP net loss

   $ (27,713   $ (19,272

ADD: Stock-based compensation

     3,378       3,482  

ADD: Amortization expense of acquired intangible assets

     1,836       1,152  

LESS: Income tax effect on Non-GAAP adjustments (1)

     —          —     
  

 

 

   

 

 

 

Non-GAAP net loss

   $ (22,499   $ (14,638
  

 

 

   

 

 

 

GAAP net loss per basic share

   $ (1.06   $ (0.76

ADD: Stock-based compensation

     0.13       0.14  

ADD: Amortization expense of acquired intangible assets

     0.07       0.04  

LESS: Income tax effect on Non-GAAP adjustments (1)

     —          —     
  

 

 

   

 

 

 

Non-GAAP net loss per basic share

   $ (0.86   $ (0.58
  

 

 

   

 

 

 

GAAP net loss per diluted share

   $ (1.06   $ (0.76

ADD: Stock-based compensation

     0.13       0.14  

ADD: Amortization expense of acquired intangible assets

     0.07       0.04  

LESS: Income tax effect on Non-GAAP adjustments

     —          —     
  

 

 

   

 

 

 

Non-GAAP net loss per diluted share (1)

   $ (0.86   $ (0.58
  

 

 

   

 

 

 

Weighted average number of common shares outstanding

    

Basic

     26,251,322       25,248,650  

Diluted

     26,251,322       25,248,650  

 

  (1) The non-GAAP adjustments would have no impact on the provision for income taxes recorded for the three months ended March 31, 2012 or 2011, respectively.

Adjusted EBITDA

Adjusted EBITDA was negative $18.6 million and negative $10.3 million for the three months ended March 31, 2012 and 2011, respectively. The reconciliation of adjusted EBITDA to net loss is set forth below:

 

     Three Months Ended March 31,  
     2012     2011  

Net loss

   $ (27,713   $ (19,272

Add back:

    

Depreciation and amortization

     6,110       4,777  

Stock-based compensation expense

     3,378       3,482  

Other income

     (1,233     (128

Interest expense

     480       163  

Provision for income tax

     396       666  
  

 

 

   

 

 

 

Adjusted EBITDA

   $ (18,582   $ (10,312
  

 

 

   

 

 

 

 

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Table of Contents

Free Cash Flow

Cash flow used in operating activities was $0.2 million and $5.7 million for the three months ended March 31, 2012 and 2011, respectively. We incurred negative free cash flows of $3.7 million and $9.2 million for the three months ended March 31, 2012 and 2011, respectively. The reconciliation of free cash flow to cash flow from operating activities is set forth below:

 

     Three Months Ended March 31,  
     2012     2011  

Net cash used in operating activities

   $ (188   $ (5,688

Subtract:

    

Purchases of property and equipment

     (3,553     (3,464
  

 

 

   

 

 

 

Free cash flow

   $ (3,741   $ (9,152
  

 

 

   

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Except as disclosed herein, there have been no material changes in the interest rate risk information and foreign exchange risk information disclosed in the “Quantitative and Qualitative Disclosures About Market Risk” subsection of the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2011 Form 10-K during the three months ended March 31, 2012.

Foreign Currency Exchange Risk

Our international business is subject to risks, including, but not limited to unique economic conditions, changes in political climate, differing tax structures, other regulations and restrictions, and foreign exchange rate volatility. Accordingly, our future results could be materially adversely impacted by changes in these or other factors.

A substantial majority of our foreign expense and sales activities are transacted in local currencies, including Australian dollars, British pounds, Canadian dollars and New Zealand dollars. In addition, our foreign sales are denominated in local currencies. Fluctuations in the foreign currency rates could affect our sales, cost of revenues and profit margins and could result in exchange losses. In addition, currency devaluations can result in a loss if we maintain deposits in a foreign currency. During the three months ended March 31, 2012, approximately 13% of our consolidated sales were generated outside the United States, and we anticipate that sales generated outside the United States will represent greater than 10% of our consolidated sales for fiscal 2012 and will continue to grow in subsequent fiscal years.

We believe that the operating expenses of our international subsidiaries that are incurred in local currencies will not have a material adverse effect on our business, results of operations or financial condition for fiscal 2012. Our operating results and certain assets and liabilities that are denominated in foreign currencies are affected by changes in the relative strength of the U.S. dollar against the applicable foreign currency. Our expenses denominated in foreign currencies are positively affected when the U.S. dollar strengthens against the applicable foreign currency and adversely affected when the U.S. dollar weakens.

During the three months ended March 31, 2012 and 2011, we incurred foreign exchange gains of $1.1 million and $0.1 million, respectively. The significant increase in gains arising from transactions denominated in foreign currencies for the three months ended March 31, 2012 as compared to the same period of 2011 was due to the significant increase of foreign denominated intercompany receivables held by us from one of our Australian subsidiaries primarily as a result of the funding provided to complete the acquisition of Energy Response and the weakening of the U.S. dollar as compared to the Australian dollar during the three months ended March 31, 2012. During the three months ended March 31, 2012, we realized gains of $0.5 million related to transactions denominated in foreign currencies. During the three months ended March 31, 2011, there were no material realized gains or losses related to transactions denominated in foreign currencies. As of March 31, 2012, we had an intercompany receivable from our Australian subsidiary that is denominated in Australian dollars and not deemed to be of a “long-term investment nature” totaling $18.3 million, or $17.6 million Australian.

A hypothetical 10% increase or decrease in foreign currencies that we transact in would not have a material adverse effect on our financial condition or results of operations other than the impact on the unrealized gain (loss) on the intercompany receivable held by us from our Australian subsidiary that is denominated in Australian dollars, for which a hypothetical 10% increase or decrease in the foreign currency would result in an incremental $1.8 million gain or loss.

 

37


Table of Contents

We currently do not have a program in place that is designed to mitigate our exposure to changes in foreign currency exchange rates. We are evaluating certain potential programs, including the use of derivative financial instruments to reduce our exposure to a reduction in U.S. dollar value and the volatility of future cash flows caused by changes in currency exchange rates. The utilization of forward foreign currency contracts would reduce, but would not eliminate, the impact of currency exchange rate movements.

Item 4. Controls and Procedures

Disclosure Controls and Procedures.

Our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Internal Control over Financial Reporting.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. We do not expect the ultimate costs to resolve these matters to have a material adverse effect on our consolidated financial condition, results of operations or cash flows.

Item 1A. Risk Factors

We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. In addition to the other information set forth in this Quarterly Report on Form 10-Q, the risks and uncertainties that we believe are most important for you to consider are discussed in Part I — Item 1A under the heading “Risk Factors” in our 2011 Form 10-K. During the three months ended March 31, 2012, there were no material changes to the risk factors that were disclosed in Part I — Item 1A under the heading “Risk Factors” in our 2011 Form 10-K.

 

38


Table of Contents

Item 6. Exhibits.

 

  10.1*    Amended and Restated Credit Agreement among EnerNOC, Inc., ENOC Securities Corporation and Silicon Valley Bank, dated as of March 14, 2012.
  31.1*    Certification of Chief Executive Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  31.2*    Certification of Chief Accounting Officer of EnerNOC, Inc. pursuant to Rule 13a-14(a) or Rule 15d-14(a) promulgated under the Securities Exchange Act of 1934, as amended.
  32.1*    Certification of the Chief Executive Officer and Chief Accounting Officer of EnerNOC, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101@    The following materials from EnerNOC, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012, formatted in XBRL (Extensible Business Reporting Language): (i) the Unaudited Condensed Consolidated Balance Sheets, (ii) the Unaudited Condensed Consolidated Statements of Operations, (iii) the Unaudited Condensed Consolidated Statements of Comprehensive Loss, (iv) the Unaudited Condensed Consolidated Statements of Cash Flows, and (v) Notes to Unaudited Condensed Consolidated Financial Statements.

 

 

* Filed herewith.
@ Users of the XBRL data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

39


Table of Contents

SIGNATURES

Pursuant to the requirements 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.

 

    EnerNOC, Inc.
Date: May 8, 2012     By:   /s/ Timothy G. Healy
      Timothy G. Healy
      Chief Executive Officer

 

Date: May 8, 2012     By:   /s/ Kevin Bligh
      Kevin Bligh
      Chief Accounting Officer

 

40

Exhibit 10.1

EXECUTION VERSION

$50,000,000 SENIOR SECURED CREDIT FACILITY

AMENDED AND RESTATED CREDIT AGREEMENT

AMONG

ENERNOC, INC.,

AND

ENOC SECURITIES CORPORATION

AS BORROWER,

THE SEVERAL LENDERS FROM TIME TO TIME PARTIES HERETO,

AND

SILICON VALLEY BANK,

AS ADMINISTRATIVE AGENT AND ISSUING LENDER

DATED AS OF MARCH 14, 2012


Table of Contents

 

     Page  

SECTION 1 DEFINITIONS

     2   

1.1 Defined Terms

     2   

1.2 Other Definitional Provisions

     24   

SECTION 2 AMOUNT AND TERMS OF COMMITMENTS

     24   

2.1 Revolving Commitments

     24   

2.2 Procedure for Revolving Loan Borrowing

     25   

2.3 [Reserved]

     26   

2.4 [Reserved]

     26   

2.5 Commitment Fees, etc.

     26   

2.6 Termination or Reduction of Commitments

     26   

2.7 Optional Prepayments

     27   

2.8 Conversion and Continuation Options

     27   

2.9 Limitations on Eurodollar Tranches

     28   

2.10 Interest Rates and Payment Dates

     28   

2.11 Computation of Interest and Fees

     28   

2.12 Inability to Determine Interest Rate

     29   

2.13 Pro Rata Treatment and Payments

     29   

2.14 Requirements of Law

     31   

2.15 Taxes

     32   

2.16 Indemnity

     34   

2.17 Change of Lending Office

     35   

2.18 Notes

     35   

2.19 Defaulting Lenders

     35   

2.20 Replacement of Lenders

     37   

SECTION 3 LETTERS OF CREDIT

     38   

3.1 L/C Commitment

     38   

3.2 Procedure for Issuance of Letters of Credit

     40   

3.3 Fees and Other Charges

     41   

3.4 L/C Participations

     41   

3.5 Reimbursement

     42   

 

-i-


Table of Contents

(continued)

 

     Page  

3.6 Obligations Absolute

     42   

3.7 Letter of Credit Payments

     43   

3.8 Applications

     43   

3.9 Interim Interest

     43   

3.10 Additional Issuing Lenders

     44   

3.11 Resignation of the Issuing Lender

     44   

SECTION 4 REPRESENTATIONS AND WARRANTIES

     44   

4.1 Financial Condition

     45   

4.2 No Change

     45   

4.3 Existence; Compliance with Law

     45   

4.4 Power, Authorization; Enforceable Obligations

     45   

4.5 No Legal Bar

     46   

4.6 Litigation

     46   

4.7 No Default

     46   

4.8 Ownership of Property; Liens; Investments

     46   

4.9 Intellectual Property

     47   

4.10 Taxes

     47   

4.11 Federal Regulations

     47   

4.12 Labor Matters

     47   

4.13 ERISA

     48   

4.14 Investment Company Act; Other Regulations

     48   

4.15 Subsidiaries

     48   

4.16 Use of Proceeds

     49   

4.17 Environmental Matters

     49   

4.18 Accuracy of Information, etc.

     50   

4.19 Security Documents

     50   

4.20 Solvency

     51   

4.21 Regulation H

     51   

4.22 Designated Senior Indebtedness

     51   

4.23 Insurance

     51   

 

-ii-


Table of Contents

(continued)

 

     Page  

4.24 No Casualty

     51   

SECTION 5 CONDITIONS PRECEDENT

     51   

5.1 Conditions to Effectiveness

     51   

5.2 Conditions to Each Extension of Credit

     54   

SECTION 6 AFFIRMATIVE COVENANTS

     54   

6.1 Financial Statements

     55   

6.2 Certificates; Other Information

     55   

6.3 Payment of Obligations

     57   

6.4 Maintenance of Existence; Compliance

     57   

6.5 Maintenance of Property; Insurance

     57   

6.6 Books and Records

     57   

6.7 Notices

     57   

6.8 Environmental Laws

     58   

6.9 Accounts; Collections

     58   

6.10 Audits

     59   

6.11 Additional Collateral, etc.

     60   

6.12 Use of Proceeds

     62   

6.13 Designated Senior Indebtedness

     62   

6.14 Further Assurances

     62   

SECTION 7 NEGATIVE COVENANTS

     62   

7.1 Financial Condition Covenants

     62   

7.2 Indebtedness

     63   

7.3 Liens

     64   

7.4 Fundamental Changes

     65   

7.5 Disposition of Property

     65   

7.6 Restricted Payments

     66   

7.7 Investments

     66   

7.8 Modifications of Certain Preferred Stock and Debt Instrument

     67   

7.9 Transactions with Affiliates

     67   

7.10 Sale Leaseback Transactions

     67   

 

-iii-


Table of Contents

(continued)

 

     Page  

7.11 Swap Agreements

     68   

7.12 Changes in Fiscal Periods

     68   

7.13 Negative Pledge Clauses

     68   

7.14 Clauses Restricting Subsidiary Distributions

     68   

7.15 Lines of Business

     68   

7.16 Amendments to Organizational Agreements and Material Contracts

     69   

SECTION 8 EVENTS OF DEFAULT

     69   

8.1 Events of Default

     69   

8.2 Application of Funds

     72   

SECTION 9 THE ADMINISTRATIVE AGENT

     73   

9.1 Appointment and Authority

     73   

9.2 Delegation of Duties

     73   

9.3 Exculpatory Provisions

     74   

9.4 Reliance by Administrative Agent

     74   

9.5 Notice of Default

     75   

9.6 Non-Reliance on Administrative Agent and Other Lenders

     75   

9.7 Indemnification

     76   

9.8 Agent in Its Individual Capacity

     76   

9.9 Successor Administrative Agent

     77   

SECTION 10 MISCELLANEOUS

     77   

10.1 Amendments and Waivers

     77   

10.2 Notices

     79   

10.3 No Waiver; Cumulative Remedies

     80   

10.4 Survival of Representations and Warranties

     80   

10.5 Payment of Expenses and Taxes

     80   

10.6 Successors and Assigns; Participations and Assignments.

     81   

10.7 Adjustments; Set-off

     84   

10.8 Counterparts

     85   

10.9 Severability

     85   

 

-iv-


Table of Contents

(continued)

 

     Page  

10.10 Integration

     85   

10.11 GOVERNING LAW

     86   

10.12 Submission To Jurisdiction; Waivers

     86   

10.13 Acknowledgements

     86   

10.14 Releases of Guarantees and Liens

     87   

10.15 Confidentiality

     87   

10.16 Additional Waivers

     88   

10.17 Patriot Act

     89   

10.18 Existing Credit Agreement Amended and Restated

     90   

Exhibits

 

Exhibit A:    Guarantee and Collateral Agreement
Exhibit B:    Form of Compliance Certificate
Exhibit C:    Form of Closing Certificate
Exhibit D:    Form of Solvency Certificate
Exhibit E:    Form of Assignment and Assumption
Exhibit F:    Form of Exemption Certificate
Exhibit G:    [Reserved]
Exhibit H:    Form of Revolving Loan Note
Exhibit I:    Form of Collateral Information Certificate
Exhibit J:    Form of Notice of Borrowing
Exhibit K:    Form of Notice of Conversion/Continuation

 

-v-


AMENDED AND RESTATED CREDIT AGREEMENT (this “ Agreement ”), dated as of March 14, 2012, among (a)  ENERNOC, INC. , a Delaware corporation (“ EnerNOC ”), (b)  ENOC SECURITIES CORPORATION , a Massachusetts corporation (the “ ENOC Securities ”) (hereinafter, EnerNOC and ENOC Securities are, jointly and severally, individually and collectively, referred to as the “ Borrower ”), (c) the several banks and other financial institutions or entities from time to time parties to this Agreement (the “ Lenders ”), (d)  SILICON VALLEY BANK (“ SVB ”), as Administrative Agent; and (e)  SVB , as an Issuing Lender.

W ITNESSETH :

W HEREAS , the Borrower has previously entered into a certain Credit Agreement dated as of April 15, 2011 with the Administrative Agent, the Issuing Lender, the “Swingline Lender” (as defined therein) and the “Lenders” (as defined therein), as amended by a First Amendment to Credit Agreement dated as of June 30, 2011, as further amended by a Second Amendment to Credit Agreement dated as of November 8, 2011, and as further amended by a Third Amendment to Credit Agreement dated as of December 30, 2011 (as so amended and in effect, the “ Existing Credit Agreement ”);

W HEREAS , the Borrower desires to obtain working capital financing and letter of credit facilities;

W HEREAS , the Lenders have agreed to extend certain credit facilities to the Borrower in an aggregate amount not to exceed $50,000,000.00, consisting of $50,000,000.00 in aggregate principal amount of Revolving Commitments, including $50,000,000.00 in aggregate principal amount of availability for Letters of Credit (as a sublimit of the Revolving Commitments);

W HEREAS , the Borrower has agreed to secure all of its Obligations by granting to the Administrative Agent, for the benefit of the Secured Parties, a first priority lien on substantially all of its assets;

W HEREAS , each of the Guarantors has agreed to guarantee the Obligations of the Borrower and to secure their respective Obligations by granting to the Administrative Agent, for the benefit of the Secured Parties, a first priority lien on substantially all of their assets;

W HEREAS , in connection with the foregoing, the Borrower, the Administrative Agent and the Lenders desire to amend and restate the Existing Credit Agreement as provided herein; and

W HEREAS , in consideration of the mutual conditions and agreements set forth in this Agreement, and for good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree that the Existing Credit Agreement shall be amended and restated in its entirety to read as follows (it being agreed that this Agreement shall not be deemed to evidence or result in a novation or repayment and reborrowing of the Obligations under, and as defined in, the Existing Credit Agreement).

N OW , T HEREFORE , 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 (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the highest of (a) the Prime Rate in effect on such day; (b) the Federal Funds Effective Rate as determined on such day plus one-half of one percent (0.50%); or (c) the Eurodollar Rate for a one (1) month Interest Period as determined on such day plus one percent (1.00%). Any change in the ABR due to a change in the Prime Rate, the Federal Funds Effective Rate, or the Eurodollar Rate, as applicable, shall be effective as of the opening of business on the effective day of such change in the Prime Rate, the Federal Funds Effective Rate, or the Eurodollar Rate, as applicable.

ABR Loans ”: Loans, the rate of interest applicable to which is based upon the ABR.

Accommodation Payment ”: as defined in Section 10.16(d).

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 intangibles (including a payment intangible).

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.

Administrative Agent ”: SVB, as the administrative agent under this Agreement and the other Loan Documents, together with any of its successors in such capacity.

Affiliate ”: as to any Person, any other Person that, directly or indirectly, is in control of, is controlled by, or is under common control with, such Person. For purposes of this definition, “control” of a Person means the power, directly or indirectly, either to (a) vote ten percent (10%) or more of the securities having ordinary voting power for the election of directors (or persons performing similar functions) of such Person or (b) direct or cause the direction of the management and policies of such Person, whether by contract or otherwise.

Aggregate Exposure ”: with respect to any Lender at any time, an amount equal to the amount of such Lender’s Revolving Commitment (including, without duplication, such Lender’s L/C Commitment) then in effect or, if the Revolving Commitment has been terminated, the amount of such Lender’s Revolving Extensions of Credit then outstanding.

 

2


Aggregate Exposure Percentage ”: with respect to any Lender at any time, the ratio (expressed as a percentage) of such Lender’s Aggregate Exposure at such time to the Aggregate Exposure of all Lenders at such time.

Agreement ”: as defined in the preamble hereto.

Allocable Amount ”: as defined in Section 10.16(d).

Applicable Margin ”: 2.00% per annum in the case of Eurodollar Loans, and 1.00% per annum in the case of ABR Loans.

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 ”: as defined in Section 10.6(b).

Assignment and Assumption ”: an Assignment and Assumption, substantially in the form of Exhibit E.

Auto-Extension Letter of Credit ”: as defined in Section 3.1(a).

Available Revolving Commitment ”: an amount equal to (a) the Total Revolving Commitments, minus (b) the aggregate undrawn Dollar Equivalent amount of all outstanding Letters of Credit at such time and the aggregate Dollar Equivalent amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time, minus (c) the outstanding principal balance of any Revolving Loans,.

Bankruptcy Code ”: Title 11 of the United States Code entitled “Bankruptcy,” as now or hereafter in effect, or any successor thereto.

Bank Services ”: are any products and/or credit services facilities provided to any Loan Party by Administrative Agent, any Lender, or any of their Affiliates, including, without limitation, all letters of credit, guidance facilities, bank services (including, without limitation, merchant services, direct deposit of payroll, business credit cards, and check cashing services) and foreign exchange services as any such products or services may be identified in the various agreements related thereto (each, a “ Bank Services Agreement ”).

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 ”: as defined in the preamble hereto.

 

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Borrowing Date ”: any Business Day specified by the Borrower as a date on which the 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 New York are authorized or required by law to close; provided that with respect to notices and determinations in connection with, and payments of principal and interest on, Eurodollar Loans, such day is also a day for trading by and between banks in Dollar deposits in the interbank eurodollar market.

Capital Expenditures ”: for any period, with respect to any Person, 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 such Person and its Subsidiaries) by such Person and its Subsidiaries 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 such Person and its Subsidiaries.

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.

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 six months 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 thirty (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

 

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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 (6) 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.

Certificated Securities ”: as defined in Section 4.19(a) .

Change of Control ”:

(a) EnerNOC shall cease to own, directly or indirectly, 100% of the Capital Stock of ENOC Securities and each of the Wholly Owned Subsidiary Guarantors except as expressly permitted hereunder.

(b) at any time, any “person” or “group” (as such terms are used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the “ Exchange Act ”)), shall become, or obtain rights (whether by means or 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 forty percent (40%) or more of the ordinary voting power for the election of directors of the Borrower (determined on a fully diluted basis); or

(c) during any period of twelve (12) consecutive months, a majority of the members of the board of directors or other equivalent governing body of the Borrower 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 (excluding, in the case of both clause (ii) and clause (iii), any individual whose initial nomination for, or assumption of office as, a member of that board or equivalent governing body occurs as a result of an actual or threatened solicitation of proxies or consents for the election or removal of one or more directors by any person or group other than a solicitation for the election of one or more directors by or on behalf of the board of directors).

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, excluding (i) cash collateral of the Loan Parties in an amount not to exceed $15,000,000 that is pledged by the Loan Parties to

 

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TD Bank, N.A. to secure the TD Letters of Credit, provided that upon the termination or non-renewal of the TD Letters of Credit such cash collateral shall automatically constitute “Collateral” hereunder and shall be promptly deposited by the Loan Parties in an account subject to a Control Agreement in favor of the Administrative Agent and (ii) cash collateral of the Loan Parties that is pledged by the Loan Parties to secure letters of credit for the benefit of the Borrower issued by an institution other than the Issuing Bank, provided that the terms of any such letter of credit, the institution issuing such letter of credit, and the amount and the terms relating to the cash collateral securing such letter of credit are approved in writing by the Administrative Agent and provided further that upon the termination or non-renewal of any such letter of credit such cash collateral shall automatically constitute “Collateral” hereunder and shall be promptly deposited by the Loan Parties in an account subject to a Control Agreement in favor of the Administrative Agent.

Collateral Information Certificate ”: the Collateral Information Certificate to be executed and delivered by the Borrower and each other Loan Party, substantially in the form of Exhibit I.

Commitment ”: as to any Lender, the Revolving Commitment (including, without duplication, such Lender’s L/C Commitment) of such Lender.

Commitment Fee ”: as defined in Section 2.5(b).

Commitment Fee Rate ”: a per annum rate of one-quarter of one percent (0.25%).

Commonly Controlled Entity ”: an entity, whether or not incorporated, that is under common control with the Borrower within the meaning of Section 4001 of ERISA or is part of a group that includes the Borrower and that is treated as a single employer under Section 414 of the Code.

Compliance Certificate ”: a certificate duly executed by a Responsible Officer of the Borrower substantially in the form of Exhibit B.

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 Agreement ”: as defined in Section 6.9 .

Copyright Security Agreement ”: as defined in the Guarantee and Collateral Agreement.

Credit Extension ” or “ extension of credit ”: is any Revolving Loan, Letter of Credit, amount utilized for Bank Services, or any other extension of credit by Lenders for Borrower’s benefit.

Default ”: any of the events specified in Section 8, whether or not any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

 

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Defaulting Lender ”: subject to Section 2.19(b) , any Lender that, as reasonably determined by the Administrative Agent, (a) has failed to perform any of its funding obligations hereunder, including in respect of its Loans or participations in respect of Letters of Credit, within one (1) Business Day of the date required to be funded by it hereunder, (b) has notified the Borrower, the Administrative Agent or any Lender that it does not intend to comply with its funding obligations or has made a public statement to that effect with respect to its funding obligations hereunder or under other agreements in which it commits to extend credit, (c) has failed, within three (3) Business Days after request by the Administrative Agent, to confirm in a manner reasonably satisfactory to the Administrative Agent that it will comply with its funding obligations, or (d) has, or has a direct or indirect parent company that has, (i) become the subject of an Insolvency Proceeding, (ii) had a receiver, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or a custodian appointed for it, or (iii) taken any action in furtherance of, or indicated its consent to, approval of or acquiescence in any such proceeding or appointment; 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.

Disposition ”: with respect to any property (including, without limitation, Capital Stock of any Subsidiary of the Borrower), any sale, lease, Sale Leaseback Transaction, assignment, conveyance, transfer or other disposition thereof and any issuance of Capital Stock of the Borrower or any of its Subsidiaries. The terms “ Dispose ” and “ Disposed of ” shall have correlative meanings.

Dollars ” and “ $ ”: dollars in lawful currency of the United States.

Dollar Equivalent ”: at any time, (a) with respect to any amount denominated in Dollars, such amount, and (b) with respect to any amount denominated in a Foreign Currency, the equivalent amount therefor in Dollars as determined by the Administrative Agent at such time based upon the then applicable exchange rate reported by Bloomberg Financial Services Reporting for sales of the Foreign Currency for transfer to the country issuing such Foreign Currency.

Domestic Subsidiary ”: any Subsidiary of the Borrower organized under the laws of any jurisdiction within the United States.

EBITDAR ”: for any period, (a) the sum, without duplication, of the amounts for such period of (i) Net Income, plus (ii) Interest Expense, plus (iii) provisions for income taxes, plus (iv) total depreciation expense, plus (v) total amortization expense, plus (vi) total rent expense, plus (vii) non-cash stock compensation expense, plus (viii) non-cash impairment of fixed assets, plus (ix) non-cash impairment of intangible assets, including goodwill, in an amount not to exceed $20,000,000 in any twelve (12) month period, plus (x) other income or expenses in an amount not to exceed $3,000,000 in any twelve (12) month period, plus (xi) for any period including the fiscal quarter ended December 31, 2011, the termination fees paid by EnerNOC to J.P. Morgan Ventures Energy Corporation (“JPM”) pursuant to that certain Mutual Termination Agreement dated as of December 29, 2011 by and between EnerNOC and JPM, provided that the aggregate amount of such termination fees added back pursuant to this clause (xi) shall not exceed $4,186,000 (of which approximately $3,186,000 was paid by the Borrower in cash in December, 2011 and $1,000,000 was prepaid by the Borrower in 2009).

 

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Effective Date ”: the date on which the conditions precedent set forth in Section 5.1 shall have been satisfied, which date is March 14, 2012.

Eligible Assignee ”: (a) a Lender, an Affiliate of a Lender or any Approved Fund; or (b) any commercial bank, insurance company, investment or mutual fund or other entity that is an “accredited investor” (as defined in Regulation D under the Securities Act) and which extends credit or buys loans as one of its substantial businesses; provided that neither the Borrower nor any Affiliate of the Borrower shall be an Eligible Assignee.

EnerNOC ”: as defined in the preamble hereto.

EnerNOC Canada ”: means EnerNOC Ltd., a company organized under the laws of Ontario, Canada.

ENOC Securities ”: as defined in the preamble hereto.

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.

ERISA ”: the Employee Retirement Income Security Act of 1974, as amended from time to time.

Eurocurrency Reserve Requirements ”: for any day as applied to a Eurodollar Loan, the aggregate (without duplication) of the maximum rates (expressed as a decimal fraction) of reserve requirements in effect on such day (including basic, supplemental, marginal and emergency reserves) under any regulations of the Board or other Governmental Authority having jurisdiction with respect thereto dealing with reserve requirements prescribed for eurocurrency funding (currently referred to as “Eurocurrency Liabilities” in Regulation D of the Board) maintained by a member bank of the Federal Reserve System.

Eurodollar Base Rate ”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, the rate per annum determined by reference to the British Bankers’ Association Interest Settlement Rates for deposits (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period in Dollars, determined as of approximately 11:00 A.M. (London, England time) two (2) Business Days prior to the beginning of such Interest Period (as set forth by Bloomberg Information Service or any successor thereto or any other service selected by the Administrative Agent which has been nominated by the British Bankers’ Association as an authorized information vendor for the purpose of displaying such rates). In the event that the rate referenced in the preceding sentence is not available, the “ Eurodollar Base Rate ” shall be determined by reference to the rate per annum equal to the offered quotation rate to first class banks in the London interbank market by SVB for deposits (for delivery on the first day of the relevant Interest Period) in Dollars of amounts in same day funds comparable to the principal amount of the applicable Loan of the Administrative Agent, in

 

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its capacity as a Lender, for which the Eurodollar Base Rate is then being determined with maturities comparable to such period as of approximately 11:00 A.M. (London, England time) two (2) Business Days prior to the beginning of such Interest Period.

Eurodollar Loans ”: Loans, the rate of interest applicable to which is based upon the Eurodollar Rate.

Eurodollar Rate ”: with respect to each day during each Interest Period pertaining to a Eurodollar Loan, a rate per annum determined for such day in accordance with the following formula:

 

 

Eurodollar Base Rate

 
 

1.00—Eurocurrency Reserve Requirements

 

Eurodollar Tranche ”: the collective reference to Eurodollar Loans under a particular Facility, the then current Interest Periods with respect to all of which begin on the same date and end on the same later date (whether or not such Loans shall originally have been made on the same day).

Event of Default ”: any of the events specified in Section 8; provided that any requirement for the giving of notice, the lapse of time, or both, has been satisfied.

Excluded Foreign Subsidiary ”: any Foreign Subsidiary in respect of which either (a) the pledge of more than 65% (or such greater percentage as would not, in the good faith judgment of the Borrower, result in material adverse tax consequences to the Borrower) 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 Borrower, result in material adverse tax consequences to the Borrower.

Excluded Taxes ”: with respect to any payment made by or on account of any obligation of any Loan Party under any Loan Document any of the following taxes imposed on or with respect to any Person: (a) taxes measured by net income (including branch profit taxes) and franchise taxes imposed in lieu of net income taxes, in each case imposed on any Person as a result of a present or former connection between such Person and the jurisdiction of the Governmental Authority imposing such tax or any political subdivision or taxing authority thereof or therein; (b) withholding taxes to the extent that the obligation to withhold amounts existed on the date that such Person became a party to this Agreement in the capacity under which such Person makes a claim under Section 2.15(a) or designates a new lending office (except to the extent the transferor to such Person (if any) was entitled, at the time the transfer to such Person became effective, to receive additional amounts under Section 2.15(a)); (c) taxes that are attributable to a failure to deliver the documentation required to be delivered pursuant to Section 2.15(e); and (d) in the case of a Non-U.S. Lender Party, any United States federal withholding taxes imposed on amounts payable to such Non-U.S. Lender Party as a result of such Non-U.S. Lender Party’s failure to comply with FATCA to establish a complete exemption from withholding thereunder.

Existing Credit Agreement ”: as defined in the recitals hereto.

 

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Existing Letters of Credit ”: each of the Letters of Credit described by date of issuance, amount, beneficiary and the date of expiry on Schedule 1.1B hereto. The Existing Letters of Credit shall not include the TD Letters of Credit.

Facility ”: each of (a) the L/C Facility (which is a sub-facility of the Revolving Facility), and (b) the Revolving Facility.

FATCA ”: sections 1471, 1472, 1473, and 1474 of the Code, the United States Treasury Regulations promulgated thereunder and published guidance with respect thereto.

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 SVB from three federal funds brokers of recognized standing selected by it.

Fee Letter ”: the letter agreement dated April 15, 2011 between Borrower and Administrative Agent.

Foreign Currency ”: lawful money of a country other than the United States.

Foreign Currency L/C ”: as defined in Section 3.1(a)(i) .

Foreign Subsidiary ”: any Subsidiary of the Borrower that is not a Domestic Subsidiary.

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 the Borrower and the Administrative Agent agree 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 Borrower’s 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 Borrower, 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.

 

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Governmental Authority ”: any nation or government, any state or other political subdivision thereof, any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative functions of or pertaining to government, any securities exchange and any self-regulatory organization (including the National Association of Insurance Commissioners).

Group Members ”: the collective reference to the Borrower and its Subsidiaries, excluding any Immaterial Subsidiary.

Guarantee and Collateral Agreement ”: the Guarantee and Collateral Agreement dated as of April 15, 2011 by the Borrower and each Subsidiary Guarantor in favor of the Administrative Agent, attached as 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 Borrower in good faith.

Guarantors ”: the collective reference to the Subsidiary Guarantors.

Holdover Letter of Credit ”: as defined in Section 3.1(a)(i) .

Hostile Acquisition ”: means the acquisition of the capital stock or other equity interests of a Person through a tender offer or similar solicitation of the owners of such capital stock or other equity interests which has not been approved (prior to such acquisition) by resolutions of the Board of Directors of such Person or by similar action if such Person is not a corporation, or as to which such approval has been withdrawn.

 

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Immaterial Subsidiary ”: means each of Borrower’s Subsidiaries listed on Schedule 1.1C hereto as such Schedule may be revised or supplemented from time with the consent of the Required Lenders, provided that such Subsidiaries do not, individually or in the aggregate (a) at any time have total assets (excluding goodwill) with a book value equal to or in excess of $15,000,000, (b) have revenues equal to or greater than $15,000,000 tested as of the last day of the fiscal quarter then most recently ended for the trailing 12 months ended on such date, in each case as determined in accordance with GAAP or (c) have a month-end cash balance in excess of $3,000,000.

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) solely to the extent that such obligations are not contingent; (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 Guarantee Obligations of such Person in respect of obligations of the kind referred to in clauses (a) through (f) above; (h) all obligations of the kind referred to in clauses (a) through (g) 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 (i) all 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 Liabilities ”: as defined in Section 10.5.

Indemnitee ”: as defined in Section 10.5.

Insolvency ”: with respect to any Multiemployer Plan, the condition that such Plan is insolvent within the meaning of Section 4245 of ERISA.

Insolvent ”: pertaining to a condition of Insolvency.

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, 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.

 

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Intellectual Property Security Agreements ”: the collective reference to each Copyright Security Agreement, Patent Security Agreement and Trademark Security Agreement executed and delivered by the Loan Parties, or any of them, and the Administrative Agent.

Intercompany Subordination Agreement ”: a Subordination Agreement among the Administrative Agent, for the benefit of the Secured Parties, and the Loan Parties in form and substance acceptable to the Administrative Agent.

Interest Expense ”: for any period, total cash interest expense (including that attributable to Capital Lease Obligations) of the Borrower and its Subsidiaries for such period with respect to all outstanding Indebtedness of the Borrower and its Subsidiaries (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).

Interest Payment Date ”: (a) as to any ABR Loan, the first day of each month to occur while such Loan is outstanding and the final maturity date of such Loan, (b) as to any Eurodollar Loan having an Interest Period of three months or less, the last Business Day of such Interest Period, (c) as to any Eurodollar Loan having an Interest Period longer than three months, each day that is three months, or a whole multiple thereof, after the first day of such Interest Period and the last day of such Interest Period, and (d) as to any Loan (other than any Revolving Loan that is an ABR Loan), the date of any repayment or prepayment made in respect thereof.

Interest Period ”: as to any Eurodollar Loan: (a) initially, the period commencing on the borrowing or conversion date, as the case may be, with respect to such Eurodollar Loan and ending one (1), two (2), three (3) or six (6) months thereafter, subject to availability, as selected by the Borrower in its Notice of Borrowing or Notice of Conversion/Continuation, as the case may be, given with respect thereto; and (b) thereafter, each period commencing on the last day of the next preceding Interest Period applicable to such Eurodollar Loan and ending one (1), two (2), three (3) or six (6) months thereafter, subject to availability, as selected by the Borrower by irrevocable notice to the Administrative Agent in a Notice of Conversion/Continuation not later than 10:00 A.M., Eastern time, on the date that is three (3) Business Days prior to the last day of the then current Interest Period with respect thereto; provided that all of the foregoing provisions relating to Interest Periods are subject to the following:

(i) if any Interest Period would otherwise end on a day that is not a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless the result of such extension would be to carry such Interest Period into another calendar month in which event such Interest Period shall end on the immediately preceding Business Day;

(ii) the Borrower may not select an Interest Period under a particular Facility that would extend beyond the Revolving Termination Date;

(iii) any Interest Period that begins on the last Business Day of a calendar month (or on a day for which there is no numerically corresponding day in the calendar month at the end of such Interest Period) shall end on the last Business Day of a calendar month; and

 

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(iv) the Borrower shall select Interest Periods so as not to require a payment or prepayment of any Eurodollar Loan during an Interest Period for such Loan.

Interest Rate Agreement ”: 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 (i) for the purpose of hedging the interest rate exposure associated with Borrower’s and its Subsidiaries’ operations, (ii) approved by Administrative Agent, and (iii) not for speculative purposes.

Inventory ”: all “inventory,” as such term is defined in the New York 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 constitute 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.

Investments ”: as defined in Section 7.7.

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).

Issuer Documents ”: with respect to any Letter of Credit, the Application, and any other document, agreement and instrument entered into by the L/C Issuer and the Borrower or in favor the L/C Issuer and relating to any such Letter of Credit.

Issuing Lender ”: as the context may require, (a) SVB or any Affiliate thereof, in its capacity as issuer of any Letter of Credit (including, without limitation, each Existing Letter of Credit), and (b) any other Lender that may become an Issuing Lender after the Effective Date pursuant to Section 3.10 or 3.11, with respect to Letters of Credit issued by such Lender. SVB is the sole Issuing Lender as of the Effective Date. 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).

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 Lender’s 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 Dollar Equivalent 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 pursuant to which such L/C Lender became 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 L/C Commitments shall not exceed the Available Revolving Commitment at any time.

 

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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 Dollar Equivalent amount of all outstanding Letters of Credit at such time plus (b) the aggregate Dollar Equivalent 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.

Lenders ”: as defined in the preamble hereto. The Lenders as of the Effective Date are identified on Schedule 1.1A.

Letter of Credit ”: as defined in Section 3.1(a); provided that such term shall include each Existing Letter of Credit. The TD Letters of Credit shall not constitute “Letters of Credit”.

Letter of Credit Availability Period ”: the period from and including the Original Closing Date to but excluding the Letter of Credit Maturity Date.

Letter of Credit Maturity Date ”: the Revolving Termination Date.

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).

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, any Intercompany Subordination Agreement, the Collateral Information Certificate, each Compliance Certificate, the Bank Services Agreements, any amendment, waiver, supplement or other modification to any of the foregoing and any other documents or instruments executed and delivered in connection with the foregoing. For purposes of Section 10.5 hereof, “Loan Documents” shall include the Commitment Termination Letter and Payoff letter dated as of March 14, 2012 among the Borrower, the administrative Agent and TD Bank, N.A. (the TD Termination Agreement” ).

 

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Loan Parties ”: each Group Member that is a party to a Loan Document.

Material Adverse Effect ”: (a) a material adverse change in, or a material adverse effect on, the operations, business, assets, properties, liabilities (actual or contingent), or condition (financial or otherwise) of the Borrower and its Subsidiaries, taken as a whole; (b) a material impairment of the rights and remedies of the Administrative Agent or any Lender under any loan documentation, or of the ability of the Borrower or any Guarantor to perform its obligations under any Loan Document to which it is a party; or (c) a material adverse effect upon the legality, validity, binding effect or enforceability against the Borrower or any Guarantor of any Loan Documents to which it is a party.

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 Lawful Rate ”: as defined in Section 2.11(c).

Moody’s ”: Moody’s Investors Service, Inc.

Mortgaged Properties ”: the real properties as to which, pursuant to Section 6.11(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 Plan that is a multiemployer plan as defined in Section 4001(a)(3) of ERISA.

Net Income ”: for any period, the consolidated net income (or loss) of the Borrower and its Subsidiaries, determined on a consolidated basis in accordance with GAAP; provided that there shall be excluded (a) the income (or deficit) of any Person accrued prior to the date it becomes a Subsidiary or is merged into or consolidated with the Borrower and its Subsidiaries, (b) the income (or deficit) of any Person (other than a Subsidiary of the Borrower) in which the Borrower or its Subsidiaries has an ownership interest, except to the extent that any such income is actually received by the Borrower or such Subsidiary in the form of dividends or similar distributions and (c) the undistributed earnings of any Subsidiary of the 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 Requirement of Law applicable to such Subsidiary.

 

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New York UCC ”: the Uniform Commercial Code as in effect from time to time in the State of New York.

Non-Excluded Taxes ”: as defined in Section 2.15(a).

Non-Extension Notice Date ”: as defined in Section 3.1(a).

Non-U.S. Lender Party ”: each Lender and each Participant, in each case that is not a “United States person” as defined in Section 7701(a)(30) of the Code.

Note ”: a Revolving Loan Note.

Notice of Borrowing ”: means a notice substantially in the form of Exhibit J.

Notice of Conversion/Continuation ”: means a notice substantially in the form of Exhibit K.

Obligations ”: the unpaid principal of and interest on (including interest accruing after the maturity of the Loans and interest, fees, costs, expenses and indemnities accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Borrower or any Guarantor, whether or not a claim for post-filing or post-petition interest, fees, costs, expenses or indemnities is allowed in such proceeding) the Loans and all other obligations and liabilities of the Borrower or any other Loan Party to the Administrative Agent or any Lender or any other Secured Party, 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, the Bank Services Agreements, 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, fees, indemnities, costs, expenses (including all fees, charges and disbursements of counsel to the Administrative Agent or to any Lender that are required to be paid by the Borrower or any Guarantor pursuant hereto) or otherwise.

Original Closing Date ”: April 15, 2011.

Other Taxes ”: any and all present or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, this Agreement or any other Loan Document.

Participant ”: as defined in Section 10.6(c).

Patent Security Agreement ”: as defined in the Guarantee and Collateral Agreement.

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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PBGC ”: the Pension Benefit Guaranty Corporation established pursuant to Subtitle A of Title IV of ERISA (or any successor).

Permitted Acquisition ” means the purchase or other acquisition 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; provided that , with respect to each such purchase or other acquisition:

(a) each such purchase or acquisition is of a Person or ongoing business engaged in business activities in which the Borrower is permitted to engage pursuant to Section 7.15;

(b) (i) 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 (ii) immediately after giving effect to such purchase or other acquisition, on a pro forma basis, the Borrower and its Subsidiaries shall be in compliance with each of the covenants set forth in this Agreement (including Section 7.1);

(c) any Person so acquired becomes a guarantor under the Guarantee and Collateral Agreement and the other requirements of Section 6.11 (subject to the limitations therein with respect to Excluded Foreign Subsidiaries) and the Security Documents are satisfied within the applicable time periods set forth therein;

(d) the total consideration for such purchases or other acquisitions shall not exceed $5,000,000 in the aggregate for all purchases or acquisitions during the term of this Agreement;

(e) no Indebtedness is assumed or incurred in connection with any such purchase or acquisition other than Indebtedness permitted by the terms of Section 7.2 hereof;

(f) after giving effect to such purchase or acquisition, the net effect of such purchase or acquisition shall be accretive to the Borrower’s EBITDAR on a pro forma basis for the 12 month period ended one year after the proposed date of consummation of such proposed purchase or acquisition;

(g) the acquisition shall not be a Hostile Acquisition; and

(h) the Borrower shall have delivered to the Administrative Agent and each Lender, at least five (5) 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, in form and substance reasonably satisfactory to the Administrative Agent, certifying that all of the requirements set forth in this definition have been satisfied or will be satisfied on or prior to the consummation of such purchase or other acquisition.

Person ”: an individual, partnership, corporation, limited liability company, business trust, joint stock company, trust, unincorporated association, joint venture, Governmental Authority or other entity of whatever nature.

 

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Plan ”: at a particular time, any employee benefit plan that is covered by ERISA and in respect of which the Borrower or a Commonly Controlled Entity is (or, if such plan were terminated at such time, would under Section 4069 of ERISA be deemed to be) an “employer” as defined in Section 3(5) of ERISA.

Preferred Stock ”: the preferred Capital Stock of the Borrower.

Prime Rate ”: is with respect at any day, the rate of interest per annum reported as the “Prime Rate” as quoted in the Wall Street Journal print edition on such day (or, if such day is not a day on which the Wall Street Journal is published, the immediately preceding day on which the Wall Street Journal was published).

Projections ”: as defined in Section 6.2(b).

Properties ”: as defined in Section 4.17(a).

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 Original Closing Date, was the Administrative Agent or a Lender or an Affiliate of the Administrative Agent or a Lender.

Quick Assets ”: on any date, the sum of Borrower’s (i) unrestricted cash, (ii) marketable securities that are immediately available for sale, and (iii) billed accounts receivable; provided that for purposes of the foregoing clause (iii), the amount of billed accounts receivable on any date shall not exceed 60% of the sum of the items specified in foregoing clauses (i) through (iii) on such date.

Quick Ratio ”: the ratio of (a) Quick Assets, to (b) the sum of (i) all of Borrower’s liabilities and Obligations under this Agreement and the other Loan Documents (including Obligations in respect of issued Letters of Credit) and (ii) Borrower’s obligations for Bank Services that are not secured by cash.

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.

Reorganization ”: with respect to any Multiemployer Plan, the condition that such plan is in reorganization within the meaning of Section 4241 of ERISA.

Replaced Lender ”: as defined in Section 2.20.

Reportable Event ”: any of the events set forth in Section 4043(c) of ERISA, other than those events as to which the thirty day notice period is waived under subsections .27, .28, .29, .30, .31, .32, .34 or .35 of PBGC Reg. § 4043.

 

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Required Lenders ”: at any time, any two or more Lenders holding more than sixty-six and two-thirds percent (66.67%) of the Total Revolving Extensions of Credit (including, without duplication, any L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time) or, prior to any termination of the Revolving Commitments, the holders of more than sixty-six and two-thirds percent (66.67%) of the Total Revolving Commitments (including, without duplication, the L/C Commitments), but in any event excluding Defaulting Lenders and their Revolving Commitments and Revolving Extensions of Credit.

Requirement of Law ”: as to any Person, the Certificate of Incorporation and By-Laws or other organizational or governing 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.

Responsible Officer ”: the chief executive officer, president, vice president, chief financial officer, chief accounting officer, treasurer, controller or comptroller of the Borrower, but in any event, with respect to financial matters, the chief financial officer, chief accounting officer, treasurer, controller or comptroller of the Borrower.

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 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 pursuant to which such Lender became a party hereto, as the same may be changed from time to time pursuant to the terms hereof (including in connection with assignments permitted hereunder). The Revolving Commitment of each Lender shall include, in any event, its L/C Commitment.

Revolving Commitment Period ”: the period from and including the Original Closing Date to the Revolving Termination Date.

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, and (b) the Dollar Equivalent of the aggregate undrawn amount of all outstanding Letters of Credit at such time and the aggregate Dollar Equivalent amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans at such time.

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 Conversion ”: as defined in Section 3.5(b).

 

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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 Borrower and the Lenders.

Revolving Loan Note ”: a promissory note in the form of Exhibit H-1, as it may be amended, supplemented or otherwise modified from time to time.

Revolving Loan Register ”: as defined in Section 10.6(b).

Revolving Loans ”: as defined in Section 2.1(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 Extensions of Credit then outstanding constitutes of the aggregate principal amount of the Total Revolving Extensions of Credit then outstanding.

Revolving Termination Date ”: April 15, 2013.

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.

SEC ”: the Securities and Exchange Commission, any successor thereto and any analogous Governmental Authority.

Secured Parties ”: the collective reference to the Administrative Agent, the Lenders (including any Issuing Lender in its capacity as Issuing Lender), any Qualified Counterparties, and the Administrative Agent, any Lender, or any of their Affiliates that is a provider of Bank Services.

Securities Act ”: the Securities Act of 1933, as amended from time to time and any successor statute.

Security Documents ”: the collective reference to the Guarantee and Collateral Agreement, the Intellectual Property Security Agreements, the Mortgages and all other security documents hereafter delivered to the Administrative Agent granting a Lien on any property of any Person to secure the obligations and liabilities of any Loan Party under any Loan Document.

Single Employer Plan ”: any Plan that is covered by Title IV of ERISA, but that is not a Multiemployer Plan.

Solvent ”: when used with respect to any Person, means that, as of any date of determination, (a) the amount of the “fair value” of the assets of such Person will, as of such

 

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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 the Borrower, any Subsidiary of Borrower or any other Loan Party and any Qualified Counterparty (or any Person who was a Qualified Counterparty as of the Original Closing Date or as of the date such Swap Agreement was entered into) in respect of interest rates to the extent permitted under Section 7.12.

Stated Rate ”: as defined in Section 2.11(c).

Subordinated Indebtedness ”: any Indebtedness which is expressly subordinated in right of payment to the prior payment in full of the Obligations (the subordination terms of which are satisfactory to the Required Lenders) and which Indebtedness is in form and on terms approved in writing by the Required Lenders.

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 Borrower.

Subsidiary Guarantor ”: each Subsidiary of the Borrower other than any Excluded Foreign Subsidiary or any Immaterial Subsidiary.

Surety Indebtedness ”: as of any date of determination, indebtedness (contingent or otherwise) owing to sureties arising from surety bonds issued on behalf the Borrower and its Subsidiaries as support for, among other things, their contracts with customers, whether such indebtedness is owing directly or indirectly by the Borrower and its Subsidiaries.

SVB ”: as defined in the preamble hereto.

 

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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 Borrower and its Subsidiaries shall be a “Swap Agreement”.

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).

TD Letters of Credit ”: the letters of credit identified on Schedule 7.2(d) hereof.

TD Termination Agreement ” is defined in the definition of “Loan Documents”.

Total L/C Commitment ”: 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 2.6 or 3.5(b). The initial Dollar Equivalent amount of the Total L/C Commitments on the Effective Date is $50,000,000. The Total L/C Commitment is a sublimit of the Total Revolving Commitment.”

Total Revolving Commitment ”: at any time, the aggregate amount of the Revolving Commitments then in effect. The original amount of the Total Revolving Commitment is $50,000,000.

Total Revolving Extensions of Credit ”: at any time, the aggregate amount of the Revolving Extensions of Credit of the Revolving Lenders outstanding at such time.

Trademark Security Agreement ”: as defined in the Guarantee and Collateral Agreement.

Transferee ”: any Eligible Assignee or Participant.

Type ”: as to any Loan, its nature as an ABR Loan or a Eurodollar Loan.

UCP 600 ”: the rules of the Uniform Customs and Practice for Documentary Credits, as most recently published by the International Chamber of Commerce and dated as of July 1, 2007 (or such later version thereof as may be in effect at the time of issuance).

UFCA ”: as defined in Section 10.16(d) .

UFTA ”: as defined in Section 10.16(d) .

Uniform Commercial Code ” or “ UCC ”: the Uniform Commercial Code (or any similar or equivalent legislation) as in effect from time to time in any applicable jurisdiction.

 

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United States ”: the United States of America.

U.S. Lender Party ”: the Administrative Agent, each Lender and each Participant, in each case that is a “United States person” as defined in Section 7701(a)(30) of the Code.

Wholly Owned Subsidiary ”: as to any Person, any other Person all of the Capital Stock of which (other than directors’ qualifying shares required by law) is owned by such Person directly and/or through other Wholly Owned Subsidiaries.

Wholly Owned Subsidiary Guarantor ”: any Subsidiary Guarantor that is a Wholly Owned Subsidiary of the Borrower.

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 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.

(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, and Section, Schedule and Exhibit references are to this Agreement unless otherwise specified.

(d) The meanings given to terms defined herein shall be equally applicable to both the singular and plural forms of such terms.

 

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SECTION 2

AMOUNT AND TERMS OF COMMITMENTS

2.1 Revolving Commitments.

(a) Subject to the terms and conditions hereof, each Revolving Lender severally agrees to make revolving credit loans (“ Revolving Loans ”) to the Borrower from time to time during the Revolving Commitment Period in an aggregate principal amount at any one time outstanding which, when added to the aggregate undrawn amount of all outstanding Letters of Credit and the aggregate amount of all L/C Disbursements that have not yet been reimbursed or converted into Revolving Loans, incurred on behalf of the Borrower and owing to such Lender, does not exceed the amount of such Lender’s Revolving Commitment; provided that the Total Revolving Extensions of Credit shall in no event exceed the Total Revolving Commitment. During the Revolving Commitment Period, the Borrower 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. The Revolving Loans may from time to time be Eurodollar Loans or ABR Loans, as determined by the Borrower and notified to the Administrative Agent in accordance with Sections 2.2 and 2.8 .

(b) The Borrower shall repay all outstanding Revolving Loans on the Revolving Termination Date.

2.2 Procedure for Revolving Loan Borrowing. Subject to the terms and conditions hereof, the Borrower may borrow under the Revolving Commitment during the Revolving Commitment Period on any Business Day; provided that the Borrower shall give the Administrative Agent an irrevocable Notice of Borrowing (which must be received by the Administrative Agent prior to 10:00 A.M., Eastern time, (a) three (3) Business Days prior to the requested Borrowing Date, in the case of Eurodollar Loans, or (b) one (1) Business Day prior to the requested Borrowing Date, in the case of ABR Loans (in each case, with originals to follow within three (3) Business Days)) ( provided that any such Notice of Borrowing of ABR Loans under the Revolving Facility to finance payments under Section 3.5(a) may be given not later than 10:00 A.M., Eastern time, on the date of the proposed borrowing), specifying (i) the amount and Type of Revolving Loans to be borrowed, (ii) the requested Borrowing Date, (iii) in the case of Eurodollar Loans, the respective amounts of each such Type of Loan and the respective lengths of the initial Interest Period therefor, and (iv) instructions for remittance of the applicable Loans to be borrowed. Unless otherwise agreed by the Administrative Agent in its sole discretion, no Revolving Loan may be made as, converted into or continued as a Eurodollar Loan having an Interest Period in excess of one (1) month prior to the date that is thirty (30) days after the Effective Date. Each borrowing under the Revolving Commitment shall be in an amount equal to, in the case of ABR Loans, $100,000 or a whole multiple of $100,000 in excess thereof (or, if the then aggregate Available Revolving Commitments are less than $100,000, such lesser amount). Upon receipt of any such Notice of Borrowing from the Borrower, the Administrative Agent shall promptly notify each Revolving Lender thereof. Each Revolving Lender will make the amount of its pro rata share of each borrowing available to the Administrative Agent for the account of the Borrower at the Revolving Loan Funding Office prior to 12:00 P.M., Eastern time, on the Borrowing Date requested by the Borrower in funds immediately available to the Administrative Agent. Upon satisfaction of the applicable conditions set forth in Section 5.2, such borrowing will then be made available to the Borrower by the Administrative Agent crediting such account as is designated in writing to the Administrative Agent by the Borrower with the aggregate of the amounts made available to the Administrative Agent by the Revolving Lenders and in like funds

 

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as received by the Administrative Agent. The Borrower promises to pay to the Administrative Agent, for the account of the Revolving Lenders, in accordance with their respective Revolving Percentages, all amounts due under the Revolving Loans on the Revolving Termination Date or such earlier date as required hereunder.

2.3 [Reserved].

2.4 [Reserved].

2.5 Commitment Fees, etc.

(a) [Reserved].

(b) As additional compensation for the Revolving Commitment, the Borrower shall pay the Administrative Agent, for the account of the Revolving Lenders, in arrears, on the first day of each calendar quarter prior to the Revolving Termination Date and on the Revolving Termination Date, a fee (the “ Commitment Fee ”) for the Borrower’s non-use of available funds in an amount equal to the Commitment Fee Rate (calculated on the basis of a 360 day year for actual days elapsed) multiplied by the difference between (x) the Total Revolving Commitment (as it may be reduced from time to time) and (y) the average daily Total Revolving Extensions of Credit during the period for which such Commitment Fee is due.

(c) [Reserved].

(d) On the Effective Date, the Borrower agrees to pay to the Administrative Agent, for the account of the Lenders, a modification fee in the amount of $75,000.

2.6 Termination or Reduction of Commitments.

(a) The Borrower shall have the right, upon not less than three (3) Business Days’ notice to the Administrative Agent, to terminate the Total Revolving Commitment or, from time to time, to reduce the amount of the Total Revolving Commitment; 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 made on the effective date thereof, the Total Revolving Extensions of Credit would exceed the Total Revolving Commitments. Any such reduction shall be in an amount equal to $1,000,000, or a whole multiple thereof, and shall reduce permanently the Total Revolving Commitment then in effect. The Total L/C Commitment shall automatically reduce by an amount equal to any reduction in the Total Revolving Commitment pursuant to this Section 2.6(a). In addition to the foregoing, the Borrower shall have the right, upon not less than three (3) Business Days’ notice to the Administrative Agent, to terminate the Total L/C Commitment or, from time to time, to reduce the amount of the Total L/C Commitment; provided that no such termination or reduction of the Total L/C Commitment 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 thereof, and shall reduce permanently the Total L/C Commitment then in effect.

 

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2.7 Optional Prepayments . The Borrower may at any time and from time to time prepay the Loans, in whole or in part, upon irrevocable notice delivered to the Administrative Agent no later than 10:00 A.M., Eastern time, three (3) Business Days prior thereto, in the case of Eurodollar Loans, and no later than 10:00 A.M., Eastern time, one (1) Business Day prior thereto, in the case of ABR Loans, which notice shall specify the date and amount of prepayment; provided that , if a Eurodollar Loan is prepaid on any day other than the last day of the Interest Period applicable thereto, the Borrower shall also pay any amounts owing pursuant to Section 2.16 ; provided further that , if such notice of prepayment indicates that such prepayment is to be funded with the proceeds of a refinancing or the sale of the Loan Parties, such notice of prepayment may be revoked if the financing or such sale is not consummated. Upon receipt of any such notice, the Administrative Agent shall promptly notify each relevant Lender thereof. If any such notice is given, the amount specified in such notice shall be due and payable on the date specified therein, together with (except in the case of Revolving Loans that are ABR Loans) accrued interest to such date on the amount prepaid. Partial prepayments of Revolving Loans shall be in an aggregate principal amount of at least $500,000 or, if greater, in whole multiples of $250,000.

2.8 Conversion and Continuation Options.

(a) The Borrower may elect from time to time to convert Eurodollar Loans to ABR Loans by giving the Administrative Agent prior irrevocable notice in a Notice of Conversion/Continuation of such election no later than 10:00 A.M., Eastern time, on the Business Day preceding the proposed conversion date; provided that any such conversion of Eurodollar Loans may only be made on the last day of an Interest Period with respect thereto. The Borrower may elect from time to time to convert ABR Loans to Eurodollar Loans by giving the Administrative Agent prior irrevocable notice in a Notice of Conversion/Continuation of such election no later than 10:00 A.M., Eastern time, on the third Business Day preceding the proposed conversion date (which notice shall specify the length of the initial Interest Period therefor); provided that no ABR Loan may be converted into a Eurodollar Loan when any Default or Event of Default has occurred and is continuing. Upon receipt of any such notice, the Administrative Agent shall promptly notify each Revolving Lender thereof.

(b) Any Eurodollar Loan may be continued as such upon the expiration of the then current Interest Period with respect thereto by the Borrower giving irrevocable notice in a Notice of Conversion/Continuation to the Administrative Agent, in accordance with the applicable provisions of the term “Interest Period” set forth in Section 1.1 , of the length of the next Interest Period to be applicable to such Loans; provided that no Eurodollar Loan may be continued as such when any Default or Event of Default has occurred and is continuing, and; provided further that , if the Borrower shall fail to give any required notice as described above in this paragraph or if such continuation is not permitted pursuant to the preceding proviso, such Loans shall be automatically converted to ABR Loans on the last day of such then expiring Interest Period. Upon receipt of any such notice the Administrative Agent shall promptly notify each relevant Lender thereof.

 

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2.9 Limitations on Eurodollar Tranches . Notwithstanding anything to the contrary in this Agreement, all borrowings, conversions and continuations of Eurodollar Loans and all selections of Interest Periods shall be in such amounts and be made pursuant to such elections so that, (a) after giving effect thereto, the aggregate principal amount of the Eurodollar Loans comprising each Eurodollar Tranche shall be equal to $1,000,000 or a whole multiple of $100,000 in excess thereof and (b) no more than five (5) Eurodollar Tranches shall be outstanding at any one time.

2.10 Interest Rates and Payment Dates.

(a) Each Eurodollar Loan shall bear interest for each day during each Interest Period with respect thereto at a rate per annum equal to the Eurodollar Rate determined for such day plus the Applicable Margin.

(b) Each ABR Loan shall bear interest at a rate per annum equal to the ABR plus the Applicable Margin.

(c) After the occurrence and during the continuance of (x) an Event of Default under Section 8.1(a) or (f), or (y) any other Event of Default if requested by the Required Lenders in their discretion, 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 2.10 plus two percent (2.00%).

(d) Interest shall be payable in arrears on each Interest Payment Date; provided that interest accruing pursuant to Section 2.10(c) shall be payable from time to time on demand.

2.11 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 ABR 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. The Administrative Agent shall, as soon as practicable, notify the Borrower and the relevant Lenders of each determination of a Eurodollar Rate. Any change in the interest rate on a Loan resulting from a change in the ABR or the Eurocurrency Reserve Requirements 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 Borrower 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 Borrower and the Lenders in the absence of manifest error. The Administrative Agent shall, at the request of the Borrower or any Lender, deliver to the Borrower or the applicable Lender a statement showing the quotations used by the Administrative Agent in determining any interest rate pursuant to Section 2.11(a) .

 

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(c) In no event shall the interest charged hereunder, with respect to the notes (if any) or any other obligations of Loan Parties under any Loan Documents exceed the maximum amount permitted under applicable law. Notwithstanding anything to the contrary herein or elsewhere, if at any time the rate of interest payable hereunder or under any note or other Loan Document (the “ Stated Rate ”) would exceed the highest rate of interest permitted under any applicable law to be charged (the “ Maximum Lawful Rate ”), then for so long as the Maximum Lawful Rate would be so exceeded, the rate of interest payable shall be equal to the Maximum Lawful Rate; provided , however , that if at any time thereafter the Stated Rate is less than the Maximum Lawful Rate, Borrower shall, to the extent permitted by law, continue to pay interest at the Maximum Lawful Rate until such time as the total interest received is equal to the total interest which would have been received had the Stated Rate been (but for the operation of this provision) the interest rate payable. Thereafter, the interest rate payable shall be the Stated Rate unless and until the Stated Rate again would exceed the Maximum Lawful Rate, in which event this provision shall again apply. In no event shall the total interest received by any Lender exceed the amount which it could lawfully have received, had the interest been calculated for the full term hereof at the Maximum Lawful Rate. If, notwithstanding the prior sentence, any Lender has received interest hereunder in excess of the Maximum Lawful Rate, such excess amount shall be applied to the reduction of the principal balance of such Lender’s Loan or to other amounts (other than interest) payable hereunder, and if no such principal or other amounts are then outstanding, such excess or part thereof remaining shall be paid to Borrower. In computing interest payable with reference to the Maximum Lawful Rate applicable to any Lender, such interest shall be calculated at a daily rate equal to the Maximum Lawful Rate divided by the number of days in the year in which such calculation is made.

2.12 Inability to Determine Interest Rate . If, prior to the first day of any Interest Period, (a) the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower) that, by reason of circumstances affecting the relevant market, adequate and reasonable means do not exist for ascertaining the Eurodollar Rate for such Interest Period, or (b) the Administrative Agent shall have received notice from the Required Lenders that the Eurodollar Rate determined or to be determined for such Interest Period will not adequately and fairly reflect the cost to such Lenders (as conclusively certified by such Lenders) of making or maintaining their affected Loans during such Interest Period, the Administrative Agent shall give telecopy or telephonic notice thereof to the Borrower and the relevant Lenders as soon as practicable thereafter. If such notice is given (x) any Eurodollar Loans under the relevant Facility requested to be made on the first day of such Interest Period shall be made as ABR Loans, (y) any Loans under the relevant Facility that were to have been converted on the first day of such Interest Period to Eurodollar Loans shall be continued as ABR Loans and (z) any outstanding Eurodollar Loans under the relevant Facility shall be converted, on the last day of the then-current Interest Period, to ABR Loans. Until such notice has been withdrawn by the Administrative Agent, no further Eurodollar Loans under the relevant Facility shall be made or continued as such, nor shall the Borrower have the right to convert Loans under the relevant Facility to Eurodollar Loans.

 

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2.13 Pro Rata Treatment and Payments.

(a) Each borrowing by the Borrower from the Lenders hereunder, each payment by the Borrower on account of the Commitment Fee and any reduction of the 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 Borrower 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 Borrower hereunder, whether on account of principal, interest, fees or otherwise, shall be made without setoff or counterclaim 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 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. If any payment hereunder (other than payments on the Eurodollar Loans) becomes due and payable on a day other than a Business Day, such payment shall be extended to the next succeeding Business Day. If any payment on a Eurodollar Loan becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day unless the result of such extension would be to extend such payment into another calendar month, in which event such payment shall be made on the immediately preceding Business Day. In the case of any extension of any payment of principal pursuant to the preceding two sentences, 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, and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower a corresponding amount. If such amount is not made available to the Administrative Agent by the required time on the Borrowing Date therefor, such Lender shall pay to the Administrative Agent, on demand, such amount with interest thereon, at a rate equal to the greater of (i) the Federal Funds Effective Rate and (ii) a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation, for the period until such Lender makes such amount immediately available to the Administrative Agent. If such Lender’s share of such borrowing is not made available to the Administrative Agent by such Lender within three (3) Business Days after such Borrowing Date, the Administrative Agent shall also be entitled to recover such amount with interest thereon at the rate per annum applicable to ABR Loans under the relevant Facility, on demand, from the Borrower.

(e) Unless the Administrative Agent shall have been notified in writing by the Borrower prior to the date of any payment due to be made by the Borrower hereunder that the Borrower will not make such payment to the Administrative Agent, the Administrative Agent may assume that the Borrower is making such payment, and the Administrative Agent may, but shall not be required to, in reliance upon such assumption, make available to the Lenders their

 

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respective pro rata shares of a corresponding amount. If such payment is not made to the Administrative Agent by the Borrower within three (3) Business Days after such due date, the Administrative Agent shall be entitled to recover, on demand, from each Lender to which any amount which was made available pursuant to the preceding sentence, such amount with interest thereon at the rate per annum equal to the daily average Federal Funds Effective Rate. Nothing herein shall be deemed to limit the rights of Administrative Agent or any Lender against the Borrower.

(f) 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 Borrower’s 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 interest and fees from time to time due and payable to itself, any Revolving 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; provided that , to the extent that the Administrative Agent chooses to exercise this right on behalf of itself or SVB in any capacity, the Administrative Agent shall also exercise this right on behalf of each other Lender.

2.14 Requirements of Law.

(a) If the adoption of or any change in any Requirement of Law or in the interpretation or application thereof or 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 on which a Lender becomes a party to this Agreement shall:

(i) impose, modify or hold applicable any reserve, special deposit, compulsory loan or similar requirement against assets held by, deposits or other liabilities in or for the account of, advances, loans or other extensions of credit by, or any other acquisition of funds by, any office of such Lender that is not otherwise included in the determination of the Eurodollar Rate; or

(ii) impose on such Lender any other condition;

and the result of any of the foregoing is to increase the cost to such Lender, by an amount that such Lender deems to be material, of making, converting into, continuing or maintaining Eurodollar Loans or issuing or participating in Letters of Credit, or to reduce any amount receivable hereunder in respect thereof, then, in any such case, the Borrower shall promptly pay such Lender, upon its demand, any additional amounts necessary to compensate such Lender for such increased cost or reduced amount receivable; provided , however , that no such additional amounts shall be payable to such Lender for taxes pursuant to this Section 2.14 to the extent that (x) such Lender received additional amounts with respect to such taxes pursuant to Section 2.15 or (y) such amounts constitute Excluded Taxes. If any Lender becomes entitled to claim any additional amounts pursuant to this paragraph, it shall promptly notify the Borrower (with a copy to the Administrative Agent) of the event by reason of which it has become so entitled.

 

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(b) If any Lender shall have determined that the adoption of, or any change in, any Requirement of Law regarding capital adequacy or in the interpretation or application thereof or compliance by such Lender or any corporation controlling such Lender with any request or directive regarding capital adequacy (whether or not having the force of law) from any Governmental Authority made subsequent to the date hereof shall have the effect of reducing the rate of return on such Lender’s or such corporation’s capital as a consequence of its obligations hereunder or under or in respect of any Letter of Credit to a level below that which such Lender or such corporation could have achieved but for such adoption, change or compliance (taking into consideration such Lender’s or such corporation’s policies with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time, after submission by such Lender to the Borrower (with a copy to the Administrative Agent) of a written request therefor, the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such corporation for such reduction.

(c) A certificate as to any additional amounts payable pursuant to this Section 2.14 submitted by any Lender to the Borrower (with a copy to the Administrative Agent) shall be conclusive in the absence of manifest error. Notwithstanding anything to the contrary in this Section 2.14, the Borrower shall not be required to compensate a Lender pursuant to this Section 2.14 for any amounts incurred more than six (6) months prior to the date that such Lender notifies the Borrower 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 six-month period shall be extended to include the period of such retroactive effect. The obligations of the Borrower pursuant to this Section 2.14 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

(d) For purposes of this Agreement, the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, guidelines, or directives in connection therewith are deemed to have gone into effect and been adopted after the date of this Agreement.

2.15 Taxes.

(a) Except as otherwise provided in this Section 2.15, all payments made by the Borrower under this Agreement shall be made free and clear of, and without deduction or withholding for or on account of, any present or future income, stamp or other taxes, levies, imposts, duties, charges, fees, deductions or withholdings, now or hereafter imposed, levied, collected, withheld or assessed by any Governmental Authority (collectively, but excluding Excluded Taxes, the “ Non-Excluded Taxes ”). If any such Non-Excluded Taxes or Other Taxes are required to be withheld from any amounts payable to the Administrative Agent or any Lender hereunder, the amounts so payable to the Administrative Agent or such Lender shall be increased to the extent necessary to yield to the Administrative Agent or such Lender (after payment of all Non-Excluded Taxes and Other Taxes) interest or any such other amounts payable hereunder at the rates or in the amounts specified in this Agreement; provided that the Borrower shall not be required to increase any such amounts payable to any Lender with respect to any Excluded Taxes.

(b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.

 

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(c) Whenever any Non-Excluded Taxes or Other Taxes are payable by the Borrower, pursuant to this Section 2.15, as promptly as practicable thereafter the Borrower shall send to the Administrative Agent for its own account or for the account of the relevant Lender, as the case may be, a certified copy of an original official receipt received by the Borrower showing payment thereof.

(d) The Borrower shall reimburse and indemnify, within thirty (30) days after receipt of demand therefor, each Lender, the Issuing Lender, and the Administrative Agent for all Non-Excluded Taxes and Other Taxes (including any Non-Excluded Taxes and Other Taxes imposed by any jurisdiction on amounts payable under this Section 2.15) paid by such Lender or the Administrative Agent and any liabilities arising therefrom or with respect thereto, including any amendment, supplement, or modification of, or any waiver or consent under or in respect of, this Agreement, the other Loan Documents, or any such other documents. A certificate of the Lender or the Administrative Agent claiming any compensation under this Section 2.15, setting forth the amounts to be paid thereunder and delivered to the Borrower with copy to the Administrative Agent, shall be conclusive, binding and final for all purposes, absent manifest error. If the Borrower fails to pay any Non-Excluded Taxes or Other Taxes when due to the appropriate taxing authority or fails to remit to the Administrative Agent the required receipts or other required documentary evidence, the Borrower 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) (i) Each U.S. Lender Party shall (A) on or prior to the date such U.S. Lender Party becomes a “U.S. Lender Party” hereunder, (B) on or prior to the date on which any such form or certification expires or becomes obsolete, (C) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this Section 2.15(e) and (D) from time to time if requested by the Borrower or the Administrative Agent (or, in the case of a Participant, the relevant Lender), provide the Administrative Agent and the Borrower (or, in the case of a Participant, the relevant Lender) with two completed originals of Form W-9 (certifying that such U.S. Lender Party is entitled to an exemption from U.S. backup withholding tax) or any successor form.

(ii) Each Non-U.S. Lender Party that, at any of the following times, is entitled to an exemption from United States withholding tax or, after a change in any Requirement of Law, is subject to such withholding tax at a reduced rate under an applicable tax treaty, shall (w) on or prior to the date such Non-U.S. Lender Party becomes a “Non-U.S. Lender Party” hereunder, (x) on or prior to the date on which any such form or certification expires or becomes obsolete, (y) after the occurrence of any event requiring a change in the most recent form or certification previously delivered by it pursuant to this Section 2.15(e)(ii) and (z) from time to time if requested by the Borrower or the Administrative Agent (or, in the case of a Participant, the relevant Lender), provide the Administrative Agent and the Borrower (or, in the case of a Participant, the relevant Lender) with two completed originals of each of the following, as applicable: (A) Forms W-8ECI (claiming exemption from U.S. withholding tax because the income is effectively connected with a U.S. trade or business), W-8BEN (claiming exemption from, or a reduction of, U.S. withholding tax under an income tax treaty) and/or W-8IMY or any successor forms, (B) in the case of a Non-U.S. Lender Party claiming exemption under Sections 871(h) or 881(c) of the Code, Form W-8BEN (claiming exemption from U.S. withholding tax

 

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under the portfolio interest exemption) or any successor form and a certificate in form and substance reasonably acceptable to the Borrower and Administrative Agent that such Non-U.S. Lender Party is not (1) a “bank” within the meaning of Section 881(c)(3)(A) of the Code, (2) a “10 percent shareholder” of the Borrower within the meaning of Section 881(c)(3)(B) of the Code or (3) a “controlled foreign corporation” described in Section 881(c)(3)(C) of the Code or (C) any other applicable document prescribed by the IRS certifying as to the entitlement of such Non-U.S. Lender Party to such exemption from United States withholding tax or reduced rate with respect to all payments to be made to such Non-U.S. Lender Party under the Loan Documents. Unless the Borrower and the Administrative Agent have received forms or other documents described above indicating that payments under any Loan Document to or for a Non-U.S. Lender Party are not subject to United States withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Loan Parties and the Administrative Agent shall withhold amounts required to be withheld by applicable Requirements of Law from such payments at the applicable statutory rate.

(iii) If a payment made to a Non-U.S. Lender Party would be subject to United States federal withholding tax imposed by FATCA if such Non-U.S. Lender Party fails to comply with the applicable reporting requirements of FATCA, such Non-U.S. Lender Party shall deliver to the Administrative Agent and Borrower any documentation under any Requirement of Law sufficient for the Administrative Agent or Borrower to comply with their obligations under FATCA and to determine that such Non-U.S. Lender has complied with such applicable reporting requirements.

(f) If the Administrative Agent or any Lender determines, in its sole discretion, that it has received a refund of any Non-Excluded Taxes or Other Taxes as to which it has been indemnified by the Borrower or with respect to which the Borrower has paid additional amounts pursuant to this Section 2.15, it shall pay over such refund to the Borrower (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrower under this Section 2.15 with respect to the Non-Excluded Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of the Administrative Agent or such Lender and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund); provided that the Borrower, upon the request of the Administrative Agent or such Lender, agrees to repay the amount paid over to the Borrower (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) to the Administrative Agent or such Lender in the event the Administrative Agent or such Lender is required to repay such refund to such Governmental Authority. This paragraph shall not be construed to require the Administrative Agent or any Lender to make available its tax returns (or any other information relating to its taxes which it deems confidential) to the Borrower or any other Person.

(g) The agreements in this Section 2.15 shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

2.16 Indemnity. The Borrower agrees to indemnify each Lender for, and to hold each Lender harmless from, any loss or expense that such Lender may sustain or incur as a consequence of (a) default by the Borrower in making a borrowing of, conversion into or continuation of Eurodollar Loans

 

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after the Borrower has given a notice requesting the same in accordance with the provisions of this Agreement, (b) default by the Borrower in making any prepayment of or conversion from Eurodollar Loans after the Borrower has given a notice thereof in accordance with the provisions of this Agreement or (c) the making of a prepayment of Eurodollar Loans on a day that is not the last day of an Interest Period with respect thereto. Such indemnification may include an amount equal to the excess, if any, of (i) the amount of interest that would have accrued on the amount so prepaid, or not so borrowed, reduced, converted or continued, for the period from the date of such prepayment or of such failure to borrow, reduce, convert or continue to the last day of such Interest Period (or, in the case of a failure to borrow, reduce, convert or continue, the Interest Period that would have commenced on the date of such failure) in each case at the applicable rate of interest or other return for such Loans provided for herein (excluding, however, the Applicable Margin included therein, if any) over (ii) the amount of interest (as reasonably determined by such Lender) that would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the interbank eurodollar market. A certificate as to any amounts payable pursuant to this Section submitted to the Borrower by any Lender shall be conclusive in the absence of manifest error. This covenant shall survive the termination of this Agreement and the payment of the Loans and all other amounts payable hereunder.

2.17 Change of Lending Office . Each Lender agrees that, upon the occurrence of any event giving rise to the operation of Sections 2.18 or 2.19(a) with respect to such Lender, it will, if requested by the Borrower, use reasonable efforts (subject to overall policy considerations of such Lender) to designate another lending office for any Loans affected by such event with the object of avoiding the consequences of such event; provided that such designation is made on terms that, in the sole 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 2.17 shall affect or postpone any of the obligations of the Borrower or the rights of any Lender pursuant to Sections 2.14 or 2.15(a).

2.18 Notes . If so requested by any Lender by written notice to the Borrower (with a copy to the Administrative Agent), the Borrower 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 Borrower’s receipt of such notice) a Note or Notes to evidence such Lender’s Loans.

2.19 Defaulting Lenders.

(a) Adjustments . Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as that Lender is no longer a Defaulting Lender, to the extent permitted by applicable law:

(i) Waivers and Amendments . 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 the definition of Required Lenders.

 

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(ii) Reallocation of Payments . 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 hereunder; third, if so determined by the Administrative Agent or requested by the Issuing Lender, to be held as cash collateral for future funding obligations of such Defaulting Lender of any participation in any Letter of Credit; fourth, as the Borrower may request (so long as no 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 Borrower, to be held in a non-interest bearing deposit account and released in order to satisfy obligations of such Defaulting Lender to fund Loans under this Agreement; sixth, to the payment of any amounts owing to the Lenders, the L/C Lenders, or the Issuing Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, any L/C Lender, or Issuing 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 Event of Default has occurred and is continuing, to the payment of any amounts owing to the Borrower as a result of any judgment of a court of competent jurisdiction obtained by the Borrower against 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. 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 2.19(a)(ii) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.

(iii) Certain Fees . A Defaulting Lender (A) shall not be entitled to receive any fee pursuant to Section 2.5 for any period during which that Lender is a Defaulting Lender (and the Borrower shall not be required to pay any such fee that otherwise would have been required to have been paid to such Defaulting Lender) and (B) shall be limited in its right to receive letter of credit fees as provided in Section 3.3.

(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 the pro rata share of each non-Defaulting Lender of any such Letter of Credit 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

 

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and is continuing; and (B) the aggregate obligation of each non-Defaulting Lender to acquire, refinance or fund participations in Letters of Credit 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 Revolving Percentage of then outstanding Letters of Credit.

(b) Defaulting Lender Cure . If the Borrower, the Administrative Agent 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), that Lender will, to the extent applicable, purchase that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit be held on a pro rata basis by the Lenders in accordance with their Revolving Percentages (without giving effect to Section 2.19(a)(iv)), whereupon that Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the Borrower while that Lender was a Defaulting Lender; and provided , further , that except to the extent otherwise expressly agreed by the affected parties, no change hereunder from Defaulting Lender to Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lender having been a Defaulting Lender.

2.20 Replacement of Lenders (i) If any Lender requests compensation under Section 2.14 , (ii) if Borrower is required to pay any additional amount to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 2.15 , (iii) if any Lender is a Defaulting Lender, or (iv) if a Lender refuses to consent to an amendment, modification or waiver of this Agreement that, pursuant to Section 10.1 requires consent of 100% of the Lenders or 100% of the Lenders with Obligations affected thereby (and the Required Lenders have consented thereto or, as applicable, 66 2/3% of affected Lenders), then Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender (the Replaced Lender ) to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in Section 10.6 ), all of its interests, rights and obligations under this Agreement to a willing assignee selected by Borrower that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that (a) Borrower shall have received the prior written consent of the Administrative Agent (except where the Administrative Agent is the Replaced Lender) and the Issuing Bank, which consents, so long as no Default has occurred and is continuing, shall not unreasonably be withheld; provided , however , that for purposes of clauses (iii) and (iv) with respect to a Defaulting Lender, such consent will not be unreasonably withheld, regardless of the occurrence and continuance of a Default, (b) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and participations in any Bank Services and Specified Swap Agreements, and accrued interest thereon, fees, and all other amounts from the assignee (to the extent of such outstanding principal and accrued interest) or Borrower (in the case of all other amounts), (c) in the case of any such assignment resulting from a claim for compensation under Section 2.14 or payments required to be made pursuant to Section 2.15 , such assignment will result in a material reduction in such

 

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compensation or payments, and (d) in the case of any such assignment resulting from a Lender refusing to consent to an amendment, modification or waiver of this Agreement, then such assignee shall consent, at the time of such assignment, to each matter in respect of which such Lender did not consent. For the avoidance of doubt, if a Lender refused to consent to an amendment, modification or waiver that required the consent of 100% of Lenders (and the Required Lenders having consented thereto) with Obligations directly affected thereby (which amendment, modification or waiver did not accordingly require the consent of 100% of all Lenders), the Loans and Commitments of such Lender that are subject to the assignments required by this Section shall include only those Loans and Commitments that constitute the Obligations directly affected by the amendment, modification or waiver to which such Lender refused to provide its consent. A Lender shall not be required to make any such assignment and delegation if prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling Borrower to require such assignment and delegation cease to apply. In connection with the foregoing, the Administrative Agent shall have the authority to execute the Assignment and Assumption on behalf of any Lender making an assignment hereunder.

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 Borrower on any Business Day during the Letter of Credit Availability Period in such form as may 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, the L/C Exposure would exceed either the Total L/C Commitment or the Available Revolving Commitment at such time. Each Letter of Credit shall (i) be denominated in Dollars, or in the discretion of the Issuing Lender, a Foreign Currency; provided that (A) the Dollar Equivalent of each Letter of Credit denominated in Foreign Currency (each, a “ Foreign Currency L/C ”) shall be reported by the Issuing Bank to the Administrative Agent (unless the Administrative Agent is the Issuing Lender) promptly upon the issuance of such Foreign Currency L/C and monthly within seven (7) Business Days prior to the end of each month (including the month of issuance) or more frequently upon the request of the Administrative Agent and (B) the Dollar Equivalent of the aggregate face amount of all Foreign Currency L/Cs shall not exceed $20,000,000 at any time; and (ii) expire no later than the earlier of (x) the first anniversary of its date of issuance and (y) the date that is five (5) Business Days prior to the Letter of Credit Maturity Date; except that (A) 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) subject to the Borrower’s satisfaction of the conditions set forth in Section 5.2 at the time of any such renewal and (B) a Letter of Credit may expire on a date that is up to 365 days after the Letter of Credit Maturity Date (each such Letter of Credit, a “ Holdover Letter of Credit ”) if, on or before the date that is five (5) Business Days prior to the Letter of Credit Maturity Date, the Borrower provides to the Issuing Lender cash collateral in an amount equal to 105% of the Dollar Equivalent of the face amount of such Letter of Credit plus all interest, fees, and costs due or to become due in connection therewith (as estimated by the Issuing Lender in its sole discretion), to secure all of

 

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the Obligations relating to such Letter of Credit; provided that the Dollar Equivalent of the aggregate face amount of all Holdover Letters of Credit shall not exceed $50,000,000 at any time; and provided , further , that following the Letter of Credit Maturity Date, the Issuing Bank may recalculate the Dollar Equivalent of the face amount of any Foreign Currency L/C at any time and, to the extent that the cash collateral previously provided by the Borrower is equal to less than 105% of the Dollar Equivalent of the face amount of such Foreign Currency L/C plus all interest, fees, and costs due or to become due in connection therewith (as estimated by the Issuing Lender in its sole discretion), the Borrower shall immediately provide sufficient additional cash collateral to the Issuing Bank to make up for this shortfall. In addition, if the Borrower so requests in any applicable Letter of Credit Application, the L/C Issuer may, in its sole discretion, agree to issue a Letter of Credit that has automatic extension provisions (each, an “ Auto-Extension Letter of Credit ”); provided that any such Auto-Extension Letter of Credit must permit the L/C Issuer to prevent any such extension at least once in each twelve-month period (commencing with the date of issuance of such Letter of Credit) by giving prior notice to the beneficiary thereof not later than a day (the “ Non-Extension Notice Date ”) in each such twelve-month period to be agreed upon at the time such Letter of Credit is issued. Unless otherwise directed by the L/C Issuer, the Borrower shall not be required to make a specific request to the L/C Issuer for any such extension. Once an Auto-Extension Letter of Credit has been issued, the Lenders shall be deemed to have authorized (but may not require) the L/C Issuer to permit the extension of such Letter of Credit at any time to an expiry date not later than the date that is five (5) Business Days prior to the Letter of Credit Maturity Date; provided , however , that the L/C Issuer shall not permit any such extension if (A) the L/C Issuer has determined that it would not be permitted, or would have no obligation, at such time to issue such Letter of Credit in its revised form (as extended) under the terms hereof (by reason of the provisions of Section 3.1(b) or otherwise), or (B) it has received notice (which may be by telephone or in writing) on or before the day that is seven (7) Business Days before the Non-Extension Notice Date from the Administrative Agent, any Lender or the Borrower that one or more of the applicable conditions specified in Section 5.2 is not then satisfied, and in each such case directing the L/C Issuer not to permit such extension.

(b) The Issuing Lender shall not at any time be obligated to issue any Letter of Credit if:

(i) such issuance would conflict with, or cause the Issuing Lender or any L/C Lender to exceed any limits imposed by, any applicable Requirement of Law, including, without limitation, 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 the Letter of Credit, or any law applicable to the Issuing Lender or any request 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 of letters of credit generally or the Letter of Credit in particular or shall impose upon the Issuing Lender with respect to the Letter of Credit any restriction, reserve or capital requirement (for which the Issuing Lender is not otherwise compensated hereunder) not in effect on the Effective Date, or shall impose upon the Issuing Lender any unreimbursed loss, cost or expense which was not applicable on the Effective Date and which the Issuing Lender in good faith deems material to it;

 

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(ii) the issuance of the Letter of Credit would violate one or more policies of the Issuing Lender applicable to letters of credit generally;

(iii) except as otherwise agreed by the Administrative Agent and the Issuing Lender, the Letter of Credit is in an initial Dollar Equivalent stated amount less than $100,000, in the case of a commercial Letter of Credit, or $500,000, in the case of a standby Letter of Credit;

(iv) any Lender is at that time a Defaulting Lender, unless the Issuing Lender has entered into arrangements, including the delivery of cash collateral, satisfactory to the Issuing Lender (in its sole discretion) with the Borrower or such Lender to eliminate the Issuing Lender’s actual or potential fronting exposure with respect to the Defaulting Lender arising from either the Letter of Credit then proposed to be issued or that Letter of Credit and all other Obligations under Letters of Credit as to which the Issuing Lender has actual or potential fronting exposure, as it may elect in its sole discretion;

(v) such Letter of Credit contains any provisions for automatic reinstatement of the stated amount thereof after any drawing thereunder; or

(vi) subject to Section 3.1(a), the expiry date of such requested Letter of Credit would occur more than twelve (12) months after the date of issuance thereof.

(c) Unless otherwise expressly agreed by the L/C Issuer and the Borrower when a Letter of Credit is issued (including any such agreement applicable to an Existing Letter of Credit), (i) the rules of the ISP shall apply to each standby Letter of Credit, and (ii) the rules of UCP 600 at the time of issuance shall apply to each commercial Letter of Credit.

(d) Unless otherwise specified herein, the amount of a Letter of Credit at any time shall be deemed to be the Dollar Equivalent of stated amount of such Letter of Credit in effect at such time; provided , however , that with respect to any Letter of Credit that, by its terms or the terms of any Issuer Document related thereto, provides for one or more automatic increases in the stated amount thereof, the amount of such Letter of Credit shall be deemed to be the maximum Dollar Equivalent of the stated amount of such Letter of Credit after giving effect to all such increases, whether or not such maximum stated amount is in effect at such time.

3.2 Procedure for Issuance of Letters of Credit . The Borrower may from time to time request that the Issuing Lender issue a Letter of Credit 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, subject to the satisfaction of the conditions set forth in Section 5.2, 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,

 

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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 Borrower. The Issuing Lender shall furnish a copy of such Letter of Credit to the Borrower 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 Borrower agrees to pay to the Administrative Agent, for the account of the L/C Lenders, with respect to each outstanding Letter of Credit issued for the account of (or at the request of) the Borrower letter of credit fees in Dollars at the Applicable Margin applicable to Eurodollar Loans on the Dollar Equivalent of the drawable amount of such Letter of Credit, payable quarterly in arrears on the last Business Day of March, June, September and December of each year and on the Letter of Credit Maturity Date (each, an “ L/C Fee Payment Date ”) after the issuance date of such Letter of Credit, as well as 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 Borrower or processing of drawings thereunder (the “ Issuing Lender Fees ”). Notwithstanding the foregoing, with respect to Existing Letters of Credit, Issuing Lender Fees shall not be charged for the remaining term of such Existing Letters of Credit; provided that upon renewal of an Existing Letter of Credit, such Existing Letter of Credit shall accrue Issuing Lender Fees as set forth above. All Issuing Lender 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 Borrower 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.

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 Dollar Equivalent of 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 Borrower 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 Dollar Equivalent 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 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

 

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specified in Section 5, (iii) any adverse change in the condition (financial or otherwise) of the Borrower, (iv) any breach of this Agreement or any other Loan Document by the Borrower, 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 Borrower shall pay or cause to be paid to the Issuing Lender an amount equal to the Dollar Equivalent of the entire amount of such L/C Disbursement not later than the immediately following Business Day. 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.

(b) If the Issuing Lender shall not have received from the Borrower the payment that it is required to make pursuant to Section 3.5(a) with respect to a Letter of Credit within the time specified in such Section, the Issuing Lender will promptly notify the Administrative Agent of the Dollar Equivalent 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 the Dollar Equivalent of such L/C Disbursement; upon such payment pursuant to this paragraph to reimburse the Issuing Lender for any L/C Disbursement, the Borrower shall be required to reimburse the L/C Lenders for such payments in Dollars (including interest accrued thereon from the date of such payment until the date of such reimbursement at the rate applicable to Revolving Loans that are ABR Loans plus (two percent (2.00%) 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 Borrower 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 Borrower 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, and the Total L/C Commitments shall be permanently reduced by such amount; 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 Borrower’s 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 Borrower may have or have had against the Issuing Lender, any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees with the Issuing Lender that the Issuing Lender shall not be responsible for, and the Borrower’s obligations hereunder shall not be affected by, among other things, the validity or genuineness of documents or of any

 

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endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the Borrower 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 Borrower 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 Borrower agrees 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 Borrower and shall not result in any liability of the Issuing Lender to the Borrower.

In addition to amounts payable as elsewhere provided in the Agreement, Borrower hereby agrees to pay and to protect, indemnify, and save the 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 the 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 the Issuing Lender or such L/C Lender (as finally determined by a court of competent jurisdiction).

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 Borrower and the Administrative Agent of the date and amount thereof. The responsibility of the Issuing Lender to the Borrower 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 Borrower shall reimburse such L/C Disbursement in full within the time period specified in Section 3.5(a) or the L/C Lenders shall reimburse 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

 

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L/C Disbursement to but excluding the date of payment by the Borrower, at the rate per annum that would apply to such amount if such amount were a Revolving Loan that is an ABR Loan; provided that the provisions of Section 2.10(c) shall be applicable to any such amounts not paid when due.

3.10 Additional Issuing Lenders. The Borrower may, at any time and from time to time with the consent of the Administrative Agent (which consent shall not be unreasonably withheld) and such Lender, designate one or more additional Lenders to act as an issuing bank under the terms of this Agreement. Any Lender designated as an issuing bank pursuant to this paragraph shall be deemed to be an “ Issuing Lender ” (in addition to being a Lender) in respect of Letters of Credit issued or to be issued by such Lender, and, with respect to such Letters of Credit, such term shall thereafter apply to the other Issuing Lender and such Lender.

3.11 Resignation of the Issuing Lender . The Issuing Lender may resign at any time by giving at least thirty (30) days’ prior written notice to the Administrative Agent, the Lenders and the Borrower. Subject to the next succeeding paragraph, upon the acceptance of any appointment as the Issuing Lender hereunder by a Lender that shall agree to serve as successor Issuing Lender, such successor shall succeed to and become vested with all the interests, rights and obligations of the retiring Issuing Lender and the retiring Issuing Lender shall be discharged from its obligations to issue additional Letters of Credit hereunder without affecting its rights and obligations with respect to Letters of Credit previously issued by it. At the time such resignation shall become effective, the Borrower shall pay all accrued and unpaid fees pursuant to Section 3.3. The acceptance of any appointment as the Issuing Lender hereunder by a successor Lender shall be evidenced by an agreement entered into by such successor, in a form satisfactory to the Borrower and the Administrative Agent, and, from and after the effective date of such agreement, (i) such successor Lender shall have all the rights and obligations of the previous Issuing Lender under this Agreement and the other Loan Documents and (ii) references herein and in the other Loan Documents to the term “Issuing Lender” shall be deemed to refer to such successor or to any previous Issuing Lender, or to such successor and all previous Issuing Lenders, as the context shall require. After the resignation of the Issuing Lender hereunder, the retiring Issuing Lender shall remain a party hereto and shall continue to have all the rights and obligations of an Issuing Lender under this Agreement and the other Loan Documents with respect to Letters of Credit issued by it prior to such resignation, but shall not be required to issue additional Letters of Credit.

SECTION 4

REPRESENTATIONS AND WARRANTIES

To induce the Administrative Agent and the Lenders to enter into this Agreement and to make the Loans and issue the Letters of Credit, the Borrower hereby represents and warrants to the Administrative Agent and each Lender that:

 

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4.1 Financial Condition.

(a) The audited consolidated balance sheets of Borrower and its Subsidiaries as of December 31, 2008, December 31, 2009, and December 31, 2010, and the related consolidated statements of operations, changes in stockholders’ (deficit) equity and comprehensive loss and cash flows each of the years then 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 Borrower 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. 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 as approved by the aforementioned firm of accountants and disclosed therein). Except as set forth on Schedule 4.1, no Group Member has, as of the Effective Date, any material (i) Guarantee Obligations, (ii) contingent liabilities and (iii) liabilities for taxes, or any material 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, 2010 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, 2011, there has been no development or event that has had or could reasonably be expected to have a Material Adverse Effect.

4.3 Existence; Compliance with Law . Except as set forth in Schedule 4.3, 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 could reasonably be expected to have a Material Adverse Effect and (d) is in material compliance with all Requirements of Law.

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 Borrower, 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 Borrower, 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 the extensions of credit hereunder or with the execution, delivery, performance, validity or enforceability of this Agreement or any of the Loan Documents by or in respect of any Group Member, except (i)

 

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Governmental Approvals, consents, authorizations, filings and notices described in Schedule 4.4, which Governmental Approvals, consents, authorizations, filings and notices have been obtained or made and are in full force and effect, (ii) the filings referred to in Section 4.19 and (iii) Governmental Approvals described in Schedule 4.5. 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 by each Group Member will not violate any Requirement of Law (except as set forth in Schedule 4.5) 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 Requirement of Law or any such Contractual Obligation (other than the Liens created by the Security Documents). No Requirement of Law or Contractual Obligation applicable to the Borrower or any of its Subsidiaries could reasonably be expected to have a Material Adverse Effect. The absence of obtaining the Governmental Approvals described in Schedule 4.5 and the violations of Requirements of Law referenced in Schedule 4.5 shall not have, or reasonably be expected to have, an adverse effect on any rights of the Lenders, the Administrative Agent pursuant to the Loan Documents or an adverse effect on the Group Members with regard to their continuing operations or operations.

4.6 Litigation . Except as set forth in Schedule 4.6, no litigation, investigation or proceeding of or before any arbitrator or Governmental Authority is pending or, to the knowledge of the 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 could 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 could reasonably be expected to have a Material Adverse Effect. No Default or Event of Default has occurred (except as set forth in Schedule 4.7), nor shall any Default or Event of Default result from the making of a 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 its real property, and good title to, or a valid leasehold interest in, all its other property, and none of such

 

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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. Section 8 of the Collateral Information Certificate sets forth a complete and accurate list of all real property owned by each Loan Party as of the date hereof, if any. Section 9 of the Collateral Information Certificate sets forth a complete and accurate list of all leases of real property under which any Loan Party is the lessee as of the date hereof.

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 Group Member’s Intellectual Property, nor does the Borrower know of any valid basis for any such claim, unless such claim could not reasonably be expected to have a Material Adverse Effect. 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 could not reasonably be expected to have a Material Adverse Effect, and there are no claims pending or, to the knowledge of the Borrower, threatened to such effect.

4.10 Taxes . Except as set forth in Schedule 4.10, each Group Member has filed or caused to be filed all Federal and state income tax returns and other material tax returns that are required to be filed and has paid all 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 taxes, the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the relevant Group Member and tax obligations which do not individually or in the aggregate exceed $500,000); no tax Lien has been filed, and, to the knowledge of the Borrower, no claim is being asserted, with respect to any such tax already due and payable and not being contested in good faith.

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 Regulations of the Board or (b) for any purpose that violates the provisions of the Regulations of the Board. If requested by any Lender or the Administrative Agent, the Borrower 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.

 

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4.12 Labor Matters . Except as, in the aggregate, could 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 Borrower, 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 . Neither a Reportable Event nor an “ accumulated funding deficiency ” (within the meaning of Section 412 of the Code or Section 302 of ERISA) has occurred during the five-year period prior to the date on which this representation is made or deemed made with respect to any Plan, and each Plan has complied in all material respects with the applicable provisions of ERISA and the Code. No termination of a Single Employer Plan has occurred, and no Lien in favor of the PBGC or a Plan has arisen, during such five-year period. The present value of all accrued benefits under each Single Employer Plan (based on those assumptions used to fund such Plans) did not, as of the last annual valuation date prior to the date on which this representation is made or deemed made, exceed the value of the assets of such Plan allocable to such accrued benefits by a material amount. Neither the Borrower nor any Commonly Controlled Entity has had a complete or partial withdrawal from any Multiemployer Plan that has resulted or could reasonably be expected to result in a material liability under ERISA, and neither the Borrower nor any Commonly Controlled Entity would become subject to any material liability under ERISA if the Borrower or any such Commonly Controlled Entity were to withdraw completely from all Multiemployer Plans as of the valuation date most closely preceding the date on which this representation is made or deemed made. No such Multiemployer Plan is in Reorganization or Insolvent.

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. Except as set forth in Schedule 4.4 and Schedule 4.5, no Loan Party is subject to regulation under any Requirement of Law (other than Regulation X of the Board) that limits its ability to incur Indebtedness. No Loan Party is subject to or is not exempt from regulation as a “holding company” under the Public Utility Holding Company Act of 2005 or as a “public utility” under the Federal Power Act or under any other federal or state statute or regulation which may limit its ability to incur Indebtedness or which may otherwise render all or any portion of the Obligations unenforceable.

4.15 Subsidiaries . Except as disclosed to the Administrative Agent by the Borrower in writing from time to time after the Effective Date, (a) Schedule 4.15 sets forth the name and jurisdiction of organization of each Subsidiary 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 Borrower or any Subsidiary, except as created by the Loan Documents.

 

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4.16 Use of Proceeds . The proceeds of the Revolving Loans, and the Letters of Credit, shall be used for general corporate and working capital purposes.

4.17 Environmental Matters . Except as, in the aggregate, could not reasonably be expected to have a Material Adverse Effect:

(a) the facilities and properties owned, leased or operated by any Group Member (the “ Properties ”) do not contain, and have not previously contained, any Materials of Environmental Concern in amounts or concentrations or under circumstances that constitute or 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 the Borrower have knowledge or reason to believe that any such notice will be received or is being threatened;

(c) Materials of Environmental Concern have not been transported or disposed of 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 have any Materials of Environmental Concern been generated, treated, stored or disposed of 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 Borrower, 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) there has been no release or threat of release of Materials of Environmental Concern at or from the Properties, or arising from or related to the operations of any Group Member in connection with the Properties 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) the Properties and all operations at the Properties are in compliance, and have in the last five years been in compliance, with all applicable Environmental Laws, and 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

 

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(g) no Group Member has assumed any liability of any other Person under Environmental Laws.

4.18 Accuracy of Information, etc . (a) 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 not misleading. The projections and pro forma financial information contained in the materials referenced above are based upon good faith estimates and assumptions believed by management of the Borrower 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.

(b) There is no fact known to any Loan Party that could reasonably be expected to have a Material Adverse Effect that has not been expressly disclosed herein, or in the other Loan Documents or otherwise disclosed to the Administrative Agent and the Lenders.

4.19 Security Documents .

(a) The Guarantee and Collateral Agreement is effective to create in favor of the Administrative Agent, for the benefit of the Secured Parties, a legal, valid and enforceable security interest in the Collateral described therein and proceeds thereof. In the case of the Pledged Stock (as defined 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)(4) of the New York UCC or the corresponding code or statute of any other applicable jurisdiction (“ Certificated Securities ”), when certificates representing such Pledged Stock are (or were) delivered to the Administrative Agent, and in the case of the other Collateral constituting personal property described in the Guarantee and Collateral Agreement, when UCC-1 financing statements in appropriate form are (or were) filed in the offices specified on Schedule 4.19(a), the Administrative Agent, for the benefit of the Secured Parties, shall have (or, as of the date of such delivery or filing, has had) 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 expressly permitted to have priority by Section 7.3). As of the Effective Date, none of the Borrower or any Subsidiary Guarantor that is a limited liability company or partnership has any Capital Stock that is a Certificated Security.

(b) Each of the Mortgages delivered after the Effective Date 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

 

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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.

4.20 Solvency. Each Loan Party is, and after giving effect to the incurrence of all Indebtedness and obligations being incurred in connection herewith and the other Loan Documents will be and will continue to be, Solvent.

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 shall be deemed “Designated Senior Indebtedness” or a similar concept thereof for purposes of any Indebtedness of the Loan Parties.

4.23 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 insurance with financially sound and reputable insurance companies insurance on all its property (and also with respect to its foreign receivables) 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

4.24 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 or condemnation proceeding affecting all or any portion of the Collateral.

SECTION 5

CONDITIONS PRECEDENT

5.1 Conditions to Effectiveness . The effectiveness of this Agreement on the Effective Date is subject to the following conditions precedent:

 

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(a) Loan Documents . (i) Each Lender shall have received (A) this Agreement executed and delivered by the Administrative Agent, the Borrower and each Lender listed on Schedule 1.1A, (B) the Guarantee and Collateral Agreement, executed and delivered by the Borrower and each Subsidiary Guarantor, and (C) an Acknowledgement and Consent in the form attached to the Guarantee and Collateral Agreement, executed and delivered by each Issuer (as defined therein), if any, that is not a Loan Party, and (D) its Note to the extent requested pursuant to Section 2.18, and (ii) the Administrative Agent shall have received each other Loan Document, executed and delivered by the parties thereto.

(b) [Reserved].

(c) Approvals . Except for the Governmental Approvals described in Schedule 4.5, all Governmental Approvals and consents and approvals of, or notices to, any other Person required in connection with the execution and performance of the Loan Documents, the continuing operations of the Group Members, and the other transactions contemplated hereby shall have been obtained and be in full force and effect, and all applicable waiting periods shall have expired without any action being taken or threatened by any competent authority that could reasonably be expected to restrain, prevent or otherwise impose burdensome conditions on the financing contemplated hereby. The absence of obtaining the Governmental Approvals described in Schedule 4.5 shall not have an adverse effect on any rights of the Lenders, or the Administrative Agent pursuant to the Loan Documents or an adverse effect on the Group Members with regard to their continuing operations or operations.

(d) Lien Searches . The Administrative Agent shall have received the results of a recent lien search in all appropriate jurisdictions (including the jurisdiction of formation or organization of each Group Member), and such search shall reveal no liens on any of the assets of the Loan Parties except for liens permitted by Section 7.3 or discharged on or prior to the Effective Date pursuant to documentation satisfactory to the Administrative Agent.

(e) Fees . The Lenders and the Administrative Agent shall have received all fees required to be paid, and all expenses for which invoices have been presented (including the reasonable fees and expenses of legal counsel), on or before the Effective Date.

(f) Secretary’s Certificate; Certified Certificate of Organization; Good Standing Certificates. The Administrative Agent shall have received (i) a certificate of each Loan Party, dated the Effective Date, substantially in the form of Exhibit C, with appropriate insertions and attachments, including the certificate of incorporation or other similar organizational document of each Loan Party certified by the relevant authority of the jurisdiction of organization of such Loan Party, the bylaws or other similar organizational document of each Loan Party and the relevant board resolutions or written consents of each Loan Party authorizing the transactions contemplated hereunder, and (ii) a long form good standing certificate for each Loan Party from its jurisdiction of organization.

(g) Legal Opinions . The Administrative Agent and each Lender shall have received the executed legal opinions of Goodwin Procter LLP, counsel to Borrower and its Subsidiaries, in a form reasonably satisfactory to the Administrative Agent. Such legal opinions shall cover such other matters incident to the transactions contemplated by this Agreement as the Administrative Agent may reasonably require.

 

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(h) Pledged Stock; Stock Powers; Pledged Notes . The Administrative Agent shall have received (i) the original certificates representing the shares of Capital Stock pledged pursuant to the Security Documents, together with an undated stock power for each such certificate executed and dated in blank by a duly authorized officer of the pledgor thereof, and (ii) each original promissory note (if any) pledged to the Administrative Agent pursuant to the Security Documents, endorsed (without recourse) in blank (or accompanied by an executed transfer form in blank) by the pledgor thereof.

(i) Filings, Registrations and Recordings . Each document (including any Uniform Commercial Code financing statement) required by the Security Documents or under law or reasonably requested by the Administrative Agent to be filed, registered or recorded to create in favor of the Administrative Agent, for the benefit of the Secured Parties, a perfected Lien on the Collateral described therein, prior and superior in right to any other Person (other than with respect to Liens expressly permitted by Section 7.3), shall be in proper form for filing, registration or recordation.

(j) Solvency Certificate . The Administrative Agent shall have received a solvency certificate from the chief financial officer or treasurer of the Borrower, substantially in the form of Exhibit D, certifying that each Loan Party is, and after giving effect to the incurrence of all Indebtedness and Obligations being incurred in connection herewith and the other Loan Documents will be, and will continue to be, Solvent.

(k) Patriot Act . The Administrative Agent shall have received, prior to the Effective 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.

(l) Insurance . The Administrative Agent shall have received insurance certificates (and underlying endorsements) satisfying the requirements of Section 5.2 of the Guarantee and Collateral Agreement and Section 6.5 hereunder.

(m) No Material Adverse Effect . There shall not have occurred since December 31, 2011 any event or condition that has had or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

(n) 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, that has had or could reasonably be expected to have, individually or in the aggregate, a Material Adverse Effect.

(o) Representations and Warranties . Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all respects except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all respects as of such earlier date.

 

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(p) No Default . No Default or Event of Default shall have occurred and be continuing.

(q) Cancellation/Assignment of Obligations to TD Bank, NA. The Revolving Loan Note in the original principal amount of $35,000,000 payable by the Borrower to TD Bank, N.A. pursuant to the Existing Credit Agreement shall have been cancelled and returned to Borrower and all participations in the Existing Letters of Credit held by TD Bank, N.A. pursuant to the Existing Credit Agreement shall have been terminated and re-assigned to SVB as Issuing Lender. The Administrative Agent, the Borrower and TD Bank, N.A. shall have executed and delivered the TD Termination Agreement.

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 on any date including, but not limited to, any Loan to be advanced and such Lender’s participation in any Letter of Credit to be issued hereunder (including its initial extension of credit) is subject to the satisfaction of the following conditions precedent on the date of such extension of credit including, but not limited to, the date of the advance of any such Loan and the date of the issuance of any such Letter of Credit:

(a) Representations and Warranties . Each of the representations and warranties made by any Loan Party in or pursuant to the Loan Documents shall be true and correct in all material respects on and as of such date as if made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall have been true and correct in all material respects as of such earlier date and except that for purposes of this Section 5.2 , the representations and warranties contained in Section 4.1 shall be deemed to refer to the most recent statements furnished pursuant to clauses (a) and (b), respectively, of Section 6.1 ;

(b) No Default . No Default or Event of Default shall have occurred as of or on such date or after giving effect to the extensions of credit requested to be made on such date; and

(c) No Material Adverse Effect . There shall not have occurred any event or condition that has had or could be reasonably expected to have, individually or in the aggregate, a Material Adverse Effect.

Each borrowing by and issuance of a Letter of Credit on behalf of the Borrower hereunder and each Revolving Loan Conversion shall constitute a representation and warranty by the Borrower as of the date of such extension of credit and each Revolving Loan Conversion that the conditions contained in this Section 5.2 have been satisfied.

SECTION 6

AFFIRMATIVE COVENANTS

The Borrower hereby agrees that, until all Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under

 

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any Loan Document (other than inchoate indemnity obligations) shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full, the Borrower shall, as to itself and each Borrower’s Subsidiaries, and shall cause each of its Subsidiaries to:

6.1 Financial Statements . Furnish to the Administrative Agent, for distribution to each Lender:

(a) as soon as available, but in any event within ninety (90) days after the end of each fiscal year of the Borrower, a copy of the audited consolidated balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such year and the related audited consolidated statements of operations, changes in stockholders’ (deficit) equity and comprehensive loss and cash flows each of the years then ended on such dates, setting forth in each case in comparative form the figures for the previous year, reported on by and accompanied by an unqualified report from Ernst & Young LLP or other independent certified public accountant reasonably acceptable to the Administrative Agent; and

(b) as soon as available, but in any event not later than forty five (45) days after the end of each fiscal quarter of the Borrower, the unaudited consolidated and consolidating balance sheet of the Borrower and its consolidated Subsidiaries as at the end of such quarter and the related unaudited consolidated and consolidating statements of income and of cash flows for such quarter and the portion of the fiscal year through the end of such quarter, setting forth in each case in comparative form the figures for the previous year, certified by a Responsible Officer as being fairly stated in all material respects (subject to normal year-end audit adjustments).

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. Documents required to be delivered pursuant to the terms of the foregoing clauses (a) and (b) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the Internet at Borrower’s website address.

6.2 Certificates; Other Information . Furnish to the Administrative Agent, for distribution to each Lender (or, in the case of clause (g), to the relevant Lender):

(a) (i) within forty five (45) days after the end of each month and concurrently with the delivery of the financial statements referred to in Section 6.1(a), (A) a certificate of a Responsible Officer stating that, to the best of each 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 observed, performed or satisfied by it, and that such

 

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Responsible Officer has obtained no knowledge of any Default or Event of Default except as specified in such certificate, (B) 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 Intellectual Property acquired by any Loan Party since the date of the most recent report delivered pursuant to this clause (B) (or, in the case of the first such report so delivered, since the Effective Date) and (C) a Compliance Certificate containing all information and calculations 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 (it being understood and agreed that such Compliance Certificate shall not be required to contain information and calculations with respect to those financial covenants that are not required to be tested on the last day of such month); provided that a ten (10) day grace period shall apply to the delivery requirement relating to the monthly Compliance Certificate set forth in this clause (C);

(b) as soon as available, and in any event no later than sixty (60) days after the end of each fiscal year of the Borrower, a detailed consolidated budget for the following fiscal year approved by the board of directors of the Borrower (including a projected consolidated balance sheet of the Borrower 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 in each case be accompanied by a certificate of a Responsible Officer stating that such Projections are based on reasonable estimates, information and assumptions and that such Responsible Officer has no reason to believe that such Projections are incorrect or misleading in any material respect;

(c) within five (5) days after the same are sent, copies of all financial statements and reports that the Borrower sends to the holders of any class of its debt securities or public equity securities and, within five (5) days after the same are filed, copies of all financial statements and reports that the Borrower may make to, or file with, the SEC; Documents required to be delivered pursuant to the terms of this clause (d) (to the extent any such documents are included in materials otherwise filed with the SEC) may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which Borrower posts such documents, or provides a link thereto, on Borrower’s website on the Internet at Borrower’s website address;

(d) upon request by the Administrative Agent, within five (5) 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 could reasonably be expected to have a material effect on any of the Governmental Approvals or otherwise on the operations of the Group Members;

(e) upon request by the Administrative Agent no more frequently than monthly, (i) an aged listing of accounts receivable (by invoice date), (ii) an aged listing of accounts payable (by invoice date), and (iii) statements detailing the balances of cash and Cash Equivalents of Borrower and its Subsidiaries; and

 

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(f) promptly, such additional financial and other information as the Administrative Agent or any Lender may from time to time reasonably request.

6.3 Payment of Obligations . Pay, discharge or otherwise satisfy at or before maturity or before they become delinquent, as the case may be, all its material obligations 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.

6.4 Maintenance of Existence; Compliance . (a) (i) Preserve, renew and keep in full force and effect its organizational existence and (ii) take all reasonable action to maintain or obtain all Governmental Approvals and all other rights, privileges and franchises necessary or desirable in the normal conduct of its business, except, in each case, as otherwise permitted by Section 7.4 and except, in the case of clause (ii) above, to the extent that failure to do so could not reasonably be expected to have a Material Adverse Effect; (b) comply with all Contractual Obligations 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 could not reasonably be expected to have a Material Adverse Effect.

6.5 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 policies on all its property (and also with respect to its foreign receivables) 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 which insurance policies shall identify the Administrative Agent, for the benefit of the Secured Parties, as loss payee or additional insured, as the case may be, and shall provide the Administrative Agent with at least thirty (30) days prior notice of termination.

6.6 Books and Records . Keep proper books of records and account in which full, true and correct entries in conformity with GAAP and all Requirements of Law shall be made of all dealings and transactions in relation to its business and activities.

6.7 Notices . Promptly give notice to the Administrative Agent and each Lender of:

(a) the occurrence of any Default or Event of Default;

 

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(b) any (i) default or event of default under any Contractual Obligation of any Group Member or (ii) litigation, investigation or proceeding that may exist at any time between any Group Member and any Governmental Authority, that in either case, if not cured or if adversely determined, as the case may be, could reasonably be expected to have a Material Adverse Effect;

(c) any litigation or proceeding affecting any Group Member (i) in which the amount involved is $500,000 or more and not covered by insurance, (ii) in which injunctive or similar relief is sought or (iii) which relates to any Loan Document;

(d) the following events, as soon as possible and in any event within thirty (30) days after the Borrower knows or has reason to know thereof: (i) the occurrence of any Reportable Event with respect to any Plan, a failure to make any required contribution to a Plan, the creation of any Lien in favor of the PBGC or a Plan or any withdrawal from, or the termination, Reorganization or Insolvency of, any Multiemployer Plan or (ii) the institution of proceedings or the taking of any other action by the PBGC or the Borrower or any Commonly Controlled Entity or any Multiemployer Plan with respect to the withdrawal from, or the termination, Reorganization or Insolvency of, any Plan; and

(e) any development or event that has had or could reasonably be expected to have a Material Adverse Effect.

Each notice pursuant to this Section 6.7 shall be accompanied by a statement of a Responsible Officer setting forth details of the occurrence referred to therein and stating what action the relevant Group Member proposes to take with respect thereto.

6.8 Environmental Laws .

(a) Comply in all material respects with, and ensure compliance in all material respects by all tenants and subtenants, if any, with, all applicable Environmental Laws, and obtain and comply in all material respects with and maintain, and ensure that all tenants and subtenants obtain and comply in all material respects with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws.

(b) Conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws and promptly comply in all material respects with all lawful orders and directives of all Governmental Authorities regarding Environmental Laws.

6.9 Accounts; Collections.

Maintain the Borrower’s and its Domestic Subsidiaries’ primary depository and operating accounts and securities accounts with SVB or one or more of SVB’s Affiliates, which accounts shall represent at least 75% of the dollar value of the Borrower’s and such Domestic Subsidiaries’ accounts at all financial institutions; provided, however, cash collateral provided by the Borrower to secure any letter of credit issued by an institution other than the Issuing Bank shall not be included when calculating the dollar value of the Borrower’s and its Domestic Subsidiaries’ accounts at all financial institutions for purposes of calculating the foregoing

 

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requirement, provided that such cash collateral provided to an institution other than the Issuing Bank is deposited with SVB or one or more of SVB’s Affiliates immediately upon the release of such cash collateral upon the reduction or termination of the letter of credit secured by such cash collateral. All of the Loan Parties’ depository, operating and securities accounts shall be and remain subject to an account control agreement in form and substance reasonably satisfactory to the Administrative Agent (each, a “ Control Agreement ”) duly executed on behalf of the applicable financial institution. Notwithstanding the foregoing, the Borrower may maintain (i) two accounts at JPMorgan Chase Bank, N.A., that are not subject to a Control Agreement provided that the aggregate amount on deposit in such accounts does exceed $1,000,000 at any time, (ii) account # 8247942548 maintained by the Borrower at TD Bank, N.A., securing the TD Letters of Credit provided that the amount on deposit in such account shall not exceed $15,000,000 and provided further that upon the termination or non-renewal of the TD Letters of Credit the Borrower shall close such account and all amounts on deposit therein shall be promptly deposited by the Loan Parties in an account subject to a Control Agreement in favor of the Administrative Agent and (iii) accounts containing cash collateral of the Loan Parties that is pledged by the Loan Parties to secure letters of credit for the benefit of the Borrower issued by an institution other than the Issuing Bank, provided that the terms of any such letter of credit, the institution issuing such letter of credit, and the amount and the terms relating to the cash collateral securing such letter of credit are approved in writing by the Administrative Agent and provided further that upon the termination or non-renewal of any such letter of credit the Borrower shall close such account and all such cash collateral shall automatically constitute “Collateral” hereunder and shall be promptly deposited by the Loan Parties in an account subject to a Control Agreement in favor of the Administrative Agent.

(a) Deposit on a daily basis directly into an account with a Lender or one or more of the Lenders’ Affiliates (which account, if maintained with an Affiliate of a Lender, shall be subject to a Control Agreement) (or cause the ACH or wire transfer of) all of the Borrower’s cash receipts and collections, including, without limitation, (i) all collections from Account Debtors of the Borrower, (ii) all of the Borrower’s available cash receipts from the sale of Inventory and other assets, and (iii) all cash payments received from any Person or from any source or on account of any sale or other transaction or event.

(b) No Group Member or Immaterial Subsidiary shall maintain any depository account, operating account, securities account or other bank or investment account outside of the United States; provided , that the Excluded Foreign Subsidiaries may maintain depository accounts, operating accounts, securities accounts or other bank or investment accounts outside the United States provided that the aggregate value of all assets in all such accounts shall at no time exceed $10,000,000.

6.10 Audits . At reasonable times and as often as may be reasonably desired, on one (1) Business Days’ notice ( provided that no notice is required if an Event of Default has occurred and is continuing), the Administrative Agent, any Lender, or any of their agents, shall have the right to inspect the Collateral and the right to audit, copy, and make abstracts from any and all of any Group Member’s books and records including ledgers, federal and state tax returns, records regarding assets or liabilities, the Collateral, business operations or financial condition, and all

 

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computer programs or storage or any equipment containing such information, to visit and inspect any of the Group Member’s properties, and to discuss the business, operations, properties and financial and other condition of the Group Members with officers and employees of the Group Members and with their independent certified public accountants. The foregoing inspections and audits shall be at Borrower’s expense, and the charge 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), plus reasonable out-of-pocket expenses; provided , prior to the occurrence and continuance of an Event of Default, that such expenses shall not exceed $15,000 in any year, so long as no Default or Event of Default shall have occurred and be continuing, the Borrower shall be not obligated to reimburse the Administrative Agent or such Lender for more than one (1) audit per year.

6.11 Additional Collateral, etc .

(a) With respect to any property (to the extent included in the definition of Collateral) acquired after the Original 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 benefit of the Secured Parties, does not have a perfected Lien, promptly (and in any event within three (3) Business Days) (i) execute and deliver to the Administrative Agent such amendments to the Guarantee and Collateral Agreement or such other documents as the Administrative Agent deems necessary or advisable to evidence that they are a Guarantor and to grant to the Administrative Agent, for the benefit of the Secured Parties, a security interest in such property and (ii) take all actions necessary or advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a perfected first priority (except as expressly permitted by Section 7.3) security interest 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 $500,000 acquired after the Original Closing Date by any Loan Party (other than any such real property subject to a Lien expressly permitted by Section 7.3(g)), promptly (i) execute and deliver a first priority Mortgage, in favor of the Administrative Agent, for the 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) as well as a current ALTA survey thereof, together with a surveyor’s certificate, and (y) any consents or estoppels reasonably deemed necessary or advisable 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.

(c) With respect to any new Subsidiary (other than an Excluded Foreign Subsidiary or an Immaterial Subsidiary) created or acquired after the Original Closing Date by

 

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any Group Member (which, for the purposes of this Section 6.11(c), shall include any existing Subsidiary that ceases to be an Excluded Foreign Subsidiary or Immaterial Subsidiary), promptly (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 benefit of the Secured Parties, a perfected first priority security interest in the Capital Stock of such new Subsidiary (other than an Excluded Foreign Subsidiary or an Immaterial Subsidiary) that is owned by any Loan Party, (ii) deliver to the Administrative Agent such documents and instruments as may be 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 Group Member, (iii) cause such new Subsidiary (other than an Excluded Foreign Subsidiary or an Immaterial Subsidiary) (x) to become a Borrower or a Subsidiary Guarantor party to this Agreement and/or the Guarantee and Collateral Agreement, (y) to take such actions necessary or advisable to grant to the Administrative Agent, for the benefit of the Secured Parties, a perfected first priority security interest in the Collateral described in the Guarantee and Collateral Agreement, with respect to such new Subsidiary (other than an Excluded Foreign Subsidiary or an Immaterial 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 requested by the Administrative Agent and (z) to deliver to the Administrative Agent a certificate of such Subsidiary (other than an Excluded Foreign Subsidiary or an Immaterial Subsidiary), in a form reasonably satisfactory to the Administrative Agent, with appropriate insertions and attachments, (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, and (v) in the case of a new Borrower hereunder, deliver an allonge executed by such new Borrower to each Lender amending its Note.

(d) With respect to any new Excluded Foreign Subsidiary created or acquired after the Original Closing Date by any Loan Party, promptly (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 benefit of the Secured Parties, a perfected first priority security interest in the Capital Stock of such new Excluded Foreign Subsidiary that is owned by any such Group Member ( provided that in no event shall more than 65% 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 Group Member, 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 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 each leased property or bailee with respect to any warehouse, processor or converter facility or other location where Collateral is stored or located, which agreement or letter shall contain a waiver or subordination

 

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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 Original Closing Date, no real property or warehouse space shall be leased by any Loan Party and no Inventory shall be shipped to a processor or converter under arrangements established after the Original Closing Date, 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 timely and fully pay and perform its obligations under all leases and other agreements with respect to each leased location or public warehouse where any Collateral is or may be located.

6.12 Use of Proceeds . Use the proceeds of each Credit Extension only for the purposes set forth in Section 4.16 and not prohibited under Section 4.11.

6.13 Designated Senior Indebtedness . Cause the Loan Documents and all of the Obligations to be deemed “Designated Senior Indebtedness” or a similar concept thereof for purposes of any Indebtedness of the Loan Parties.

6.14 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

Borrower hereby agrees that, until all Commitments have been terminated and the principal of and interest on each Loan, all fees and all other expenses or amounts payable under any Loan Document (other than inchoate indemnity obligations) shall have been paid in full and all Letters of Credit have been canceled or have expired and all amounts drawn thereunder have been reimbursed in full, the Borrower shall not, as to itself, nor shall the Borrower permit any of its Subsidiaries to, directly or indirectly:

7.1 Financial Condition Covenants .

(a) Modified Quick Ratio . (i) For the months ending on April 30, 2012 and May 31, 2012, permit the Quick Ratio to be tested as of the last day of each such month, to be less than 1.00 to 1.00 or (ii) for the month ending on August 31, 2012, permit the Quick Ratio to be tested as of the last day of such month, to be less than 1.50 to 1.00, or (iii) for each month other than the months ending on April 30, 2012, May 31, 2012, and August 31, 2012, permit the Quick Ratio to be tested as of the last day of each such month, to be less than 2.00 to 1.00. Borrower shall have unrestricted cash of not less than $30,000,000 on deposit with SVB at all times during the period commencing on April 1, 2012 through and including June 29, 2012.

 

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(b) Minimum EBITDAR . Permit EBITDAR to be less than (i) $25,000,000 for the twelve months ending on March 31, 2011 and June 30, 2011, (ii) $35,000,000 for the twelve months ending on September 30, 2011 and December 31, 2011, (iii) $25,000,000 for the twelve months ending on March 31, 2012, (iv) $15,000,000 for the twelve months ending on June 30, 2012, (v) $1.00 for the twelve months ending on September 30, 2012 and December 31, 2012, and (vi) $10,000,000 for the twelve months ending on March 31, 2013 and on the last day of each fiscal quarter thereafter.

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) so long as an Intercompany Subordination Agreement is in full force and effect, Indebtedness of (i) the Borrower or any Subsidiary Guarantor to any other Loan Party or (ii) any Subsidiary (which is not a Subsidiary Guarantor) to any other Subsidiary (which is not a Subsidiary Guarantor);

(c) Guarantee Obligations incurred in the ordinary course of business by the Borrower and its Subsidiaries of obligations of any Wholly Owned Subsidiary Guarantor;

(d) Indebtedness outstanding on the date hereof and listed on Schedule 7.2(d) and any refinancings, refundings, renewals or extensions thereof (without shortening the maturity thereof, increasing the principal amount thereof or increasing the rate of interest thereon); provided that the TD Letters of Credit may not remain outstanding after, or be renewed or extended to a date later than, June 29, 2012;

(e) Indebtedness (including, without limitation, Capital Lease Obligations) secured by Liens permitted by Section 7.3(g) in an aggregate principal amount not to exceed $500,000 at any one time outstanding and any refinancings, refundings, renewals or extensions thereof (without shortening the maturity thereof, increasing the principal amount thereof or increasing the rate of interest thereon);

(f) Surety Indebtedness;

(g) Indebtedness of the type described in clause (b) of the definition of Indebtedness consisting of earn-out or other acquisition-related obligations incurred in connection with acquisitions by the Borrower or any of its Subsidiaries that are otherwise permitted by the terms of this Agreement; provided , that , the total amount of such Indebtedness consisting of earn-out or other acquisition-related obligations shall not exceed (i) $1,000,000 for any single acquisition or (ii) $3,000,000 in the aggregate for all acquisitions during the term of this Agreement; and

(h) additional Indebtedness of the Borrower or any of its Subsidiaries in an aggregate principal amount (for the Borrower and all Subsidiaries) not to exceed $500,000 at any one time outstanding.

 

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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 Borrower or its Subsidiaries, as the case may be, in conformity with GAAP;

(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 thirty (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;

(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 Borrower or its Subsidiaries;

(f) Liens in existence on the date hereof listed on Schedule 7.3(f), securing Indebtedness permitted by Section 7.2(d); provided that no such Lien is spread to cover any additional property after the Effective Date and that the amount of Indebtedness secured thereby is not increased; and provided , further that the Liens securing the TD Letters of Credit shall be terminated on or before June 29, 2012;

(g) Liens securing Indebtedness of the Borrower or any Subsidiary incurred pursuant to Section 7.2(e) to finance the acquisition of fixed or capital assets; provided that (i) such Liens shall be created substantially simultaneously with the acquisition 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 under any lease entered into by the Borrower or any Subsidiary in the ordinary course of its business and covering only the assets so leased;

(j) judgment Liens that do not constitute a Default or Event of Default under Section 8.1(h) of this Agreement; and

 

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(k) Liens not otherwise permitted by this Section 7.3 securing obligations permitted hereunder so long as neither (i) the aggregate outstanding principal amount of the obligations secured thereby nor (ii) the aggregate fair market value (determined as of the date such Lien is incurred) of the assets subject thereto exceeds (as to the Borrower and its Subsidiaries) $500,000 at any one time.

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 the Borrower may be merged or consolidated with or into the Borrower ( provided that the Borrower shall be the continuing or surviving Person) or with or into any Wholly Owned Subsidiary Guarantor ( provided that the Wholly Owned Subsidiary Guarantor shall be the continuing or surviving Person);

(b) any Subsidiary of the Borrower may Dispose of any or all of its assets (i) to the Borrower or any Wholly Owned Subsidiary Guarantor (upon voluntary liquidation or otherwise) 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, or, in the case of any Subsidiary, issue or sell any shares of such Subsidiary’s Capital Stock to any Person, except:

(a) the Disposition of obsolete, worn out, or surplus property in the ordinary course of business;

(b) the sale 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 any Subsidiary’s Capital Stock to the Borrower or any Wholly Owned Subsidiary Guarantor so long as such Capital Stock is pledged to the Administrative Agent for the benefit of the Secured Parties;

(e) subject in all respects to Section 8.1(k), the sale or issuance of the Borrower’s Capital Stock;

(f) the use or transfer of money or Cash Equivalents in a manner that is not prohibited by the terms of this Agreement or the other Loan Documents;

 

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(g) the licensing of patents, trademarks, copyrights, and other intellectual property rights on a non exclusive basis in the ordinary course of business; and

(h) the Disposition of other property having a fair market value not to exceed $500,000 in the aggregate for any fiscal year of the Borrower.

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 or similar payment with respect to, any Subordinated Indebtedness, or 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:

(a) any Subsidiary may make Restricted Payments to its parent ( provided such parent is a Loan Party or, if such parent is not a Loan Party, such Restricted Payment is promptly distributed to a Loan Party), to the Borrower, or to any Wholly Owned Subsidiary Guarantor; and

(b) so long as no Default or Event of Default shall have occurred and be continuing, the Borrower may: (i) purchase common stock or common stock options from present or former officers, directors or employees of any Group Member upon the death, disability or termination of employment of such officer, director, or employee; provided that the aggregate amount of payments under this clause (i) shall not exceed $250,000 during any fiscal year of the Borrower; and (ii) repurchase or redeem common stock of EnerNOC held by its public stockholders, provided that both immediately before and after making such repurchase or redemption pursuant to this clause (ii), the Borrower and its Subsidiaries shall be in pro forma compliance with all of the covenants set forth in Section 7.1 and no Default or Event of Default shall have occurred and be continuing and provided further that the aggregate amount of repurchases under this clause (ii) shall not exceed $1,000,000 during any fiscal year of the Borrower.

7.7 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) Investments in cash and Cash Equivalents;

(c) Guarantee Obligations permitted by Section 7.2;

 

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(d) loans and advances to employees of any Group Member in the ordinary course of business (including for travel, entertainment and relocation expenses) in an aggregate amount for all Group Members not to exceed $250,000 at any one time outstanding;

(e) intercompany Investments by any Group Member in the Borrower or any Person that, prior to such investment, is a Wholly Owned Subsidiary Guarantor;

(f) Investments in the ordinary course of business consisting of endorsements of negotiable instruments for collection or deposit;

(g) Investments received in settlement of amounts due to the Borrower or any of its Subsidiaries effected in the ordinary course of business or owing to the Borrower or any of its Subsidiaries as a result of Insolvency proceedings involving an Account Debtor or upon the foreclosure or enforcement of any Lien in favor of the Borrower or its Subsidiaries;

(h) Permitted Acquisitions; and

(i) (i) Investments of a Subsidiary that is not a Borrower hereunder in or to other Subsidiaries or a Borrower, (ii) Investments of a Borrower in another Borrower, and (iii) Investments by Borrower in Subsidiaries that are not Borrowers hereunder for the ordinary and necessary current operating expenses of such Subsidiaries so long as the aggregate amount of such Investments does not exceed Five Million Dollars ($5,000,000.00) per fiscal year.

7.8 Modifications of Certain Preferred Stock and Debt Instrument . (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 any Preferred Stock (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.

7.9 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 the Borrower or any Wholly Owned Subsidiary Guarantor) 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.

 

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7.10 Sale Leaseback Transactions . Enter into any Sale Leaseback Transaction.