As confidentially submitted to the Securities and Exchange Commission on August 10, 2017
This draft registration statement has not been publicly filed with the Securities and
Exchange Commission and all information herein remains strictly confidential.
Registration No. 333-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
SWITCH, INC.
(Exact name of Registrant as specified in its charter)
Nevada | 7370 | 82-1883953 | ||
(State or other jurisdiction of incorporation or organization) |
(Primary Standard Industrial Classification Code Number) |
(I.R.S. Employer Identification Number) |
7135 S. Decatur Boulevard
Las Vegas, NV 89118
(702) 444-4111
(Address, including zip code, and telephone number, including area code, of Registrants principal executive offices)
Rob Roy
Founder, Chief Executive Officer and Chairman
Switch, Inc.
7135 S. Decatur Boulevard
Las Vegas, NV 89118
(702) 444-4111
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Charles K. Ruck Shayne Kennedy Latham & Watkins LLP 650 Town Center Drive, 20th Floor Costa Mesa, CA 92626 (714) 540-1235 |
Thomas Morton, Esq. Chase Leavitt, Esq. 7135 S. Decatur Boulevard Las Vegas, NV 89118 (702) 444-4111 |
Kenneth J. Gordon Richard A. Kline Seo Salimi Goodwin Procter LLP 100 Northern Avenue Boston, MA 02210 (617) 570-1000 |
Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ | |||
Non-accelerated filer | ☒ (Do not check if a smaller reporting company) | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Registered |
Proposed Maximum Aggregate Offering Price(1)(2) |
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Class A Common Stock, $0.001 par value per share |
$ | $ | ||
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(1) | Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
(2) | Includes the aggregate offering price of additional shares that the underwriters have the option to purchase from the Registrant. |
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
Subject to Completion. Dated August 10, 2017. Shares Switch, Inc. Class A Common Stock This is an initial public offering of shares of Class A common stock of Switch, Inc. Prior to this offering, there has been no public market for the Class A common stock. It is currently estimated that the initial public offering price per share will be between $ and $. We intend to list our Class A common stock on the under the symbol SWCH. Following this offering, we will have three classes of authorized common stock. The Class A common stock offered hereby and the Class B common stock will have one vote per share. The Class C common stock will have 10 votes per share. Madisogota, LLC, an affiliate of Mr. Rob Roy, our Founder, Chief Executive Officer and Chairman, and certain trusts for the benefit of the Roy family will hold all of our issued and outstanding Class C common stock after this offering and will hold approximately % of the combined voting power of our outstanding capital stock after this offering. As a result, the Roy family will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our articles of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. Upon consummation of this offering, we intend to use the net proceeds to purchase newly issued common membership interests (Common Units) of Switch, Ltd. Following the purchase of Common Units, we will be a holding company and our principal asset will be our Common Units in Switch, Ltd. We will also become the managing member of Switch, Ltd. and, although we will have a minority economic interest in Switch, Ltd., we will operate and control all of its business and affairs and will have sole voting interest in, and control the management of, Switch, Ltd. The continuing members of Switch, Ltd. will hold approximately Common Units, representing a % economic interest in Switch, Ltd. and no voting interest. Following this offering, the continuing members of Switch, Ltd. may redeem their Common Units for newly issued shares of our Class A common stock or, at our option, for cash. Following this offering, holders of our Class A common stock will hold approximately % of our voting power, and holders of our Class B and Class C common stock will hold approximately % and %, respectively, of our voting power. We are an emerging growth company as defined under the federal securities laws, and as such, we have elected to comply with certain reduced public company reporting requirements for this prospectus and may elect to comply with reduced public company reporting requirements in future filings. Following this offering, we will be a controlled company within the meaning of the corporate governance rules of the . See The Transactions and ManagementCorporate Governance. See Risk Factors beginning on page 22 to read about factors you should consider before buying shares of our Class A common stock. Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense. Per Share Total Initial public offering price $ $ Underwriting discount(1) $ $ Proceeds, before expenses, to Switch, Inc. $ $ (1) See Underwriting for additional information regarding underwriting compensation. To the extent that the underwriters sell more than shares of Class A common stock, the underwriters have the option to purchase up to an additional shares from us at the initial price to the public less the underwriting discount. The underwriters expect to deliver the shares against payment in New York, New York on , 2017. Goldman Sachs & Co. LLC J.P. Morgan BMO Capital Markets Wells Fargo Securities Citigroup Credit Suisse Jefferies BTIG Raymond James Stifel William Blair Prospectus dated , 2017 The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
Prospectus
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F-1 |
Through and including , 2017 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealers obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
You should rely only on the information contained in this prospectus or in any free writing prospectus we may authorize to be delivered or made available to you. We and the underwriters have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses we have prepared. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We are offering to sell, and seeking offers to buy, shares of our Class A common stock only under circumstances and in jurisdictions where offers and sales are permitted. The information in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of shares of our Class A common stock. Our business, financial condition, results of operations and prospectus may have changed since that date.
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For investors outside the United States, we have not, and the underwriters have not, done anything that would permit this offering or possession or distribution of this prospectus or any free writing prospectus we may provide to you in connection with this offering in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of Class A common stock and the distribution of this prospectus outside the United States. See Underwriting.
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GLOSSARY
As used in this prospectus, unless the context otherwise requires, references to:
| we, us, our, the Company, Switch and similar references refer: (i) following the completion of the Transactions (as defined below), including this offering, to Switch, Inc., and, unless otherwise stated, all of its subsidiaries, including Switch, Ltd., and, unless otherwise stated, all of its subsidiaries, and (ii) on or prior to the completion of the Transactions, including this offering, to Switch, Ltd. and, unless otherwise stated, all of its subsidiaries. |
| Continuing Members refer to the Founder Continuing Members and Non-Founder Continuing Members. |
| Founder Continuing Members refer to Madisogota, LLC, an affiliate of Mr. Rob Roy, our Founder, Chairman and Chief Executive Officer, and certain trusts for the benefit of the Roy family, each of which will continue to own Common Units (as defined below) after the Transactions and who may, following the completion of this offering, exchange their Common Units for shares of our Class A common stock as described in Certain Relationships and Related Party TransactionsSwitch Operating Agreement. |
| Non-Founder Continuing Members refer to those Original Members, other than the Founder Continuing Members, that will continue to own Common Units after the Transactions and who may, following the completion of this offering, exchange their Common Units for shares of our Class A common stock as described in Certain Relationships and Related Party TransactionsSwitch Operating Agreement. The Non-Founder Continuing Members will include the following directors and officers of Switch, Inc., and beneficial owners of 5% or more of the Class B common stock of Switch, Inc.: . |
| Former Incentive Unit Holders refer collectively to (i) our named executive officers; (ii) Madisogota, LLC, an affiliate of Mr. Rob Roy, our Founder, Chief Executive Officer and Chairman; (iii) certain trusts for the benefit of the Roy family; (iv) Donald D. Snyder, a member of our board of directors; and (v) certain other current and former non-executive employees, in each case, who hold existing incentive units in Switch, Ltd. and whose incentive units will convert into Common Units of Switch, Ltd. in connection with the Transactions. |
| Former Members refer to those Original Members who will transfer their Common Units for shares of our Class A common stock in connection with the completion of this offering. |
| Common Units refer to the single class of issued common membership interests of Switch, Ltd. |
| Original Members refer to the owners of Switch, Ltd. prior to the Transactions, including the Former Incentive Unit Holders. |
| Switch Operating Agreement refers to Switch, Ltd.s amended and restated operating agreement, which will become effective on or prior to the completion of this offering. |
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This summary highlights selected information that is presented in greater detail elsewhere in this prospectus. This summary does not contain all of the information you should consider before deciding to invest in our Class A common stock. You should read this entire prospectus carefully, including Risk Factors and Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision.
What We Are
Switch is a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything.
Our mission is to enable the advancement of humanity by creating smart, resilient and sustainable infrastructure solutions that support the most innovative technology ecosystems.
Our Business
We believe the future of the connected world depends on the sustainable and cost-effective growth of the internet and the services it enables. Using our technology platform, we provide solutions to help enable that growth. We believe we are a pioneer in the design, construction and operation of some of the worlds most reliable, secure, resilient and sustainable data centers. Our advanced data centers are the center of our platform and provide power densities that exceed industry averages with efficient cooling, while being powered by 100% renewable energy. Two of our data centers are the only carrier-neutral colocation facilities in the world to be certified Tier IV Design, Tier IV Facility and Tier IV Gold in Operational Excellence. While these certifications have been the highest classifications available in the industry, we are building our current facilities to our proprietary Tier 5 Platinum standards, which exceed Tier IV standards. Our platform has powerful network effects and nurtures a rich technology ecosystem that benefits its participants. We further enhance these benefits as we innovate and expand our platform ecosystem. We currently have more than 800 customers, including some of the worlds largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications providers.
Our patented data center designs have redefined traditional data center space and cooling, allowing our customers to achieve significantly higher power densities than may be available in traditional data centers. We build our facilities using Switch Modularly Optimized Designs, or Switch MODs. These designs allow us to rapidly deploy or replace infrastructure to meet our customers current and future data storage and compute requirements. We believe that the design of our data centers reduces our operational costs, minimizes investment risk and positions us to adapt as the Internet of Everything continues to evolve. Our technologies were all designed and invented by our founder, Rob Roy, and are protected by over 350 issued and pending patent claims. Since the opening of our first colocation facility, we have delivered 100% uptime across all of our facilities.
We presently own and operate three primary campus locations, called Primes, which encompass ten colocation facilities with an aggregate of up to 4.0 million gross square feet of space. These facilities have up to 415 megawatts of power available to them. Our Primes consist of The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; and The Pyramid Campus
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in Grand Rapids, Michigan. In addition, we recently purchased land to develop a fourth Prime, The Keep Campus, in Atlanta, Georgia. Our Primes are strategically located in geographies that combine a low risk of natural disaster, favorable tax policies for customers deploying computing infrastructure and low latency connectivity to major metropolitan markets, such as Los Angeles, San Francisco, Silicon Valley, Chicago, New York, Northern Virginia and Miami.
We believe our advanced platform, high level of service and competitive pricing create a disruptive platform with a powerful customer value proposition. Our data centers are designed for efficiency and allow our customers to achieve higher than industry-average power densities per cabinet with appropriate cooling, which we believe improves the performance and increases the life of our customers equipment. Our data centers are located in areas with tax benefits and access to competitively priced renewable power, both of which help further lower our customers total cost of ownership. Finally, our Combined Ordering Retail Ecosystem, or CORE, service aggregates our customers buying power, and can significantly lower many of our customers connectivity costs. We believe the power of our customer value proposition is evidenced by our customer loyalty and low annual churn rate. Moreover, we believe that our technologies, modular expansion and development approach allow us to earn attractive cash flow yields on our invested capital.
We have achieved significant growth in our business and have a track record of strong financial performance. On an annual basis, our revenue has grown from $166.8 million in 2013 to $318.4 million in 2016, representing a compounded annual growth rate, or CAGR, of 24.0%. We generated net income of $73.5 million and $31.4 million during the years ended December 31, 2015 and 2016, respectively, and $16.7 million and $20.3 million during the three months ended March 31, 2016 and 2017, respectively. Our net income for the year ended December 31, 2016 included a nonrecurring charge of $27.0 million related to our becoming an unbundled purchaser of energy. In 2015 and 2016, we generated Adjusted EBITDA of $141.9 million and $153.2 million, respectively, representing an Adjusted EBITDA margin of 53.4% and 48.1%, respectively. During the three months ended March 31, 2016 and 2017, we generated Adjusted EBITDA of $37.6 million and $47.1 million, respectively, representing an Adjusted EBITDA margin of 50.9% and 52.8%, respectively. For a reconciliation of Adjusted EBITDA to net income, the most directly comparable GAAP financial measure, see Selected Historical Consolidated Financial and Other DataKey Metrics and Non-GAAP Financial Measures.
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Company Snapshot
1 | Churn is defined as a reduction in recurring revenue attributed to customer terminations or non-renewal of expired contracts, as a percentage of revenue at the beginning of the period. |
2 | Cash flow yield on invested capital is defined as Adjusted EBITDA less corporate taxes and maintenance capital expenditures, divided by total assets, less cash and equivalents, construction in progress, and non-interest-bearing liabilities. |
The Network Effects Across our Technology Infrastructure Platform and Ecosystem
Our technology infrastructure platform supports a dynamic technology ecosystem bringing together enterprises and service providers, including cloud and managed services providers and telecommunications carriers. Participants benefit from the proximity to these service providers, customers and collaborators. Our platform and our ecosystem have independent but synergistic self-proliferating network effects that benefit participants as we continue to innovate, our platform evolves and our ecosystem grows. As our platform and customer base expands, we continue to realize growing efficiencies of scale, which allows us to provide higher value services to our customers.
Our Market Opportunity
Industry Background
Computational processing power continues to advance, and the amount of data that enterprises must manage, analyze and monitor is dramatically increasing. For example:
| over 200 billion smart devices will be connected to the internet by 2020, compared to only 15 billion in 2015, representing a 68% CAGR, according to estimates by Intel Corporation; |
| an estimated 929 million wearable devices will exist globally by 2021, an increase of nearly three times the 325 million wearable devices in 2016, according to a white paper published by Cisco Systems; |
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| smart cities will use 7.3 billion connected sensors by 2020, almost six times more than in 2015, representing a 42% CAGR, according to estimates by Gartner, Inc., or Gartner; |
| more than 75 million autonomous vehicles will be sold by 2035, according to IHS Markit estimates; and |
| over three gigabytes of data per person per day is created today, and this will grow by 38% per year through 2020, according to Technavio. |
The rapid rise in data traffic and the worlds reliance on the internet to deliver services and information is making the collection, storage and transfer of data one of the largest challenges created by the internet. According to a white paper published by Cisco Systems, global internet traffic is expected to grow to 15.3 zettabytes in 2020, up from 4.7 zettabytes in 2015, representing a CAGR of 27%. Similarly, total data center storage installed capacity is expected to grow at a 35% CAGR to 1.8 zettabytes in 2020 from 0.4 zettabytes in 2015.
The power requirements and financial costs to support this growth in data, traffic and storage are massive and growing. Based on a 2016 U.S. Department of Energy report, U.S. data centers consumed approximately 70 billion kilowatt-hours of electricity in 2014, representing 1.8% of total energy consumption in the United States and equivalent to the amount consumed by 6.4 million average American homes. According to 451 Research, global data center colocation spending is expected to grow at a 12% CAGR from $29.7 billion in 2016 to $47.4 billion in 2020. At the same time, service provider data centers are only beginning to penetrate the data center market. International Data Corporation predicts that, by 2019, service provider data centers will account for only 28% of the worldwide data center capacity by square footage compared to 13% in 2016.
Industry Limitations
We believe that traditional data center infrastructure and the public cloud are not optimally suited to support the growing wave of mission critical enterprise data applications and increasingly powerful IT equipment due to the following beliefs:
| Increases in server density are beginning to strain the current power and cooling capacity of many traditional colocation data centers. We expect this will require many traditional data center companies and enterprise-built data center facilities to attempt to retrofit their existing infrastructure. |
| Organizations are increasingly using the public cloud due to its cost-effectiveness and pay-as-you-go scalability. While many applications are well-suited to this environment, the public cloud is not an ideal solution for certain business-critical data storage and computing needs. Highly complex workloads and those involving sensitive or regulated data can require the greater resiliency, speed and security offered by colocation environments. |
| Given the limitations of both the public cloud and the enterprise-built facilities, we expect enterprises to increasingly deploy IT equipment across hybrid cloud and colocation environments, with mission critical data stored at highly resilient and secure colocation facilities. |
| Enterprises are beginning to recognize significant value from data center providers that bring together enterprises, cloud and managed services providers and telecommunications carriers in an environment that fosters communication, collaboration and innovation. We believe these elements will be difficult to find among traditional colocation data centers. |
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We believe a significant opportunity exists for data centers that can address the shortcomings of traditional colocation facilities, enterprise-built facilities and public cloud offerings.
Our Competitive Strengths
We believe we distinguish ourselves from typical colocation providers and other technology infrastructure companies through our competitive strengths, which include:
Purpose-Built, Highly-Resilient, Patented Solutions
Our critical infrastructure components are purpose-built to satisfy customers needs, drive efficiency and enable the deployment of highly advanced computing technologies, and our designs are protected by over 350 issued and pending patent claims. Our Switch MODs allow us to rapidly deploy or replace infrastructure as our customers needs evolve. We believe this reduces operational costs, minimizes investment risk and facilitates our ability to adapt as the Internet of Everything continues to evolve.
We have redefined data center space and cooling, allowing our customers to achieve higher power densities than they can in traditional data centers. Our power densities enable our customers to include more IT equipment per cabinet than in typical data center environments, which can reduce space requirements and the associated monthly costs and set-up costs and drive down in-cabinet latency. Additionally, we believe our ability to run more powerful cabinets at the appropriate temperature improves performance and extends the life of our customers equipment. This results in lower total cost of ownership for our customers.
Differentiated Technology Ecosystem Underscored by Powerful Network Effects
We operate a dynamic technology ecosystem that brings together a wide variety of parties. As we continue to innovate, we believe our customer value proposition strengthens, attracting new customers and encouraging existing customers to grow with us. This expanding, diverse mix of enterprise customers attracts cloud service providers, managed services providers and telecommunications carriers. This growing base of service providers, in turn, attracts other new enterprise customers seeking an environment with diverse, high-quality service providers and other innovative companies with which to collaborate.
Commitment to Sustainability
We were the only company recognized by Greenpeace in its 2017 Clicking Clean report as having a 100% clean energy index. We were also the only company in the report to receive an A grade in all five categories, and our energy index was higher than every other technology company identified in the report.
Through technological innovation, industry partnerships and public advocacy, we also support renewable energy production facilities. We believe our achievements in sustainability also drive customer demand. Deploying IT equipment within a Switch data center helps our customers achieve their green energy objectives and reduce their carbon footprint.
Our Strong and Trusted Brand
We operate under the slogan Truth in Technology, which embodies our belief that the product should be so amazing that nothing more than the truth is necessary to sell it.
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Our reputation and track record of delivering 100% uptime across all of our facilities contribute to our efficient and robust organic growth. We have grown our customer base primarily through industry and customer referrals, and our customers tend to increase their spending with us over time, demonstrating the power of our brand and the quality of our solutions.
Visionary and Experienced Leadership Underscored by a Culture of Innovation and Execution
Our Founder, Chief Executive Officer and Chairman, Rob Roy, is a serial inventrepreneur who is a recognized expert in advanced end-to-end solutions for mission-critical facilities.
We have a deep and experienced senior management team comprised of 16 members, who collectively have over 135 years of experience at Switch, and 13 of whom have been with Switch for more than five years.
Our Growth Strategy
Our goal is to enable the current and future compute needs of our customers and to facilitate technological advancement through smart and sustainable infrastructure solutions designed to support the most innovative technology ecosystems in the world. To accomplish this, we plan to:
| Continue to Grow Our Existing Prime Campus Locations. We currently operate The Core Campus, The Citadel Campus and The Pyramid Campus in or near Las Vegas, Reno and Grand Rapids, respectively, and have secured land for The Keep Campus in Atlanta. We plan to continue to expand these Primes and actively pursue additional customers with strategic fit for our ecosystem, as well as sell additional solutions to existing customers. |
| Expand into New Geographies in the United States. We intend to continue to evaluate geographic expansion opportunities for our data center facilities, focusing on areas within the United States with limited or no natural disaster risks, favorable business and tax climates, close proximity to major cities, robust telecommunications networks and significant customer demand. |
| Grow Our Single-User Line of Data Centers. Our Switch MOD design enables us to rapidly deploy new facilities in a single-user configuration. We believe this expands our addressable market opportunity in the United States and represents a potential new source of revenue. |
| Leverage Our Unique Technology Ecosystem to Drive Interconnection Growth. Our ecosystem connects more than 800 customers, including over 100 cloud and managed services providers and 50 telecommunications providers, which creates an important hub for the Internet of Everything. We plan to support our customers interconnection needs by continuing to increase our cross connect and external broadband offerings. |
| Maintain and Extend Our Technological Leadership. We have a long history of innovation and, led by Rob Roy, we are a dynamically inventive organization. We plan to continue to invest in the development of new technologies in order to continue improving our standards for security, availability and scalability. Additionally, we intend to leverage our patented technologies and designs to strategically pursue new, adjacent market opportunities outside our core business. |
| Pursue Strategic Partnerships. We may enter into strategic relationships with a variety of partners that contribute to our business. For example, rather than simply offering our customers connectivity to public cloud environments, frequently referred to as being an on |
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ramp to the cloud, we may partner with public cloud providers to address that portion of their customers needs that require higher density and reliability than is typically available from public cloud offerings. To facilitate these potential partnerships, we plan to expand to locations near hyperscale cloud deployments where we can provide colocation for cloud customers mission critical needs. |
Our Technology
We design, construct and operate super scale data centers that address the growing challenges facing the data center industry. Key elements of our data centers include:
Modularly Optimized Design
The modular design of our data centers is enabled by our patented Switch MOD products. The Switch MOD architecture allows us to build colocation data centers of various sizes by combining multiple Switch MODs into a single structure. Combining Switch MODs allows for shared power sources and increased operational efficiency.
We can also build any of our Switch MODs in a single-user configuration. This provides an alternative to traditional colocation for customers with large, dedicated compute and data storage needs. Regardless of whether they are used for colocation or single-user purposes, we design, manufacture and operate our Switch MODs to meet our proprietary Tier 5 Platinum standard.
Power Density and Cooling Capacity
One of the most significant challenges faced by traditional colocation facilities is the need to increase their power density and cooling capacity to keep pace with the increases in IT equipment power requirements and heat exhaustion. We have developed patented technologies that have redefined data center space and cooling, allowing customers to deploy high density and scalable IT architectures to support demanding and mission critical workloads. Our data centers are designed to enable us to adapt to customers needs for increased power and densities without retrofitting our existing facilities.
Resiliency
Another challenge faced by all data centers is the ability to assure customers that their IT equipment remains operational despite utility power outages or other unplanned occurrences. Since the opening of our first colocation facility, we have delivered 100% uptime to our customers. To accomplish this, we have implemented a tri-redundant design, consisting of three separate power systems with no single points of failure. Additionally, each power system contains its own generators and uninterruptible power system. Effectively, one entire system can experience a failure without our customers experiencing any downtime.
Risks Affecting Us
We are subject to a number of risks, including risks that may prevent us from achieving our business objectives or that may adversely affect our business, financial condition, results of operations
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and prospects. You should carefully consider the risks described under the heading Risk Factors included elsewhere in this prospectus. These risks include, among others:
| a slowdown in the demand for data center resources and other market and economic conditions could have a material adverse effect on us; |
| any inability to manage our growth could disrupt our business and reduce our profitability; |
| the data center business is capital-intensive, and our capacity to generate capital may be insufficient to meet our anticipated capital requirements and the failure to obtain the necessary capital when needed may force us to delay, limit or terminate our expansion efforts or other operations; |
| our success depends on our ability to license the space in our existing data centers. The failure to license the space in our data centers may harm our growth prospects, future business, financial condition and results of operations; |
| we face risks associated with having a long selling and implementation cycle for our services that requires us to make significant time and resource commitments prior to recognizing revenue for those services; |
| we may not generate sufficient cash flow to meet our debt service and working capital requirements; |
| increased power costs and limited availability of power resources may adversely affect our results of operations; |
| we generate significant revenue from data centers located in one location and a significant disruption to this location could materially and adversely affect our operations; |
| any failure in the critical systems of the data center facilities we operate or services we provide could lead to disruptions in our customers businesses and could harm our reputation and result in financial penalty and legal liabilities, which would reduce our revenue and have a material adverse effect on our results of operation; |
| our principal asset after the completion of this offering will be our interest in Switch, Ltd., and, accordingly, we will depend on distributions from Switch, Ltd. to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Switch, Ltd.s ability to make such distributions may be subject to various limitations and restrictions; |
| the Tax Receivable Agreement with the Continuing Members requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial; |
| our Founder, Chief Executive Officer and Chairman has control over all stockholder decisions because he controls a substantial majority of the combined voting power of our common stock. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval; and |
| we have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations. |
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Summary of the Transactions
Prior to the completion of this offering and the organizational transactions described below, Switch, Ltd. was owned entirely by the Original Members and operated its business through itself and various wholly owned subsidiaries. Switch, Inc. was incorporated as a Nevada corporation on June 13, 2017 to serve as the issuer of the Class A common stock offered in this offering.
In connection with the completion of this offering, we will consummate the following organizational transactions:
| we will amend and restate Switch, Ltd.s existing operating agreement effective as of the completion of this offering to, among other things, (i) split the number of authorized, issued and outstanding Common Units on a -to- basis, (ii) convert all of the Former Incentive Unit Holders incentive units into Common Units and (iii) appoint Switch, Inc. as the managing member of Switch, Ltd.; |
| we will amend and restate our articles of incorporation to, among other things, (i) provide for Class A common stock, Class B common stock and Class C common stock, (ii) issue shares of Class B common stock to the Non-Founder Continuing Members on a one-to-one basis with the number of Common Units they own, for nominal consideration and (iii) issue shares of Class C common stock to the Founder Continuing Members on a one-to-one basis with the number of Common Units they own, for nominal consideration; |
| we will issue shares of our Class A common stock to the purchasers in this offering, or shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| we intend to use all of the net proceeds from this offering to acquire Common Units from Switch, Ltd. at a purchase price per Common Unit equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions, collectively representing % of Switch, Ltd.s outstanding Common Units following this offering, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| Switch, Ltd. intends to use the proceeds from the sale of Common Units to Switch, Inc. as described in Use of Proceeds, including for general corporate purposes and working capital; |
| the Former Members will exchange their ownership of Common Units for shares of Class A common stock on a one-to-one basis; |
| the Continuing Members will continue to own their Common Units and will have no economic interests in Switch, Inc. despite their ownership of Class B common stock or Class C common stock, where economic interests means the right to receive any distributions or dividends, whether cash or stock, in connection with common stock; and |
| Switch, Inc. will enter into (i) a tax receivable agreement, or the Tax Receivable Agreement, with Switch, Ltd. and the Continuing Members and (ii) a registration rights agreement, or the Registration Rights Agreement, with the Continuing Members who, assuming that all of the Common Units of such Continuing Members are redeemed or exchanged for newly issued shares of Class A common stock on a one-to-one basis, will own shares of Switch, Inc.s Class A common stock, representing approximately % of the combined voting power of all of Switch, Inc.s common stock, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, and the Former Members. Although the actual timing and amount of any payments that we make to the Continuing |
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Members under the Tax Receivable Agreement will vary, we expect those payments will be significant. |
Following this offering, Common Units will be redeemable at the election of such Continuing Members for newly issued shares of Class A common stock on a one-to-one basis (and their shares of Class B common stock or Class C common stock, as the case may be will be cancelled on a one-to-one basis upon any such issuance). We will have the option to instead make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Switch Operating Agreement. Our decision to make a cash payment upon a Continuing Members election will be made by our independent directors (within the meaning of ) who are disinterested.
Our corporate structure following this offering, as described above, is commonly referred to as an Up-C structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or passthrough entity, for income tax purposes following the offering. One of these benefits is that future taxable income of Switch, Ltd. that is allocated to the Continuing Members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing Members may redeem their Common Units for shares of our Class A common stock or, at our option, for cash, the Up-C structure also provides the Continuing Members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See The Transactions and Description of Capital Stock.
We will receive the same benefits as the Continuing Members on account of our ownership of Common Units in an entity treated as a partnership, or passthrough entity, for income tax purposes. As we redeem additional Common Units from the Continuing Members under the mechanism described above, we will obtain a step-up in tax basis in our share of Switch, Ltd.s assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. We expect to enter into the Tax Receivable Agreement with Switch, Ltd. and each of the Continuing Members that will provide for the payment by us to the Continuing Members of 85% of the amount of tax benefits, if any, that we actually realize (or in some cases are deemed to realize) as a result of (i) increases in tax basis resulting from the redemption of Common Units and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement.
We refer to the foregoing distribution and organizational transactions collectively as the Transactions. For more information regarding our structure after the completion of the Transactions, including this offering, see The Transactions.
Immediately following this offering, we will be a holding company and our principal asset will be the Common Units we purchase from Switch, Ltd. and acquire from the Former Members. As the managing member of Switch, Ltd., we will operate and control all of the business and affairs of Switch, Ltd. and, through Switch, Ltd. and its subsidiaries, conduct our business. Accordingly, although we will have a minority economic interest in Switch, Ltd., we will have the sole voting interest in, and control the management of, Switch, Ltd. As a result, we expect we will consolidate Switch, Ltd. in our consolidated financial statements and will report a non-controlling interest related to the Common Units held by the Continuing Members on our consolidated financial statements.
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See Description of Capital Stock for more information about our amended and restated articles of incorporation and the terms of the Class A common stock, Class B common stock and Class C common stock. See Certain Relationships and Related Party Transactions for more information about:
| the Switch Operating Agreement, including the terms of the Common Units and the redemption right of the Continuing Members; |
| the Tax Receivable Agreement; and |
| the Registration Rights Agreement. |
The following diagram shows our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock:
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Corporate Information
We were incorporated as a Nevada corporation on June 13, 2017 for the purpose of issuing the Class A common stock in this offering and acquiring Common Units in Switch, Ltd. Our corporate headquarters are located at 7135 S. Decatur Boulevard, Las Vegas, NV 89118. Our telephone number is (702) 444-4111. Our principal website address is www.switch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Emerging Growth Company
We qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012. An emerging growth company may take advantage of specified reduced reporting requirements that are otherwise generally applicable to public companies. These reduced reporting requirements include:
| an exemption from compliance with the auditor attestation requirement on the effectiveness of our internal control over financial reporting; |
| an exemption from compliance with any requirement that the Public Company Accounting Oversight Board may adopt regarding a supplement to the auditors report providing additional information about the audit and the financial statements; |
| reduced disclosure about our executive compensation arrangements; |
| an exemption from the requirements to obtain a non-binding advisory vote on executive compensation or a stockholder approval of any golden parachute arrangements; and |
| extended transition periods for complying with new or revised accounting standards. |
We may take advantage of these exemptions until the last day of our fiscal year following the fifth anniversary of the completion of this offering or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than $1.07 billion in annual revenue, we are deemed to be a large accelerated filer under the rules of the Securities and Exchange Commission or we issue more than $1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some, but not all, of the available exemptions. We have taken advantage of certain reduced reporting burdens in this prospectus. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock.
The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
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The Offering
Issuer |
Switch, Inc. | |
Shares of Class A common stock offered by us |
shares | |
Underwriters option to purchase additional shares of Class A common stock |
shares | |
Shares of Class A common stock to be issued to the Former Members |
shares | |
Shares of Class A common stock to be outstanding immediately after this offering |
shares, representing % of the voting interest and 100% of the economic interest in us, or shares, representing % of the voting interest and 100% of the economic interest in us if the underwriters exercise in full their option to purchase additional shares. | |
Shares of Class B common stock to be outstanding immediately after this offering |
shares, representing % of the voting interest and no economic interest in us. | |
Shares of Class C common stock to be outstanding immediately after this offering |
shares, representing % of the voting interest and no economic interest in us. | |
Common Units of Switch, Ltd. to be held by us immediately after this offering |
Common Units, representing a % economic interest in the business of Switch, Ltd., or Common Units, representing a % economic interest in the business of Switch, Ltd. if the underwriters exercise in full their option to purchase additional shares of Class A common stock. | |
Common Units of Switch, Ltd. to be held by the Continuing Members after this offering |
Common Units, representing a % economic interest in the business of Switch, Ltd., or Common Units, representing a % economic interest in the business of Switch, Ltd. if the underwriters exercise in full their option to purchase additional shares of Class A common stock. | |
Ratio of shares of Class A common stock to Common Units |
Our amended and restated articles of incorporation and the Switch Operating Agreement will require that we and Switch, Ltd. at all times maintain a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of Common Units owned by us. |
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Ratio of shares of Class B common stock to Common Units |
Our amended and restated articles of incorporation and the Switch Operating Agreement will require that we and Switch, Ltd. at all times maintain a one-to-one ratio between the number of shares of Class B common stock owned by the Non-Founder Continuing Members and the number of Common Units owned by the Non-Founder Continuing Members. | |
Ratio of shares of Class C common stock to Common Units |
Our amended and restated articles of incorporation and the Switch Operating Agreement will require that we and Switch, Ltd. at all times maintain a one-to-one ratio between the number of shares of Class C common stock owned by the Founder Continuing Members and the number of Common Units owned by the Founder Continuing Members. | |
Permitted holders of shares of Class B common stock |
Only the Non-Founder Continuing Members and their permitted transferees of Common Units as described herein will be permitted to hold shares of our Class B common stock. Shares of Class B common stock are transferable only together with an equal number of Common Units. See Certain Relationships and Related Party TransactionsSwitch Operating Agreement. | |
Permitted holders of shares of Class C common stock |
Only the Founder Continuing Members and their permitted transferees of Common Units as described herein will be permitted to hold our Class C common stock. Shares of Class C common stock are transferable only together with an equal number of Common Units. See Certain Relationships and Related Party TransactionsSwitch Operating Agreement. | |
Voting rights |
Each share of our Class A common stock entitles its holder to one vote per share, representing an aggregate of % of the combined voting power of our issued and outstanding common stock upon the completion of this offering, or % if the underwriters exercise their option to purchase additional shares in full.
Each share of our Class B common stock entitles its holder to one vote per share, representing an aggregate of % of the combined voting power of our issued and outstanding common stock upon the completion of this offering, or % if the |
14
underwriters exercise their option to purchase additional shares in full.
Each share of our Class C common stock entitles its holder to 10 votes per share, representing an aggregate of % of the combined voting power of our issued and outstanding common stock upon the completion of this offering, or % if the underwriters exercise their option to purchase additional shares in full.
All classes of our common stock generally vote together as a single class on all matters submitted to a vote of our stockholders, except as otherwise required by law or our amended and restated articles of incorporation. Upon the completion of this offering, our Class B common stock will be held exclusively by the Non-Founder Continuing Members and our Class C common stock will be held exclusively by the Founder Continuing Members. See Description of Capital Stock. | ||
Voting power of the Original Members after this offering |
% or %, if the underwriters exercise in full their option to purchase additional shares. | |
Voting power of the Former Members after this offering |
% or %, if the underwriters exercise in full their option to purchase additional shares. | |
Voting power of our executive officers, directors and persons holding more than 5% of our Class A, Class B or Class C common stock (other than any purchasers in this offering) after this offering |
% or %, if the underwriters exercise in full their option to purchase additional shares. | |
Redemption rights of holders of Common Units |
The Continuing Members, from time to time following the completion of the offering, may require Switch, Ltd. to redeem all or a portion of their Common Units for newly issued shares of Class A common stock on a one-to-one basis or, at our option, a cash payment equal to the volume weighted average market price of one share of our Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Switch Operating Agreement. Our decision to make a cash payment upon a Continuing Members redemption election will be made by |
15
our independent directors (within the meaning of ) who are disinterested. See Certain Relationships and Related Party TransactionsSwitch Operating Agreement. Shares of our Class B common stock and Class C common stock, as the case may be, will be cancelled on a one-to-one basis if we, at the election of a Continuing Member, redeem or exchange Common Units of such Continuing Member pursuant to the terms of the Switch Operating Agreement. | ||
Use of proceeds |
We intend to use the net proceeds from this offering to purchase Common Units, or Common Units if the underwriters exercise their option in full to purchase additional shares of Class A common stock, directly from Switch, Ltd. at a price per Common Unit equal to the initial public offering price per share of Class A common stock in this offering, less the underwriting discounts and commissions. Switch, Ltd. intends to use the net proceeds from the sale of Common Units to us for general corporate purposes and working capital. We may also use a portion of the net proceeds for the repayment of debt, to make cash payments to the Continuing Members pursuant to the Tax Receivable Agreement or for the acquisition of businesses or technologies that we believe are complementary to our own, although we currently have no agreements, commitments or understandings with respect to any specific acquisition. | |
Tax Receivable Agreement |
We will enter into a Tax Receivable Agreement with Switch, Ltd. and each of the Continuing Members that will provide for the payment by Switch, Inc. to the Continuing Members of 85% of the amount of tax benefits, if any, that Switch, Inc. actually realizes (or in some circumstances is deemed to realize) as a result of (i) increases in tax basis resulting from any future redemptions that are funded by Switch, Inc. or exchanges of Common Units described above under Redemption rights of holders of Common Units and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement. See Certain Relationships and Related Party Transactions Tax Receivable Agreement for a discussion of the Tax Receivable Agreement. |
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Registration Rights Agreement |
Pursuant to the Registration Rights Agreement, we will, subject to the terms and conditions thereof, agree to register the resale of the shares of our Class A common stock that are issuable to the Continuing Members upon redemption or exchange of their Common Units or issued by us in connection with the Transactions to Former Members upon exchange of their Common Units. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement. | |
Risk factors |
Investing in shares of our Class A common stock involves a high degree of risk. See Risk Factors for a discussion of factors you should carefully consider before investing in shares of our Class A common stock. | |
Proposed symbol |
SWCH |
Unless we indicate otherwise or the context otherwise requires, all information in this prospectus:
| gives effect to the Switch Operating Agreement, as well as the filing of our amended and restated articles of incorporation; |
| gives effect to the Transactions; |
| assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock from us; and |
| assumes that the outstanding Common Units as of March 31, 2017 are split into an aggregate of Common Units upon the effectiveness of the Switch Operating Agreement. |
The shares of Class A common stock to be outstanding following this offering excludes:
| 166,845 Common Units issuable upon the exercise of options to purchase Common Units outstanding as of March 31, 2017, with a weighted-average exercise price of $2.09 per share; |
| shares of Class A common stock reserved for future issuance under our 2017 Incentive Award Plan, which will become effective prior to the completion of this offering; and |
| shares of Class A common stock that may be issuable upon exercise of the Continuing Members rights to redeem their Common Units. |
The shares of Class B common stock to be outstanding following this offering is based on Common Units held by the Non-Founder Continuing Members as of March 31, 2017. The shares of Class C common stock to be outstanding following this offering is based on Common Units held by the Founder Continuing Members as of March 31, 2017.
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Summary Historical and Pro Forma Consolidated Financial and Other Data
The following tables present the summary historical and other data for Switch, Ltd. and its subsidiaries and unaudited pro forma consolidated financial information for Switch, Inc. Switch, Ltd. is the predecessor of the issuer, Switch, Inc., for financial reporting purposes. The summary consolidated statements of income data for the years ended December 31, 2015 and 2016 were derived from the audited consolidated financial statements of Switch, Ltd. included elsewhere in this prospectus. The summary consolidated statements of income data for the three months ended March 31, 2016 and 2017 and the summary consolidated balance sheet data as of March 31, 2017 were derived from the unaudited consolidated interim financial statements of Switch, Ltd. included elsewhere in this prospectus. The unaudited consolidated interim financial statements have been prepared on the same basis as the audited consolidated financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. The following summary consolidated financial and other data should be read in conjunction with the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus.
The summary unaudited pro forma consolidated balance sheet as of March 31, 2017 and unaudited pro forma consolidated statements of income for the year ended December 31, 2016 and the three months ended March 31, 2017 present our consolidated financial position and results of operations after giving effect to (i) the organizational transactions described under The Transactions; (ii) the acceleration of vesting of incentive units and the conversion of incentive units into Common Units; (iii) borrowings under our amended and restated credit agreement in connection with a distribution in the amount of $ million by Switch, Ltd. to the Original Members; and (iv) this offering and the use of proceeds from this offering, as if each had been completed as of January 1, 2016 with respect to the unaudited pro forma consolidated statements of income and as of March 31, 2017 with respect to the unaudited pro forma consolidated balance sheet.
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The summary historical consolidated financial and other data of Switch, Inc. have not been presented, as Switch, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.
Historical Switch, Ltd. | Pro Forma Switch, Inc. | |||||||||||||||||||||||
Years Ended December 31, |
Three Months Ended March 31, |
Year Ended December 31, 2016 |
Three Months Ended March 31, 2017 |
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2015 | 2016 | 2016 | 2017 | |||||||||||||||||||||
(in thousands, except unit/share and per unit/share data) | ||||||||||||||||||||||||
(unaudited) | (unaudited) | |||||||||||||||||||||||
Consolidated Statements of Income Data: |
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Revenue |
$ | 265,870 | $ | 318,352 | $ | 73,966 | $ | 89,157 | ||||||||||||||||
Cost of revenue |
141,060 | 168,844 | 37,376 | 45,375 | ||||||||||||||||||||
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Gross profit |
124,810 | 149,508 | 36,590 | 43,782 | ||||||||||||||||||||
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Selling, general and administrative expense |
45,251 | 71,420 | 16,777 | 19,343 | ||||||||||||||||||||
Impact fee expense |
| 27,018 | | | ||||||||||||||||||||
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Income from operations |
79,559 | 51,070 | 19,813 | 24,439 | ||||||||||||||||||||
Other income (expense): |
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Interest expense, including amortization of debt issuance costs |
(7,682 | ) | (10,836 | ) | (2,197 | ) | (4,020 | ) | ||||||||||||||||
Equity in net earnings (losses) of investments |
821 | (10,138 | ) | (1,120 | ) | (441 | ) | |||||||||||||||||
Loss on extinguishment of debt |
(212 | ) | | | | |||||||||||||||||||
Gain on sale of asset |
248 | | | | ||||||||||||||||||||
Impairment of notes receivable |
| (2,371 | ) | | | |||||||||||||||||||
Gain on lease termination |
| 2,801 | | | ||||||||||||||||||||
Other |
738 | 842 | 182 | 350 | ||||||||||||||||||||
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Total other income (expense) |
(6,087 | ) | (19,702 | ) | (3,135 | ) | (4,111 | ) | ||||||||||||||||
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Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | $ | $ | ||||||||||||||
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Net income per unit/share(1): |
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Basic |
$ | 0.37 | $ | 0.16 | $ | 0.08 | $ | 0.10 | $ | $ | ||||||||||||||
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Diluted |
$ | 0.37 | $ | 0.15 | $ | 0.08 | $ | 0.10 | $ | $ | ||||||||||||||
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Weighted-average units/shares outstanding(1): |
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Basic |
196,773,458 | 199,047,070 | 198,898,170 | 199,776,051 | ||||||||||||||||||||
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Diluted |
199,272,269 | 203,461,420 | 201,765,027 | 205,493,272 | ||||||||||||||||||||
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(1) | See Notes 2 and 12 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net income per unit, and the weighted-average number of units used in the computation of the per unit amounts. See Note 4 to our unaudited pro forma consolidated statements of income included elsewhere in this prospectus for an explanation of the calculations of our pro forma basic and diluted net income per share and the weighted-average number of shares used in the computation of the per share amounts. |
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March 31, 2017 | ||||||||||||
Actual | Pro Forma(1) | Pro Forma As Adjusted(2)(3) |
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(in thousands) (unaudited) |
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Consolidated Balance Sheet Data: |
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Cash |
$ | 21,709 | $ | $ | ||||||||
Working capital (deficit) |
(97,638 | ) | ||||||||||
Property and equipment, net |
948,992 | |||||||||||
Total assets |
999,948 | |||||||||||
Deferred revenue, current and noncurrent |
30,206 | |||||||||||
Long-term debt, current and noncurrent |
539,735 | |||||||||||
Capital lease obligations, current and noncurrent |
23,466 | |||||||||||
Total members/stockholders equity |
297,678 |
(1) | Reflects the pro forma balance sheet data for Switch, Inc. after giving effect to (i) the organizational transactions described under The Transactions; (ii) the acceleration of vesting of incentive units and the conversion of incentive units into Common Units; and (iii) borrowings under our amended and restated credit agreement in connection with a distribution in the amount of $ million by Switch, Ltd. to the Original Members. |
(2) | Reflects the pro forma amounts described in Note (1) above as adjusted to reflect the sale and issuance of shares of our Class A common stock by us in this offering, at the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
(3) | Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our cash, working capital (deficit), total assets and total members/stockholders equity by approximately $ million, assuming that the number of shares of Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) the amount of our cash, working capital (deficit), total assets and total members/stockholders equity by approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
Key Metrics and Non-GAAP Financial Measures
We monitor the following unaudited key metrics and non-GAAP financial measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
Years Ended December 31, |
Three Months Ended March 31, |
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2015 | 2016 | 2016 | 2017 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Recurring revenue |
$ | 258,736 | $ | 308,200 | $ | 72,179 | $ | 87,309 | ||||||||
Capital expenditures |
$ | 190,113 | $ | 287,097 | $ | 50,115 | $ | 107,015 | ||||||||
Customers |
661 | 773 | 691 | 782 | ||||||||||||
Adjusted EBITDA |
$ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||
Adjusted EBITDA margin |
53.4 | % | 48.1 | % | 50.9 | % | 52.8 | % |
For an explanation of our key metrics and non-GAAP financial measures, see Managements Discussion and Analysis of Financial Condition and Results of OperationsKey Metrics and Non-GAAP Financial Measures.
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Adjusted EBITDA
The following table sets forth reconciliations of our net income to Adjusted EBITDA for the periods presented:
Years Ended December 31, |
Three Months Ended March 31, |
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2015 | 2016 | 2016 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Adjusted EBITDA: |
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Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
Interest expense |
7,682 | 10,836 | 2,197 | 4,020 | ||||||||||||
Interest income(1) |
(260 | ) | (332 | ) | (12 | ) | (7 | ) | ||||||||
Depreciation and amortization |
55,355 | 66,591 | 15,311 | 20,037 | ||||||||||||
Loss on disposal of property and equipment |
1,307 | 1,994 | 133 | 20 | ||||||||||||
Impact fee expense |
| 27,018 | | | ||||||||||||
Equity-based compensation |
5,237 | 5,935 | 2,208 | 2,250 | ||||||||||||
Equity in (net earnings) losses of investments |
(821 | ) | 10,138 | 1,120 | 441 | |||||||||||
Loss on extinguishment of debt |
212 | | | | ||||||||||||
Gain on sale of asset |
(248 | ) | | | | |||||||||||
Gain on lease termination |
| (2,801 | ) | | | |||||||||||
Impairment of notes receivable and interest receivable(2) |
| 2,426 | | | ||||||||||||
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Adjusted EBITDA |
$ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||
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(1) | Interest income is included in the Other line of other income (expense) in our consolidated statements of comprehensive income. |
(2) | The write-off of interest income receivable pertaining to our notes receivable with Planet3, Inc. is included in the selling, general and administrative expense line in our consolidated statements of comprehensive income. |
See Selected Historical Consolidated Financial and Other DataKey Metrics and Non-GAAP Financial Measures for information regarding the limitations of using Adjusted EBITDA and Adjusted EBITDA margin as financial measures.
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Investing in our Class A common stock involves a high degree of risk. You should carefully consider the risks and uncertainties described below, together with all of the other information included in this prospectus, including Managements Discussion and Analysis of the Financial Condition and Results of Operations and the consolidated financial statements and the related notes included elsewhere in this prospectus, before making an investment decision. We cannot assure you that any of the events discussed below will not occur. Our business, financial condition and results of operations could be materially and adversely affected by any of these risks or uncertainties. In that case, the trading price of our Class A common stock could decline, and you may lose all or part of your investment.
Risks Related to Our Business
A slowdown in the demand for data center resources and other market and economic conditions could have a material adverse effect on us.
Adverse developments in the data center market or in the industries in which our customers operate could lead to a decrease in the demand for data center resources, which could have a material adverse effect on us. We face risks including:
| a decline in the technology industry, such as a decrease in the use of mobile or web-based commerce, business layoffs or downsizing, relocation of businesses, increased costs of complying with existing or new government regulations and other factors; |
| a slowdown in the growth of the Internet generally as a medium for commerce and communication; |
| a downturn in the market for data center space generally, which could be caused by an oversupply of or reduced demand for data center space; |
| any transition by our customers of data center storage from third-party providers like us to customer-owned and operated facilities; |
| the rapid development of new technologies or the adoption of new industry standards that render our or our customers current products and services obsolete or unmarketable and, in the case of our customers, that contribute to a downturn in their businesses, increasing the likelihood of a default under their service agreements or that they become insolvent; |
| the migration from colocation data centers to the public cloud; and |
| technological advancements that result in less data center space being required. |
To the extent that any of these or other adverse conditions occurs, they are likely to impact market demand and pricing for our services.
Additionally, we and our customers are affected by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.
Any inability to manage our growth could disrupt our business and reduce our profitability.
We have experienced significant growth in recent years. Our revenue grew from $166.8 million in 2013 to $318.4 million in 2016. In addition, between January 1, 2013 and June 15, 2017, we grew from
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four data centers with 670,000 gross square feet, or GSF, of space to ten data centers with an aggregate of up to 4.0 million GSF of space, and we expect to continue to grow and expand. Our rapid growth has placed, and will continue to place, significant demands on our management and our administrative, operational and financial systems. Continued expansion increases the challenges we face in:
| managing a large and growing customer base; |
| obtaining suitable land to build new data centers; |
| establishing new operations at additional data centers and maintaining efficient use of the data center facilities we operate; |
| expanding our service portfolio to cover a wider range of services; |
| creating and capitalizing on economies of scale; |
| obtaining additional capital to meet our future capital needs; |
| recruiting, training and retaining a sufficient number of skilled technical, sales and management personnel; |
| maintaining effective oversight over personnel and multiple data center locations; |
| coordinating work among sites and project teams; and |
| developing and improving our internal systems, particularly for managing our continually expanding business operations. |
If we fail to manage the growth of our operations effectively, our businesses and prospects may be materially and adversely affected.
Our operating results may fluctuate.
We have experienced fluctuations in our results of operations on a quarterly and annual basis. The fluctuations in our operating results may cause the market price of our Class A common stock to be volatile. We may experience significant fluctuations in our operating results in the foreseeable future due to a variety of factors, including, but not limited to:
| the timing and magnitude of depreciation and interest expense or other expenses related to the acquisition, purchase or construction of additional data centers or the upgrade of existing data centers; |
| demand for space, power and services at our data centers; |
| changes in general economic conditions, such as an economic downturn, or specific market conditions in the telecommunications and internet industries, both of which may have an impact on our customer base; |
| the duration of the sales cycle for our offerings; |
| acquisitions or dispositions we may make; |
| the financial condition and credit risk of our customers; |
| the provision of customer discounts and credits; |
| the mix of current and proposed products and offerings and the gross margins associated with our products and offerings; |
| the timing required for new and future data centers to open or become fully utilized; |
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| competition in the markets in which we operate; |
| conditions related to international operations; |
| increasing repair and maintenance expenses in connection with our data centers; |
| lack of available capacity in our existing data centers to generate new revenue or delays in opening new or acquired data centers that delay our ability to generate new revenue in markets which have otherwise reached capacity; |
| the timing and magnitude of other operating expenses, including taxes, expenses related to the expansion of sales, marketing, operations and acquisitions, if any, of complementary businesses and assets; |
| the cost and availability of adequate public utilities, including power; |
| changes in employee stock-based compensation; |
| overall inflation; |
| increasing interest expense due to any increases in interest rates and/or potential additional debt financings; |
| changes in our tax planning strategies or failure to realize anticipated benefits from such strategies; |
| changes in income tax benefit or expense; and |
| changes in or new generally accepted accounting principles in the U.S. as periodically released by the Financial Accounting Standards Board. |
Any of the foregoing factors, or other factors discussed elsewhere in this report, could have a material adverse effect on our business, results of operations and financial condition. Although we have experienced growth in revenue in recent quarters, this growth rate is not necessarily indicative of future operating results. It is possible that we may not be able to generate net income on a quarterly or annual basis in the future. In addition, a relatively large portion of our expenses are fixed in the short term, particularly with respect to lease and personnel expenses, depreciation and amortization and interest expenses. Therefore, our results of operations are particularly sensitive to fluctuations in revenue. As such, comparisons to prior reporting periods should not be relied upon as indications of our future performance. In addition, our operating results in one or more future quarters may fail to meet the expectations of securities analysts or investors.
The data center business is capital-intensive, and our capacity to generate capital may be insufficient to meet our anticipated capital requirements. Failure to obtain the necessary capital when needed may force us to delay, limit or terminate our expansion efforts or other operations.
The costs of constructing, developing, operating and maintaining data centers and growing our operations are substantial. While we strive to match the growth of our facilities to the demand for services, we still must spend significant amounts before we receive any revenue. Moreover, the anticipated demand may not materialize and we could be left with over-capacity. Further, we may encounter development delays, excess development costs, or delays in developing space for our customers. Moreover, the costs of constructing, developing, operating and maintaining data centers and growing our operations may increase in the future, which may make it more difficult for us to expand our business and to operate our data centers profitably. We are required to fund the costs of constructing, developing, operating and maintaining our data centers and growing our operations with cash. We may also need to raise additional funds through equity or debt financings in the future in
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order to meet our operating and capital needs. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms. Our inability to generate sufficient cash from operations or to obtain additional debt or equity financing may require us to prioritize projects or curtail capital expenditures and could adversely affect our results of operations. If we cannot generate sufficient capital to meet our anticipated capital requirements, our financial condition, business expansion and future prospects could be materially and adversely affected.
If we raise additional funds through further issuances of equity or equity-linked securities, our existing stockholders could suffer significant dilution in their percentage ownership of our company, and any new equity securities we issue could have rights, preferences and privileges senior to those of holders of our Class A common stock. In addition, any debt financing that we may obtain in the future could have restrictive covenants relating to our capital raising activities and other financial and operational matters, which may make it more difficult for us to obtain additional capital and to pursue business opportunities, including potential acquisitions.
Our success depends on our ability to license the space in our existing data centers. The failure to license the space in our data centers may harm our growth prospects, future business, financial condition and results of operations.
Our growth depends on our ability to successfully license the space in our existing data centers. We may not be able to attract customers for the space in our data centers for a number of reasons, including, if we:
| fail to provide competitive pricing terms; |
| provide space that is deemed by existing and potential customers to be inferior to those of our competitors, based on factors, including available power, preferred design features, security considerations, location, and connectivity; or |
| are unable to provide services that our existing and potential customers desire. |
If we are unable to license available space on a timely basis or at favorable pricing terms, it could have a material adverse effect on our business, results of operations and growth prospects.
We face risks associated with having a long selling and implementation cycle for our services that requires us to make significant time and resource commitments prior to recognizing revenue for those services.
We often have a long selling cycle for our largest transactions, which can range from a few months to up to a year or more. This can require our customers and us to invest significant capital, human resources and time prior to receiving any revenue. A customers decision to utilize our colocation services or our other services often involves time-consuming contract negotiations and substantial due diligence on the part of the customer regarding the adequacy of our infrastructure and attractiveness of our resources and services. Furthermore, we may expend significant time and resources in pursuing a particular sale or customer, and we do not recognize revenue for our services until such time as the services are provided under the terms of the applicable contract. Our efforts in pursuing a particular sale or customer may not be successful, and we may not always have sufficient capital on hand to satisfy our working capital needs between the date on which we sign an agreement with a new customer and when we first receive revenue for services delivered to the customer. If our efforts in pursuing sales and customers are unsuccessful, or our cash on hand is insufficient to cover our working capital needs over the course of our long selling cycle, our financial condition could be negatively affected.
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We may not generate sufficient cash flow to meet our debt service and working capital requirements.
As of March 31, 2017, we had total indebtedness of $539.7 million under our credit facilities. Our leveraged position could have important consequences, including:
| impairing our ability to obtain additional financing for working capital, capital expenditures, acquisitions or general corporate purposes; |
| requiring us to dedicate a substantial portion of our operating cash flow to paying principal and interest on our indebtedness, thereby reducing the funds available for operations; |
| limiting our ability to grow and make capital expenditures due to the financial covenants contained in our debt arrangements; |
| impairing our ability to adjust rapidly to changing market conditions, invest in new or developing technologies, or take advantage of significant business opportunities that may arise; and |
| making us more vulnerable if a general economic downturn occurs or if our business experiences difficulties. |
Additionally, our credit facilities are secured by a first-priority security interest in substantially all of the assets of Switch, Ltd. and its wholly-owned material domestic subsidiaries. Our amended and restated credit agreement also contains a number of covenants that, among other things, restrict our ability to incur additional debt, incur additional liens or contingent liabilities, make investments in other persons or property, or sell or dispose of our assets. For more information, see Description of Certain Indebtedness.
We will need to successfully implement our business strategy on a timely basis to meet our debt service and working capital needs. We may not successfully implement our business strategy, and even if we do, we may not realize the anticipated results of our strategy and generate insufficient operating cash flow to meet our debt service obligations and working capital needs.
In the event our cash flow is inadequate to meet our debt service and working capital requirements, we may be required, to the extent permitted under the amended and restated credit agreement and any other credit facilities, to seek additional financing in the debt or equity markets, refinance or restructure all or a portion of our indebtedness, sell selected assets or reduce or delay planned capital or operating expenditures; however, this insufficient cash flow may make it more difficult for us to obtain financing on terms that are acceptable to us, or at all. We could also face substantial liquidity problems. If we are unable to generate sufficient cash flow or otherwise obtain funds needed to make required payments under our indebtedness, or if we breach any covenants under our indebtedness, we would be in default under its terms and the holders of such indebtedness may be able to accelerate the maturity of such indebtedness, which could cause defaults under our other indebtedness.
Increased power costs and limited availability of power resources may adversely affect our results of operations.
We are a large consumer of power and costs of power account for a significant portion of our cost of revenue. We require power supply to provide many services we offer, such as powering and cooling our customers servers and network equipment and operating critical data center plant and equipment infrastructure.
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The amount of power required by our customers may increase as they adopt new technologies, for example, for virtualization of hardware resources. As a result, the average amount of power utilized per server is increasing, which in turn increases power consumption required to cool the data center facilities. Pursuant to our service agreements, we provide our customers with a committed level of power supply availability. Historically, our energy costs have been seasonal, with increased costs primarily in the summer months that have affected our results of operations. Additionally, we have also committed to operating our data centers with 100% clean and renewable energy. While we are currently able to obtain 100% clean and renewable energy at costs that we believe are reasonable, a significant increase in the cost of clean and renewable energy or a decrease in its availability could have materially adverse consequences including, among others, placing us at a cost disadvantage if we are forced to increase our fees for providing, or damaging our brand and reputation if we are unable to provide, 100% clean and renewable energy. Although we aim to improve the energy efficiency of the data center facilities that we operate, there can be no assurance such data center facilities will be able to deliver sufficient power to meet the growing needs of our customers. Moreover, we may not be able to address those customers needs with 100% clean and renewable energy. We may lose customers or our customers may reduce the services purchased from us due to increased power costs and limited availability of power resources, including clean and renewable power resources, or we may incur costs for data center space which we cannot utilize, which would reduce our revenue and have a material and adverse effect on our cost of revenue and results of operations.
We attempt to manage our power resources and limit exposure to system downtime due to power outages from the electric grid by having redundant power feeds from the grid and by using backup generators and battery power. However, these protections may not limit our exposure to power shortages or outages entirely. Any system downtime resulting from insufficient power resources or power outages could damage our reputation and lead us to lose current and potential customers, which would harm our financial condition and results of operations.
We generate significant revenue from data centers located in one location and a significant disruption to this location could materially and adversely affect our operations.
We generate significant revenue from data centers located in Las Vegas and a significant disruption to this location could materially and adversely affect our operations. The Pyramid Campus in Grand Rapids and The Citadel Campus near Reno opened in June 2016 and November 2016, respectively. As both locations are in the first phase of development and will require additional capital investment to reach full build out, the revenue contribution from these locations is relatively small in comparison to The Core Campus in Las Vegas. Our data centers located in Las Vegas comprised 95.9% of our revenue during the three months ended March 31, 2017 and comprised 99.4% of our revenue during the year ended December 31, 2016. The occurrence of a catastrophic event, or a prolonged disruption in this region could materially and adversely affect our operations.
Any failure in the critical systems of the data center facilities we operate or services we provide could lead to disruptions in our customers businesses and could harm our reputation and result in financial penalty and legal liabilities, which would reduce our revenue and have a material adverse effect on our results of operation.
The critical systems of the data center facilities we operate and the services we provide are subject to failure. Any failure in the critical systems of any data center facility we operate or services that we provide, including a breakdown in critical plant, equipment or services, such as the cooling equipment, generators, backup batteries, routers, switches, or other equipment, power supplies, or network connectivity, whether or not within our control, could result in service interruptions and data losses for our customers as well as equipment damage, which could significantly disrupt the normal business operations of our customers and harm our reputation and reduce our revenue. Any failure or
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downtime in one of the data center facilities that we operate could affect many of our customers. The total destruction or severe impairment of any of the data center facilities we operate could result in significant downtime of our services and loss of customer data. Since our ability to attract and retain customers depends on our ability to provide highly reliable service, even minor interruptions in our service could harm our reputation and cause us to incur financial penalties. The services we provide are subject to failures resulting from numerous factors, including:
| power loss; |
| equipment failure; |
| human error or accidents; |
| theft, sabotage and vandalism; |
| failure by us or our suppliers to provide adequate service or maintenance to our equipment; |
| network connectivity downtime and fiber cuts; |
| security breaches to our infrastructure; |
| improper building maintenance by us; |
| physical, electronic and cyber security breaches; |
| fire, earthquake, hurricane, tornado, flood and other natural disasters; |
| extreme temperatures; |
| water damage; |
| public health emergencies; and |
| terrorism. |
We provide service level commitments to our customers. As a result, service interruptions or equipment damage in our data centers could result in credits to these customers. We cannot assure you that our customers will accept these credits as compensation. Service interruptions and equipment failures may also damage our brand image and reputation. Significant or frequent service interruptions could reduce the confidence of our customers and cause our customers to terminate or not renew their licenses. In addition, we may be unable to attract new customers if we have a reputation for significant or frequent service disruptions in our data centers.
Moreover, service interruptions and equipment failures may expose us to legal liability. As our services are critical to many of our customers business operations, any disruption in our services could result in lost profits or other indirect or consequential damages to our customers. Although our customer contracts typically contain provisions attempting to limit our liability for breach of the agreement, including failing to meet our service level commitments, there can be no assurance that a court would enforce any contractual limitations on our liability in the event that one of our customers brings a lawsuit against us as the result of a service interruption that they may ascribe to us. The outcome of any such lawsuit would depend on the specific facts of the case and any legal and policy considerations that we may not be able to mitigate. In such cases, we could be liable for substantial damage awards.
Delays in the expansion of existing data centers or the construction of new data centers could involve significant risks to our business.
In order to meet customer demand and the continued growth of our business, we need to expand existing data centers or obtain suitable land to build new data centers. Expansion of existing data
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centers and construction of new data centers are currently underway or being contemplated and such expansion and construction requires us to carefully select and rely on the experience of one or more designers, general contractors, and subcontractors during the design and construction process. If a designer or contractor experiences financial or other problems during the design or construction process, we could experience significant delays and incur increased costs to complete the projects, resulting in negative impacts on our results of operations.
In addition, we need to work closely with the local power suppliers, and sometimes local governments, where our proposed data centers are located. Delays in actions that require the assistance of such third parties, or delays in receiving required permits and approvals from such parties, may also affect the speed with which we complete data center projects or result in their not being completed at all. We have experienced such delays in receiving approvals and permits or in actions to be taken by third parties in the past and may experience them again in the future.
If we experience significant delays in the supply of power required to support the data center expansion or new construction, either during the design or construction phases, the progress of the data center expansion and construction could deviate from our original plans, which could cause material and negative effects to our revenue growth, profitability and results of operations.
We are continuing to invest in our expansion efforts but may not have sufficient customer demand in the future to realize expected returns on these investments.
We expect to continue to expand our data center footprint. In connection with our expansion plans, we may be required to commit significant operational and financial resources, but there can be no guarantee we will have sufficient customer demand in those markets to support these centers once they are built. This risk may be greater in a market where we have not operated previously. Once development of a data center facility is complete, we incur certain operating expenses even if there are no customers occupying any space. Consequently, if any of our properties have significant vacancies for an extended period of time, our results of operations and business and financial condition will be affected adversely, the impact of which could be material. In addition, unanticipated technological changes could affect customer requirements for data centers, and we may not have built such requirements into our new data centers. If any of these developments or contingencies were to occur, it could make it difficult for us to realize expected or reasonable returns on our investments.
If we fail to adequately protect our proprietary intellectual property rights, our competitive position could be impaired and we may lose valuable assets, generate reduced revenue and incur costly litigation to protect our rights.
Our success depends, in part, on our ability to protect our proprietary intellectual property rights, including certain methodologies, practices, tools, technologies and technical expertise we utilize in designing, developing, implementing and maintaining applications and processes used in providing our services. We rely on a combination of patent, trademark, trade secrets and other intellectual property laws, non-disclosure agreements with our employees, consultants, customers and other relevant persons and other measures to protect our intellectual property, including our brand identity. However, the steps we take to protect our intellectual property may be inadequate, and we may choose not to pursue or maintain protection for our intellectual property in the United States or foreign jurisdictions. We will not be able to protect our intellectual property if we are unable to enforce our rights or if we do not detect unauthorized use of our intellectual property. Despite our precautions, it may be possible for unauthorized third parties to copy our technology and use information that we regard as proprietary to create technology that competes with ours. Further, the laws of some countries do not protect proprietary rights to the same extent as the laws of the United States, and mechanisms for enforcement of intellectual property rights in some foreign countries may be inadequate. To the extent
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we expand our international activities, our exposure to unauthorized copying and use of our technologies and proprietary information may increase. Accordingly, despite our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our technology and intellectual property.
We rely in part on trade secrets, proprietary know-how and other confidential information to maintain our competitive position. Although we enter into non-disclosure and invention assignment agreements with our employees, enter into non-disclosure agreements with our customers, consultants and other parties with whom we have strategic relationships and business alliances and enter into intellectual property assignment agreements with our consultants and vendors, no assurance can be given that these agreements will be effective in controlling access to and distribution of our technology and proprietary information. Further, these agreements do not prevent our competitors from independently developing technologies that are substantially equivalent or superior to our products.
To protect our intellectual property rights, we may be required to spend significant resources to monitor and protect these rights. Litigation may be necessary in the future to enforce our intellectual property rights and to protect our trade secrets. Such litigation could be costly, time consuming and distracting to management and could result in the impairment or loss of portions of our intellectual property. Furthermore, our efforts to enforce our intellectual property rights may be met with defenses, counterclaims and countersuits attacking the validity and enforceability of our intellectual property rights. Our inability to protect our proprietary technology, as well as any costly litigation or diversion of our managements attention and resources, could disrupt our business, as well as have a material adverse effect on our financial condition and results of operations.
We may in the future be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.
We may from time to time face allegations that we have infringed the patents, copyrights, trademarks and other intellectual property rights of third parties, including from our competitors. We may be unaware of the intellectual property rights that others may claim cover some or all of our technology or services. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop using certain technologies or offering certain services or may result in significant damage awards or settlement costs.
Even if these matters do not result in litigation or are resolved in our favor or without significant cash settlements, these matters, and the time and resources necessary to litigate or resolve them, could divert the time and resources of our management team and harm our business, our operating results and our reputation.
We rely on the proper and efficient functioning of computer and data-processing systems, and a large-scale malfunction could have a material adverse effect on us.
Our ability to keep our data centers operating depends on the proper and efficient functioning of computer and data-processing systems. Since computer and data-processing systems are susceptible to malfunctions and interruptions, including those due to equipment damage, power outages, computer viruses and a range of other hardware, software and network problems, we cannot guarantee that our data centers will not experience such malfunctions or interruptions in the future. Additionally, expansions and developments in the products and services that we offer could increasingly add a measure of complexity that may overburden our data center and network resources and human capital, making service interruptions and failures more likely. A significant or large-scale malfunction or interruption of one or more of any of our data centers computer or data-processing systems could adversely affect our ability to keep such data centers running efficiently. If a malfunction results in a wider or sustained disruption to business at a property, it could have a material adverse effect on us.
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We may be vulnerable to security breaches which could disrupt our operations and have a material adverse effect on our financial condition and results of operations.
We provide the infrastructure and physical security for our customers IT equipment, which often contains highly confidential and mission critical data. A party who is able to compromise the physical security measures protecting our data center facilities could misappropriate our or our customers proprietary information or cause interruptions or malfunctions in our operations. As we provide assurances to our customers that we provide the highest level of security, such a compromise could be particularly harmful to our brand and reputation. We may be required to expend significant capital and resources to protect against such threats or to alleviate problems caused by breaches in security. As techniques used to breach security change frequently and are often not recognized until launched against a target, we may not be able to implement new security measures in a timely manner or, if and when implemented, we may not be certain whether these measures could be circumvented. Any breaches that may occur could expose us to increased risk of lawsuits, regulatory penalties, loss of existing or potential customers, harm to our reputation and increases in our security costs, which could have a material adverse effect on our financial condition and results of operations.
In addition, any assertions of alleged security breaches or systems failure made against us, whether true or not, could harm our reputation, cause us to incur substantial legal fees and have a material adverse effect on our business, reputation, financial condition and results of operations. Whether or not any such assertion actually proceeds to litigation, we may be required to devote significant management time and attention to its resolution (through litigation, settlement or otherwise), which would detract from our managements ability to focus on our business. Any such resolution could involve the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement with terms that restrict the operation of our business.
A significant portion of our revenue is highly dependent on a limited number of customers, and the loss of, or any significant decrease in business from, these customers could adversely affect our financial condition and results of operations.
Our top 10 customers accounted for approximately 38.4% and 38.5% of our revenue for the year ended December 31, 2016 and the three months ended March 31, 2017, respectively.
There are a number of factors that could cause us to lose customers. Because many of our contracts involve services that are mission-critical to our customers, any failure by us to meet a customers expectations could result in cancellation or non-renewal of the contract. Our service agreements usually allow our customers to terminate their agreements with us before the end of the contract period under certain specified circumstances, including our failure to deliver services as required under such agreements, and in some cases without cause as long as sufficient notice is given. In addition, our customers may decide to reduce spending on our services or demand price reductions due to a challenging economic environment or other factors, both internal and external, relating to their business such as corporate restructuring or changing their outsourcing strategy by moving more facilities in-house or outsourcing to other service providers. In addition, our reliance on any individual customer for a significant portion of our revenue may give that customer a degree of pricing leverage against us when negotiating contracts and terms of services with us.
The loss of any of our major customers, or a significant decrease in the extent of the services that they outsource to us or the price at which we sell our services to them, could materially and adversely affect our financial condition and results of operations.
Our customer contract commitments are subject to reduction and potential cancellation.
Some of our customer contracts allow for early termination, subject to payment of specified costs and penalties, which may be less than the revenue we would expect to receive under such contracts.
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Our customer contract commitments could significantly decrease if any of the customer contracts are terminated either pursuant to, or in violation of, the terms of such contract. In addition, our customer contract commitments during a particular future period may be reduced for reasons outside of our customers control, such as general current economic conditions. If our customer contract commitments are significantly reduced, our results of operations and the price of our Class A common stock could be materially and adversely affected.
Even if our current and future customers have entered into a binding contract with us, they may choose to terminate such contract prior to the expiration of its terms. Any penalty for early termination may not adequately compensate us for the time and resources we have expended in connection with such contract, or at all, which could have a material adverse effect on our results of operations and cash flows.
Our customer base may decline if our customers or potential customers develop their own data centers or expand their own existing data centers.
Some of our customers have in the past, and may in the future, develop their own data center facilities. Other customers with their own existing data centers may choose to expand their data center operations in the future. One of our business strategies is to sell or lease our singleuser MOD line. In the event that any of our key customers were to develop or expand their own data centers, we may lose business, fail to execute on our strategy of our single-user MOD line or face pressure as to the pricing of our services. In addition, if we fail to offer services that are cost-competitive and operationally advantageous as compared with services provided in-house by our customers, we may lose customers or fail to attract new customers. If we lose a customer, there is no assurance that we would be able to replace that customer at the same or a higher rate, or at all, and our business and results of operations would suffer.
Our churn rate may increase or we may be unable to achieve high contract renewal rates.
We seek to renew customer contracts when those contracts are due for renewal. We endeavor to provide high levels of customer service, support, and satisfaction to maintain long-term customer relationships and to secure high rates of contract renewals for our services. Nevertheless, we cannot assure you that we will be able to renew service contracts with our existing customers or re-commit space relating to expired service contracts to new customers if our current customers do not renew their contracts. In the event of a customers termination or non-renewal of expired contracts, our ability to enter into services contracts so that new or other existing customers utilize the expired existing space in a timely manner will impact our results of operations.
If we do not succeed in attracting new customers for our services and growing revenue from existing customers, we may not achieve our anticipated revenue growth.
Our ability to attract new customers, as well as our ability to grow revenue from our existing customers, depends on a number of factors, including our ability to offer high quality services at competitive prices, the strength of our competitors and the capabilities of our marketing and sales teams to attract new customers. If we fail to attract new customers or grow revenue from existing customers, we may not be able to grow our revenue as quickly as we anticipate or at all.
The migration from colocation data centers to the public cloud may have a material adverse effect on our results of operations.
Although the demand for public cloud solutions is growing rapidly, we anticipate that there will continue to be a strong demand for colocation data centers. If our assumptions prove to be incorrect, the migration from colocation data centers to the cloud could harm our financial condition and results of operations.
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Unanticipated changes in the tax rates and policies of the states in which we operate could materially and adversely affect our results of operations.
We strategically choose the locations of our U.S. campuses. One of the factors we consider is the favorable tax rates and policies that provide zero or low-tax environments for our customers to deploy computing infrastructure. If the tax rates and policies of the states in which our data centers are located increase and our customers are exposed to higher taxes, our data centers may become less attractive to certain of our existing and potential customers, which could materially and adversely affect our results of operations.
The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could seriously harm our business.
We depend to a significant degree on the continuous service and performance of Rob Roy, our founder, chairman and chief executive officer, and our experienced senior management team and other key personnel. Mr. Roy, our senior management team and other key personnel may resign or could be terminated for any reason at any time. Mr. Roy has been responsible for our companys strategic vision and the development of our technology and business, and so if he should stop working for us for any reason, it is unlikely that we would be able to immediately find a suitable replacement. The loss of our senior management team or key personnel could disrupt our business operations and create uncertainty as we search for and integrate a replacement. If any member of our senior management leaves us to join a competitor or to form a competing company, any resulting loss of existing or potential clients to any such competitor could have a material adverse effect on our business, financial condition and results of operations. In addition, we do not maintain key man life insurance for any of the senior members of our management team or our key personnel.
Future consolidation and competition in our customers industries could reduce the number of our existing and potential customers and make us dependent on a more limited number of customers.
Mergers or consolidations in our customers industries in the future could reduce the number of our existing and potential customers and make us dependent on a more limited number of customers. If our customers merge with or are acquired by other entities that are not our customers, they may discontinue or reduce the use of our data centers in the future. Additionally, some of our customers may compete with one another in various aspects of their businesses, which places additional competitive pressures on our customers. Any of these developments could have a material adverse effect on us.
We may not be able to compete effectively against our current and future competitors.
We offer a broad range of data center services and, as a result, we may compete with a wide range of data center service providers for some or all of the services we offer. We face competition from numerous developers, owners and operators in the data center industry, including managed service providers and REITs, some of which own or lease properties similar to ours, or may do so in the future, in the same submarkets in which our properties are located. In particular cloud offerings may influence our customers to move workloads to cloud providers, which may reduce the services they obtain from us. Our current and future competitors may vary by size and service offerings and geographic presence. In addition, many data center companies are consolidating to create new companies with greater market power.
Competition is primarily centered on reputation and track record, quality and availability of data center space, quality of service, technical expertise, security, reliability, functionality, breadth and depth
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of services offered, geographic coverage, scale, financial strength and price. Some of our current and future competitors may have greater brand recognition, longer operating histories, stronger marketing, technical and financial resources and access to greater and less expensive power than we do. In addition, many companies in the industry are consolidating, which could further increase the market power of our competitors. As a result, some of our competitors may be able to:
| offer space at pricing below current market rates or below the pricing we currently charge our customers; |
| bundle colocation services with other services or equipment they provide at reduced prices; |
| develop superior products or services, gain greater market acceptance, and expand their service offerings more efficiently or rapidly; |
| adapt to new or emerging technologies and changes in customer requirements more quickly; |
| take advantage of acquisition and other opportunities more readily; and |
| adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services. |
We operate in a competitive market, and we face pricing pressure for our services. Prices for our services are affected by a variety of factors, including supply and demand conditions and pricing pressures from our competitors. We may be required to lower our prices to remain competitive, which may decrease our margins and adversely affect our business prospects, financial condition and results of operations.
We have government customers, which subjects us to risks including early termination, audits, investigations, sanctions and penalties.
We derive some revenue from contracts with the U.S., state and local governments. Some of these customers may terminate all or part of their contracts at any time, without cause. There is increased pressure for governments and their agencies to reduce spending. Some of our contracts at the state and local levels are subject to government funding authorizations.
Additionally, government contracts are generally subject to audits and investigations which could result in various civil and criminal penalties and administrative sanctions, including termination of contracts, refund of a portion of fees received, forfeiture of profits, suspension of payments, fines and suspensions or debarment from future government business.
If we are unable to adapt to evolving technologies and customer demands in a timely and cost-effective manner, our ability to sustain and grow our business may suffer.
The markets for the data centers we own and operate, as well as certain of the industries in which our customers operate, are characterized by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels and changing customer demands. As a result, the infrastructure at our data centers may become less marketable due to demand for new processes and technologies, including, without limitation: (i) new processes to deliver power to, or eliminate heat from, computer systems; (ii) customer demand for additional redundancy capacity; (iii) new technology that permits higher levels of critical load and heat removal than our data centers are currently designed to provide; and (iv) an inability of the power supply to support new, updated or upgraded technology. In addition, the systems that connect our data centers to the Internet and other external networks may become insufficient, including with respect to latency, reliability and diversity of connectivity. We may not be able to adapt to changing technologies or meet customer demands for new processes or technologies in a timely and cost-effective manner, if at all, which would adversely impact our ability to sustain and grow our business.
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In addition, new technologies have the potential to replace or provide lower cost alternatives to our services. The adoption of such new technologies could render some or all of our services obsolete or unmarketable. We cannot guarantee that we will be able to identify the emergence of all of these new service alternatives successfully, modify our services accordingly, or develop and bring new services to market in a timely and cost-effective manner to address these changes. If and when we do identify the emergence of new service alternatives and introduce new services to market, those new services may need to be made available at lower profit margins than our then-current services. Failure to provide services to compete with new technologies or the obsolescence of our services could lead us to lose current and potential customers or could cause us to incur substantial costs, which would harm our operating results and financial condition. Our introduction of new alternative services that have lower price points than our current offerings may also result in our existing customers switching to the lower cost products, which could reduce our revenue and have a material adverse effect on our results of operation.
Potential future regulations that apply to industries we serve may require customers in those industries to seek specific requirements from their data centers that we are unable to provide. These may include physical security requirements applicable to the defense industry and government contractors and privacy and security regulations applicable to the financial services and health care industries. If such regulations were adopted or such extra requirements demanded by certain customers, we could lose some customers or be unable to attract new customers in certain industries, which would have materially and adverse effect our operations.
We depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to the customers in our data centers, and any delays or disruptions in service could have a material adverse effect on us.
Our products and infrastructure rely on third-party service providers. In particular, we depend on third parties to provide Internet, telecommunication and fiber optic network connectivity to the customers in our data centers, and we have no control over the reliability of the services provided by these suppliers. Our customers may in the future experience difficulties due to service failures unrelated to our systems and services. Any Internet, telecommunication or fiber optic network failures may result in significant loss of connectivity to our data centers, which could reduce the confidence of our customers and could consequently impair our ability to retain existing customers or attract new customers and could have a material adverse effect on us.
Similarly, we depend upon the presence of Internet, telecommunications and fiber optic networks serving the locations of our data centers in order to attract and retain customers. The construction required to connect multiple carrier facilities to our data centers is complex, requiring a sophisticated redundant fiber network, and involves matters outside of our control, including regulatory requirements and the availability of construction resources. Each new data center that we develop requires significant amounts of capital for the construction and operation of a sophisticated redundant fiber network. We believe that the availability of carrier capacity affects our business and future growth. We cannot assure you that any carrier will elect to offer its services within our data centers or that once a carrier has decided to provide connectivity to our data centers that it will continue to do so for any period of time. Furthermore, some carriers are experiencing business difficulties or have announced consolidations or mergers. As a result, some carriers may be forced to downsize or terminate connectivity within our data centers, which could adversely affect our customers and could have a material adverse effect on us.
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The occurrence of a catastrophic event or a prolonged disruption may exceed our insurance coverage by significant amounts.
Our operations are subject to hazards and risks normally associated with the daily operations of our data center facilities. Currently, we maintain various insurance policies for business interruption for lost profits, property and casualty, public liability, commercial employee insurance, workers compensation, personal property and auto liability. Our business interruption insurance for lost profits includes coverage for business interruptions, our property and casualty insurance includes coverage for equipment breakdowns and our commercial employee insurance includes employee group insurance. We are self-insured for medical insurance. We believe our insurance coverage adequately covers the risks of our daily business operations. However, our current insurance policies may be insufficient in the event of a prolonged or catastrophic event. The occurrence of any such event that is not entirely covered by our insurance policies may result in interruption of our operations and subject us to significant losses or liabilities and damage our reputation as a provider of business continuity services. In addition, any losses or liabilities that are not covered by our current insurance policies may have a material adverse effect on our business, financial condition and results of operations.
Environmental problems are possible and can be costly.
Environmental liabilities could arise on the land that we own and have a material adverse effect on our financial condition and performance. Federal, state and local laws and regulations relating to the protection of the environment may require a current or previous owner or operator of real estate to investigate and remediate hazardous or toxic substances or petroleum product releases at or from the property. In addition, we could incur costs to comply with such laws and regulations, the violation of which could lead to substantial fines and penalties.
We may have to pay governmental entities or third parties for property damage and for investigation and remediation costs that they incurred in connection with any contamination at our current and former properties without regard to whether we knew of or caused the presence of the contaminants. Even if more than one person may have been responsible for the contamination, each person covered by these environmental laws may be held responsible for all of the clean-up costs incurred.
Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements.
Our leases for self-developed data centers could be terminated early and we may not be able to renew our existing leases and agreements on commercially acceptable terms or our rent or payment under the agreements could increase substantially in the future, which could materially and adversely affect our operations.
Two of our facilities and one of our facilities under development are located on properties for which we have long term operating and capital leases. We also lease the building shell for one of these facilities. Such leases generally have remaining terms of 15 to 49 years. In some instances, we may elect to exercise an option to purchase the leased premises and facilities, or in other instances, elect to extend the term of certain leases, in each case, according to the terms and conditions under the relevant lease agreements. However, upon the expiration of such leases (including any extension terms), we may not be able to renew these leases on commercially reasonable terms, if at all. Even though the lessors for most of our data centers generally do not have the right of unilateral early termination unless they provide the required notice and opportunity to cure (as applicable), the lease may nonetheless be terminated early if we are in material breach of the lease agreements.
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We may assert claims for compensation against the landlords if they elect to terminate a lease agreement early and without due cause. If the leases for our data centers were terminated early prior to their expiration date, notwithstanding any compensation we may receive for early termination of such leases, or if we are not able to renew such leases, we may have to incur significant cost related to relocation. Our leased facilities are located in properties that are subject to master ground leases. If the landlords under such master ground leases elect to terminate the respective master leases in case of default or breach by the master lessees thereunder or otherwise pursuant to the terms and conditions of the relevant master lease, we may not be able to protect our leasehold interest, and may be ordered to vacate the affected premises. Any relocation could also affect our ability to provide continuous uninterrupted services to our customers and harm our reputation. As a result, our business and results of operations could be materially and adversely affected.
Any difficulties in identifying and consummating future acquisitions, alliances or joint ventures may expose us to potential risks and have an adverse effect on our business, results of operations or financial condition.
We may seek to make strategic acquisitions and enter into alliances and joint ventures to further expand our business. If we are presented with appropriate opportunities, we may acquire additional businesses, services, resources, or assets, including data centers that are complementary to our primary business. Our integration of the acquired entities or assets into our business may not be successful and may not enable us to expand into new services, customer segments or operating locations as well as we expect. This would significantly affect the expected benefits of these acquisitions. Moreover, the integration of any acquired entities or assets into our operations could require significant attention from our management. The diversion of our managements attention and any difficulties encountered in any integration process could have an adverse effect on our ability to manage our business. In addition, we may face challenges trying to integrate new operations, services and personnel with our existing operations. Our possible future acquisitions may also expose us to other potential risks, including risks associated with unforeseen or hidden liabilities, the diversion of resources from our existing businesses and technologies, our inability to generate sufficient revenue to offset the costs, expenses of acquisitions and potential loss of, or harm to, relationships with employees and customers as a result of our integration of new businesses. The occurrence of any of these events could have a material and adverse effect on our ability to manage our business, our financial condition and our results of operations.
If our or our customers proprietary intellectual property or confidential information is misappropriated or disclosed by us or our employees in violation of applicable laws and contractual agreements, we could be exposed to protracted and costly legal proceedings, lose clients and our business could be seriously harmed.
There could be unauthorized disclosure or use of our technical knowledge, practices or procedures by our employees. We have entered into confidentiality agreements with our employees which contain nondisclosure covenants that survive indefinitely as to our trade secrets. Pursuant to these confidentiality agreements, our employees are required to assign any of their inventions that are developed or reduced to practice during their employment with us that pertain to any of our lines of business activity, that are aided by the use of our time, materials or facilities, or that relate to any of their work with us. However, we may not be able to enforce the confidentiality agreements we have with our personnel.
Additionally, we and our employees are in some cases provided with access to our customers proprietary intellectual property and confidential information, including technology, software products, business policies and plans, trade secrets and personal data. Many of our customer contracts require that we do not engage in the unauthorized use or disclosure of such intellectual property or information
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and that we will be required to indemnify our customers for any loss they may suffer as a result. We use security technologies and other methods to prevent employees from making unauthorized copies, or engaging in unauthorized use or unauthorized disclosure, of such intellectual property and confidential information. The confidentiality agreements we enter into with our employees limit access to and distribution of our customers intellectual property and other confidential information as well as our own. However, the steps taken by us in this regard may not be adequate to safeguard our and our customers intellectual property and confidential information. Moreover, some of our customer contracts do not include any limitation on our liability with respect to breaches of our obligation to keep the intellectual property or confidential information we receive from them confidential. In addition, we may not always be aware of intellectual property registrations or applications relating to source codes, software products or other intellectual property belonging to our customers. As a result, if our customers proprietary rights are misappropriated by us or our employees, our customers may consider us liable for such act and seek damages and compensation from us.
Assertions of infringement of intellectual property or misappropriation of confidential information against us, if successful, could have a material adverse effect on our business, financial condition and results of operations. Protracted litigation could also result in existing or potential customers deferring or limiting their purchase or use of our services until resolution of such litigation. Even if such assertions against us are unsuccessful, they may cause us to lose existing and future business and incur reputational harm and substantial legal fees.
Competition for employees is intense, and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success depends on the efforts and talent of our employees, including data center design, construction management, operations, engineering, IT, risk management, and sales and marketing personnel. Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition for highly skilled personnel is extremely intense. We may not be able to hire and retain these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of employment.
In addition, we invest significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them. If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality of our services and our ability to serve our customers could diminish, resulting in a material adverse effect to our business.
We have entered, and expect to continue to enter, into joint venture, strategic collaborations and other similar arrangements, and these activities involve risks and uncertainties. A failure of any such relationship could have a material adverse effect on our business and results of operations.
We have entered, and expect to continue to enter, into joint venture, teaming strategic collaborations and other similar arrangements. These activities involve risks and uncertainties, including the risk of the joint venture or applicable entity failing to satisfy its obligations, which may result in certain liabilities to us for guarantees and other commitments, the challenges in achieving strategic objectives and expected benefits of the business arrangement, the risk of conflicts arising between us and our partners and the difficulty of managing and resolving such conflicts, and the difficulty of managing or otherwise monitoring such business arrangements. A failure of our business relationships could have a material adverse effect on our business and results of operations.
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The uncertain economic environment may have an adverse impact on our business and financial condition.
The uncertain economic environment could have an adverse effect on our liquidity. While we believe we have a strong customer base, if the current market conditions were to worsen, some of our customers may have difficulty paying us and we may experience increased churn in our customer base and reductions in their commitments to us. We may also be required to make allowances for doubtful accounts and our results would be negatively impacted. Our sales cycle could also be lengthened if customers reduce spending on, or delay decision-making with respect to, our services, which could adversely affect our revenue growth and our ability to recognize revenue. We could also experience pricing pressure as a result of economic conditions if our competitors lower prices and attempt to lure away our customers with lower cost solutions. Finally, our ability to access the capital markets may be severely restricted at a time when we would like, or need, to do so, which could have an impact on our flexibility to pursue additional expansion opportunities and maintain our desired level of revenue growth in the future.
Our international operations through our joint venture may expose us to certain operating, legal and other risks, which could adversely impact our business, results of operations and financial condition.
Our joint ventures international operations may expose us to risks that we have not generally faced in the United States. These risks include:
| challenges caused by distance, language, cultural and ethical differences and the competitive environment; |
| heightened risks of unethical, unfair or corrupt business practices, actual or claimed, in certain geographies and of improper or fraudulent sales arrangements that may impact financial results and result in restatements of, and irregularities in, financial statements; |
| foreign exchange restrictions and fluctuations in currency exchange rates; |
| application of multiple and conflicting laws and regulations, including complications due to unexpected changes in foreign laws and regulatory requirements; |
| new and different sources of competition; |
| potentially different pricing environments, longer sales cycles and longer accounts receivable payment cycles and collections issues; |
| management communication and integration problems resulting from cultural differences and geographic dispersion; |
| potentially adverse tax consequences, including multiple and possibly overlapping tax structures, the complexities of foreign value-added tax systems, restrictions on the repatriation of earnings and changes in tax rates; |
| greater difficulty in enforcing contracts, accounts receivable collection and longer collection periods; |
| the uncertainty and limitation of protection for intellectual property rights in some countries; |
| increased financial accounting and reporting burdens and complexities; |
| lack of familiarity with local laws, customs and practices, and laws and business practices favoring local competitors or partners; and |
| political, social and economic instability abroad, terrorist attacks and security concerns in general. |
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The occurrence of any one of these risks could harm our international business and, consequently, our results of operations. Additionally, operating in international markets requires significant management attention and financial resources. We cannot be certain that the investment and additional resources required to operate in other countries will produce desired levels of revenue or profitability.
In addition, our agreement with our international joint venture partner limits our ability to engage in activities or transactions outside of the United States. Although we expressly retain the right to construct and license third parties to construct single client data centers outside of the United States, we are required to grant our joint venture the reasonable opportunity to interact and reach an agreement with such customer to develop a colocation facility prior to concluding our agreement with such third party. Furthermore, in the event any such single user data center outside the United Stated using our technology is made available to third parties as colocation space, such data center will be deemed a facility subject to our license agreement. We would then be required to make appropriate arrangements to acknowledge SUPERNAP International, S.A.s license rights in, and to, the technology for the multitenant data center. These limitations may prevent us from pursuing otherwise attractive and potentially lucrative international expansion opportunities.
Future legislation and regulation, both domestic and abroad, governing the internet and other related communications services could have an adverse effect on our business operations.
Various laws and governmental regulations, both in the United States and abroad, governing internet related services, related communications services and information technologies remain largely unsettled, even in areas where there has been some legislative action. There may also be forthcoming regulation in the United States in the areas of cybersecurity, data privacy and data security, any of which could impact us and our customers. Similarly, data privacy regulations outside of the United States continue to evolve. Future legislation could impose additional costs on our business or require us to make changes in our operations which could adversely affect our operations.
Our properties may not be suitable for use other than as data centers, which could make it difficult to sell or reposition them if we are not able to lease available space and could materially adversely affect our business, results of operations and financial condition.
Our data centers are designed primarily to house and run IT equipment and, therefore, contain extensive electrical and mechanical systems and infrastructure. As a result, they may not be suited for use as anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease vacant space for more traditional uses, or for us to sell a property to a buyer for use other than as a data center.
Risks Related to Our Organizational Structure
Our principal asset after the completion of this offering will be our interest in Switch, Ltd., and, accordingly, we will depend on distributions from Switch, Ltd. to pay our taxes and expenses, including payments under the Tax Receivable Agreement. Switch, Ltd.s ability to make such distributions may be subject to various limitations and restrictions.
Upon the completion of this offering, we will be a holding company and will have no material assets other than our ownership of Common Units of Switch, Ltd. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Switch, Ltd. and its subsidiaries and distributions we receive from Switch, Ltd. There can be no assurance that our subsidiaries will generate sufficient cash flow to distribute funds to us or
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that applicable state law and contractual restrictions, including negative covenants in our debt instruments, will permit such distributions.
Switch, Ltd. will continue to be treated as a partnership for U.S. federal income tax purposes and, as such, will not be subject to any entity-level U.S. federal income tax. Instead, taxable income will be allocated to holders of Common Units, including us. Accordingly, we will incur income taxes on our allocable share of any net taxable income of Switch, Ltd. Under the terms of the Switch Operating Agreement, Switch, Ltd. will be obligated to make tax distributions to holders of Common Units, including us. In addition to tax expenses, we will also incur expenses related to our operations, including payments under the Tax Receivable Agreement, which we expect could be significant. See Certain Relationships and Related Party TransactionsTax Receivable Agreement. We intend, as its managing member, to cause Switch, Ltd. to make cash distributions to the owners of Common Units in an amount sufficient to (i) fund their tax obligations in respect of taxable income allocated to them and (ii) cover our operating expenses, including payments under the Tax Receivable Agreement. However, Switch, Ltd.s ability to make such distributions may be subject to various limitations and restrictions, such as restrictions on distributions that would either violate any contract or agreement to which Switch, Ltd. is then a party, including debt agreements, or any applicable law, or that would have the effect of rendering Switch, Ltd. insolvent. If we do not have sufficient funds to pay tax or other liabilities or to fund our operations, we may have to borrow funds, which could materially adversely affect our liquidity and financial condition and subject us to various restrictions imposed by any such lenders. To the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, such payments generally will be deferred and will accrue interest until paid; provided, however, that nonpayment for a specified period may constitute a material breach of a material obligation under the Tax Receivable Agreement and therefore accelerate payments due under the Tax Receivable Agreement. See Certain Relationships and Related Party TransactionsTax Receivable Agreement and Certain Relationships and Related Party TransactionsSwitch Operating AgreementDistributions. In addition, if Switch, Ltd. does not have sufficient funds to make distributions, our ability to declare and pay cash dividends will also be restricted or impaired. See Risks Related to This Offering and Ownership of Our Class A Common Stock and Dividend Policy.
The Tax Receivable Agreement with the Continuing Members requires us to make cash payments to them in respect of certain tax benefits to which we may become entitled, and we expect that the payments we will be required to make will be substantial.
Upon the closing of this offering, we will be a party to the Tax Receivable Agreement with Switch, Ltd. and the Continuing Members. Under the Tax Receivable Agreement, we will be required to make cash payments to the Continuing Members equal to 85% of the tax benefits, if any, that we actually realize, or in certain circumstances are deemed to realize, as a result of (i) the increases in the tax basis of assets of Switch, Ltd. resulting from any redemptions or exchanges of Common Units from the Continuing Members as described under Certain Relationships and Related Party TransactionsSwitch Operating AgreementCommon Unit Redemption Right and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that we make to the Continuing Members under the Tax Receivable Agreement will vary, we expect those payments will be significant. Any payments made by us to the Continuing Members under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us. Furthermore, our future obligation to make payments under the Tax Receivable Agreement could make us a less attractive target for an acquisition, particularly in the case of an acquirer that cannot use some or all of the tax benefits that are the subject of the Tax Receivable Agreement. For more information, see Certain Relationships and Related Party TransactionsTax Receivable Agreement. Payments under the Tax Receivable Agreement are not conditioned on any Continuing Members continued ownership of Common Units or our Class A common stock after this offering.
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The actual amount and timing of any payments under the Tax Receivable Agreement will vary depending upon a number of factors, including the timing of redemptions or exchanges by the holders of Common Units, the amount of gain recognized by such holders of Common Units, the amount and timing of the taxable income we generate in the future, and the federal tax rates then applicable.
Our Founder, Chief Executive Officer and Chairman has control over all stockholder decisions because he controls a substantial majority of the combined voting power of our common stock. This will limit or preclude your ability to influence corporate matters, including the election of directors, amendments of our organizational documents and any merger, consolidation, sale of all or substantially all of our assets, or other major corporate transaction requiring stockholder approval.
Madisogota, LLC, an affiliate of Mr. Rob Roy, our Founder, Chief Executive Officer and Chairman, and certain trusts for the benefit of the Roy family will collectively control approximately % of the combined voting power of our common stock (or % if the underwriters exercise their option to purchase additional shares in full) after the completion of this offering and the application of the net proceeds from this offering as a result of his ownership of our Class C common stock, each share of which is entitled to 10 votes on all matters submitted to a vote of our stockholders.
Mr. Roy, through Madisogota, LLC and the other trusts, will have the ability to substantially control us, including the ability to control any action requiring the general approval of our stockholders, including the election of our board of directors, the adoption of amendments to our articles of incorporation and bylaws and the approval of any merger or sale of substantially all of our assets. This concentration of ownership and voting power may also delay, defer or even prevent an acquisition by a third party or other change of control of us and may make some transactions more difficult or impossible without his support, even if such events are in the best interests of minority stockholders. This concentration of voting power with Mr. Roy may have a negative impact on the price of our Class A common stock. In addition, because shares of our Class C common stock have 10 votes per share on matters submitted to a vote of our stockholders, Mr. Roy will be able to control our company as long as he beneficially owns at least 10% of our issued and outstanding common stock.
As our Chief Executive Officer, Mr. Roy has control over our day-to-day management and the implementation of major strategic investments of our company, subject to authorization and oversight by our board of directors. As a board member and officer, Mr. Roy owes fiduciary duties to the Company, including those of care and loyalty, and must act in good faith and with a view to the interests of the corporation. However, Nevada law provides that a director or officer shall not be personally liable to the Company for a breach of fiduciary duty except for an act or omission constituting a breach and which involves intentional misconduct, fraud or a knowing violation of law. As a stockholder, even a controlling stockholder, Mr. Roy is entitled to vote his shares, and shares over which he has voting control, in his own interests, which may not always be in the interests of our stockholders generally. Because Mr. Roy, through Madisogota, LLC and the other trusts, holds his economic interest in our business through Switch, Ltd., rather than through the public company, he may have conflicting interests with holders of shares of our Class A common stock. For example, Mr. Roy may have a different tax position from us, which could influence his decisions regarding whether and when we should dispose of assets or incur new or refinance existing indebtedness, especially in light of the existence of the Tax Receivable Agreement, and whether and when we should undergo certain changes of control within the meaning of the Tax Receivable Agreement or terminate the Tax Receivable Agreement. In addition, the structuring of future transactions may take into consideration these tax or other considerations even where no similar benefit would accrue to us. See Certain Relationships and Related Party TransactionsTax Receivable Agreement. In addition, Mr. Roys significant ownership in us and resulting ability to effectively control us may discourage someone from making a significant equity investment in us, or could discourage transactions involving a change in control, including transactions in which you as a holder of shares of our Class A common stock might otherwise receive a premium for your shares over the then-current market price.
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Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Members that will not benefit Class A common stockholders to the same extent as it will benefit the Continuing Members.
Our organizational structure, including the Tax Receivable Agreement, confers certain benefits upon the Continuing Members that will not benefit the holders of our Class A common stock to the same extent as it will benefit the Continuing Members. We will enter into the Tax Receivable Agreement with Switch, Ltd. and the Continuing Members and it will provide for the payment by us to the Continuing Members of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of (1) the increases in the tax basis of assets of Switch, Ltd. resulting from any redemptions or exchanges of Common Units from the Continuing Members as described under Certain Relationships and Related Party TransactionsSwitch Operating AgreementCommon Unit Redemption Right and (2) certain other tax benefits related to our making payments under the Tax Receivable Agreement. See Certain Relationships and Related Party TransactionsTax Receivable Agreement. Although we will retain 15% of the amount of such tax benefits, this and other aspects of our organizational structure may adversely impact the future trading market for the Class A common stock.
In certain cases, payments under the Tax Receivable Agreement to the Continuing Members may be accelerated or significantly exceed the actual benefits we realize in respect of the tax attributes subject to the Tax Receivable Agreement.
The Tax Receivable Agreement provides that upon certain mergers, asset sales, other forms of business combinations or other changes of control or if, at any time, we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successors obligations, under the Tax Receivable Agreement to make payments thereunder would be based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.
As a result of the foregoing, (i) we could be required to make payments under the Tax Receivable Agreement that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement, and (ii) if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement, which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a substantial negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. There can be no assurance that we will be able to fund or finance our obligations under the Tax Receivable Agreement.
We will not be reimbursed for any payments made to the Continuing Members under the Tax Receivable Agreement in the event that any tax benefits are disallowed.
Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine, and the Internal Revenue Service, or the IRS, or another tax authority may challenge all or part of the tax basis increases, as well as other related tax positions we take, and a court could sustain such challenge. If the outcome of any such challenge would reasonably be expected to materially affect a recipients payments under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each Continuing Member that directly or indirectly owns at least 10% of the outstanding Common Units. We will not be reimbursed for any cash payments previously made to the
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Continuing Members under the Tax Receivable Agreement in the event that any tax benefits initially claimed by us and for which payment has been made to a Continuing Member are subsequently challenged by a taxing authority and are ultimately disallowed. Instead, any excess cash payments made by us to a Continuing Member will be netted against any future cash payments that we might otherwise be required to make to such Continuing Member under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to a Continuing Member for a number of years following the initial time of such payment and, if any of our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. As a result, payments could be made under the Tax Receivable Agreement in excess of the tax savings that we realize in respect of the tax attributes with respect to a Continuing Member that are the subject of the Tax Receivable Agreement.
Fluctuations in our tax obligations and effective tax rate and realization of our deferred tax assets may result in volatility of our operating results.
We are subject to taxes by the U.S. federal, state, local and foreign tax authorities, and our tax liabilities will be affected by the allocation of expenses to differing jurisdictions. We record tax expense based on our estimates of future payments, which may include reserves for uncertain tax positions in multiple tax jurisdictions, and valuation allowances related to certain net deferred tax assets. At any one time, many tax years may be subject to audit by various taxing jurisdictions. The results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these matters. We expect that throughout the year there could be ongoing variability in our quarterly tax rates as events occur and exposures are evaluated. Our future effective tax rates could be subject to volatility or adversely affected by a number of factors, including:
| changes in the valuation of our deferred tax assets and liabilities; |
| expected timing and amount of the release of any tax valuation allowances; |
| tax effects of stock-based compensation; |
| changes in tax laws, regulations or interpretations thereof; or |
| future earnings being lower than anticipated in countries where we have lower statutory tax rates and higher than anticipated earnings in countries where we have higher statutory tax rates. |
In addition, our effective tax rate in a given financial statement period may be materially impacted by a variety of factors including but not limited to changes in the mix and level of earnings, varying tax rates in the different jurisdictions in which we operate, fluctuations in valuation allowances, deductibility of certain items, or by changes to existing accounting rules or regulations. Further, tax legislation may be enacted in the future which could negatively impact our current or future tax structure and effective tax rates. We may be subject to audits of our income, sales, and other transaction taxes by U.S. federal, state, local, and foreign taxing authorities. Outcomes from these audits could have an adverse effect on our operating results and financial condition.
Changes in tax law may have an adverse effect on our business, financial condition, and results of operations and may also affect the federal tax considerations of the purchase, ownership, and disposition of our Class A Common Stock.
Potential tax reform in the United States may result in significant changes to U.S. federal income tax law, including changes to the U.S. federal income taxation of corporations (including the Company) or changes to the U.S. federal income taxation of stockholders in U.S. corporations, including investors in our Class A Common Stock. Certain proposed changes to the U.S. corporate tax regime include:
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adjustment of the maximum corporate tax rate, immediate expensing of certain business investment, and elimination of a deduction for net interest expense, as well as substantial changes to the international tax system, including border tax adjustments, a destination based cash flow tax, and moving to a territorial based tax system. We are currently unable to predict whether any such changes will occur and, if so, the impact of such changes, including on the U.S. federal income tax considerations relating to the purchase, ownership, and disposition of our common stock discussed below in the section titled Material U.S. Federal Income Tax Consequences to Non-U.S. Holders.
If we were deemed to be an investment company under the Investment Company Act of 1940, as amended, or the 1940 Act, as a result of our ownership of Switch, Ltd., applicable restrictions could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
Under Sections 3(a)(1)(A) and (C) of the 1940 Act, a company generally will be deemed to be an investment company for purposes of the 1940 Act if (i) it is, or holds itself out as being, engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in securities or (ii) it engages, or proposes to engage, in the business of investing, reinvesting, owning, holding or trading in securities and it owns or proposes to acquire investment securities having a value exceeding 40% of the value of its total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis. We do not believe that we are an investment company, as such term is defined in either of those sections of the 1940 Act.
As the managing member of Switch, Ltd., we will control and operate Switch, Ltd. On that basis, we believe that our interest in Switch, Ltd. is not an investment security as that term is used in the 1940 Act. However, if we were to cease participation in the management of Switch, Ltd., our interest in Switch, Ltd. could be deemed an investment security for purposes of the 1940 Act.
We and Switch, Ltd. intend to conduct our operations so that we will not be deemed an investment company. However, if we were to be deemed an investment company, restrictions imposed by the 1940 Act, including limitations on our capital structure and our ability to transact with affiliates, could make it impractical for us to continue our business as contemplated and could have a material adverse effect on our business.
We will be a controlled company within the meaning of the rules, and, as a result, we may rely on exemptions from certain corporate governance requirements that provide protection to stockholders of other companies.
Upon completion of this offering, the Founder Continuing Members will control more than 50% of our combined voting power. As a result, we will be considered a controlled company for the purposes of rules and corporate governance standards. As a controlled company, we would be exempt from certain corporate governance requirements, including those that would otherwise require our board of directors to have a majority of independent directors and require that we either establish a Compensation and Nominating and Corporate Governance Committees, each comprised entirely of independent directors, or otherwise ensure that the compensation of our executive officers and nominees for directors are determined or recommended to the board of directors by the independent members of the board of directors. Although we intend to comply with the listing requirements even though we will be a controlled company, there is no guarantee that we will not take advantage of these exemptions in the future. Accordingly, so long as we are a controlled company, holders of our Class A common stock may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements.
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Risks Related to This Offering and Ownership of Our Class A Common Stock
Immediately following the completion of this offering, the Continuing Members will have the right to have their Common Units redeemed or exchanged into shares of Class A common stock, which may cause volatility in our stock price.
After this offering, we will have an aggregate of more than shares of Class A common stock authorized but unissued, including approximately shares of Class A common stock issuable upon redemption of Common Units that will be held by the Continuing Members. Switch, Ltd. will enter into the Switch Operating Agreement and, subject to certain restrictions set forth therein and as described elsewhere in this prospectus, the Continuing Members will be entitled to have their Common Units redeemed for shares of our Class A common stock. We also intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued to the Continuing Members upon redemption of Common Units and the shares of Class A common stock issued to the Former Members in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement.
We cannot predict the timing or size of any future issuances of our Class A common stock resulting from the redemption or exchange of limited liability company interests or the effect, if any, that future issuances and sales of shares of our Class A common stock may have on the market price of our Class A common stock. Sales or distributions of substantial amounts of our Class A common stock, including shares issued in connection with an acquisition, or the perception that such sales or distributions could occur, may cause the market price of our Class A common stock to decline.
If you purchase shares of Class A common stock in this offering, you will incur immediate and substantial dilution.
Dilution is the difference between the offering price per share and the pro forma net tangible book value per share of our Class A common stock immediately after the offering. The price you pay for shares of our Class A common stock sold in this offering is substantially higher than our pro forma net tangible book value per share immediately after this offering. If you purchase shares of Class A common stock in this offering, based on the midpoint of the price range set forth on the cover page of this prospectus, you will incur immediate and substantial dilution in the amount of $ per share. In addition, you may also experience additional dilution upon future equity issuances to investors or to our employees and directors under our 2017 Incentive Award Plan, or the 2017 Plan, and any other equity incentive plans we may adopt. As a result of this dilution, investors purchasing shares of Class A common stock in this offering may receive significantly less than the full purchase price that they paid for the stock purchased in this offering in the event of liquidation. See Dilution.
We do not know whether a market will develop for our Class A common stock or what the market price of our Class A common stock will be, and as a result, it may be difficult for you to sell your shares of our Class A common stock.
Before this offering, there was no public trading market for our Class A common stock. If a market for our Class A common stock does not develop or is not sustained, it may be difficult for you to sell your shares of Class A common stock at an attractive price or at all. We cannot predict the prices at which our Class A common stock will trade. It is possible that in one or more future periods our results of operations may be below the expectations of public market analysts and investors and, as a result of these and other factors, the price of our Class A common stock may fall.
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If our operating and financial performance in any given period does not meet the guidance that we provide to the public, our stock price may decline.
We may provide public guidance on our expected operating and financial results for future periods. Any such guidance will be comprised of forward-looking statements subject to the risks and uncertainties described in this prospectus and in our other public filings and public statements. Our actual results may not always be in line with or exceed any guidance we have provided, especially in times of economic uncertainty. If, in the future, our operating or financial results for a particular period do not meet any guidance we provide or the expectations of investment analysts or if we reduce our guidance for future periods, the market price of our Class A common stock may decline as well.
If securities analysts do not publish research or reports about our business or if they publish negative evaluations of our Class A common stock, the price of our Class A common stock could decline.
The trading market for our Class A common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not currently have and may never obtain research coverage by industry or financial analysts. If no or few analysts commence coverage of us, the trading price of our stock would likely decrease. Even if we do obtain analyst coverage, if one or more of the analysts covering our business downgrade their evaluations of our stock, the price of our Class A common stock could decline. If one or more of these analysts cease to cover our Class A common stock, we could lose visibility in the market for our stock, which in turn could cause our Class A common stock price to decline.
Our Class A common stock may be volatile or may decline regardless of our operating performance, and you may not be able to resell your shares at or above the initial public offering price.
After this offering, the market price for our Class A common stock is likely to be volatile, in part because our shares have not been traded publicly. In addition, the market price of our Class A common stock may fluctuate significantly in response to a number of factors, most of which we cannot control, including:
| our operating performance and prospects and those of other similar companies; |
| actual or anticipated variations in our financial condition, liquidity or results of operations; |
| changes in financial projections we may provide to the public or our failure to meet these projections; |
| change in the estimates of securities analysts relating to our earnings or other operating metrics; |
| publication of research reports about us, our significant customers, our competition, data center companies generally or the technology industry; |
| recruitment or departure of key personnel; |
| new laws or regulations or new interpretations of existing laws or regulations applicable to our business; |
| changes in market valuations of similar companies; |
| announcements by us or our competitors of significant technological innovations, acquisitions, strategic partnerships, joint ventures, or capital commitments; |
| actual or anticipated developments in our business or our competitors businesses or the competitive landscape generally; |
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| developments or disputes concerning our intellectual property or our services, or third-party proprietary rights; |
| adverse market reaction to leverage we may incur or equity we may issue in the future; |
| actions by institutional stockholders; |
| actual or perceived accounting issues, including changes in accounting standards, policies, guidelines, interpretations or principles; |
| compliance with requirements; |
| speculation in the press or investment community about our company or industry or the economy in general; |
| adverse developments in the creditworthiness, business or prospects of one or more of our significant customers; |
| lawsuits threatened or filed against us; |
| other events or factors, including those resulting from war, incidents of terrorism, or responses to these events; |
| the realization of any of the other risk factors presented in this prospectus; |
| the overall performance of the equity markets; and |
| general market and economic conditions. |
The initial public offering price of our Class A common stock will be determined by negotiations between us and the underwriters based upon a number of factors and may not be indicative of prices that will prevail following the closing of this offering. Volatility in the market price of our Class A common stock may prevent investors from being able to sell their Class A common stock at or above the initial public offering price. As a result, you may suffer a loss on your investment.
Our anti-takeover provisions could prevent or delay a change in control of our company, even if such change in control would be beneficial to our stockholders.
Provisions of our amended and restated articles of incorporation and amended and restated bylaws, as they will be in effect upon completion of this offering, as well as provisions of Nevada law could discourage, delay or prevent a merger, acquisition or other change in control of our company, even if such change in control would be beneficial to our stockholders. These provisions include:
| the 10 vote per share feature of our Class C common stock; |
| authorizing the issuance of blank check preferred stock that could be issued by our board of directors to increase the number of outstanding shares and thwart a takeover attempt; |
| prohibiting the use of cumulative voting for the election of directors; |
| prohibiting stockholders from calling special meetings; |
| limiting the ability of stockholders to amend our bylaws and certain provisions of our articles of incorporation, in each case by requiring the affirmative vote of holders of at least two-thirds of the votes that stockholders would be entitled to cast in any annual election of directors; |
| after the Founder Continuing Members no longer beneficially own at least % of our outstanding common stock, requiring all stockholder actions to be taken at a meeting of our stockholders; and |
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| establishing advance notice and duration of ownership requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings. |
These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and cause us to take other corporate actions you desire. In addition, because our board of directors is responsible for appointing the members of our management team, these provisions could in turn affect any attempt by our stockholders to replace current members of our management team.
In addition, we are subject to Nevadas statute on combinations with interested stockholders (Sections 78.41178.444 of the Nevada Revised Statutes), which prohibits us from entering into a combination with an interested stockholder for up to four years, unless certain conditions are met (such as, in some circumstances, approval both by our board of directors and by stockholders with a supermajority of our voting power). Under the statute, an interested stockholder is a person who beneficially owns (or, if one of our affiliates or associates, did, within the prior two years, beneficially own) stock with 10% or more of the corporations voting power. The inability of an interested stockholder to pursue the types of combinations restricted by the statute could discourage, delay or prevent a merger, acquisition or other change in control of our company.
Finally, a person acquiring a significant proportion of our voting stock could be precluded from voting all or a portion of such shares under Nevadas control share statute (Sections 78.37878.3793 of the Nevada Revised Statutes), which prohibits an acquirer of stock, under certain circumstances, from voting its control shares of stock acquired up to 90 days prior to crossing certain ownership threshold percentages, unless the acquirer obtains approval of the disinterested stockholders. If the voting rights are not approved, the statute would allow us to call all of such control shares for redemption at the average price paid for such shares.
Limitations on director and officer liability and our indemnification of our officers and directors may discourage stockholders from bringing suit against a director.
Our amended and restated articles of incorporation and bylaws provide, with certain exceptions as permitted by Nevada corporation law, that a director or officer shall not be personally liable to us or our stockholders for breach of fiduciary duty as a director, except for acts or omissions which involve intentional misconduct, fraud or knowing violation of law. These provisions may discourage stockholders from bringing suit against a director for breach of fiduciary duty and may reduce the likelihood of derivative litigation brought by stockholders on our behalf against a director. In addition, our amended and restated articles of incorporation and bylaws provide for mandatory indemnification of directors and officers to the fullest extent permitted by Nevada law.
We may issue shares of preferred stock in the future, which could make it difficult for another company to acquire us or could otherwise adversely affect holders of our Class A common stock, which could depress the price of our Class A common stock.
Our amended and restated articles of incorporation will authorize us to issue one or more series of preferred stock. Our board of directors will have the authority to determine the preferences, limitations and relative rights of the shares of preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by our stockholders. Our preferred stock could be issued with voting, liquidation, dividend and other rights superior to the rights of our Class A common stock. The potential issuance of preferred stock may delay or prevent a change in control of us, discourage bids for our Class A common stock at a premium to the market price, and materially and adversely affect the market price and the voting and other rights of the holders of our Class A common stock.
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We may be subject to securities class action, which may harm our business and operating results.
Companies that have experienced volatility in the market price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the future. Securities litigation against us could result in substantial costs and damages, and divert managements attention from other business concerns, which could seriously harm our business, results of operations, financial condition or cash flows.
We may also be called on to defend ourselves against lawsuits relating to our business operations. Some of these claims may seek significant damage amounts due to the nature of our business. Due to the inherent uncertainties of litigation, we cannot accurately predict the ultimate outcome of any such proceedings. A future unfavorable outcome in a legal proceeding could have an adverse impact on our business, financial condition and results of operations. In addition, current and future litigation, regardless of its merits, could result in substantial legal fees, settlement or judgment costs and a diversion of managements attention and resources that are needed to successfully run our business.
Substantial future sales of our Class A common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our Class A common stock in the public market after this offering, or the perception that these sales could occur, could adversely affect the price of our Class A common stock and could impair our ability to raise capital through the sale of additional shares. Upon the closing of this offering, we will have shares of Class A common stock outstanding (or if the underwriters exercise in full their option to purchase additional shares of Class A common stock) and authorized but unissued shares of Class A common stock that would be issuable upon redemption or exchange of Common Units. The shares of Class A common stock offered in this offering will be freely tradable without restriction under the Securities Act, except for any shares of our Class A common stock that may be held or acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, which will be restricted securities under the Securities Act. Restricted securities may not be sold in the public market unless the sale is registered under the Securities Act or an exemption from registration is available.
We and each of our directors, executive officers and holders of substantially all of our outstanding common stock, which collectively will hold % of our outstanding capital stock (including shares of Class A common stock issuable upon redemption or exchange of Common Units) after giving effect to this offering, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any shares of common stock or securities convertible into or exchangeable for (including the Common Units), or that represent the right to receive, shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC. See Underwriting. All of our shares of common stock outstanding as of the date of this prospectus (and shares of Class A common stock issuable upon redemption or exchange of Common Units) may be sold in the public market by existing stockholders following the expiration of the applicable lock-up period, subject to applicable limitations imposed under federal securities laws. In addition, Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC may, in their sole discretion, release all or some portion of the shares subject to lock-up agreements at any time and for any reason. Sales of a substantial number of such shares upon expiration of the lock-up and market stand-off agreements, the perception that such sales may occur, or early release of these agreements, could cause our market price to fall or make it more difficult for you to sell your Class A common stock at a time and price that you deem appropriate.
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We intend to enter into a Registration Rights Agreement pursuant to which the shares of Class A common stock issued upon redemption or exchange of Common Units held by the Continuing Members and the shares of Class A common stock issued to the Former Members in connection with the Transactions will be eligible for resale, subject to certain limitations set forth therein. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement.
We also intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Class A common stock issued or issuable under our 2017 Plan. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market following the expiration of the applicable lock-up period. We expect that the initial registration statement on Form S-8 will cover shares of our Class A common stock.
See Shares Eligible for Future Sale for a more detailed description of the restrictions on selling shares of our common stock after this offering.
In the future, we may also issue additional securities if we need to raise capital, which could constitute a material portion of our then-outstanding shares of common stock.
We are an emerging growth company, and any decision on our part to comply only with certain reduced reporting and disclosure requirements applicable to emerging growth companies could make our Class A common stock less attractive to investors.
We are an emerging growth company, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies but not to emerging growth companies, including:
| not being required to have our independent registered public accounting firm audit our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act; |
| reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements; and |
| exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. |
We could be an emerging growth company for up to five years following the completion of this offering. Our status as an emerging growth company will end as soon as any of the following takes place:
| the last day of the fiscal year in which we have more than $1.07 billion in annual revenue; |
| the date we qualify as a large accelerated filer, with at least $700 million of equity securities held by non-affiliates; |
| the date on which we have issued, in any three-year period, more than $1.0 billion in non-convertible debt securities; or |
| the last day of the fiscal year ending after the fifth anniversary of the completion of this offering. |
We cannot predict if investors will find our Class A common stock less attractive if we choose to rely on any of the exemptions afforded emerging growth companies. If some investors find our Class A common stock less attractive because we rely on any of these exemptions, there may be a less active trading market for our Class A common stock and the market price of our Class A common stock may be more volatile.
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Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a registration statement under the Securities Act declared effective or do not have a class of securities registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company, which is neither an emerging growth company nor a company that has opted out of using the extended transition period difficult because of the potential differences in accounting standards used.
We will incur increased costs as a result of becoming a public company and in the administration of our complex organizational structure.
As a public company, we will incur significant legal, accounting, insurance and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. We also have incurred and will incur costs associated with the Sarbanes-Oxley Act and related rules implemented by the Securities and Exchange Commission, or the SEC. Following the completion of this offering, we will incur ongoing periodic expenses in connection with the administration of our organizational structure. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. In estimating these costs, we took into account expenses related to insurance, legal, accounting, and compliance activities, as well as other expenses not currently incurred. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to obtain certain types of insurance and to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our Class A common stock, fines, sanctions and other regulatory action and potentially civil litigation. Our organizational structure, including our Tax Receivable Agreement, is very complex and we require the expertise of various tax, legal and accounting advisers to ensure compliance with applicable laws and regulations. We have and will continue to incur significant expenses in connection with the administration of our organizational structure. As a result, our expenses for legal, tax and accounting compliance may be significantly greater than other companies of our size that do not have a similar organizational structure or a tax receivable agreement in place.
We have identified a material weakness in our internal control over financial reporting and may identify additional material weaknesses in the future or otherwise fail to maintain an effective system of internal controls, which may result in material misstatements of our financial statements or cause us to fail to meet our periodic reporting obligations.
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness
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related to our lack of communication and information sharing within the various parts of our organization, which resulted in our recording out-of-period adjustments to our consolidated financial statements during the year ended December 31, 2016.
We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, including policies and procedures to improve our ability to communicate and share information in a timely manner, as well as designing and implementing improved processes and internal controls. In addition, we are formalizing our internal control documentation and strengthening supervisory reviews by our management. While we are implementing measures to remediate the material weakness, we cannot predict the success of such measures or the outcome of our assessment of these measures at this time. We can give no assurance that this implementation will remediate this deficiency in internal control or that additional material weaknesses or significant deficiencies in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements or cause us to fail to meet our reporting obligations.
We will be required, pursuant to Section 404 of the Sarbanes-Oxley Act, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting for the first fiscal year beginning after the effective date of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. Our independent registered public accounting firm will not be required to attest to the effectiveness of our internal control over financial reporting until our first annual report required to be filed with the SEC following the date we are no longer an emerging growth company, as defined in the JOBS Act. We will be required to disclose changes made in our internal control and procedures on a quarterly basis. To comply with the requirements of being a public company, we may need to undertake various actions, such as implementing new internal controls and procedures and hiring accounting or internal audit staff. We have begun the costly and challenging process of compiling the system and processing documentation necessary to perform the evaluation needed to comply with Section 404, when applicable, and we may not be able to complete our evaluation, testing and any required remediation in a timely fashion.
We may not pay dividends on our Class A common stock.
Following the completion of this offering, our board of directors may elect to pay cash dividends on our Class A common stock. However, no decision has been made with respect to the amount and timing of dividend payments, if any. The continued operation and expansion of our business will require substantial funding. Accordingly, we cannot assure you that we will pay dividends in the future. Any determination to pay dividends in the future will be at the discretion of our board of directors and will depend upon results of operations, financial condition, contractual restrictions, restrictions imposed by applicable law and other factors our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Switch, Ltd. and its subsidiaries. Under our amended and restated credit agreement, Switch, Ltd. is currently restricted from paying cash dividends or certain other restricted payments, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of ours or of our subsidiaries. Accordingly, if you purchase shares in this offering, realization of a gain on your investment may depend solely on the appreciation of the price of our Class A common stock, which may never occur. Investors seeking cash dividends in the foreseeable future should not purchase our Class A common stock.
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We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Switch intends to use the proceeds of this offering to purchase newly issued Common Units as described in The Transactions and Use of Proceeds. We cannot specify with certainty the particular uses of the net proceeds that Switch, Ltd. will receive from such purchase. Our management will have broad discretion in Switch, Ltd.s application of such proceeds, including for any of the purposes described in Use of Proceeds. Accordingly, you will have to rely upon the judgment of our management with respect to the use of the proceeds, with only limited information concerning managements specific intentions. Our management may cause Switch, Ltd. to spend a portion or all of the net proceeds from this offering in ways that our stockholders may not desire or that may not yield a favorable return. The failure by our management to cause Switch, Ltd., to apply these funds effectively could harm our business. Pending their use, Switch, Ltd. may invest the net proceeds from this offering in a manner that does not produce income or that loses value.
The provision of our articles of incorporation requiring exclusive venue in the Eighth Judicial District Court of Clark County, Nevada for certain types of lawsuits may have the effect of discouraging lawsuits against our directors and officers.
Our amended and restated articles of incorporation, as they will be in effect upon the completion of this offering, will require that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of Nevada law or our amended and restated articles of incorporation or amended and restated bylaws or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine will have to be brought only in the Eighth Judicial District Court of Clark County, Nevada. Although we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the federal securities laws, which statements involve substantial risks and uncertainties. Forward-looking statements generally relate to future events or our future financial or operating performance. In some cases, you can identify forward-looking statements because they contain words such as may, will, should, expects, plans, anticipates, could, intends, target, projects, contemplates, believes, estimates, predicts, potential or continue or the negative of these words or other similar terms or expressions that concern our expectations, strategy, plans or intentions. Forward-looking statements contained in this prospectus include, but are not limited to, statements about:
| our goals and strategies; |
| our expansion plans; |
| our future business development, financial condition and results of operations; |
| the expected growth of the data center market; |
| our expectations regarding demand for, and market acceptance of, our services; |
| our expectations regarding our customer growth rate; |
| the network effects associated with our business; |
| our plans to further invest in and grow our business, and our ability to effectively manage our growth and associated investments; |
| our ability to timely and effectively scale and adapt our existing technology; |
| our ability to successfully enter new markets; |
| our ability to maintain, protect and enhance our intellectual property and not infringe upon others intellectual property; |
| our realization of any benefit from the Tax Receivable Agreement and our organizational structure; and |
| our anticipated uses of the net proceeds from this offering. |
These forward-looking statements are subject to a number of risks, uncertainties and assumptions, including those described in Risk Factors and elsewhere in this prospectus. Moreover, we operate in a very competitive and rapidly changing environment, and new risks may emerge from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking events and circumstances discussed in this prospectus may not occur and actual results could differ materially and adversely from those anticipated or implied in the forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee that the future results, levels of activity, performance or events and circumstances reflected in the forward-looking statements will be achieved or occur. We undertake no obligation to update publicly any forward-looking statements for any reason after the date of this prospectus to conform these statements to actual results or to changes in our expectations, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed with the SEC as exhibits to the registration statement of which this prospectus is a part with the understanding that our actual future results, levels of activity, performance, and events and circumstances may be materially different from what we expect.
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Organizational Structure
In connection with the completion of this offering, we will effect certain organizational transactions. Unless otherwise stated or the context otherwise requires, all information in this prospectus reflects the completion of the organizational transactions and this offering, which we refer to collectively as the Transactions. See The Transactions for a description of the Transactions and a diagram depicting our organizational structure after giving effect to the Transactions, including this offering.
Following the Transactions, we will be a holding company and the managing member of Switch, Ltd., and upon completion of this offering and the application of proceeds therefrom, our principal asset will be Common Units of Switch, Ltd. For financial reporting purposes, Switch, Ltd. is the predecessor of Switch, Inc. Switch, Inc. will be the financial reporting entity following this offering. Accordingly, this prospectus contains the following historical financial statements:
| Switch, Inc. Other than the inception balance sheet, dated as of June 13, 2017, the historical financial information of Switch, Inc. has not been included in this prospectus since it is a newly incorporated entity, has no business transactions or activities to date and had no assets or liabilities during the periods presented in this prospectus. |
| Switch, Ltd. As Switch, Inc. will have no other interest in any operations other than those of Switch, Ltd. and its subsidiaries, the historical consolidated financial information included in this prospectus is that of Switch, Ltd. and its subsidiaries. |
The unaudited pro forma financial information of Switch, Inc. presented in this prospectus has been derived by the application of pro forma adjustments to the historical consolidated financial statements of Switch, Ltd. and its subsidiaries included elsewhere in this prospectus. These pro forma adjustments give effect to (i) the organizational transactions described under The Transactions; (ii) the acceleration of vesting of incentive units and the conversion of incentive units into Common Units; and (iii) borrowings under our amended and restated credit agreement in connection with a distribution in the amount of $ million by Switch, Ltd. to the Original Members, as if all such transactions had occurred on January 1, 2016, in the case of the unaudited pro forma consolidated statement of income data, and as of March 31, 2017, in the case of the unaudited pro forma consolidated balance sheet. See Unaudited Pro Forma Consolidated Financial Information for a complete description of the adjustments and assumptions underlying the pro forma financial information included in this prospectus.
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This prospectus includes our trademarks, trade names and service marks, such as SWITCH®, SWITCH MOD®, POWER SPINE, SWITCH SAFE®, CORE®, INNEVATION®, SUPERLOOP®, TIER 5® and TRUTH IN TECHNOLOGY®, which are protected under applicable intellectual property laws and are our property. This prospectus also contains trademarks, trade names and service marks of other companies, which are the property of their respective owners. Solely for convenience, trademarks, trade names and service marks referred to in this prospectus may appear without the ®, or SM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to these trademarks, trade names and service marks. We do not intend our use or display of other parties trademarks, trade names or service marks to imply, and such use or display should not be construed to imply, a relationship with, or endorsement or sponsorship of us by, these other parties.
Unless otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate is based on information from independent industry and research organizations, other third-party sources (including industry publications, surveys and forecasts), and management estimates. Management estimates are derived from publicly available information released by independent industry analysts and third-party sources, such as Gartner, as well as data from our internal research, and are based on assumptions made by us upon reviewing such data and our knowledge of such industry and markets which we believe to be reasonable. Although we believe the data from these third-party sources is reliable, we have not independently verified any third-party information. In addition, projections, assumptions and estimates of the future performance of the industry in which we operate and our future performance are necessarily subject to uncertainty and risk due to a variety of factors, including those described in Risk Factors and Special Note Regarding Forward-Looking Statements. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.
The Gartner report described in this prospectus, Forecast: Internet of ThingsEndpoints and Associated Services, Worldwide, 2016, represents data, research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner and are not representations of fact. The Gartner report speaks as of its original publication date, and not as of the date of this prospectus, and the opinions expressed in the Gartner report are subject to change without notice.
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Existing Organization
Prior to the completion of this offering and the organizational transactions described below, the Original Members are the only members of Switch, Ltd. Switch, Ltd. is treated as a partnership for U.S. federal income tax purposes and, as such, is not subject to any U.S. federal entity-level income taxes. Rather, taxable income or loss is included in the U.S. federal income tax returns of Switch, Ltd.s members.
Switch, Inc. was incorporated as a Nevada corporation on June 13, 2017 to serve as the issuer of the Class A common stock offered hereby.
Transactions
In connection with the closing of this offering, we will consummate the following organizational transactions, which we refer to as the Transactions:
| we will amend and restate the Switch Operating Agreement, to, among other things, (i) split the number of authorized, issued and outstanding Common Units on a -for- basis, (ii) convert all of the Former Incentive Unit Holders incentive units into Common Units and (iii) appoint Switch as the managing member of Switch, Ltd.; |
| we will amend and restate our articles of incorporation to, among other things, (i) provide for Class A common stock, Class B common stock and Class C common stock, (ii) issue shares of Class B common stock to the Non-Founder Continuing Members on a one-to-one basis with the number of Common Units they own, for nominal consideration, and (iii) issue shares of Class C common stock to the Founder Continuing Members on a one-to-one basis with the number of Common Units they own, for nominal consideration; |
| we will issue shares of our Class A common stock to the purchasers in this offering, or shares if the underwriters exercise in full their option to purchase additional shares of Class A common stock, in exchange for net proceeds of approximately $ million, or approximately $ million if the underwriters exercise in full their option to purchase additional shares of Class A common stock, assuming the shares are offered at $ per share, the midpoint of the price range listed on the cover page of this prospectus, after deducting underwriting discounts and commissions but before offering expenses; |
| we intend to use all of the net proceeds from this offering to acquire Common Units from Switch, Ltd. at a purchase price per Common Unit equal to the initial public offering price of Class A common stock, less underwriting discounts and commissions, collectively representing % of Switch, Ltd.s outstanding Common Units, or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| Switch, Ltd. intends to use the proceeds from the sale of Common Units to Switch, Inc. for general corporate purposes and working capital. See Use of Proceeds; |
| the Former Members will exchange their ownership of Common Units for shares of Class A common stock on a one-to-one basis; |
| the Continuing Members will continue to own the Common Units they received in connection with the conversion of their existing membership interests in Switch, Ltd. into Common Units and will have no economic interests in Switch, Inc. despite their ownership of Class B common stock or Class C common stock, where economic interests means the right to receive any distributions or dividends, whether cash or stock, in connection with common stock; and |
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| Switch, Inc. will enter into (i) the Tax Receivable Agreement with Switch, Ltd. and the Continuing Members and (ii) the Registration Rights Agreement with the Continuing Members who, upon the completion of this offering, will own shares of Switchs Class B common stock and Class C common stock, representing approximately % of the combined voting power of all of Switch, Inc.s common stock, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, and the Former Members. Although the actual timing and amount of any payments that we make to the Continuing Members under the Tax Receivable Agreement will vary, we expect those payments will be significant. |
Following this offering, Common Units will be redeemable at the election of such Continuing Members for newly issued shares of Class A common stock on a one-to-one basis (and their shares of Class B common stock or Class C common stock, as the case may be, will be cancelled on a one-to-one basis upon any such issuance). We will have the option to instead make a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Switch Operating Agreement. Our decision to make a cash payment upon a Continuing Members election will be made by our independent directors (within the meaning of ) who are disinterested.
Our corporate structure following this offering, as described above, is commonly referred to as an Up-C structure, which is often used by partnerships and limited liability companies when they undertake an initial public offering of their business. The Up-C structure will allow the Continuing Members to continue to realize tax benefits associated with owning interests in an entity that is treated as a partnership, or passthrough entity, for income tax purposes following the offering. One of these benefits is that future taxable income of Switch, Ltd. that is allocated to the Continuing Members will be taxed on a flow-through basis and therefore will not be subject to corporate taxes at the entity level. Additionally, because the Continuing Members may redeem their Common Units for shares of our Class A common stock or, at our option, for cash, the Up-C structure also provides the Continuing Members with potential liquidity that holders of non-publicly traded limited liability companies are not typically afforded. See Description of Capital Stock.
We will receive the same benefits as the Continuing Members on account of our ownership of Common Units in an entity treated as a partnership, or passthrough entity, for income tax purposes. As we redeem additional Common Units from the Continuing Members under the mechanism described above, we will obtain a step-up in tax basis in our share of Switch, Ltd.s assets. This step-up in tax basis will provide us with certain tax benefits, such as future depreciation and amortization deductions that can reduce the taxable income allocable to us. We expect to enter into the Tax Receivable Agreement with Switch, Ltd. and each of the Continuing Members that will provide for the payment by us to the Continuing Members of 85% of the amount of tax benefits, if any, that we actually realize (or in some cases are deemed to realize) as a result of (i) increases in tax basis resulting from the redemption of Common Units and (ii) certain other tax benefits attributable to payments made under the Tax Receivable Agreement.
For a description of the terms of the Registration Rights Agreement and the Tax Receivable Agreement, see Certain Relationships and Related Party Transactions.
Organizational Structure Following this Offering
Immediately following the completion of the Transactions, including this offering:
| we will be a holding company and our principal asset will be Common Units of Switch, Ltd.; |
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| we will be the managing member of Switch, Ltd. and will control the business and affairs of Switch, Ltd. and its subsidiaries; |
| our amended and restated articles of incorporation and the Switch Operating Agreement will require that (i) we at all times maintain a ratio of one Common Unit owned by us for each share of Class A common stock issued by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities), and (ii) Switch, Ltd. at all times maintain (x) a one-to-one ratio between the number of shares of Class A common stock issued by us and the number of Common Units owned by us, (y) a one-to-one ratio between the number of shares of Class B common stock owned by the Non-Founder Continuing Members and the number of Common Units owned by the Non-Founder Continuing Members, and (z) a one-to-one ratio between the number of shares of Class C common stock owned by the Founder Continuing Members and the number of Common Units owned by the Founder Continuing Members; |
| we will own Common Units representing % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, where economic interests means the right to receive any distributions, whether cash, property or securities of Switch, Ltd., in connection with Common Units; |
| the purchasers in this offering (i) will own shares of Class A common stock, representing approximately % of the combined voting power of all of our common stock, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, (ii) will own % of the economic interest in us and (iii) through our ownership of Common Units, indirectly will hold approximately % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| the Former Members (i) will own shares of Class A common stock, representing approximately % of the combined voting power of all of Switch, Inc.s common stock, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, (ii) will own % of the economic interest in Switch, Inc., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, and (iii) through Switch, Inc.s ownership of Common Units, indirectly will hold approximately % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| the Non-Founder Continuing Members will own (i) Common Units, representing % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, and (ii) through their ownership of Class B common stock, approximately % of the voting power in Switch, Inc., or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| the Founder Continuing Members will own (i) Common Units, representing % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, and (ii) through their ownership of Class C common stock, approximately % of the voting power in Switch, Inc., or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock; |
| following the offering, each Common Unit held by the Continuing Members will be redeemable, at the election of such members, for newly issued shares of Class A common stock on a one-for-one basis or, at our option, a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed (subject to |
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customary adjustments, including for stock splits, stock dividends and reclassifications) in accordance with the terms of the Switch Operating Agreement. See Certain Relationships and Related Party TransactionsSwitch Operating Agreement. Our decision to make a cash payment upon a Continuing Members election will be made by our independent directors (within the meaning of ) who are disinterested. Shares of our Class B common stock and Class C common stock, as the case may be, will be cancelled on a one-to-one basis if we, at the election of a Continuing Member, redeem or exchange Common Units of such Continuing Member pursuant to the terms of the Switch Operating Agreement; and |
| the Original Members collectively (i) will own Class A common stock, Class B common stock and Class C common stock representing approximately % of the combined voting power of all of Switch, Inc.s common stock, or approximately %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock and (ii) will own % of the economic interest in Switch, Ltd., or %, if the underwriters exercise in full their option to purchase additional shares of Class A common stock, representing both a direct interest through the Continuing Members ownership of Common Units and an indirect interest through the Former Members ownership of Class A common stock. |
As the managing member of Switch, Ltd., we will operate and control all of the business and affairs of Switch, Ltd. and, through Switch, Ltd. and its subsidiaries, conduct our business. Accordingly, although we will have a minority economic interest in Switch, Ltd., we will have the sole voting interest in, and control the management of, Switch, Ltd. As a result, we will consolidate Switch, Ltd. in our consolidated financial statements and will report a non-controlling interest related to the Common Units held by the Continuing Members on our consolidated financial statements. Switch, Inc. will have a board of directors and executive officers, but will have no employees. The functions of all of our employees are expected to reside at Switch, Ltd.
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The following diagram shows our organizational structure after giving effect to the Transactions, including this offering, assuming no exercise by the underwriters of their option to purchase additional shares of Class A common stock:
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We estimate that the net proceeds to us from the sale of shares of Class A common stock in this offering will be approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the price range listed on the cover page of this prospectus, and, after deducting the estimated underwriting discounts and commissions and the estimated offering expenses.
Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us by approximately $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses. We may also increase or decrease the number of shares we are offering. Each increase (decrease) of 1,000,000 shares in the number of shares offered by us would increase (decrease) the net proceeds to us by approximately $ million, assuming that the assumed initial public offering price remains the same, and after deducting the estimated underwriting discounts and commissions and the estimated offering expenses.
We intend to use the net proceeds to us from this offering to purchase Common Units from Switch, Ltd. at a purchase price per Common Unit equal to the initial public offering price per share of Class A common stock, less underwriting discounts and commissions.
We intend to cause Switch, Ltd. to use the proceeds it receives for general corporate purposes and working capital. We may also cause Switch, Ltd. to use a portion of the net proceeds for the repayment of debt, to make cash payments to the Continuing Members pursuant to the Tax Receivable Agreement or for the acquisition of businesses or technologies that we believe are complementary to our own, although we currently have no agreements, commitments or understandings with respect to any specific acquisition. At this time, we have not specifically identified a material single use for which we intend to use the net proceeds (or cause the net proceeds to be used by Switch, Ltd.), and, accordingly, we are not able to allocate the net proceeds among any potential uses in light of the variety of factors that will affect how such net proceeds will be ultimately used by us or Switch, Ltd. Our management will have broad discretion to direct Switch, Ltd.s use of the proceeds.
If the underwriters exercise their option to purchase additional shares of Class A common stock in full, we estimate that our additional net proceeds will be approximately $ million. We will use the additional net proceeds we receive pursuant to any exercise of the underwriters option to purchase additional shares of Class A common stock to purchase additional Common Units from Switch, Ltd. to maintain the one-to-one ratio between the number of shares of Class A common stock issued by us and the number of Common Units owned by us.
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Following the completion of this offering, our board of directors may elect to pay cash dividends on our Class A common stock. Holders of our Class B common stock and Class C common stock are not entitled to participate in any dividends declared by our board of directors. No decision has been made with respect to the amount and timing of dividend payments, if any. We cannot assure you that we will pay dividends in the future. Any determination to pay dividends to holders of Class A common stock will be at the discretion of our board of directors and will depend upon many factors, including our results of operations, financial condition, capital requirements, restrictions in Switch, Ltd.s debt agreements and other factors that our board of directors deems relevant. We are a holding company, and substantially all of our operations are carried out by Switch, Ltd. and its subsidiaries. Additionally, under our amended and restated credit agreement, Switch, Ltd. is currently restricted from paying cash dividends or certain other restricted payments, and we expect these restrictions to continue in the future, which may in turn limit our ability to pay dividends on our Class A common stock. Our ability to pay dividends may also be restricted by the terms of any future credit agreement or any future debt or preferred equity securities of us or our subsidiaries. See Risk FactorsWe may not pay dividends on our Class A common stock and Description of Certain Indebtedness.
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The following table sets forth our cash and capitalization as of March 31, 2017 as follows:
| of Switch, Ltd. on an actual basis; |
| of Switch, Inc. on a pro forma basis to reflect (i) the organizational transactions described under The Transactions; (ii) the acceleration of vesting of incentive units and the conversion of incentive units into Common Units; (iii) borrowings under our amended and restated credit agreement in connection with a distribution in the amount of $ million by Switch, Ltd. to the Original Members; and (iv) the amendment and restatement of our articles of incorporation; and |
| on a pro forma as adjusted basis to reflect the adjustments described above and the sale and issuance of shares of Class A common stock pursuant to this offering, based on an assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus and after deducting assumed underwriting discounts and commissions and estimated offering expenses. |
This table should be read in conjunction with the information contained in this prospectus, including The Transactions, Use of Proceeds, Managements Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements and the related notes thereto appearing elsewhere in this prospectus.
As of March 31, 2017 | ||||||||||||
Actual | Pro Forma | Pro Forma as Adjusted(1) |
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(in thousands, except share and per share data) |
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(unaudited) | ||||||||||||
Cash |
$ | 21,709 | $ | $ | ||||||||
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Long-term debt(2) |
$ | 539,735 | $ | $ | ||||||||
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Members/stockholders equity: |
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Preferred stock, $0.001 par value per share, shares authorized and no shares outstanding on a pro forma and pro forma as adjusted basis |
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Class A common stock, $0.001 par value per share, shares authorized, no shares outstanding on a pro forma basis and shares outstanding on a pro forma as adjusted basis |
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Class B common stock, $0.001 par value per share, shares authorized and shares outstanding on a pro forma and pro forma as adjusted basis |
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Class C common stock, $0.001 par value per share, shares authorized and shares outstanding on a pro forma and pro forma as adjusted basis |
| |||||||||||
Additional paid-in capital |
| |||||||||||
Members interest |
298,099 | |||||||||||
Accumulated other comprehensive loss |
(421 | ) | ||||||||||
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Total members/stockholders equity |
297,678 | |||||||||||
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Total capitalization |
$ | 837,413 | $ | $ | ||||||||
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(1) | Each $1.00 increase (decrease) in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our pro forma as adjusted cash, additional paid-in capital, total members/stockholders equity and total capitalization by approximately $ |
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million, assuming that the number of shares of our Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) the amount of our pro forma as adjusted cash, additional paid-in capital, total members/stockholders equity and total capitalization by approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
(2) | See Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesOutstanding Indebtedness. |
In the table above, the number of shares of Class A common stock outstanding as of March 31, 2017 on a pro forma as adjusted basis excludes:
| 166,845 Common Units issuable upon the exercise of options to purchase Common Units outstanding as of March 31, 2017, with a weighted-average exercise price of $2.09 per share; |
| shares of our Class A common stock reserved for future issuance under our 2017 Plan, which will become effective prior to the completion of this offering; and |
| shares of our Class A common stock that may be issuable upon exercise of the Continuing Members rights to redeem their Common Units. |
The shares of Class B common stock to be outstanding on a pro forma and pro forma as adjusted basis is based on Common Units held by the Non-Founder Continuing Members as of March 31, 2017. The shares of Class C common stock to be outstanding on a pro forma and pro forma as adjusted basis following this offering is based on Common Units held by the Founder Continuing Members as of March 31, 2017.
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The Continuing Members will maintain their Common Units in Switch, Ltd. after the Transactions. Because the Continuing Members do not own any Class A common stock or have any right to receive distributions from Switch, Inc., we have presented dilution in pro forma net tangible book value per share both before and after this offering assuming that all of the holders of Common Units (other than Switch, Inc.) had their Common Units redeemed or exchanged for newly-issued shares of Class A common stock on a one-to-one basis (rather than for cash) and the cancellation for no consideration of all of their shares of Class B common stock and Class C common stock (which are not entitled to receive distributions or dividends, whether cash or stock from Switch, Inc.) in order to more meaningfully present the potential dilutive impact on the investors in this offering. We refer to the assumed redemption or exchange of all Common Units for shares of Class A common stock as described in the previous sentence as the Assumed Redemption.
Dilution in pro forma net tangible book value per share to investors purchasing shares of our Class A common stock in this offering represents the difference between the amount per share paid by investors purchasing shares of our Class A common stock in this offering and the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after completion of this offering.
Pro forma net tangible book value per share of Switch, Inc. is determined by dividing our total tangible assets less our total liabilities by the number of shares of our Class A common stock outstanding. Switch Ltd.s historical net tangible book value as of March 31, 2017 was $ million, or $ per Common Unit. After giving effect to the Transactions and the Assumed Redemption, our pro forma net tangible book value as of March 31, 2017 was $ million, or $ per share, based on the total number of shares of our Class A common stock outstanding as of March 31, 2017.
After giving further effect to the sale by us of shares of our Class A common stock in this offering at the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2017 would have been $ million, or $ per share.
This represents an immediate increase in pro forma net tangible book value of $ per share to our existing stockholders and an immediate dilution in pro forma net tangible book value of $ per share to investors purchasing shares of our common stock in this offering. The following table illustrates this dilution:
Assumed initial public offering price per share |
$ | |||||||
Pro forma net tangible book value per share as of March 31, 2017 |
$ | |||||||
Increase in pro forma net tangible book value per share attributable to investors purchasing shares of our Class A common stock in this offering |
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Pro forma as adjusted net tangible book value per share of our Class A common stock immediately after the completion of this offering |
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Dilution in pro forma net tangible book value per share to investors purchasing shares in this offering |
$ | |||||||
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Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this
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prospectus, would increase or decrease, as applicable, our pro forma as adjusted net tangible book value per share to new investors by $ , and would increase or decrease, as applicable, dilution per share to investors purchasing shares of our Class A common stock in this offering by $ , assuming the number of shares of our Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. Similarly, each 1,000,000 increase or decrease in the number of shares of our Class A common stock offered by us would increase or decrease, as applicable, our pro forma as adjusted net tangible book value by approximately $ per share and increase or decrease, as applicable, the dilution to investors purchasing shares of our Class A common stock in this offering by $ per share, assuming the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
If the underwriters option to purchase additional shares of our Class A common stock from us is exercised in full, the pro forma as adjusted net tangible book value per share of our Class A common stock immediately after the completion of this offering would be $ per share, and the dilution in pro forma net tangible book value per share to investors purchasing shares of our common stock in this offering would be $ per share.
The following table presents, as of March 31, 2017, after giving effect to the Assumed Redemption and the sale by us of shares of our Class A common stock in this offering at the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, the difference between the existing stockholders, which are the Continuing Members, and the investors purchasing shares of our Class A common stock in this offering with respect to the number of shares of our common stock purchased from us, the total consideration paid or to be paid to us, and the average price per share paid or to be paid to us, before deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us:
Shares Purchased | Total Consideration |
Average Price |
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Number | Percent | Amount | Percent | Per Share | ||||||||||||||||
Existing stockholders |
% | $ | % | $ | ||||||||||||||||
Investors purchasing shares of our Class A common stock in this offering |
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Total |
100.0 | % | $ | 100.0 | % | |||||||||||||||
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|
Each $1.00 increase or decrease in the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase or decrease, as applicable, the total consideration paid by investors purchasing shares in this offering and total consideration paid by all stockholders by approximately $ million, assuming the number of shares of our Class A common stock offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Except as otherwise indicated, the above discussion and tables assume no exercise of the underwriters option to purchase additional shares of our common stock from us. If the underwriters option to purchase additional shares of our Class A common stock were exercised in full, our existing stockholders, which are the Continuing Members, would own % and the investors purchasing shares of our Class A common stock in this offering would own % of the total number of shares of our common stock outstanding immediately after completion of this offering.
68
In the discussion above, the number of shares of our Class A common stock that will be outstanding after this offering excludes:
| 166,845 Common Units issuable upon the exercise of options to purchase Common Units outstanding as of March 31, 2017, with a weighted-average exercise price of $2.09 per share; and |
| shares of our Class A common stock reserved for future issuance under our 2017 Plan, which will become effective prior to the completion of this offering. |
69
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OTHER DATA
The following tables present the selected historical consolidated financial information and other data for Switch, Ltd. and its subsidiaries. Switch, Ltd. is the predecessor of the issuer, Switch, Inc., for financial reporting purposes. The consolidated statements of income data for the years ended December 31, 2015 and 2016, and the consolidated balance sheet data as of December 31, 2015 and 2016, have been derived from our audited consolidated financial statements of Switch, Ltd. included elsewhere in this prospectus. The consolidated statements of income data (except for net income per unit/share and weighted-average units/shares outstanding data) for the years ended December 31, 2013 and 2014 have been derived from the audited consolidated financial statements of Switch, Ltd. that have not been included in this prospectus. The consolidated statements of income data for the three months ended March 31, 2016 and 2017 and the consolidated balance sheet data as of March 31, 2017 have been derived from the unaudited consolidated financial statements of Switch, Ltd. included elsewhere in this prospectus. The unaudited consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements, and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments that we consider necessary for a fair statement of the financial information set forth in those statements. The results of operations for the periods presented below are not necessarily indicative of the results to be expected for any future period and the results for any interim period are not necessarily indicative of the results that may be expected for a full year. You should read the consolidated financial and other data set forth below in conjunction with the section titled Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included elsewhere in this prospectus. The selected consolidated financial and other data of Switch, Inc. has not been presented since Switch, Inc. is a newly incorporated entity, has had no business transactions or activities to date and had no assets or liabilities during the periods presented in this section.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2016 | 2017 | |||||||||||||||||||
(in thousands, except unit/share and per unit/share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Consolidated Statements of Income Data: |
||||||||||||||||||||||||
Revenue |
$ | 166,835 | $ | 207,306 | $ | 265,870 | $ | 318,352 | $ | 73,966 | $ | 89,157 | ||||||||||||
Cost of revenue |
81,290 | 108,902 | 141,060 | 168,844 | 37,376 | 45,375 | ||||||||||||||||||
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Gross profit |
85,545 | 98,404 | 124,810 | 149,508 | 36,590 | 43,782 | ||||||||||||||||||
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Selling, general and administrative expense |
38,574 | 35,570 | 45,251 | 71,420 | 16,777 | 19,343 | ||||||||||||||||||
Impact fee expense |
| | | 27,018 | | | ||||||||||||||||||
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|
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|
|||||||||||||
Income from operations |
46,971 | 62,834 | 79,559 | 51,070 | 19,813 | 24,439 | ||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense, including amortization of debt issuance costs |
(5,511 | ) | (6,772 | ) | (7,682 | ) | (10,836 | ) | (2,197 | ) | (4,020 | ) | ||||||||||||
Equity in net earnings (losses) of investments |
(57 | ) | (1,053 | ) | 821 | (10,138 | ) | (1,120 | ) | (441 | ) | |||||||||||||
Loss on extinguishment of debt |
(2,146 | ) | | (212 | ) | | | | ||||||||||||||||
Gain on sale of asset |
| | 248 | | | | ||||||||||||||||||
Impairment of notes receivable |
| | | (2,371 | ) | | | |||||||||||||||||
Gain on lease termination |
| | | 2,801 | | | ||||||||||||||||||
Other |
657 | 1,500 | 738 | 842 | 182 | 350 | ||||||||||||||||||
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|
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Total other income (expense) |
(7,057 | ) | (6,325 | ) | (6,087 | ) | (19,702 | ) | (3,135 | ) | (4,111 | ) | ||||||||||||
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Net income |
$ | 39,914 | $ | 56,509 | $ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||||||
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70
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2016 | 2017 | |||||||||||||||||||
(in thousands, except unit/share and per unit/share data) | ||||||||||||||||||||||||
(unaudited) | ||||||||||||||||||||||||
Net income per unit/share(1): |
||||||||||||||||||||||||
Basic |
$ | 0.21 | $ | 0.28 | $ | 0.37 | $ | 0.16 | $ | 0.08 | $ | 0.10 | ||||||||||||
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Diluted |
$ | 0.20 | $ | 0.28 | $ | 0.37 | $ | 0.15 | $ | 0.08 | $ | 0.10 | ||||||||||||
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Weighted-average units/shares outstanding(1): |
||||||||||||||||||||||||
Basic |
188,322,897 | 198,431,693 | 196,773,458 | 199,047,070 | 198,898,170 | 199,776,051 | ||||||||||||||||||
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Diluted |
201,815,537 | 203,410,628 | 199,272,269 | 203,461,420 | 201,765,027 | 205,493,272 | ||||||||||||||||||
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(1) | See Notes 2 and 12 to our consolidated financial statements included elsewhere in this prospectus for an explanation of the calculations of our basic and diluted net income per unit or share and the weighted-average number of units or shares used in the computation of the per unit/share amounts. |
As of December 31, | March 31, 2017 |
|||||||||||
2015 | 2016 | |||||||||||
(in thousands) | ||||||||||||
(unaudited) | ||||||||||||
Consolidated Balance Sheet Data: |
||||||||||||
Cash and cash equivalents |
$ | 14,192 | $ | 22,713 | $ | 21,709 | ||||||
Working capital (deficit) |
(23,476 | ) | (107,861 | ) | (97,638 | ) | ||||||
Property and equipment, net |
598,234 | 874,259 | 948,992 | |||||||||
Total assets |
647,578 | 921,015 | 999,948 | |||||||||
Deferred revenue, current and noncurrent |
14,253 | 24,858 | 30,206 | |||||||||
Long-term debt, current and noncurrent |
292,517 | 472,067 | 539,735 | |||||||||
Capital lease obligations, current and noncurrent |
19,466 | 23,466 | 23,466 | |||||||||
Total members equity |
284,694 | 278,363 | 297,678 |
Key Metrics and Non-GAAP Financial Measures
We monitor the following unaudited key metrics and non-GAAP financial measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2016 | 2017 | |||||||||||||||||||
(dollars in thousands) | ||||||||||||||||||||||||
Recurring revenue |
$ | 163,916 | $ | 201,615 | $ | 258,736 | $ | 308,200 | $ | 72,179 | $ | 87,309 | ||||||||||||
Capital expenditures |
$ | 115,534 | $ | 130,216 | $ | 190,113 | $ | 287,097 | $ | 50,115 | $ | 107,015 | ||||||||||||
Customers |
445 | 567 | 661 | 773 | 691 | 782 | ||||||||||||||||||
Adjusted EBITDA |
$ | 95,468 | $ | 112,214 | $ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||||||
Adjusted EBITDA margin |
57.2 | % | 54.1 | % | 53.4 | % | 48.1 | % | 50.9 | % | 52.8 | % |
For an explanation of our key metrics other than Adjusted EBITDA and Adjusted EBITDA margin, see Managements Discussion and Analysis of Financial Condition and Results of OperationsKey Metrics and Non-GAAP Financial Measures.
To provide investors with additional information regarding our financial results, we monitor and have presented within this prospectus Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP measures. These non-GAAP measures are not based on any standardized methodology
71
prescribed by U.S. GAAP and are not necessarily comparable to similarly titled measures presented by other companies.
We define Adjusted EBITDA as net income adjusted for interest expense, interest income, income taxes, depreciation and amortization and for specific and defined supplemental adjustments to exclude (i) non-cash equity-based compensation expense; (ii) equity in net earnings (losses) of investments; and (iii) certain other items that we believe are not indicative of our core operating performance, such as the impact fee expense related to our application to become an unbundled purchaser of energy and other gains and losses. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
Our Adjusted EBITDA and Adjusted EBITDA margin are not prepared in accordance with GAAP, and should not be considered in isolation of, or as an alternative to measures used in accordance with GAAP. We present Adjusted EBITDA and Adjusted EBITDA margin because we believe certain investors use them as measures of a companys historical operating performance and its ability to service and incur debt. We believe that the inclusion of certain adjustments in presenting Adjusted EBITDA and Adjusted EBITDA margin is appropriate to provide additional information to investors because Adjusted EBITDA and Adjusted EBITDA margin exclude certain items that we believe are not indicative of our core operating performance and that are not excluded in the calculation of EBITDA. Adjusted EBITDA is also similar to the measures used under the debt covenants included in our credit facilities, except that the definition used in our credit facilities does not exclude cash gains. Accordingly, we believe that Adjusted EBITDA and Adjusted EBITDA margin provide useful information to investors and others in understanding and evaluating our operating results, enhancing the overall understanding of our past performance and future prospects, and allowing for greater transparency with respect to key financial metrics used by our management in its financial and operational-decision making.
Our non-GAAP financial measures have limitations as analytical tools and you should not consider them in isolation or as a substitute for an analysis of our results under GAAP. There are a number of limitations related to the use of these non-GAAP financial measures versus their nearest GAAP equivalents. Non-GAAP financial measures may not provide information directly comparable to measures provided by other companies in our industry, as those other companies may calculate their non-GAAP financial measures differently. In addition, the non-GAAP measures exclude certain recurring expenses that have been and will continue to be significant expenses of our business.
72
The following tables set forth reconciliations of our net income to Adjusted EBITDA for the periods presented:
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||||||||||
2013 | 2014 | 2015 | 2016 | 2016 | 2017 | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Adjusted EBITDA: |
||||||||||||||||||||||||
Net income |
$ | 39,914 | $ | 56,509 | $ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||||||
Interest expense |
5,511 | 6,772 | 7,682 | 10,836 | 2,197 | 4,020 | ||||||||||||||||||
Interest income(1) |
(166 | ) | (1,024 | ) | (260 | ) | (332 | ) | (12 | ) | (7 | ) | ||||||||||||
Depreciation and amortization |
34,601 | 43,918 | 55,355 | 66,591 | 15,311 | 20,037 | ||||||||||||||||||
Loss on disposal of property and equipment |
235 | 695 | 1,307 | 1,994 | 133 | 20 | ||||||||||||||||||
Impact fee expense |
| | | 27,018 | | | ||||||||||||||||||
Equity-based compensation |
13,170 | 4,291 | 5,237 | 5,935 | 2,208 | 2,250 | ||||||||||||||||||
Equity in (net earnings) losses of investments |
57 | 1,053 | (821 | ) | 10,138 | 1,120 | 441 | |||||||||||||||||
Loss on extinguishment of debt |
2,146 | | 212 | | | | ||||||||||||||||||
Gain on sale of asset |
| | (248 | ) | | | | |||||||||||||||||
Gain on lease termination |
| | | (2,801 | ) | | | |||||||||||||||||
Impairment of notes receivable and interest receivable(2) |
| | | 2,426 | | | ||||||||||||||||||
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|
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Adjusted EBITDA |
$ | 95,468 | $ | 112,214 | $ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||||||
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(1) | Interest income is included in the Other line of other income (expense) in our Consolidated Statements of Comprehensive Income. |
(2) | The write-off of interest income receivable pertaining to our notes receivable with Planet3, Inc. is included in the selling, general and administrative expense line in our Consolidated Statements of Comprehensive Income. |
73
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The unaudited pro forma consolidated balance sheet as of March 31, 2017 and unaudited pro forma consolidated statements of income for the year ended December 31, 2016 and the three months ended March 31, 2017 present our consolidated financial position and results of operations after giving effect to (i) the organizational transactions described under The Transactions; (ii) the acceleration of vesting of incentive units and the conversion of incentive units into Common Units, which will only be presented on the unaudited pro forma consolidated balance sheet; (iii) borrowings under our amended and restated credit agreement in connection with a distribution in the amount of $ million by Switch, Ltd. to the Original Members; and (iv) this offering and the use of proceeds from this offering. The unaudited pro forma consolidated statements of income for the year ended December 31, 2016 and for the three months ended March 31, 2017 assume the Transactions were completed on January 1, 2016. The unaudited pro forma consolidated balance sheet as of March 31, 2017 assumes the Transactions were completed on March 31, 2017.
As a public company, we will be implementing additional procedures and processes for the purpose of addressing the standards and requirements applicable to public companies. We expect to incur additional annual expenses related to these steps and, among other things, additional directors and officers liability insurance, director fees, reporting requirements of the SEC, transfer agent fees, hiring additional accounting, legal and administrative personnel, increased auditing and legal fees and similar expenses. We have not included any pro forma adjustments relating to these costs.
The unaudited pro forma consolidated financial information has been prepared based on our historical financial statements and the assumptions and adjustments as described in the notes to the unaudited pro forma consolidated financial information. The pro forma adjustments are based upon available information and methodologies that are factually supportable and directly attributable to the Transactions. In addition, the unaudited pro forma consolidated statements of income reflect only those adjustments that are expected to have a continuing impact on our results of operations. The unaudited pro forma consolidated financial statements are presented for illustrative purposes only and do not purport to represent our consolidated results of operations or consolidated financial position that would actually have occurred had the Transactions referred to above been consummated on the dates assumed or to project our consolidated results of operations or consolidated financial position for any future date or period.
As described in greater detail under Certain Relationships and Related Party TransactionsTax Receivable Agreement, in connection with the completion of this offering, we will enter into the Tax Receivable Agreement with the Continuing Members that will provide for the payment by Switch, Inc. to the Continuing Members of 85% of the amount of tax benefits, if any, that Switch, Inc. actually realizes as a result of (i) increases in the tax basis of assets of Switch, Ltd. resulting from any redemptions or exchanges of Common Units as described under Certain Relationships and Related Party TransactionsSwitch Operating AgreementCommon Unit Redemption Right and (ii) certain other tax benefits related to our making payments under the Tax Receivable Agreement. Due to the uncertainty in the amount and timing of future exchanges of Common Units by the Continuing Members, the unaudited pro forma consolidated financial information assumes that no exchanges of Common Units have occurred and therefore no increases in tax basis in Switch Ltd.s assets or other tax benefits that may be realized thereunder have been assumed in the unaudited pro forma consolidated financial information. However, if all of the Continuing Members were to exchange their Common Units, we would recognize a deferred tax asset of approximately $ million and a liability of approximately $ million, assuming (i) all exchanges occurred on the same day; (ii) a price of $ per share (the midpoint of the price range listed on the cover page of this prospectus); (iii) a constant corporate tax rate of %; (iv) we will have sufficient taxable income to fully utilize the tax benefits; and (v) no material changes in tax law. For each 5% increase (decrease) in the amount of
74
Common Units exchanged by the Continuing Members, our deferred tax asset would increase (decrease) by approximately $ million and the related liability would increase (decrease) by approximately $ million, assuming that the price per share and corporate tax rate remain the same. For each $1.00 increase (decrease) in the assumed share price of $ per share, our deferred tax asset would increase (decrease) by approximately $ million and the related liability would increase (decrease) by approximately $ million, assuming that the number of Common Units exchanged by the Continuing Members and the corporate tax rate remain the same. These amounts are estimates and have been prepared for informational purposes only. The actual amount of deferred tax assets and related liabilities that we will recognize will differ based on, among other things, the timing of the exchanges, the price of our shares of Class A common stock at the time of the exchange, and the tax rates then in effect.
The presentation of the unaudited pro forma consolidated financial information is prepared in conformity with Article 11 of Regulation S-X.
Our historical financial information has been derived from our consolidated financial statements and accompanying notes included elsewhere in this prospectus. The unaudited pro forma consolidated financial information should be read together with Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and our historical consolidated financial statements and related notes thereto included elsewhere in this prospectus.
75
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 31, 2017
Switch, Ltd. and Subsidiaries Actual |
Distribution Adjustments |
Transaction Adjustments |
As Adjusted Before Offering |
Initial Public Offering Adjustments |
Switch, Inc. Pro Forma |
|||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
ASSETS |
||||||||||||||||||||||||||||||||
CURRENT ASSETS: |
||||||||||||||||||||||||||||||||
Cash |
$ | 21,709 | (3) | |||||||||||||||||||||||||||||
Accounts receivable |
12,835 | |||||||||||||||||||||||||||||||
Prepaid expenses |
5,144 | |||||||||||||||||||||||||||||||
Other current assets |
2,486 | |||||||||||||||||||||||||||||||
Deferred tax asset |
| |||||||||||||||||||||||||||||||
|
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|
|
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|
|
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Total current assets |
42,174 | |||||||||||||||||||||||||||||||
Property and equipment, net |
948,992 | |||||||||||||||||||||||||||||||
Long term deposit |
4,440 | |||||||||||||||||||||||||||||||
Other assets |
4,342 | (4) | ||||||||||||||||||||||||||||||
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|
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|
|
|||||||||||||||||||||
TOTAL ASSETS |
$ | 999,948 | ||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||||||||
LIABILITIES AND MEMBERS EQUITY |
||||||||||||||||||||||||||||||||
CURRENT LIABILITIES: |
||||||||||||||||||||||||||||||||
Long term debt, current portion |
$ | 16,830 | ||||||||||||||||||||||||||||||
Accounts payable |
34,133 | |||||||||||||||||||||||||||||||
Accrued expenses |
7,359 | |||||||||||||||||||||||||||||||
Accrued construction payables |
7,512 | |||||||||||||||||||||||||||||||
Accrued Michigan building and land purchase |
23,477 | |||||||||||||||||||||||||||||||
Accrued impact fee expense |
27,018 | |||||||||||||||||||||||||||||||
Deferred revenue, current portion |
12,137 | |||||||||||||||||||||||||||||||
Customer deposits |
7,346 | |||||||||||||||||||||||||||||||
Capital lease obligations, current portion |
4,000 | |||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total current liabilities |
139,812 | |||||||||||||||||||||||||||||||
Long-term debt, net |
522,905 | 173,400 | (1 | ) | ||||||||||||||||||||||||||||
Capital lease obligations |
19,466 | |||||||||||||||||||||||||||||||
Accrued interest, capital lease obligations |
2,018 | |||||||||||||||||||||||||||||||
Deferred revenue |
18,069 | |||||||||||||||||||||||||||||||
Payable to related parties pursuant to tax receivable agreement |
| |||||||||||||||||||||||||||||||
|
|
|
|
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|
|
|
|
|
|||||||||||||||||||||
TOTAL LIABILITIES |
702,270 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma consolidated balance sheet.
76
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 31, 2017 (continued)
Switch, Ltd. and Subsidiaries Actual |
Distribution Adjustments |
Transaction Adjustments |
As Adjusted Before Offering |
Initial Public Offering Adjustments |
Switch, Inc. Pro Forma |
|||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||
MEMBERS/STOCKHOLDERS EQUITY: |
||||||||||||||||||||||||||||||||
Class A common stock, $0.001 par value per share; shares authorized, shares issued and outstanding on a pro forma basis |
| (3),(5) | ||||||||||||||||||||||||||||||
Class B common stock, $0.001 par value per share; shares authorized, shares issued and outstanding on a pro forma basis |
| (2),(5) | ||||||||||||||||||||||||||||||
Class C common stock, $0.001 par value per share; shares authorized, shares issued and outstanding on a pro forma basis |
| (2),(5) | ||||||||||||||||||||||||||||||
Members equity |
298,099 | 173,400 | (1 | ) | (2),(5) | |||||||||||||||||||||||||||
Additional paid-in capital |
| (1),(5) | (3),(4) | |||||||||||||||||||||||||||||
Accumulated other comprehensive loss |
(421 | ) | ||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|||||||||||||||||||||
Total members/stockholders equity attributable to Switch |
297,678 | |||||||||||||||||||||||||||||||
Non-controlling interest |
| (6) | ||||||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
TOTAL MEMBERS/STOCKHOLDERS EQUITY |
297,678 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
TOTAL LIABILITIES AND MEMBERS/STOCKHOLDERS EQUITY |
$ | 999,948 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited pro forma consolidated balance sheet.
77
Notes to Unaudited Pro Forma Consolidated Balance Sheet
(1) | Subsequent to March 31, 2017, Switch, Ltd. made a distribution in the amount of $173.4 million to Original Members, comprised of $73.4 million to certain members with unreturned capital contributions in accordance with our Third Amended and Restated Operating Agreement and $100.0 million to Original Members in accordance with their percentage interests. In connection with the distribution, we incurred borrowings under the amended and restated credit agreement. This adjustment represents the recognition of the distribution and the new borrowings as if the distribution was declared and paid and the credit facility entered into on March 31, 2017. |
(2) | Reflects the Transactions, including (i) the elimination of existing members equity of $ million in consolidation of Switch, Ltd. into the financial statements of Switch, Inc., (ii) the issuance of shares of Class B common stock to Switch, Ltd.s Non-Founder Continuing Members on a one-to-one basis with the number of Common Units owned by them, for nominal consideration, (iii) the issuance of Class C common stock to the Founder Continuing Members on an one-to-one basis with the number of Common Units they own, for nominal consideration, and (iv) the exchange of Common Units by the Former Members for shares of Class A common stock on a one-to-one basis. Upon completion of the Transactions, Switch, Inc. will become the sole manager of Switch, Ltd. Although we will have an indirect minority economic interest in Switch, Ltd., we will have the sole voting interest in, and control the management of, Switch, Ltd. As a result, we will consolidate the financial results of Switch, Ltd. and will report a non-controlling interest related to the Common Units held by the Continuing Members on our consolidated balance sheet. |
(3) | Reflects the net effect on cash of the receipt of gross proceeds of $ million from the offering, based on an assumed sale of shares of Class A common stock at an assumed initial public offering price of $ per share, which is the midpoint of the price range listed on the cover page of this prospectus. A $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease the net proceeds we receive from this offering by approximately $ million, assuming the number of shares offered by us as set forth on the cover page of this prospectus remains the same and after deducting offering expenses. Each increase (decrease) of 1,000,000 shares in the number of shares of Class A common stock offered by us would increase (decrease) the amount of our cash, total assets and total members/stockholders equity by approximately $ million, assuming an initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us. |
(4) | Deferred costs associated with this offering, including certain legal, accounting and other related costs, have been recorded in other assets on the consolidated balance sheet. Upon completion of this offering, these deferred costs will be charged against the proceeds from this offering with a corresponding reduction to additional paid-in capital. |
(5) | In connection with the Transactions, the following pro forma adjustments were recorded to stockholders equity (in thousands): |
Par value of Class B common stock issued |
||||
Par value of Class C common stock issued |
||||
Acquisition of noncontrolling interest of Switch, Ltd. (see Note (6)) |
||||
|
|
|||
$ | ||||
|
|
(6) | After the offering and Transactions, Switch, Inc.s only material asset will be the direct and indirect ownership of % of the Common Units and voting interest in Switch, Ltd. and Switch, Inc.s only business will be to act as the managing member of Switch, Ltd. Therefore, pursuant to ASC 810 Consolidation, we will consolidate the financial results of Switch, Ltd. into our financial statements. |
78
Notes to Unaudited Pro Forma Consolidated Balance Sheet(Continued)
The ownership interests of the Continuing Members will be accounted for as a noncontrolling interest in Switch, Inc.s financial statements after this offering. Immediately following this offering, the noncontrolling interest of Switch, Ltd. will represent % of the outstanding Common Units calculated as follows (in thousands): |
Total pro forma Switch, Inc. stockholders equity |
$ | |||
Net liabilities attributable to Switch, Inc. controlling interest less: |
||||
Historical noncontrolling interest of Switch, Ltd. |
||||
|
|
|||
Pro forma equity of Switch, Ltd. |
$ | |||
|
|
|||
Pro forma equity attributable to % noncontrolling interest of Switch, Inc. |
$ | |||
|
|
The adjustment to additional paid-in capital for the acquisition of noncontrolling interest of Switch, Ltd. (see Note (5)) is as follows (in thousands):
Switch, Ltd. members equity held by the noncontrolling interest holders prior to the offering and Transactions |
$ | |||
Less: Pro forma equity attributable to % noncontrolling interest of Switch, Ltd. |
||||
|
|
|||
Adjustment to additional paid-in capital |
$ | |||
|
|
79
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Year Ended December 31, 2016
Switch, Ltd. and Subsidiaries Actual |
Transaction Adjustments |
As Adjusted Before Offering |
Initial Public Offering Adjustments |
Switch, Inc. Pro Forma |
||||||||||||||||||||
(in thousands, except per unit/share data) | ||||||||||||||||||||||||
Revenue |
$ | 318,352 | $ | $ | $ | $ | ||||||||||||||||||
Cost of revenue |
168,844 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
149,508 | |||||||||||||||||||||||
Selling, general and administrative expense |
71,420 | |||||||||||||||||||||||
Impact fee expense |
27,018 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from operations |
51,070 | |||||||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(10,836 | ) | (3) | |||||||||||||||||||||
Equity in net earnings (losses) of investments |
(10,138 | ) | ||||||||||||||||||||||
Impairment of notes receivable |
(2,371 | ) | ||||||||||||||||||||||
Gain on lease termination |
2,801 | |||||||||||||||||||||||
Other |
842 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other income (expense) |
(19,702 | ) | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income tax expense |
31,368 | |||||||||||||||||||||||
Income tax expense |
| (1) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
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Net income |
31,368 | |||||||||||||||||||||||
Less: net income attributable to noncontrolling interest |
| (2) | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
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Net income attributable to Switch, Inc. |
$ | 31,368 | $ | $ | $ | $ | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|||||||||||||||
Net income per unit/share: |
||||||||||||||||||||||||
Basic |
$ | 0.16 | (4) | $ | ||||||||||||||||||||
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|
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Diluted |
$ | 0.15 | $ | |||||||||||||||||||||
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|
|
|
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Weighted-average number of units/shares outstanding used in computing net income per unit: |
||||||||||||||||||||||||
Basic |
199,047,070 | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Diluted |
203,461,420 | |||||||||||||||||||||||
|
|
|
|
See accompanying notes to unaudited pro forma consolidated statements of income.
80
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
For the Three Months Ended March 31, 2017
Switch, Ltd. and Subsidiaries Actual |
Transaction Adjustments |
As Adjusted Before Offering |
Initial Public Offering Adjustments |
Switch, Inc. Pro Forma |
||||||||||||||||||||
(in thousands, except per unit/share data) | ||||||||||||||||||||||||
Revenue |
$ | 89,157 | $ | $ | $ | $ | ||||||||||||||||||
Cost of revenue |
45,375 | |||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||||
Gross profit |
43,782 | |||||||||||||||||||||||
Selling, general and administrative expense |
19,343 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income from operations |
24,439 | |||||||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Interest expense |
(4,020 | ) | (3) | |||||||||||||||||||||
Equity in net earnings (losses) of investments |
(441 | ) | ||||||||||||||||||||||
Other |
350 | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total other income (expense) |
(4,111 | ) | ||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Income before income tax expense |
20,328 | |||||||||||||||||||||||
Income tax expense |
| (1) | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
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Net income |
20,328 | |||||||||||||||||||||||
Less: net income attributable to noncontrolling interest |
| (2) | ||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
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Net income attributable to Switch, Inc. |
$ | 20,328 | $ | $ | $ | $ | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
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Net income per unit/share: |
||||||||||||||||||||||||
Basic |
$ | 0.10 | (4) | $ | ||||||||||||||||||||
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|
|
|
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Diluted |
$ | 0.10 | $ | |||||||||||||||||||||
|
|
|
|
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Weighted-average number of units/shares used in computing net income per unit/share: |
||||||||||||||||||||||||
Basic |
199,776,051 | |||||||||||||||||||||||
|
|
|
|
|||||||||||||||||||||
Diluted |
205,493,272 | |||||||||||||||||||||||
|
|
|
|
See accompanying notes to unaudited pro forma consolidated statements of income.
81
Notes to Unaudited Pro Forma Consolidated Statements of Income
(1) | Following the offering and the Transactions, Switch, Inc. will be subject to U.S. federal income taxes, in addition to state and local taxes, with respect to its allocable share of any net taxable income of Switch, Ltd. As a result, the pro forma statements of income reflects an adjustment to provide for corporate income taxes at our estimated effective rate of %, which includes provision for U.S. federal income taxes and assumes the highest statutory rates apportioned to each state and local jurisdiction. The operations of Switch, Ltd. are primarily conducted in the State of Nevada, which does not have a corporate level income tax. |
The provision for income taxes from operations differs from the amount of income tax computed by applying the applicable U.S. statutory federal income tax rate to income before provision for income taxes as follows:
Federal statutory rate |
% | |||
State and local rate |
% | |||
Rate benefit from flow-through entity |
% | |||
|
|
|||
Pro forma effective tax rate |
% | |||
|
|
Tax rules generally require that pre-transaction built-in-gains are allocated back to the historical LLC members. Our effective tax rate includes a rate benefit attributable to the fact that, after the Transactions, approximately % of Switch, Inc.s earnings will not be subject to corporate level taxes as the applicable income tax expense will be incurred by, and be the obligation of, the members of Switch, Ltd. holding the noncontrolling interests. Thus, the pro forma effective tax rate on the portion of income attributable to Switch, Inc. is expected to be %.
(2) | After the offering and the Transactions, Switch, Inc. will become the managing member of Switch, Ltd. and will have a minority economic interest in Switch, Ltd. but will have 100% of the voting power and control the management of Switch, Ltd. Immediately following the offering, the noncontrolling interest, representing the Continuing Members of Switch, Ltd. other than Switch, Inc., will be %. Net income attributable to the noncontrolling interest holders of Switch, Inc. represents % of income before provision for income taxes, as well as net income attributable to noncontrolling interest holders of Switch, Ltd. |
(3) | Reflects increase in interest expense of $6.8 million for the year ended December 31, 2016 and $1.7 million for the three months ended March 31, 2017 assuming the $173.4 million in borrowings from the amended and restated credit agreement incurred in connection with the distribution that will be paid in June 2017 to Original Members as if such borrowing had occurred on January 1, 2016. The amended and restated credit agreement bears interest at a rate of 3.94% per annum, which is the weighted-average interest rate applicable on the date the amended and restated credit agreement was closed. A change in the interest rate of 0.125% would increase or decrease total interest expense by approximately $217,000 for the year ended December 31, 2016 and $54,000 for the three months ended March 31, 2017. |
(4) | Pro forma basic income per share is computed by dividing the net income available to Class A common stockholders by the weighted-average of shares of Class A common stock outstanding during the period. Pro forma diluted net income per share is computed by adjusting the net income available to Class A common stockholders and the weighted-average of shares of Class A common stock outstanding to give effect to potentially dilutive securities. Shares of Class B and Class C common stock do not participate in earnings of Switch, Inc. As a result, the shares of Class B and Class C common stock are not considered participating securities and are not included in the weighted-average shares outstanding for purposes of computing pro forma net income per share. |
82
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with Selected Historical Consolidated Financial and Other Data and the consolidated financial statements and related notes thereto included elsewhere in this prospectus. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those discussed in Risk Factors included elsewhere in this prospectus.
Overview
We are a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything. Using our technology platform, we provide solutions to help enable that growth. Our advanced data centers are the center of our platform and provide power densities that exceed industry averages with efficient cooling, while being powered by 100% renewable energy. These super scale data centers address the growing challenges facing the data center industry. Our critical infrastructure components in our data centers are purpose-built to satisfy customers needs, drive efficiency and enable the deployment of highly advanced computing technologies.
We presently own and operate three primary campus locations, called Primes, which encompass ten colocation facilities with an aggregate of up to 4.0 million gross square feet, or GSF, of space. Our Primes consist of The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; and The Pyramid Campus in Grand Rapids, Michigan. In addition, we recently announced our plan to develop a fourth Prime, The Keep Campus, in Atlanta, Georgia. In addition to our Primes, we hold a 50% ownership interest in SUPERNAP International, S.A., or SUPERNAP International, which has deployed facilities in Italy and Thailand. We have accounted for this ownership interest under the equity method of accounting.
We currently have more than 800 customers, including some of the worlds largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications providers. Our business is based on a recurring revenue model comprised of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services. We consider these services recurring because our customers are generally billed on a fixed and recurring basis each month for the duration of their contract. We derive more than 95% of our revenue from recurring revenue streams and we expect to continue to do so for the foreseeable future. For the years ended December 31, 2015 and 2016 and the three months ended March 31, 2016 and 2017, our largest customer, eBay, Inc., and its affiliates accounted for 14%, 13%, 13% and 10%, respectively, of our revenue.
Our non-recurring revenue is primarily comprised of installation services related to a customers initial deployment. These services are non-recurring because they are billed typically once, upon completion of the installation.
We have achieved significant growth in our business and have a track record of strong financial performance. On an annual basis, our revenue has grown from $166.8 million in 2013 to $318.4 million in 2016, representing a compounded annual growth rate, or CAGR, of 24.0%. We generated net income of $73.5 million and $31.4 million during the years ended December 31, 2015 and 2016, respectively, and $16.7 million and $20.3 million during the three months ended March 31, 2016 and 2017, respectively. Our net income for the year ended December 31, 2016 included a nonrecurring
83
charge of $27.0 million related to our becoming an unbundled purchaser of energy. In 2015 and 2016, we generated Adjusted EBITDA of $141.9 million and $153.2 million, respectively, representing an Adjusted EBITDA margin of 53.4% and 48.1%, respectively. During the three months ended March 31, 2016 and 2017, we generated Adjusted EBITDA of $37.6 million and $47.1 million, respectively, representing an Adjusted EBITDA margin of 50.9% and 52.8%, respectively.
Factors that May Influence Future Results of Operations
Market and Economic Conditions. We are affected by general business and economic conditions in the United States and globally. These conditions include short-term and long-term interest rates, inflation, money supply, political issues, legislative and regulatory changes, fluctuations in both debt and equity capital markets and broad trends in industry and finance, all of which are beyond our control. Macroeconomic conditions that affect the economy and the economic outlook of the United States and the rest of the world could adversely affect our customers and vendors, which could adversely affect our results of operations and financial condition.
Growth and Expansion Activities. Our future revenue growth will depend on our ability to maintain our existing revenue base while expanding and increasing utilization at our existing and developing Prime Campus locations. Our existing Prime Campus locations currently encompass ten data centers with an aggregate of 4.0 million GSF of space and up to 415 MW of power. As of March 31, 2017, the utilization rates at these Prime Campuses, based on available cabinets, were approximately 80%, 12% and 9% at The Core Campus, The Citadel Campus and The Pyramid Campus, respectively. Additionally, each of our existing Primes has room for further expansion, and we have designs to add up to 5.9 million GSF of additional space to The Citadel Campus and 940,000 GSF of additional space to The Pyramid Campus. We may be unable to attract customers to our data centers for a number of reasons, including if we fail to provide competitive pricing terms, provide space that is deemed to be inferior to that of our competitors or are unable to provide services that our existing and potential customers desire.
Cost of Power. We are a large consumer of power, and power costs account for a significant portion of our cost of revenue. We require power supply to provide many services we offer, such as powering and cooling our customers IT equipment and operating critical data center plant and equipment infrastructure. Pursuant to our service agreements, we provide our customers with a committed level of power supply availability. Additionally, we have committed to operating our data centers with 100% clean and renewable energy. We may lose customers or our customers may reduce the services purchased from us due to increased power costs and limited availability of power resources, including clean and renewable energy, or our brand or reputation could be adversely affected if we are unable to provide 100% clean and renewable energy.
Capital Expenditures. Our growth and expansion initiatives require significant capital. The costs of constructing, developing, operating and maintaining data centers and growing our operations are substantial. While we strive to match the growth of our facilities to the demand for services, we still must spend significant amounts before we receive any revenue. If we are unable to generate sufficient capital to meet our anticipated capital requirements, our growth could slow and operations could be adversely affected. Our maintenance capital expenditures were $8.6 million and $5.1 million for the years ended December 31, 2015 and 2016 and $1.8 million and $1.0 million for the three months ended March 31, 2016 and 2017, respectively.
Growth in Customers. Our results of operations could be significantly affected by the growth or reduction of our customer base. We have over 800 customers, including some of the worlds largest technology and digital media companies, cloud and managed service providers, financial institutions
84
and telecommunications providers. We believe we have significant opportunity to both grow penetration of our existing customers as well as attract new customers. Our ability to attract new customers depends on a number of factors, including our ability to offer high quality services at competitive prices and the capability of our marketing and sales team to attract new customers. Additionally, a significant portion of our revenue is highly dependent on our top 10 customers and the loss of these customers or any significant decrease in their business could adversely affect our results of operations.
Key Metrics and Non-GAAP Financial Measures
We monitor the following unaudited key metrics and non-GAAP financial measures to help us evaluate our business, identify trends affecting our business, formulate business plans and make strategic decisions.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(dollars in thousands) | ||||||||||||||||
Recurring revenue |
$ | 258,736 | $ | 308,200 | $ | 72,179 | $ | 87,309 | ||||||||
Capital expenditures |
$ | 190,113 | $ | 287,097 | $ | 50,115 | $ | 107,015 | ||||||||
Customers |
661 | 773 | 691 | 782 | ||||||||||||
Adjusted EBITDA |
$ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||
Adjusted EBITDA margin |
53.4 | % | 48.1 | % | 50.9 | % | 52.8 | % |
Recurring Revenue
We calculate recurring revenue as contractual revenue under signed contracts calculated in accordance with GAAP for the applicable period. Recurring revenue does not include any installation or other one-time revenue, which would be classified as non-recurring revenue. Management uses recurring revenue as a supplemental performance measure because it provides a useful measure of increases in contractual revenue from our customers and provides a baseline revenue measure on which to plan expenses.
The following table sets forth a reconciliation of recurring revenue to total revenue for the periods presented.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Recurring revenue |
$ | 258,736 | $ | 308,200 | $ | 72,179 | $ | 87,309 | ||||||||
Non-recurring revenue |
7,134 | 10,152 | 1,787 | 1,848 | ||||||||||||
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Revenue |
$ | 265,870 | $ | 318,352 | $ | 73,966 | $ | 89,157 | ||||||||
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|
|
Capital Expenditures
We define capital expenditures as cash purchases of property and equipment during a particular period. We believe that capital expenditures is a useful metric because it provides information regarding the growth of our technology infrastructure platform and the potential to expand our services and add new customers.
85
Customers
We believe that the number of customers is a key metric because our ability to attract new customers and grow our customer base helps drive our success and is an important contributor to the growth in our revenue.
We define the number of customers at the end of any particular period as the number of parties or organizations that have entered into a contract with us for which the term has not ended. Each party, such as a company, an educational or government institution, or a distinct business unit of a large company, with which we have entered into a contract is considered to be a unique customer, which may result in more than one customer within a single organization.
Adjusted EBITDA and Adjusted EBITDA Margin
We define Adjusted EBITDA as net income adjusted for interest expense, interest income, income taxes, depreciation and amortization and for specific and defined supplemental adjustments to exclude (i) non-cash equity-based compensation expense; (ii) equity in net earnings (losses) of investments; and (iii) certain other items that we believe are not indicative of our core operating performance, such as the impact fee expense related to our application to become an unbundled purchaser of energy and other gains and losses. We define Adjusted EBITDA margin as Adjusted EBITDA divided by revenue.
See Selected Historical Consolidated Financial and Other DataKey Metrics and Non-GAAP Financial Measures for information regarding the limitations of using Adjusted EBITDA and Adjusted EBITDA margin as financial measures.
The following tables set forth reconciliations of our net income to Adjusted EBITDA for the periods presented:
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
Adjusted EBITDA: |
||||||||||||||||
Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
Interest expense |
7,682 | 10,836 | 2,197 | 4,020 | ||||||||||||
Interest income(1) |
(260 | ) | (332 | ) | (12 | ) | (7 | ) | ||||||||
Depreciation and amortization |
55,355 | 66,591 | 15,311 | 20,037 | ||||||||||||
Loss on disposal of property and equipment |
1,307 | 1,994 | 133 | 20 | ||||||||||||
Impact fee expense |
| 27,018 | | | ||||||||||||
Equity-based compensation |
5,237 | 5,935 | 2,208 | 2,250 | ||||||||||||
Equity in (net earnings) losses of investments |
(821 | ) | 10,138 | 1,120 | 441 | |||||||||||
Loss on extinguishment of debt |
212 | | | | ||||||||||||
Gain on sale of asset |
(248 | ) | | | | |||||||||||
Gain on lease termination |
| (2,801 | ) | | | |||||||||||
Impairment of notes receivable and interest receivable(2) |
| 2,426 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Adjusted EBITDA |
$ | 141,936 | $ | 153,173 | $ | 37,635 | $ | 47,089 | ||||||||
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|
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|
|
(1) | Interest income is included in the Other line of other income (expense) in our consolidated statements of comprehensive income. |
(2) | The write-off of interest income receivable pertaining to our notes receivable with Planet3, Inc. is included in the selling, general and administrative expense line in our consolidated statements of comprehensive income. |
86
Components of Results of Operations
Revenue
We derive more than 95% of our revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services, which includes cross-connects, broadband services and external connectivity. The remainder of our revenue is from non-recurring revenue streams, which primarily includes installation and contract settlements. Based on the current growth stage of our business, we expect increases in revenue to be driven primarily by increases in volume, rather than changes in the prices we charge to our customers.
Revenue from recurring revenue streams is generally billed monthly and recognized ratably over the period to which the service relates. Contracts with our customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation, which was 89 months, 73 months and 73 months as of December 31, 2015 and 2016 and March 31, 2017, respectively. Revenue from connectivity services is recognized on a gross basis, primarily because we act as the principal in the transactions, take title to services and bear credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.
Cost of Revenue
Cost of revenue consists primarily of depreciation and amortization expense, expenses associated with the operations of our facilities, including electricity and other utility costs and repairs and maintenance, data center employees salaries and benefits, including equity-based compensation, connectivity costs, and rental payments related to our leased buildings and land used in data center operations. A substantial majority of our cost of revenue is fixed in nature and may not vary significantly from period to period, unless we expand our existing data centers or open new data centers. However, there are certain costs that are considered more variable in nature, including utilities and supplies that are directly related to growth in our existing and new customer base. We expect the cost of our utilities, specifically electricity, to decrease initially as we become an unbundled purchaser of energy and are able to purchase energy from the open market. The largest portion of our utility costs are fixed and a smaller portion is variable with market conditions.
Gross Profit and Gross Margin
Gross profit, or revenue less cost of revenue, and gross margin, or gross profit as a percentage of revenue, has been and will continue to be affected by various factors, including customer growth, the expansion of our existing data centers or opening of new data centers, and the cost of our utilities, specifically electricity. Our gross margin may fluctuate from period to period depending on the interplay of these factors.
Operating Expenses
Selling, General and Administrative Expense
Selling, general and administrative expenses consist primarily of salaries and related expenses, including equity-based compensation, accounting, legal and other professional service fees, real estate and personal property taxes, rental payments related to our corporate office lease, marketing and selling expenses, including sponsorships, commissions paid to partners, travel, depreciation and
87
amortization expense, insurance, and other facility and employee related costs. This expense classification may not be comparable to those of other companies. We expect to incur additional selling, general and administrative expenses as we continue to scale our operations to invest in sales and marketing initiatives to further increase our revenue and support our growth. Following the completion of this offering, we also expect to incur additional general and administrative expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the Securities and Exchange Commission and those of any national securities exchange on which our securities are traded, additional insurance expenses, investor relations activities and other administrative and professional services. As a result, we expect that our selling, general and administrative expense will increase in absolute dollars but may fluctuate as a percentage of our revenue from period to period.
Impact Fee Expense
In September 2016, we filed an application with the Public Utilities Commission of Nevada, or PUCN, to become an unbundled purchaser of energy, capacity and ancillary services from a new provider of electric resources. The application was approved in December 2016 and we elected to pay the impact fee to NV Energy, our former energy provider, of $27.0 million in a lump sum by the earlier of August 1, 2017 or the date by which we are able to secure all necessary rights and contracts, including our Network Integration Transmission Service agreements with NV Energy and other compliance items. As there was no future economic benefit to us from the impact fee, it was recognized as an expense in December 2016. The impact fee was paid in May 2017. We do not expect to incur a similar fee in future periods.
Other Income (Expense) Items
Interest Expense
Interest expense consists primarily of interest on our credit facilities and amortization of debt issuance costs.
Equity in Net Earnings (Losses) of Investments
Equity in net earnings (losses) of investments primarily consists of our share of results of operations from our equity method investments. We currently hold two investments, SUPERNAP International and Planet3, Inc., or Planet3. Our investments in SUPERNAP International and Planet3 were accounted for under the equity method of accounting through March 31, 2017 and December 31, 2016, respectively, and our share of their results of operations are included within equity in net earnings (losses) of investments for each applicable period presented. As of March 31, 2017, the carrying value of our investment in SUPERNAP International was reduced to zero as a result of recording our share of its losses. As of December 31, 2016, we determined an other than temporary loss in the value of our investment in Planet3 had occurred, and we therefore fully impaired its carrying value. Accordingly, we discontinued the equity method of accounting for our investments in SUPERNAP International and Planet3 as of March 31, 2017 and December 31, 2016, respectively, and will not provide for additional losses until our share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended.
Other
Other (expense) income items primarily consist of other items that have impacted our results of operations such as loss on extinguishment of debt resulting from termination and full repayment of previously held debt obligations, impairment of notes receivable and gains and losses resulting from other transactions.
88
Results of Operations
The following table sets forth our results of operations for the periods indicated:
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(in thousands) | ||||||||||||||||
(unaudited) | ||||||||||||||||
Consolidated Statements of Income Data: |
||||||||||||||||
Revenue |
$ | 265,870 | $ | 318,352 | $ | 73,966 | $ | 89,157 | ||||||||
Cost of revenue |
141,060 | 168,844 | 37,376 | 45,375 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
124,810 | 149,508 | 36,590 | 43,782 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative expense |
45,251 | 71,420 | 16,777 | 19,343 | ||||||||||||
Impact fee expense |
| 27,018 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from operations |
79,559 | 51,070 | 19,813 | 24,439 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(7,682 | ) | (10,836 | ) | (2,197 | ) | (4,020 | ) | ||||||||
Equity in net earnings (losses) of investments |
821 | (10,138 | ) | (1,120 | ) | (441 | ) | |||||||||
Loss on extinguishment of debt |
(212 | ) | | | | |||||||||||
Gain on sale of asset |
248 | | | | ||||||||||||
Impairment of notes receivable |
| (2,371 | ) | | | |||||||||||
Gain on lease termination |
| 2,801 | | | ||||||||||||
Other |
738 | 842 | 182 | 350 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income (expense) |
(6,087 | ) | (19,702 | ) | (3,135 | ) | (4,111 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
|
|
|
|
|
|
|
|
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The following table sets forth the consolidated statements of income data for each of the periods presented as a percentage of revenue. Amounts may not sum due to rounding.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
Consolidated Statements of Income, as a percentage of revenue: |
||||||||||||||||
Revenue |
100 | % | 100 | % | 100 | % | 100 | % | ||||||||
Cost of revenue |
53 | 53 | 51 | 51 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
47 | 47 | 49 | 49 | ||||||||||||
Operating expenses: |
||||||||||||||||
Selling, general and administrative expense |
17 | 22 | 23 | 22 | ||||||||||||
Impact fee expense |
| 8 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Income from operations |
30 | 16 | 27 | 27 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
(3 | ) | (3 | ) | (3 | ) | (5 | ) | ||||||||
Equity in net earnings (losses) of investments |
| (3 | ) | (2 | ) | | ||||||||||
Loss on extinguishment of debt |
| | | | ||||||||||||
Gain on sale of asset |
| | | | ||||||||||||
Impairment of notes receivable |
| (1 | ) | | | |||||||||||
Gain on lease termination |
| 1 | | | ||||||||||||
Other |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total other income (expense) |
(2 | ) | (6 | ) | (4 | ) | (5 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
28 | % | 10 | % | 23 | % | 23 | % | ||||||||
|
|
|
|
|
|
|
|
Comparison of the Three Months Ended March 31, 2016 and 2017
Revenue
Three Months Ended March 31, |
Change | |||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(in thousands, except percentage) | ||||||||||||||||
Revenue |
$ | 73,966 | $ | 89,157 | $ | 15,191 | 21 | % |
Revenue increased by $15.2 million, or 21%, for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. The increase in revenue was primarily attributable to a $12.6 million increase in colocation revenue and a $2.3 million increase in connectivity revenue, which resulted from increased sales as we expanded facilities in The Core Campus throughout 2016 and opened the first facilities in The Pyramid Campus and The Citadel Campus in June 2016 and November 2016, respectively.
Cost of Revenue and Gross Margin
Three Months Ended March 31, |
Change | |||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Cost of revenue |
$ | 37,376 | $ | 45,375 | $ | 7,999 | 21 | % | ||||||||
Gross margin |
49 | % | 49 | % |
90
Cost of revenue increased by $8.0 million, or 21%, for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. The increase was primarily attributable to a $4.5 million increase in depreciation and amortization costs, a $2.2 million increase in facilities costs associated with increased power usage and a $0.9 million increase in connectivity costs, largely resulting from the buildout and expansion of The Core Campus, The Citadel Campus and The Pyramid Campus. Gross margin remained constant for the three months ended March 31, 2017, compared to the three months ended March 31, 2016.
Selling, General and Administrative Expense
Three Months Ended March 31, |
Change | |||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(in thousands, except percentage) | ||||||||||||||||
Selling, general and administrative expense |
$ | 16,777 | $ | 19,343 | $ | 2,566 | 15 | % |
Selling, general and administrative expense increased by $2.6 million, or 15%, for the three months ended March 31, 2017, compared to the three months ended March 31, 2016. The increase was primarily attributable to a $1.7 million increase in salaries and related expenses primarily due to an increase in headcount, a $0.6 million increase in bad debt expense due to the increase in aging of receivables and a $0.3 million increase in taxes.
Other Income (Expense)
Three Months Ended March 31, |
Change | |||||||||||||||
2016 | 2017 | Amount | % | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
$ | (2,197 | ) | $ | (4,020 | ) | $ | (1,823 | ) | 83 | % | |||||
Equity in net earnings (losses) of investments |
(1,120 | ) | (441 | ) | 679 | (61 | ) | |||||||||
Other |
182 | 350 | 168 | 92 |
Interest Expense
Interest expense increased by $1.8 million to $4.0 million for the three months ended March 31, 2017, compared to $2.2 million for the three months ended March 31, 2016. The change was primarily driven by an increase in our outstanding long-term debt from $300.2 million as of March 31, 2016 to $539.7 million as of March 31, 2017.
Equity in Net Earnings (Losses) of Investments
Equity in net earnings (losses) of investments was $0.4 million in net losses for the three months ended March 31, 2017, compared to $1.1 million of net losses for the three months ended March 31, 2016. The net losses of $0.4 million for the three months ended March 31, 2017 are related to the financial performance of our equity method investment in SUPERNAP International. As of December 31, 2016, we determined an other than temporary loss in the value of our investment in Planet3 had occurred, and we therefore fully impaired its carrying value. Accordingly, we discontinued the equity method of accounting for our investment in Planet3 as of December 31, 2016 and will not provide for additional losses until our share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended. We recognized our share of net losses related to our equity method investments in SUPERNAP International and Planet3 of $0.4 million and $0.7 million, respectively, during the three months ended March 31, 2016 due to the financial performance of these two entities.
91
Comparison of the Years Ended December 31, 2015 and 2016
Revenue
Years Ended December 31, |
Change | |||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(in thousands, except percentage) | ||||||||||||||||
Revenue |
$ | 265,870 | $ | 318,352 | $ | 52,482 | 20 | % |
Revenue increased by $52.5 million, or 20%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase in revenue was primarily attributable to a $42.6 million increase in colocation revenue and an $8.2 million increase in connectivity revenue, which resulted from increased sales as we expanded The Core Campus throughout 2015 and 2016 and opened our first facilities in each of The Pyramid Campus and The Citadel Campus in 2016.
Cost of Revenue and Gross Margin
Years Ended December 31, |
Change | |||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Cost of revenue |
$ | 141,060 | $ | 168,844 | $ | 27,784 | 20 | % | ||||||||
Gross margin |
47 | % | 47 | % |
Cost of revenue increased by $27.8 million, or 20%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase resulted from a $10.5 million increase in depreciation and amortization costs attributable to the buildout and expansions of The Core Campus, The Pyramid Campus and The Citadel Campus, a $7.7 million increase in direct labor costs from an increase in headcount and a $7.0 million increase in connectivity costs resulting from our growth in operations. In addition, there was a $2.0 million increase in facilities costs and a $0.5 million increase in rent expense primarily due to The Pyramid Campus data center going into service in June 2016. Gross margin remained constant for the year ended December 31, 2016, compared to the year ended December 31, 2015.
Operating Expenses
Years Ended December 31, |
Change | |||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Selling, general and administrative expense |
$ | 45,251 | $ | 71,420 | $ | 26,169 | 58 | % | ||||||||
Impact fee expense |
| 27,018 | 27,018 | NM | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expenses |
$ | 45,251 | $ | 98,438 | $ | 53,187 | 118 | % | ||||||||
|
|
|
|
|
|
NM Not meaningful
Selling, General and Administrative
Selling, general and administrative expense increased by $26.2 million, or 58%, for the year ended December 31, 2016, compared to the year ended December 31, 2015. The increase was primarily attributable to an $11.4 million increase in salaries and related expenses, primarily due to an increase in headcount. In addition, there were increases in costs due to the expansions of The Citadel
92
Campus and The Pyramid Campus prior to their openings that are not attributable to cost of revenue, including a $3.8 million increase in rent expense and a $1.3 million increase in taxes. The increase in selling, general and administrative expense is also attributable to a $2.6 million increase in expenses relating to employee meals and training costs due to the increase in headcount, a $2.3 million increase in marketing and selling costs related to sponsorships at various events, a $1.3 million increase in commissions paid to partners due to increased customer referral activity, a $1.4 million increase in depreciation expense, a $1.1 million increase in legal and accounting services and a $1.0 million increase in travel expenses related to the construction projects for The Citadel Campus and The Pyramid Campus.
Impact Fee Expense
Impact fee expense was $27.0 million for the year ended December 31, 2016, compared to zero for the year ended December 31, 2015. We filed an application with the PUCN to become an unbundled purchaser of energy, capacity and ancillary services from a new provider of electric resources, which was approved in December 2016. There was no such activity in 2015.
Other Income (Expense)
Years Ended December 31, |
Change | |||||||||||||||
2015 | 2016 | Amount | % | |||||||||||||
(in thousands, except percentages) | ||||||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense |
$ | (7,682 | ) | $ | (10,836 | ) | $ | (3,154 | ) | 41 | % | |||||
Equity in net earnings (losses) of investments |
821 | (10,138 | ) | (10,959 | ) | NM | ||||||||||
Loss on extinguishment of debt |
(212 | ) | | 212 | NM | |||||||||||
Gain on sale of asset |
248 | | (248 | ) | NM | |||||||||||
Impairment of notes receivable |
| (2,371 | ) | (2,371 | ) | NM | ||||||||||
Gain on lease termination |
| 2,801 | 2,801 | NM | ||||||||||||
Other |
738 | 842 | 104 | 14 |
NM Not meaningful
Interest Expense
Interest expense increased by $3.2 million to $10.8 million for the year ended December 31, 2016, compared to $7.7 million for the year ended December 31, 2015. The change was primarily driven by an increase in our outstanding long-term debt from $292.5 million as of December 31, 2015 to $472.1 million as of December 31, 2016.
Equity in Net Earnings (Losses) of Investments
Equity in net earnings (losses) of investments was net losses of $10.1 million for the year ended December 31, 2016, compared to net earnings of $0.8 million for the year ended December 31, 2015. The change was due to the financial performance of SUPERNAP International and Planet3, our equity method investments in which we share in the losses and earnings of these entities. During 2015, SUPERNAP International recognized $10.0 million in revenue under a license agreement with a Thailand joint venture. During 2016, both of our equity method investment entities incurred net losses and in addition, we recorded an impairment for the full carrying value of our investment in Planet3 of $4.4 million.
93
Loss on Extinguishment of Debt
Loss on extinguishment of debt of $0.2 million for the year ended December 31, 2015 related to the May 2015 termination and full repayment of our previous credit facilities. There was no such extinguishment of debt in 2016.
Gain on Sale of Asset
Gain on sale of asset of $0.2 million for the year ended December 31, 2015 related to a gain on the sale of land owned by one of our wholly owned subsidiaries. There was no such gain in 2016.
Impairment of Notes Receivable
Impairment of notes receivable was $2.4 million for the year ended December 31, 2016 due to a full impairment in 2016 of the carrying value of notes receivable from Planet3. There was no such impairment in 2015.
Gain on Lease Termination
Gain on lease termination was $2.8 million for the year ended December 31, 2016 related to a gain in 2016 resulting from the termination of a customers lease of land for the development of office space on The Citadel Campus. There was no such activity in 2015.
94
Quarterly Results of Operations
The following tables set forth our unaudited quarterly consolidated statements of income data for each of the quarters indicated, as well as the percentage that each line item represents of our revenue for each quarter presented. The information for each quarter has been prepared on a basis consistent with our audited consolidated financial statements included in this prospectus, and reflect, in the opinion of management, all adjustments of a normal, recurring nature that are necessary for a fair statement of the financial information contained in those statements. Our historical results are not necessarily indicative of the results that may be expected in the future. The following quarterly financial data should be read in conjunction with our audited consolidated financial statements included in this prospectus.
Three Months Ended | ||||||||||||||||||||||||||||||||||||
Mar. 31, 2015 |
June 30, 2015 |
Sept. 30, 2015 |
Dec. 31, 2015 |
Mar. 31, 2016 |
June 30, 2016 |
Sept. 30, 2016 |
Dec. 31, 2016 |
Mar. 31, 2017 |
||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
Consolidated Statements of Income: |
||||||||||||||||||||||||||||||||||||
Revenue |
$ | 60,919 | $ | 64,314 | $ | 67,794 | $ | 72,843 | $ | 73,966 | $ | 80,832 | $ | 81,666 | $ | 81,888 | $ | 89,157 | ||||||||||||||||||
Cost of revenue |
31,421 | 35,394 | 39,045 | 35,200 | 37,376 | 40,984 | 47,029 | 43,455 | 45,375 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross profit |
29,498 | 28,920 | 28,749 | 37,643 | 36,590 | 39,848 | 34,637 | 38,433 | 43,782 | |||||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||||||
Selling, general and administrative expense |
10,467 | 11,109 | 11,306 | 12,369 | 16,777 | 17,506 | 18,225 | 18,912 | 19,343 | |||||||||||||||||||||||||||
Impact fee expense |
| | | | | | | 27,018 | | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Income (loss) from operations |
19,031 | 17,811 | 17,443 | 25,274 | 19,813 | 22,342 | 16,412 | (7,497 | ) | 24,439 | ||||||||||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||||||||||
Interest expense |
(1,573 | ) | (1,865 | ) | (2,182 | ) | (2,062 | ) | (2,197 | ) | (2,379 | ) | (2,273 | ) | (3,987 | ) | (4,020 | ) | ||||||||||||||||||
Equity in net earnings (losses) of investments |
(878 | ) | 4,333 | (1,527 | ) | (1,107 | ) | (1,120 | ) | (1,436 | ) | (1,260 | ) | (6,322 | ) | (441 | ) | |||||||||||||||||||
Loss on extinguishment of debt |
| (212 | ) | | | | | | | | ||||||||||||||||||||||||||
Gain on sale of asset |
| | 248 | | | | | | | |||||||||||||||||||||||||||
Impairment of notes receivable |
| | | | | | | (2,371 | ) | | ||||||||||||||||||||||||||
Gain on lease termination |
| | | | | | 2,801 | | | |||||||||||||||||||||||||||
Other |
287 | 50 | 175 | 226 | 182 | 8 | 246 | 406 | 350 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total other income (expense) |
(2,164 | ) | 2,306 | (3,286 | ) | (2,943 | ) | (3,135 | ) | (3,807 | ) | (486 | ) | (12,274 | ) | (4,111 | ) | |||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) |
$ | 16,867 | $ | 20,117 | $ | 14,157 | $ | 22,331 | $ | 16,678 | $ | 18,535 | $ | 15,926 | $ | (19,771 | ) | $ | 20,328 | |||||||||||||||||
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|
|
|
|
|
|
95
Three Months Ended | ||||||||||||||||||||||||||||||||||||
Mar. 31, 2015 |
June 30, 2015 |
Sept. 30, 2015 |
Dec. 31, 2015 |
Mar. 31, 2016 |
June 30, 2016 |
Sept. 30, 2016 |
Dec. 31, 2016 |
Mar. 31, 2017 |
||||||||||||||||||||||||||||
Consolidated Statements of Income as a percentage of revenue: |
||||||||||||||||||||||||||||||||||||
Revenue |
100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | ||||||||||||||||||
Cost of revenue |
52 | 55 | 58 | 48 | 51 | 51 | 58 | 53 | 51 | |||||||||||||||||||||||||||
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross profit |
48 | 45 | 42 | 52 | 49 | 49 | 42 | 47 | 49 | |||||||||||||||||||||||||||
Operating expenses |
||||||||||||||||||||||||||||||||||||
Selling, general and administrative expense |
17 | 17 | 17 | 17 | 23 | 22 | 22 | 23 | 22 | |||||||||||||||||||||||||||
Impact fee expense |
| | | | | | | 33 | | |||||||||||||||||||||||||||
|
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|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Income (loss) from operations |
31 | 28 | 26 | 35 | 27 | 28 | 20 | (9 | ) | 27 | ||||||||||||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||||||||||||||
Interest expense |
(3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (3 | ) | (5 | ) | (5 | ) | ||||||||||||||||||
Equity in net earnings (losses) of investments |
(1 | ) | 7 | (2 | ) | (2 | ) | (2 | ) | (2 | ) | (2 | ) | (8 | ) | | ||||||||||||||||||||
Loss on extinguishment of debt |
| | | | | | | | | |||||||||||||||||||||||||||
Gain on sale of asset |
| | | | | | | | | |||||||||||||||||||||||||||
Impairment of notes receivable |
| | | | | | | (3 | ) | | ||||||||||||||||||||||||||
Gain on lease termination |
| | | | | | 3 | | | |||||||||||||||||||||||||||
Other |
| | | | | | | | | |||||||||||||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total other income (expense) |
(4 | ) | 4 | (5 | ) | (4 | ) | (4 | ) | (5 | ) | (1 | ) | (15 | ) | (5 | ) | |||||||||||||||||||
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Net income (loss) |
28 | % | 31 | % | 21 | % | 31 | % | 23 | % | 23 | % | 20 | % | (24 | )% | 23 | % | ||||||||||||||||||
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Quarterly Trends in Revenue
Our quarterly revenue increased in each period presented primarily due to an increase in the sale of our services as a result of the construction and expansion of our data centers, increasing brand awareness and the success of our sales efforts with existing customers and new customers. Our revenue increased in the three months ended September 30, 2015, December 31, 2015, June 30, 2016 and March 31, 2017 due primarily to the timing of modular deployments of our data centers.
Quarterly Trends in Cost of Revenue and Operating Expenses
Our cost of revenue has increased over time as a result of our growth, primarily related to increased personnel-related costs due to increase in headcount and increased infrastructure costs to support our expanded operations and our continued investment in our services. Our cost of revenue has tended to be seasonal with increased costs primarily in the summer months due to increased energy costs. Going forward, we expect that our status as an unbundled purchaser of energy will help us to better manage the seasonality associated with energy costs by, among other things, enabling us to purchase energy using long-term contracts.
Our operating expenses have increased sequentially as a result of our growth, primarily related to increased personnel-related costs due to increase in headcount and increases in administrative and marketing expenses to support the expansion of our business and our continued investment in our growth. We experienced significant increases in operating expenses in the fourth quarter of 2016 due to the impact fee expense incurred as a result of the approval of our application with the PUCN to become an unbundled purchaser of energy, capacity and ancillary services from a new provider of electric resources. Our increase in selling, general, and administrative expense beginning in the three months ended March 31, 2016 was primarily driven by increased salaries and related expenses due to
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increased headcount and the costs of expanding The Citadel Campus and The Pyramid Campus prior to their openings that are not attributable to cost of revenue.
Liquidity and Capital Resources
Upon the completion of this offering, we will be a holding company and will have no material assets other than our ownership of Common Units of Switch, Ltd. As such, we will have no independent means of generating revenue or cash flow, and our ability to pay our taxes and operating expenses or declare and pay dividends in the future, if any, will be dependent upon the financial results and cash flows of Switch, Ltd. and its subsidiaries and any distributions we receive from Switch, Ltd. The terms of the amended and restated credit agreement limit the ability of Switch, Ltd., among other things, to incur additional debt, incur additional liens, encumbrances or contingent liabilities, and pay distributions or make certain other restricted payments (with certain exceptions and baskets, including, among other things, a restricted payment basket of $15.0 million per fiscal year).
As of March 31, 2017, we had $21.7 million of cash. As of March 31, 2017, our total indebtedness was comprised of debt and financing obligations totaling $563.2 million consisting of (i) $539.7 million of principal from our credit facilities (net of deferred debt issuance costs), as defined below, respectively, and (ii) $23.5 million from our capital lease obligations. As of March 31, 2017, we had access to $165.7 million in additional liquidity from our revolving credit facility. We believe we have sufficient cash and access to liquidity, coupled with anticipated cash generated from operating activities, to satisfy our anticipated cash needs for working capital and capital expenditures for at least the next 12 months, including repayment of the current portion of our debt as it becomes due and completion of our development projects. We plan to continue to finance our operations and capital expenditures from customers paying for our services, through the use of our credit facilities and through the proceeds of this offering.
In addition, following the completion of this offering, we will be obligated to make payments under the Tax Receivable Agreement. Although the actual timing and amount of any payments that we make to the Continuing Members under the Tax Receivable Agreement will vary, we expect that those payments will be significant. Any payments we make to Continuing Members under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Switch, Ltd. and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us.
Cash Flows
The following table summarizes our cash flows for the periods indicated (in thousands):
Years Ended December 31, |
Three Months Ended March 31, |
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2015 | 2016 | 2016 | 2017 | |||||||||||||
(unaudited) | ||||||||||||||||
Cash provided by operating activities |
$ | 129,281 | $ | 166,065 | $ | 41,506 | $ | 43,429 | ||||||||
Cash used in investing activities |
(196,344 | ) | (292,001 | ) | (51,402 | ) | (108,401 | ) | ||||||||
Cash provided by financing activities |
67,693 | 134,457 | 4,295 | 63,968 | ||||||||||||
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Net increase (decrease) in cash and cash equivalents |
$ | 630 | $ | 8,521 | $ | (5,601 | ) | $ | (1,004 | ) | ||||||
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Cash Flows from Operating Activities
Cash from operating activities is primarily generated from operating income from our colocation and connectivity activities.
During the three months ended March 31, 2017, cash provided by operating activities was $43.4 million, which consisted of net income of $20.3 million, adjusted by non-cash charges of $23.5 million and a net change of $0.4 million in our operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $20.0 million, equity-based compensation of $2.3 million, bad debt expense of $0.5 million and equity in losses of investments of $0.4 million. The change in our net operating assets and liabilities was primarily due to a $6.2 million decrease in accrued expenses primarily due to payments for vendor-related accruals, accrued power usage and accrued payroll liabilities and a $4.2 million increase in accounts receivable due to an increase in the number and amount of customer invoices during the period, partially offset by a $4.7 million increase in accounts payable due to the timing of invoices from vendors and related payments and a $5.3 million increase in deferred revenue due to the timing of billings and cash received in advance of revenue recognition primarily for recurring revenue.
During the three months ended March 31, 2016, cash provided by operating activities was $41.5 million, which consisted of net income of $16.7 million, adjusted by non-cash charges of $18.9 million and a net change of $5.9 million in our operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $15.3 million, equity-based compensation of $2.2 million, and equity in losses of investments of $1.1 million. The change in our net operating assets and liabilities was primarily due to a $1.7 million increase in deferred revenue due to the timing of billings and cash received in advance of revenue recognition primarily for recurring revenue. In addition, the change was due to a $1.3 million increase in accrued expenses primarily driven by an increase in payroll liabilities due to the timing of payments, a $1.2 million decrease in prepaid expenses and other assets due primarily to the timing of payments for prepaid taxes and prepaid maintenance, and a $0.7 million increase in accounts payable due to the timing of invoices from vendors and related payments, and a $0.6 million decrease in accounts receivable due to an increase in advance payments from customers.
During the year ended December 31, 2016, cash provided by operating activities was $166.1 million, which consisted of net income of $31.4 million, adjusted by non-cash charges of $89.0 million and a net change of $45.7 million in our operating assets and liabilities. The non-cash charges are primarily comprised of depreciation and amortization of $66.6 million, impairment of our investment in Planet3 of $7.7 million, equity-based compensation of $5.9 million, equity in losses of investments of $5.8 million, loss on disposal of property and equipment of $2.0 million and amortization of debt issuance costs of $0.9 million. The change in our net operating assets and liabilities was primarily due to an increase in accrued impact fee expense of $27.0 million as a result of the approval of our application to become an unbundled purchaser of electric resources to power our data centers, an increase of $12.0 million in deferred revenue and customer deposits due to the timing of billings and cash received in advance of revenue recognition primarily for recurring revenue, a $7.5 million increase in accrued expenses primarily due to an increase in vendor-related accruals and accrued payroll liabilities, partially offset by a $1.1 million increase in accounts receivable due to an increase in the number and amount of customer invoices during the period.
During the year ended December 31, 2015, cash provided by operating activities was $129.3 million, which consisted of net income of $73.5 million, adjusted by non-cash items of $61.8 million and a net change of $6.0 million in our operating assets and liabilities. The non-cash items are primarily comprised of depreciation and amortization of $55.4 million, equity-based compensation of $5.2 million, loss on disposal of property and equipment of $1.3 million and amortization of debt issuance
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costs of $0.6 million, partially offset by equity in net earnings of investments of $0.8 million. The change in our net operating assets and liabilities was primarily due to an increase of $4.5 million in prepaid expenses and other assets primarily due to increase in prepaid maintenance and other receivable, a decrease of $1.2 million in accounts payable due to the timing of invoices from vendors and related payments, and a $3.6 million increase in accounts receivable due to an increase in the number and amount of customer invoices during the period. These changes were partially offset by an increase of $2.9 million in deferred revenue and customer deposits due to the timing of billings and cash received in advance of revenue recognition primarily for recurring revenue.
As of June 1, 2017, we became an unbundled purchaser of energy. We expect to receive benefits in the form of lower energy costs going forward.
Cash Flows from Investing Activities
During the three months ended March 31, 2017, cash used in investing activities was $108.4 million, primarily consisting of capital expenditures of $107.0 million related to the expansion of our data center facilities and $1.4 million in cash outflow for an escrow deposit primarily related to the purchase of real property, improvements and personal property, which closed in April 2017.
During the three months ended March 31, 2016, cash used in investing activities was $51.4 million, primarily consisting of capital expenditures of $50.1 million related to the expansion of our data center facilities and an additional investment of $1.5 million in Planet3.
During the year ended December 31, 2016, cash used in investing activities was $292.0 million, primarily consisting of capital expenditures of $287.1 million related to the expansion of our data center facilities, purchases of notes receivable of $3.0 million, and an additional investment of $1.5 million in Planet3.
During the year ended December 31, 2015, cash used in investing activities was $196.3 million, primarily consisting of capital expenditures of $190.1 million related to the expansion of our data center facilities and our investment of $6.5 million in Planet3. These outflows were partially offset by proceeds from the sale of property and equipment of $1.2 million.
Cash Provided by Financing Activities
During the three months ended March 31, 2017, cash provided by financing activities was $64.0 million, consisting of $70.0 million in proceeds from borrowings made on our credit facilities, partially offset by $3.5 million in distributions to members and repayments of long-term debt of $2.5 million.
During the three months ended March 31, 2016, cash provided by financing activities was $4.3 million, consisting of $10.0 million in proceeds from borrowings made on our credit facilities, partially offset by $3.2 million in distributions to members and repayments of long-term debt of $2.5 million.
During the year ended December 31, 2016, cash provided by financing activities was $134.5 million, primarily consisting of $189.0 million in proceeds from borrowings made on our credit facilities, partially offset by distributions to members of $28.1 million, repurchases of member unit options of $15.1 million, and repayments of long-term debt of $10.0 million.
During the year ended December 31, 2015, cash provided by financing activities was $67.7 million, primarily consisting of $321.9 million proceeds from borrowings made on our credit facilities, partially offset by repayments of long-term debt of $223.6 million, distributions to members of
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$20.5 million, payment of long-term deposits of $4.4 million in connection with an agreement whereby our principal provider of power will design, construct, maintain and own a substation and related feeders that will service the development of future data center facilities on The Core Campus, payment of debt issuance costs of $2.8 million, taxes paid for net settlement of exercised options of $1.6 million, and repurchases of member unit options of $1.4 million.
Outstanding Indebtedness
On May 5, 2015, we entered into a credit agreement with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, which replaced our previous $250.0 million credit agreement. The credit agreement consisted of a $200.0 million term loan facility and a $400.0 million revolving credit facility, each with a term of five years.
Upon satisfying certain conditions, the credit agreement provided that we could increase the amount available for borrowing under the credit facilities no more than five times (up to an additional $125.0 million in total) during the term of the credit agreement. On May 2, 2016, we amended the credit agreement to increase the aggregate amount available for borrowing under the facilities by an additional $125.0 million and to modify certain other terms and conditions.
The facilities are collateralized by substantially all of our tangible and intangible personal property and guaranteed by certain of our wholly owned subsidiaries. Interest on the facilities is calculated based on a base rate plus the applicable margin or a LIBOR rate plus the applicable margin, at our election. Interest calculations are based on 365/366 days for a base rate loan and 360 days for a LIBOR loan. Base rate interest payments are due and payable in arrears on the last day of each calendar quarter, beginning December 31, 2015. LIBOR rate interest payments are due and payable on the last day of each selected interest period (not to extend beyond three-month intervals).
The facilities have, among other things, financial and other covenants. As of March 31, 2017, the maximum consolidated total leverage ratio was 4.00 to 1.00 and the minimum consolidated fixed charge coverage ratio was 1.50 to 1.00. The maximum consolidated total leverage ratio is subject to change periodically for future fiscal quarters. We were in compliance with these covenants as of March 31, 2017.
The terms of the facilities limit our ability, among other things, to return capital to equity interest holders, grant liens on its assets and incur additional debt.
On June 27, 2017, we amended and restated the former credit agreement to, among other things, increase our availability to $462 million. Additionally, on June 30, 2017, we made a distribution in the amount of $173.4 million to the Original Members, comprised of $73.4 million to certain members with unreturned capital contributions in accordance with our Third Amended and Restated Operating Agreement and $100.0 million to Original Members pro rata in accordance with their percentage interests. In connection with the distribution, we incurred borrowings under the amended and restated credit agreement of $173.4 million. Since March 31, 2017, our outstanding indebtedness has increased by $289.2 million. For a description of the amended and restated credit agreement, see Description of Certain Indebtedness.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements for any of the periods presented.
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Contractual Obligations
The following table summarizes our contractual obligations as of December 31, 2016 (in thousands):
Payments Due by Period | ||||||||||||||||||||
Less Than 1 Year |
1 to 3 Years |
3 to 5 Years |
More Than 5 Years |
Total | ||||||||||||||||
Long-term debt, principal(1) |
$ | 15,000 | $ | 40,000 | $ | 419,300 | $ | | $ | 474,300 | ||||||||||
Long-term debt, interest(2) |
13,668 | 25,778 | 4,270 | | 43,716 | |||||||||||||||
Capital lease obligations(3) |
5,896 | 4,016 | 4,367 | 33,636 | 47,915 | |||||||||||||||
Operating leases(4) |
5,340 | 10,095 | 7,603 | 59,367 | 82,405 | |||||||||||||||
Other contractual commitments(5) |
164,682 | 10,532 | 4,090 | 27,113 | 206,417 | |||||||||||||||
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$ | 204,586 | $ | 90,421 | $ | 439,630 | $ | 120,116 | $ | 854,753 | ||||||||||
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(1) | Represents principal payments only. We will pay interest on outstanding indebtedness based on the rates and terms summarized in Note 6 Long-term Debt to our consolidated financial statements. |
(2) | Represents interest expected to be incurred on our long-term debt based on obligations outstanding at December 31, 2016. |
(3) | Represents principal and interest. See Note 7 Leases to our consolidated financial statements. |
(4) | Represents minimum operating lease payments, excluding potential lease renewals. See Note 7 Leases to our consolidated financial statements. |
(5) | Represents primarily construction-related purchase orders for our data centers. Amounts also include the impact fee liability discussed above and estimated payments under renewable energy power purchase agreements. See Note 9 Commitments and Contingencies to our consolidated financial statements. |
The table above excludes any obligations under the Tax Receivable Agreement. Although the actual timing and amount of any payments that we make to the Continuing Members under the Tax Receivable Agreement will vary, we expect that those payments will be significant.
In January 2017, we entered into an expansion and five-year term extension on one of our operating leases, which resulted in an increase to future minimum lease payment obligations of $7.5 million over the new term.
On March 8, 2017, we entered into a firm power purchase agreement of electricity to purchase a minimum of 40 MW per energy hour for a term of 36 months, or a minimum purchase commitment of $33.4 million during the term, starting June 1, 2017.
In April 2017, we purchased approximately 25.1 acres of real property, improvements and personal property located near The Citadel Campus for a purchase price of $6.2 million. In June 2017, we purchased approximately 68.3 acres and 16 acres of land in Atlanta, Georgia for a purchase price of $2.4 million and $1.3 million, respectively, for The Keep Campus that is under development.
Since December 31, 2016, our outstanding indebtedness increased by $356.7 million.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to financial market risks, primarily in interest rates related to our debt obligations.
Interest Rate Risk
Our primary exposure to market risk is interest rate risk associated with our long-term debt. We evaluate our exposure to market risk by monitoring interest rates in the marketplace. We attempt to
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limit our exposure to interest rate risk by managing the mix of our borrowings and through our normal operating and financing activities. Borrowings under our credit agreement as of December 31, 2016 and March 31, 2017 bear interest at a margin above LIBOR or base rate (each as defined in the credit agreement) as selected by us. We had $472.1 million and $539.7 million of outstanding borrowings under our facilities as of December 31, 2016 and March 31, 2017, respectively. During the years ended December 31, 2015 and, 2016 and the three months ended March 31, 2017, the effect of a hypothetical 100 basis point increase or decrease in overall interest rates would not have had a material impact on our interest expense due to changes in interest rates.
We had cash and cash equivalents of $14.2 million, $22.7 million and $21.7 million as of December 31, 2015 and 2016, and March 31, 2017, respectively. Our cash and cash equivalents are held in cash deposits and money market funds. Due to the short-term nature of these instruments, we do not believe that we have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. Declines in interest rates, however, would reduce our future interest income. During the years ended December 31, 2015 and 2016 and the three months ended March 31, 2017, the effect of a hypothetical 100 basis point increase or decrease in overall interest rates would not have had a material impact on our interest income.
Internal Control over Financial Reporting
In connection with the audit of our consolidated financial statements as of and for the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. The material weakness was due to a failure of the information and communication component of internal control to provide complete and accurate output because of deficiencies in the communication process. Contracts executed by various departments were not communicated, on a timely basis, to the accounting department, resulting in recording of out-of-period adjustments that impacted the recognition and disclosure of amounts in the consolidated financial statements during the year ended December 31, 2016. We are implementing measures designed to improve our internal control over financial reporting to remediate this material weakness, including policies and procedures to improve our ability to communicate and share information in a timely manner, as well as designing and implementing improved processes and internal controls. In addition, we are formalizing our internal control documentation and strengthening supervisory reviews by our management.
While we believe that these efforts will improve our internal control over financial reporting, the implementation of these measures is ongoing and will require validation and testing of the design and operating effectiveness of internal controls over a sustained period of financial reporting cycles. We cannot assure you that the measures we have taken to date, and are continuing to implement, will be sufficient to remediate the material weakness we have identified or avoid potential future material weaknesses. If the steps we take do not correct the material weakness in a timely manner, we will be unable to conclude that we maintain effective internal control over financial reporting. Accordingly, there could continue to be a reasonable possibility that a material misstatement of our financial statements would not be prevented or detected on a timely basis.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with generally accepted accounting principles in the United States, or U.S. GAAP. The preparation of these financial statements requires our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses and related disclosures. Our estimates are
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based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these judgments and estimates under different assumptions or conditions and any such differences may be material. We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving managements judgments and estimates.
Revenue Recognition
We derive more than 95% of our revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services. The remainder of our revenue is from non-recurring revenue streams, such as installation and contract settlements. We commence revenue recognition for our services when all of the following criteria are met:
| there is persuasive evidence of an arrangement; |
| the service has been or is being provided to the customer; |
| collection of the fees is reasonably assured; and |
| the amount of fees to be paid by the customer is fixed or determinable. |
Revenue from recurring revenue streams are generally billed monthly and recognized ratably over the period to which the service relates. Contracts with our customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation. Revenue from connectivity services is recognized on a gross basis primarily because we act as the principal in the transactions, take title to services and bear credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.
Multiple Element Arrangements
We enter into multiple element revenue arrangements in which a customer may purchase a combination of the right to use network capacity (e.g., conduit and fiber optic cables), maintenance services and colocation services. Terms of performance, cancellation, termination or refunds in these arrangements are similar to those for individual stand-alone deliverables. The services we offer under these revenue arrangements qualify as separate units of accounting. Multiple deliverables within revenue arrangements are allocated to separate units of accounting if the deliverables meet both of the following criteria:
| the delivered items have value to the customer on a stand-alone basis. The items have value on a stand-alone basis if they are sold separately by any vendor or the customer could resell the delivered items on a stand-alone basis; and |
| if the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in our control. |
At the inception of a multiple element arrangement, we must: (1) determine whether and when each unit of accounting has been delivered or performed; (2) determine the fair value of each unit of accounting using the selling price hierarchy of vendor-specific evidence of fair value, or VSOE, third-party evidence, or TPE, or our best estimate of the selling price, or BESP; and (3) allocate the total price among the various units of accounting using the relative selling price method. Once the total price
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has been allocated among the various units of accounting, revenue is recognized on a monthly basis over the term of the agreement when the relevant revenue recognition criteria are met for each element, which is upon acceptance or use of the services by the customer.
VSOE generally exists when the deliverable is sold separately; however, in certain instances VSOE cannot be established if the deliverable cannot be priced within a narrow range or has a limited sales history. When VSOE cannot be established, the selling price for each element is established based on TPE. TPE is determined based on competitor prices for similar deliverables when sold separately. When the selling price is not able to be established using VSOE or TPE, BESP is used in the allocation of arrangement consideration. BESP is our best estimate of the price at which a product or service would be sold if it were sold on a stand-alone basis. We determine BESP for a service by considering multiple factors including, but not limited to, pricing practices, market conditions, competitive landscape, type of customer, geographies, internal costs and gross margin objectives. Revenue is allocated to rights to use network capacity and related colocation services and maintenance services under these arrangements based on TPE. Revenue allocated to other colocation services provided under these arrangements is based on VSOE.
Equity-Based Compensation
We measure equity-based compensation cost at the grant date for all equity-based awards made to employees and members based on the fair value of the awards, and recognize as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
We grant incentive units equity awards to our employees and members and these equity awards generally have only a service condition. The service-based condition of our equity awards generally is satisfied over a period of up to five years. We use the Black-Scholes option-pricing model to determine the fair value of our equity awards.
We estimate the fair value of our equity-based awards using the Black-Scholes option pricing model, which requires the input of highly complex and subjective variables. Our assumptions are as follows:
| Expected volatility. As we have not been a public company and do not have a trading history for our member equity units, the expected price volatility of the member equity units is estimated by analyzing the volatility of companies in the same industry and selecting volatility within the range. |
| Risk-free interest rate. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the equity awards. |
| Expected term. The expected term of the equity award is calculated by analyzing the historical exercise data and obtaining the weighted average of the holding period for the equity awards. |
| Expected dividend yield. The expected dividend rate is determined at the grant date for each equity award. |
We will continue to use judgment in evaluating the expected volatility and expected terms used for our equity-based compensation calculations on a prospective basis.
Because our member units are not publicly traded, we must estimate the fair value of our member equity units. Historically, for all periods prior to this offering, the fair values of member equity units were estimated on each grant date by our board of managers. In order to determine the fair value of our member equity units, our board of managers considered, among other things, contemporaneous
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valuations of our member equity units prepared by an unrelated third-party valuation firm in accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or AICPA Guide. Our board of managers exercised reasonable judgment and considered several objective and subjective factors to determine the best estimate of the fair value of our member equity units including:
| our historical and expected operating and financial performance; |
| current business conditions; |
| our stage of development and business strategy; |
| the likelihood of achieving a liquidity event, such as an initial public offering or sale of our company given prevailing market conditions and the nature and history of our business; |
| market multiples of comparable companies in our industry; |
| the lack of an active public market for our equity units; |
| the market performance of comparable publicly traded peer companies; and |
| macroeconomic conditions. |
In determining the fair value of our member equity units, we estimated the enterprise value of our business primarily using a weighted average approach of a combination of the following three methods: (i) publicly traded data center company multiples; (ii) data center precedent transaction multiples; and (iii) the discounted cash flow method based on our five-year forecast. The weighting of these three methods varied over time. Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events.
For equity awards after the completion of this offering, our board of directors intends to determine the fair value of each share of underlying common stock based on the closing price of our common stock as reported on the date of grant.
We recorded equity-based compensation expense of $5.2 million, $5.9 million, $2.2 million and $2.3 million for the years ended December 31, 2015 and 2016, and the three months ended March 31, 2016 and 2017, respectively. We expect to continue to grant equity-based awards in the future, and to the extent that we do, our equity-based compensation expense recognized in future periods will likely increase.
The intrinsic value of all outstanding equity awards as of March 31, 2017 was $ million based on the assumed initial public offering price of $ per share, which is the midpoint of the estimated offering price range set forth on the cover page of this prospectus, after deducting underwriting discounts and commissions and estimated offering expenses payable by us.
JOBS Act Accounting Election
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.
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Recent Accounting Pronouncements
See Note 2 to our Consolidated Financial Statements Summary of Significant Accounting PoliciesRecent Accounting Pronouncements for more information.
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What We Are
Switch is a technology infrastructure company powering the sustainable growth of the connected world and the Internet of Everything. Our mission is to enable the advancement of humanity by creating smart, resilient and sustainable infrastructure solutions that support the most innovative technology ecosystems.
Company Overview
We believe the future of the connected world depends on the sustainable and cost-effective growth of the internet and the services it enables. Using our technology platform, we provide solutions to help enable that growth. We believe we are a pioneer in the design, construction and operation of some of the worlds most reliable, secure, resilient and sustainable data centers. Our advanced data centers are the center of our platform and provide power densities that exceed industry averages with efficient cooling, while being powered by 100% renewable energy. Two of our data centers are the only carrier-neutral colocation facilities in the world to be certified Tier IV Design, Tier IV Facility and Tier IV Gold in Operational Excellence. While these certifications have been the highest classifications available in the industry, we are building our current facilities to our proprietary Tier 5 Platinum standards, which exceed Tier IV standards. Our platform has powerful network effects and nurtures a rich technology ecosystem that benefits its participants. We further enhance these benefits as we innovate and expand our platform ecosystem. We currently have more than 800 customers, including some of the worlds largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications providers.
The growing nexus between internet connectivity, internet-based services, data and analytics, and the advancement of computational processing power is rapidly expanding the amount of data that enterprises can access and manage. At the same time, the Internet of Everything is exponentially expanding the available data sources, as utility grids, automobiles, aircraft, home appliances, wearable devices and numerous other sources are all connecting to the internet. The compute capacity necessary to manage and analyze this data is also advancing and demanding increasing amounts of power to operate. We believe that traditional technology infrastructure is not capable of supporting the growing wave of mission critical data and increasingly powerful IT equipment.
The vast majority of our data centers are greenfield construction, and our critical infrastructure components are purpose-built to satisfy customers needs, drive efficiency and enable the deployment of highly advanced computing technologies. We build our facilities using Switch Modularly Optimized Designs, or Switch MODs. These designs allow us to rapidly deploy or replace infrastructure to meet our customers current and future data storage and compute requirements. Additionally, our patented designs have redefined traditional data center space and cooling, allowing our customers to achieve significantly higher power densities than are available in traditional data centers. We believe the combination of these design elements reduces our operational costs, minimizes investment risk and positions us to adapt as the Internet of Everything continues to evolve. Our technologies were all designed and invented by our founder, Rob Roy, and are protected by over 350 issued and pending patent claims. Since the opening of our first colocation facility, we have delivered 100% uptime across all of our facilities.
We presently own and operate three primary campus locations, called Primes, which encompass ten colocation facilities with an aggregate of up to 4.0 million gross square feet, or GSF, of space. These facilities have up to 415 megawatts, or MW, of power available to them. Our Primes consist of
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The Core Campus in Las Vegas, Nevada; The Citadel Campus near Reno, Nevada; and The Pyramid Campus in Grand Rapids, Michigan. In addition, we recently purchased land to develop a fourth Prime, The Keep Campus, in Atlanta, Georgia. Our Primes are strategically located in geographies that combine a low risk of natural disaster, favorable tax policies for customers deploying computing infrastructure and low latency connectivity to major metropolitan markets, such as Los Angeles, San Francisco, Silicon Valley, Chicago, New York, Northern Virginia and Miami. As a result, customers in these metropolitan markets can access our advanced colocation facilities while reducing exposure to the higher taxes, higher cost of power and higher risk of natural disaster that might be prevalent in other markets. In addition to our Primes, SUPERNAP International, S.A., or SUPERNAP International, our international joint venture, has deployed facilities in Italy and Thailand that collectively provide up to 904,200 GSF of space, with up to 100 MW of power available to these facilities. We can also use our Switch MOD technology to build single-user facilities, and we are actively pursuing opportunities to deploy this technology in a build-to-suit offering for our enterprise customers.
We have fostered the development of a robust technology ecosystem around our platform that consists of enterprises and service providers that include cloud and managed services providers and telecommunications carriers. Both our platform and our ecosystem have self-reinforcing network effects that benefit participants as both our platform and our ecosystem grows. As our platform and customer base expands, we continue to realize growing efficiencies of scale, which allows us to provide higher value services to our customers.
We believe our advanced platform, high level of service and competitive pricing create a disruptive platform with a powerful customer value proposition that differentiates us from many other existing solutions. Our advanced data centers are designed for efficiency and allow our customers to achieve higher than average power densities per cabinet with appropriate cooling, which we believe improves the performance and increases the life of our customers equipment. We located our data centers in areas with tax benefits, such as low or no sales tax on equipment, and access to competitively priced renewable power, both of which help further lower our customers total cost of ownership. Finally, our Combined Ordering Retail Ecosystem, or CORE, service aggregates our customers buying power, and can significantly lower many of our customers connectivity costs. We believe the power of our customer value proposition is evidenced by our customer loyalty and low annual churn rate, which we define as the reduction in recurring revenue attributed to customer terminations or non-renewal of expired contracts, divided by revenue at the beginning of the period. Our average annual churn rate over the three years ended December 31, 2016 was 1.4%.
We believe that our technologies enable attractive cash flow yields on invested capital. Our modular expansion and vertically integrated development approach allows us to deploy capital efficiently, which further increases our yields. Across our current facilities, we have generated on average a 22.7% yield on invested capital in 2016. We define cash flow yield on invested capital as Adjusted EBITDA less corporate taxes and maintenance capital expenditures, divided by total assets, less cash and equivalents, construction in progress, and non-interest-bearing liabilities.
We have achieved significant organic growth in our business and have a track record of strong financial performance. Our revenue has grown from $166.8 million in 2013 to $318.4 million in 2016, representing a compound annual growth rate, or CAGR, of 24.0%. For the same years, our Adjusted EBITDA grew from $95.5 million to $153.2 million, representing a CAGR of 17.1%. Our net income for the years ended December 31, 2013, 2014, 2015 and 2016 was $39.9 million, $56.5 million, $73.5 million and $31.4 million, respectively. Our net income for the year ended December 31, 2016 included a nonrecurring charge of approximately $27.0 million related to our becoming an unbundled purchaser of energy. For a reconciliation of Adjusted EBITDA, a non-GAAP financial measure, to net income, see Selected Historical Consolidated Financial and Other DataKey Metrics and Non-GAAP Financial Measures.
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Our Opportunity
Industry Background
Computational processing power continues to advance, and the amount of data that enterprises
must manage, analyze and monitor is dramatically increasing. For example:
| over 200 billion smart devices will be connected to the internet by 2020, compared to only 15 billion in 2015, representing a 68% CAGR, according to estimates by Intel Corporation; |
| an estimated 929 million wearable devices will exist globally by 2021, an increase of nearly three times the 325 million wearable devices in 2016, according to a white paper published by Cisco Systems; |
| smart cities will use 7.3 billion connected sensors by 2020, almost six times more than in 2015, representing a 42% CAGR, according to estimates by Gartner; |
| more than 75 million autonomous vehicles will be sold by 2035, according to IHS Markit estimates; and |
| over three gigabytes of data per person per day is created today, and this will grow by 38% per year through 2020, according to Technavio. |
The rapid rise in data traffic and the worlds reliance on the internet to deliver services and information is making the collection, storage and transfer of data one of the largest challenges created by the internet. According to a white paper published by Cisco Systems, global internet traffic is expected to grow to 15.3 zettabytes in 2020, up from 4.7 zettabytes in 2015, representing a CAGR of 27%. Similarly, total data center storage installed capacity is expected to grow at a 35% CAGR to 1.8 zettabytes in 2020 from 0.4 zettabytes in 2015.
The power requirements and financial costs to support this growth in data, traffic and storage are massive and growing. Based on a 2016 U.S. Department of Energy report, U.S. data centers consumed approximately 70 billion kilowatt-hours of electricity in 2014, representing 1.8% of total energy consumption in the United States and equivalent to the amount consumed by 6.4 million average American homes. According to 451 Research, global data center colocation spending is expected to grow at a 12% CAGR from $29.7 billion in 2016 to $47.4 billion in 2020. At the same time, service provider data centers are only beginning to penetrate the data center market. International Data Corporation predicts that, by 2019, service provider data centers will account for only 28% of the worldwide data center capacity by square footage compared to 13% in 2016.
Industry Limitations
Despite the continued growth of traditional data center infrastructure and the continued demand for the public cloud due to its cost-effectiveness and pay-as-you-go scalability, we believe that traditional data center infrastructure and the public cloud are not optimally suited to support the growing wave of mission critical enterprise data applications and increasingly powerful IT equipment for several reasons, including the following.
First, we believe that increases in server density are beginning to strain the current power and cooling capacity of traditional colocation data centers. As IT hardware advances, servers increase in power but decrease in size, generating more heat and requiring more cooling per cabinet. Chip feature sizes have been repeatedly scaled down to fit more transistors in smaller chips. The nodes on a chip shrank from 30,000 nanometers, or nm, in 1963 to 14 nm in 2016, and are expected to reach 5 nm by 2026. We expect these trends will require many traditional data center companies and enterprise-built data center facilities to attempt to retrofit their existing infrastructure to accommodate the additional
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weight of denser cabinets and the additional equipment necessary to power and cool those cabinets. Current designs typically include raised floors and cooling equipment installed on the ceiling or roof. Retrofitting these designs, even if possible, would be time-consuming, expensive and highly disruptive to existing customers, and may still not allow a data center to keep pace with technological advances.
Second, we believe that the public cloud is not an ideal solution for certain business critical data storage and computing needs. Large or sophisticated workloads may be expensive to run in the public cloud or may require higher availability and reliability than the public cloud provides. Enterprises with sensitive or regulated data, such as financial institutions and healthcare companies, may be unwilling or unable to use the public cloud for security-related or compliance reasons. In addition, some workloads require an active-active environment, which necessitates two physical environments in close proximity to each other. Further, the public clouds shared servers are not an efficient computing environment to run analytics such as advanced machine-learning algorithms, analyze sensitive medical device data or manage autonomous vehicle networks.
Third, given the limitations of both the public cloud and the enterprise-built facilities, we expect enterprises to increasingly deploy IT equipment across hybrid cloud and colocation environments, with mission critical data stored at a colocation facility. As a result, the resiliency and security of the colocation facilities will take on even greater importance. There are significant business risks and potential costs associated with running mission-critical applications in a physical environment that is not 100% resilient and secure. These costs include lost revenue, damage to mission critical data, damage to equipment, legal and regulatory impact, and decline in brand value and reputation. In some instances, the costs can be significantly higher. For example, a recent five-hour outage cost a national airline millions of dollars in revenue.
Finally, we believe that enterprises are beginning to recognize significant value from environments that encourage and facilitate interaction among their various constituents. The deeper and broader the participation that occurs within the environment, the greater the value to the various participants. As a result, data centers can add significant additional value by bringing together enterprises, cloud and managed services providers and telecommunications carriers in an environment that fosters communication, collaboration and innovation. We believe these elements will be difficult to find among traditional colocation data centers.
We believe a significant opportunity exists for data centers that can address the shortcomings of traditional colocation facilities, enterprise-built facilities and public cloud offerings.
Our Competitive Strengths
We believe we distinguish ourselves from typical colocation providers and other technology infrastructure companies through our competitive strengths, which include:
Purpose-Built, Highly-Resilient, Patented Solutions
Our critical infrastructure components are purpose-built to satisfy customers needs, drive efficiency and enable the deployment of highly advanced computing technologies, and our designs are protected by over 350 issued and pending patent claims. Our Switch MODs allow us to rapidly deploy or replace infrastructure as our customers needs evolve. We believe this reduces operational costs, minimizes investment risk and facilitates our ability to adapt as the Internet of Everything continues to evolve.
We have redefined data center space and cooling, allowing our customers to achieve higher power densities than they can in traditional data centers. For example, while traditional data centers
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delivered an average of 5 to 6 kW per cabinet in 2015, we currently deliver more than 55 kW of usable power per cabinet in one of our customers multi-cabinet deployments. Our power densities enable our customers to include more IT equipment per cabinet than in typical data center environments, which can reduce space requirements and the associated monthly costs and set-up costs and drive down in-cabinet latency. Additionally, we believe our ability to run more powerful cabinets at the appropriate temperature improves performance and extends the life of our customers equipment. This results in lower total cost of ownership for our customers.
We have the only carrier-neutral colocation facilities in the world to be certified Tier IV Design, Tier IV Facility and Tier IV Gold in Operational Excellence, all of which were among the highest classifications available in the industry at the time. This requires fully redundant systems and total fault tolerance. We utilize the most stringent operational protocols to ensure our customers infrastructure is always on. As such, we have delivered 100% uptime across all of our facilities since the opening of our first colocation facility. In an effort to increase transparency and enhance the reliability of data center rating standards, we recently introduced a proprietary Tier 5 Platinum standard. This standard exceeds the Tier IV Gold certifications and incorporates more than 30 additional elements critical to data center design and constant operation. These elements include even more stringent parameters regarding long-term power system capabilities, the number of available carriers, zero roof penetrations, the location of cooling system lines in or above the data center, physical and network security and 100% use of renewable energy. We currently build our facilities to this Tier 5 Platinum standard.
Differentiated Technology Ecosystem Underscored by Powerful Network Effects
We operate a dynamic technology ecosystem that brings together a wide variety of parties. Many of the participants in our ecosystem collaborate and engage in commerce with one another to enhance their own businesses. As we continue to innovate, we believe our customer value proposition strengthens, attracting new customers and encouraging existing customers to grow with us. This expanding, diverse mix of enterprise customers attracts cloud service providers, managed services providers and telecommunications carriers. This growing base of service providers, in turn, attracts other new enterprise customers seeking an environment with diverse, high-quality service providers and other innovative companies with which to collaborate.
The powerful Switch technology ecosystem creates value for our enterprise customers in the form of telecommunications purchasing, robust service provider access, private interconnection alternatives among enterprise customers and the opportunity to collaborate with other participants in our ecosystem. For example, our CORE service aggregates our customers buying power and can significantly lower customers connectivity costs. The ecosystem yields intrinsic value for us by lowering our customer acquisition costs and enhancing our customer value proposition, which we believe drives further customer loyalty. In addition, because many of our customers choose to run mission-critical and advanced applications within our facilities, we gain exposure to emerging technologies. We believe this provides us with unique visibility into future trends and bolsters our ability to plan for evolving needs.
Commitment to Sustainability
We believe that while data runs the planet, it should not ruin the planet. We were the only company recognized by Greenpeace in its 2017 Clicking Clean report as having a 100% clean energy index. Our energy index was higher than every other technology company identified in the report, including Apple, Facebook, Google, Microsoft and Salesforce. Additionally, we were the only company in the report to receive an A grade in all five categories measured by Greenpeace, and our overall A grade outperformed all of the other data center operators, including Equinix, which received a clean energy index of 20% and a B grade, Digital Realty Trust, which received a clean energy index of 21%
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and a C grade, and DuPont Fabros, which received a clean energy index of 7% and an F grade. We believe that many technology and infrastructure companies, as well as their customers and clients, evaluate progress towards achieving clean energy goals by reference to the company scorecards included in the Greenpeace report.
Through technological innovation, industry partnerships and public advocacy, we also support renewable energy production facilities. While we are proud of our achievements in safeguarding the future of our planet, we believe our achievements in sustainability also drive customer demand. More than ever, enterprises are searching for solutions to address their own clean energy goals. Deploying IT equipment within a Switch data center helps our customers achieve their green energy objectives and reduce their carbon footprint.
Our Strong and Trusted Brand
Trust, innovation and perfection are hallmarks of the Switch brand.
We recognize the level of trust customers place in us to house and protect their IT equipment. We operate under the slogan Truth in Technology, which embodies the notion that the product should be so amazing that nothing more than the truth is necessary to sell it. We endeavor to further safeguard our customers trust by striving to deliver perfection in all that we do, and we are proud to have delivered 100% uptime across all of our facilities. However, we are never satisfied, and we continually strive to innovate and deliver novel solutions for the emerging challenges our customers face as technology and business needs evolve.
Our reputation and track record contribute to our efficient and robust organic growth. We have grown our customer base primarily through industry and customer referrals, and our customers tend to increase their spending with us over time, demonstrating the power of our brand and the quality of our solutions. As a result, our sales and marketing spend for the year ended December 31, 2016 was 3.7% of revenue. We believe this is among the lowest in the industry.
Visionary and Experienced Leadership Underscored by a Culture of Innovation and Execution
Our Founder, Chief Executive Officer and Chairman, Rob Roy, is a serial inventrepreneur who is a recognized expert in advanced end-to-end solutions for mission-critical facilities. Rob Roy first invented his design for the Switch MOD more than a decade ago and since then has added numerous inventions and corresponding patent claims to the Switch portfolio. The designs of our data center facilities are protected by over 350 issued and pending patent claims documenting inventions by Rob Roy.
Rob Roy has instilled in us the practice of Switchful Thinkingthe state of constant willingness to change and adapt and to produce the best solutions through innovation and invention. We were built and are led by a management team of technology futurists who believe that everything is possible through listening, intellectualizing, forming a plan and executing.
We have a deep and experienced senior management team comprised of 16 members, who collectively have over 135 years of experience at Switch, and 13 of whom have been with Switch for more than five years.
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Our Growth Strategy
Our goal is to enable the current and future compute needs of our customers and to facilitate technological advancement through smart and sustainable infrastructure solutions designed to support the most innovative technology ecosystems in the world. To accomplish this, we plan to:
| Continue to Grow Our Existing Prime Campus Locations. We currently operate The Core Campus, The Citadel Campus and The Pyramid Campus in or near Las Vegas, Reno and Grand Rapids, respectively, and have secured land for The Keep Campus in Atlanta. These Primes currently encompass ten data centers with an aggregate of up to 4.0 million GSF of space and up to 415 MW of power available to these facilities. We plan to continue to expand these Primes and actively pursue additional customers with strategic fit for our ecosystem, as well as sell additional solutions to existing customers. Each of our Primes has room for expansion, and we currently have designs to add up to approximately 5.9 million GSF of additional space to The Citadel Campus and approximately 940,000 GSF of additional space to The Pyramid Campus. |
| Expand into New Geographies in the United States. We intend to continue to evaluate geographic expansion opportunities for our data center facilities, focusing on areas within the United States with limited or no natural disaster risks, favorable business and tax climates, close proximity to major cities, robust telecommunications networks, and significant customer demand. For example, we recently secured land for The Keep Campus to expand geographically into the southeast and mid-Atlantic United States. We believe this approach, combined with our ability to deploy capital efficiently through our modular design, reduces the risks associated with our geographic expansion and enhances the strategic value of our new locations. |
| Grow Our Single-User Line of Data Centers. Our Switch MOD design enables us to rapidly deploy new facilities in a single-user configuration. We believe this expands our addressable market opportunity in the United States and represents a potential new source of revenue. We may decide to pursue these single-user opportunities directly, or by licensing our intellectual property to third parties in U.S. markets that may not be strategic to us or that are not readily accessible. |
| Leverage Our Unique Technology Ecosystem to Drive Interconnection Growth. Our ecosystem connects more than 800 customers, including over 100 cloud and managed services providers and 50 telecommunications providers, which creates an important hub for the Internet of Everything. We plan to support our customers interconnection needs by continuing to increase our cross connect and external broadband offerings. |
| Maintain and Extend Our Technological Leadership. We have a long history of innovation and, led by Rob Roy, we are a dynamically inventive organization. We plan to continue to invest in the development of new technologies in order to continue improving our standards for security, availability and scalability. Additionally, we intend to leverage our patented technologies and designs to strategically pursue new, adjacent market opportunities outside our core business. By leveraging our technology and leadership in data center design, we believe we can solve new problems created by the rapid expansion of the internet, data storage and analytics. |
| Pursue Strategic Partnerships. We may enter into strategic relationships with a variety of partners that contribute to our business. For example, rather than simply offering our customers connectivity to public cloud environments, frequently referred to as being an on ramp to the cloud, we may partner with public cloud providers to address that portion of their customers needs that require higher density and reliability than is typically available from public cloud offerings. To facilitate these potential partnerships, we plan to expand to locations |
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near hyperscale cloud deployments where we can provide colocation for cloud customers mission critical needs. |
Our Technology
Our Solution
We design, construct and operate super scale data centers that address the growing challenges facing the data center industry. Key elements of our data centers include:
Modularly Optimized Design
The modular design of our data centers is enabled by our patented Switch MOD products. The Switch MOD architecture allows us to build colocation data centers of various sizes by combining multiple Switch MODs into a single structure. For example, at The Core Campus, each of our LAS VEGAS 8 and LAS VEGAS 9 facilities were constructed by combining multiple Switch MODs. Combining Switch MODs allows for shared power sources and increased operational efficiency.
We can also build any of our Switch MODs in a single-user configuration. This provides an alternative to traditional colocation for customers with large, dedicated compute and data storage needs. Regardless of whether they are used for colocation or single-user purposes, we design, manufacture and operate our Switch MODs to meet our proprietary Tier 5 Platinum standard.
The Switch POWER SPINE is an innovative adaptation allowing increased modularity in data center architecture. The Switch POWER SPINE provides the structure and pathway to provision power from any power room to any cabinet within the data center. This allows for the delivery of additional circuits to any cabinet over many years in an efficient and organized fashion. The POWER SPINE also reduces construction costs by placing the overhead weight of the heavy power conduits on the concrete steel-reinforced slab on grade floor, reducing the roof load and infrastructure needed to support that load. Placing the POWER SPINE on the grade floor also increases the seismic integrity of the facility.
The Switch Power Distribution Units, or PDUs, are part of our system-plus-system color-coded power components, which provide modular power and allow the data center to deliver 100% power uptime.
Power Density and Cooling Capacity
One of the most significant challenges faced by traditional colocation facilities is the need to increase their power density and cooling capacity to keep pace with the increases in IT equipment power requirements and heat exhaustion. Traditional data centers are designed with a raised floor and internal Computer Room Air Conditioner, or CRAC, units that take up valuable floor space. In these traditional environments, the hot air exhausted by IT equipment blends with the cold air provided by the CRAC units, which causes the temperature to rise. As customers add more equipment, the data center operator must install additional internal CRAC units. Customers in these traditional data centers are required to leave portions of the cabinets empty to reduce the amount of heat coming out of the cabinet, which forces the customer to buy additional space for their equipment to accommodate for these cooling restrictions. We expect many traditional colocation facilities will be required to attempt to retrofit their infrastructure, if possible, to accommodate the additional weight of denser cabinets and the additional equipment necessary to power and cool those cabinets. Without these retrofitting changes, we believe these traditional colocation facilities will not be able to accommodate the newer servers or the higher densities required by customers who want to run them.
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We have developed patented technologies that have redefined data center space and cooling, allowing customers to deploy high density and scalable IT architectures to support demanding and mission critical workloads. Our data centers are designed to enable us to adapt to customers needs for increased power and densities without retrofitting our existing facilities. These technologies include:
| 100% Hot Aisle Containment Rows. We refer to our patented 100% Hot Aisle Containment Row technology as the Switch T-SCIF, or Thermal Separate Compartment in Facility. As depicted in the figure below, the T-SCIF creates a fully contained hot aisle between parallel rows of cabinets. The heat from customers equipment exhausts into the hot aisle, where it vents up into a hot-air plenum and out of the data center via extraction fans. Simultaneously, cold air is released from the overhead vents in the cold room into the intakes of the IT equipment in the cabinets, which cools the equipment. The exhausted hot air is never allowed to blend back into the cold room, which helps ensure that our customers IT equipment operates in the correct environmental conditions. Using this cooling method, we are able to cool power levels that significantly exceed those of traditional data centers. For example, while traditional data centers delivered an average of 5 to 6 kW per cabinet in 2015, we currently deliver more than 55 kW of usable power per cabinet in one of our customers multi-cabinet deployments. Our ability to support these increased densities enables our customers to use and buy less cabinet space to house their equipment, which reduces the cost of their deployment. Similarly, the ability to handle these increased densities allows us to deploy more power on less space, driving a higher return on capital. |
| Exterior Wall Penetrating Multi-Mode HVAC Units. We provide cooling to the T-SCIFs using our patented Exterior Wall Penetrating Multi-Mode heating, ventilation and air conditioning, or HVAC, units that we refer to as the TSC 500, TSC 600 and TSC 1000. The units are attached to the exterior wall of the Switch MOD, which alleviates the cost of reinforcing the data center floor or roof to support the weight of HVAC equipment, while also enabling complete segregation of hot and cold air in the data center. The exterior location of our TSC units eliminates the need to bring water into the data center, frees up valuable IT space for cabinet deployments and allows us to repair or replace any single TSC without disrupting the data center environment. Each of our TSC 500, TSC 600 and TSC 1000 units |
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can take advantage of multiple modes of cooling depending on the environment, which enables us to construct facilities that can be cooled entirely without water. We believe this combination of cooling methods makes our facilities the most efficient and resilient large-scale commercial data centers ever constructed. |
| Hot and Cold Containment Segregation Structure. The Switch BLACK IRON FOREST is the framework that supports the weight of the 100% Hot Aisle Containment Rows within a T-SCIF, the ceiling for the heat containment chamber, and the power delivery pathways for each uninterruptible power system, or UPS, and cabinet system-plus-system PDU. This increases the stability and integrity of our facilities by distributing all overhead weight to a concrete steel-reinforced slab on grade floor. This structure is also connected horizontally across the facility which increases the physical stability of the facility. In addition, this structures thermal qualities help efficiently maintain the temperature within the data center because all of this metal gets cold from all the cold air blowing on it all the time, and stays cold, radiating cold air through the room and helping to keep the room cold. |
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Resiliency
Another challenge faced by all data centers is the ability to assure customers that their IT equipment remains operational despite utility power outages or other unplanned occurrences. Since the opening of our first colocation facility, we have delivered 100% uptime to our customers. To accomplish this, we have implemented a tri-redundant design, consisting of three separate power systems with no single points of failure. Additionally, each power system contains its own generators and UPSs. Effectively, one entire system can experience a failure without our customers experiencing any downtime. Other proprietary elements that contribute to our resiliency include:
| Redundant Data Center Roofing System. Switch SHIELD is a patented system consisting of an inner roof and outer roof that are separated by nine feet. Both roofs are solid steel, unpenetrated, watertight, airtight, and rated to withstand winds up to 200 miles per hour. If the outer roof is damaged, the inner roof still protects our customers IT equipment. Switch SHIELD mitigates extreme weather conditions and, with its dual-roof architecture, allows the maintenance, repair or replacement of the roof components while protecting the critical system operations of the data center below, even during a full roof replacement. |
| Multi-System Power Containers. The Switch POD, or Power Optimized Delivery, consists of a separate, color-coded, tri-redundant system in a system-plus-system configuration. This tri-redundant design reinforces our mission-critical focus on delivering 100% power uptime. |
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| Data Center Infrastructure Management System (DCIM). The advanced infrastructure solutions that power, cool, connect and protect our data centers are monitored and optimized with our Living Data Center, or LDC, software. This Switch-developed and supported software monitors all the critical infrastructure of the data center macro-environment and the micro-environments for each customer. Our customers can securely access data pertaining to each of their deployments on a real-time basis as LDC dynamically updates and displays information synthesized from thousands of sensors deployed throughout each facility. |
Our Campus Locations
As of June 1, 2017, we have the following Prime Campuses operating or under development at strategic locations in the United States, encompassing ten data centers:
| The Core Campus. The Core Campus in Las Vegas, Nevada currently encompasses eight separate data centers with up to approximately 2.0 million GSF of space and up to 275 MW of 100% renewable power available to these facilities. We have one additional data center under construction at The Core Campus, which we expect will be operational in 2018 and that will provide approximately 340,000 GSF of additional space and have up to 40 MW of 100% renewable power available to the facility. The Core Campus location offers approximately 5- and 6-millisecond latencies to Southern California and Phoenix, respectively. |
| The Citadel Campus. The Citadel Campus near Reno, Nevada is designed to be the worlds largest data center campus. Our first data center in The Citadel Campus, which we believe will be the largest data center in the world upon completion, opened in November 2016. This data center is designed to include up to approximately 1.4 million GSF of space and have up to 130 MW of 100% renewable power available to the facility. We have plans to build seven additional data centers at The Citadel Campus that will provide up to approximately 5.9 million GSF of additional space and have up to 520 MW of 100% renewable power available to the facilities. We anticipate that the first of these data centers will become operational in 2019, with the remaining to be constructed as necessary to meet customer demand. The Citadel Campus location offers approximately 4-millisecond latency to Northern California. |
| The Pyramid Campus. The Pyramid Campus is our Northeastern Prime and is located in Grand Rapids, Michigan. It was designed to be the largest data center campus in the eastern United States. The first data center space became available in the Switch Pyramid, an adaptive reuse of the former Steelcase Pyramid, in June 2016. The Switch Pyramid is designed to include up to 220,000 GSF of space and have up to 10 MW of 100% renewable power available to the facility. The Pyramid Campus is planned to include up to two additional data centers that will provide up to approximately 940,000 GSF of additional space and have up to 100 MW of 100% renewable power available to the facilities. We expect to construct these facilities as necessary to meet customer demand and anticipate the first will become |
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operational in 2019. In addition to serving the Michigan market, The Pyramid Campus location offers approximately 4-millisecond latency to Chicago. |
| The Keep Campus. The Keep Campus is our planned Southeastern Prime under development and located in Atlanta, Georgia. We began developing the campus in June 2017 and expect to begin construction in the fourth quarter of 2017, with data center space available in 2018. |
The Core Campus and The Citadel Campus are connected through a fiber network known as the Switch SUPERLOOP. The Switch SUPERLOOP gives customers the advantages of a highly available yet low latency fiber network in close proximity to the major markets of California, but without the high taxes, the high cost of power or the high risk of natural disasters associated with California. The latency between The Core Campus and The Citadel Campus locations is approximately 7 milliseconds using the Nevada portion of the SUPERLOOP. This connectivity enables customers to deploy mission-critical infrastructure and workloads in a large active-active data center configuration. It also provides geographical redundancy of data center deployments while staying within Nevadas tax-advantaged business climate. Through our carrier partners, the Switch SUPERLOOP location also provides approximately 4-millisecond connectivity from The Citadel Campus to the Bay Area and approximately 5-millisecond connectivity from The Core Campus to Southern California.
We carefully chose the locations of our U.S. campuses based on characteristics that we believed would help drive resiliency, performance and cost efficiencies for our customers. Our Prime campus locations are located in areas with low natural disaster risk. For example, the State of Nevada boasts the lowest natural disaster rating in the Western United States. Additionally, each of these locations offers favorable tax and economic development policies that provide zero or low-tax environments for our customers to deploy IT equipment. While all of our locations offer a lower-cost source of 100% renewable power, there are additional efficiency advantages. For example, the Nevada climate is characterized by low humidity and relatively stable temperatures for most of the year. This improves cooling efficiencies and reduces power consumption. We own most of our facilities, and where the land and shell are not owned, we hold long-term leases on those assets.
In addition to our Primes, SUPERNAP International has deployed facilities in Italy and Thailand that collectively provide up to 904,200 GSF of space and have up to 100 MW of power available to the facilities.
Our Platform Has Powerful Network Effects and Nurtures a Rich Technology Ecosystem
Our technology infrastructure platform supports a dynamic technology ecosystem bringing together enterprises and service providers, including cloud and managed services providers and telecommunications carriers. Participants benefit from the proximity to these service providers, customers and collaborators. Our platform and our ecosystem have independent but synergistic self-proliferating network effects that benefit participants as we continue to innovate, our platform evolves and our ecosystem grows.
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As we continue to improve and enhance our technology, we believe our customer value proposition grows stronger. In turn, our ability to deliver increasing value to our customers attracts new customers and encourages existing customers to grow with us.
Our Technology Ecosystem Creates Significant Value and Has Powerful Network Effects
Our super scale data centers are akin to a large and dynamic digital city, which is home to a wide variety of technology citizens. These citizens engage in commerce with each other and collaborate to enhance their offerings to the world in general. All benefit from the density of our facilities, the proximity to each other and the opportunity to interact in a safe, secure and stable environment. Our ecosystem includes numerous enterprises from a wide variety of business segments, many of which are operating their most dense deployments and hosting mission-critical data and applications. These enterprises attract other participants within the ecosystem, such as cloud platform providers, managed services providers and telecommunications carriers that we refer to collectively as ecosystem service providers.
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In turn, the presence of these ecosystem service providers attracts other new enterprise customers seeking to collaborate with our ecosystem service providers. This further differentiates our ecosystem by increasing customer diversity and the range of mission-critical applications run within a single campus. We proactively foster an environment where technology companies can connect and innovate on various projects, which further increases participation in the ecosystem.
The powerful Switch technology ecosystem envisioned by Rob Roy creates value for our enterprise customers, such as:
| Telecommunications Purchasing. The scale of our campuses attracts a robust network of telecommunications carriers to our facilities that is mutually beneficial to our customers and the carriers. The size and diversity of customers in our campuses generate significant demand for connectivity, while at the same time providing a cost effective entry point for carriers. Because of Rob Roys inventions, Switch can fit a significantly larger amount of customers into each data center campus, therefore on-net telecommunications carriers can sell large quantities of services to this ecosystem of customers. Our CORE purchasing cooperative aggregates the buying power of our customers, enabling us to provide significant cost-savings on connectivity, while also maintaining a flexible and expansive carrier partner ecosystem from which our customers can choose. Customers can use CORE to acquire connectivity services outside of our campuses. |
| Service Provider Access. Our Switch CLOUD ecosystem provides our customers with direct access to more than 100 cloud and managed services providers and the flexibility to leverage the right mix of on- and off-premise public and private cloud services. By establishing these connections within our facility, our customers enjoy low-latency, highly secure and flexible access to multiple cloud providers to meet their unique business requirements. In 2015, Data Center Frontier ranked The Core Campus #1 out of the Top 10 Cloud Campus Ecosystems, ahead of colocation facilities provided by Equinix, Digital Realty and DuPont Fabros. |
| Interconnectivity. Our ecosystem connects more than 800 customers, including over 100 cloud and managed services providers and more than 50 telecommunications providers, which enhances our customers ability to inter- and cross-connect. The ability for customers to privately interconnect has many benefits including reducing costs, optimizing performance and satisfying regulatory requirements. Interconnecting within our data center allows customers to avoid the expense associated with long-haul dedicated connectivity and provides reduced latency and higher availability. By cross-connecting within our facilities, regulated entities can avoid the need to exchange traffic over the internet, thereby satisfying regulatory security requirements in a more cost-efficient manner. |
| Collaborative Innovation. Our dedicated non-commissioned sales team is driven to help our customers connect, innovate and develop technologies of the future and actively works to foster collaboration amongst our ecosystem participants. Because our sales force is non-commissioned, they are enabled and encouraged to build positive relationships and foster interaction between our customers on a platform grounded in truth. This is part of our Truth in Technology commitment. For example, we connected a small Internet Protocol television, or IPTV, company in our ecosystem with a large hospitality company in our ecosystem that was frustrated with the performance of, and options available on, the televisions in its hotel rooms. We also assisted them with their technical collaboration. As a result, the IPTV company now provides services to over 5,000 hotel rooms operated by the hospitality company. We believe our ecosystem played a key role in initiating and developing this successful relationship. |
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Our technology ecosystem also creates intrinsic value for Switch, such as:
| Visibility into Future Technologies. Our customers run some of their most mission-critical and advanced applications in our super scale facilities and our exposure to that technology gives us unique visibility into future trends and allows us to plan for future needs. |
| Lower Customer Acquisition Costs. Our ecosystem attracts customers. This natural and self-reinforcing phenomenon results in less time and money spent acquiring customers. |
| Customer Loyalty. Our ecosystem helps support our strong customer value proposition, which in turn creates customer loyalty. We believe this loyalty is evidenced by our low annual churn rate, which averaged approximately 1.4% over the last three years. Additionally, in the quarter ended March 31, 2017, approximately 56% of our revenue was derived from parties that had been our customer for more than five years. Moreover, our customers regularly expand their deployments within our facilities. For example, in each of the years ended December 31, 2014, 2015 and 2016, 67% or more of the entities that were our customers at the end of the immediately preceding year increased their spending with us, and the total annual revenue increase from those customers that increased spending was at least 22%. Additionally, revenue from customers whose first full year of operations with us was 2013 grew at a CAGR of approximately 25% from 2013 to 2016. |
Our Customer Scale and Density allows us to offer Collaborative Services
As our platform and customer base continues to expand, we continue to realize growing efficiencies and benefits of scale at each of our Primes. Our large and growing customer base within each Prime has provided us with the economies of scale necessary to provide our customers valuable ancillary services, such as Switch CONNECT and Switch SAFE.
| Switch CONNECT. Switch CONNECT provides telecommunications audit and agency services that help our customers evaluate network needs and purchase substantially discounted telecommunications services through CORE, our purchasing cooperative. CORE aggregates the buying power of the over $5 trillion combined market capitalization of the customers in our ecosystem. Our Switch CONNECT team has achieved savings in excess of 50% for our customers compared with their previous telecommunications spend. |
| Switch SAFE. Switch SAFE provides our customers with a large scale, always-on distributed denial of service (D/DoS) attack mitigation platform. We work with customers to understand attack profiles and configure networks to respond to the evolving threat landscape. Switch SAFE is capable of managing attacks of up to 300 gigabits-per-second and 220 million packets-per-second from a single device, allowing our customers to keep their mission critical services up and running. |
Our customer density results in a multiplicity of technology enterprises in the same location which creates a powerful environment for both our enterprise customers and our ecosystem service providers. We believe these customer densities and volumes enable our ecosystem service providers to earn a desirable return on their capital investment, even with the discounted rates we negotiate on behalf of our customers.
These collaborative services create even greater value for our customers and ecosystem service providers alike, creating a self-reinforcing feedback loop.
Our Customers
We have more than 800 customers, including some of the worlds largest technology and digital media companies, cloud and managed service providers, financial institutions and telecommunications
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providers. Our customer base is meaningfully diversified across key industries, including approximately 24% in cloud, IT and software, 18% in digital media and entertainment, 17% in retail and consumer goods, 10% in financial and 9% in telecommunications. In each of these industries we have marquee customers who have grown with us over time. We believe that we have a significant opportunity to both grow penetration of existing customers as well as attract new customers. For the year ended December 31, 2016, our top 10 customers accounted for approximately 38.4% of revenue, and only one customer accounted for more than 10% of revenue during such period. For the three months ended March 31, 2017, our top 10 customers accounted for approximately 38.5% of revenue, and no single customer accounted for more than 10% of revenue during such period.
We provide our customers with a consistent experience and high level of service at low cost, which enables us to maintain one of the lowest churn rates in the industry. From 2014 to 2016, our annual churn rate averaged 1.4%. Our early customers remain loyal to us today. Our typical customer contract has a three-to-five-year term, and in the year ended December 31, 2016 and three months ended March 31, 2017, 53% and 56% of our revenue came from customers that have been with us for more than five years, respectively. Moreover, we derive a significant amount of our growth from existing customers.
Sustainability
Since January 1, 2016, we have powered all of our U.S. data centers with 100% clean and renewable energy. We are the largest data center operator in the United States to be 100% renewably powered, and we support local and new renewable facilities. We have successfully accomplished this goal through a combination of technological innovation, capital investment, industry partnerships and public advocacy. Many of our customers and potential customers are looking for ways to achieve their green goals and reach desired levels of sustainability, which other colocation solutions cannot provide. By locating their IT equipment with us, they are able to advance on those goals and improve on their current level of sustainability. Elements of our sustainability efforts include the following:
| Clicking Clean Scorecard. In recognition of our efforts, Greenpeace awarded us A grades in all five categories measured by Greenpeace in its 2017 Clicking Clean Company Scorecard. We were the only company in the United States that received all A grades, and we were recognized as the leader among colocation data centers evaluated in the study. We believe that many technology and infrastructure companies, as well as their customers and clients, evaluate progress towards achieving clean energy goals by reference to the company scorecards included in this report. |
| Leading Power and Cooling Efficiency. Our technology results in significant efficiencies enabling annual, independently audited Power Usage Effectiveness, or PUE, of 1.28. We do not believe other colocation data center providers are able to maintain such a low PUE while simultaneously allowing customers to operate at very high power densities. We accomplish all of this without compromising our adherence to industry best standards. Our facilities are 100% green and operate at a level that exceeds the standards of IEEE, ANSI, ASHRAE, 24/7, ISO 9001, SAS 70/SSAE-16, BICSI, and the Green Grid Association. |
| Supporting New and Local Solar. In 2016, we partnered with the local Nevada utility to construct Switch Station 1 and Switch Station 2, which are two solar power stations in Las Vegas, Nevada having a combined 179 MW of nameplate capacity. |
| Energy Market Direct Access. We were the first entity since 2005 to seek the right to unbundle from the electric monopoly in Nevada. By leaving the monopoly and being able to purchase power from the broader electric market, we have greater freedom to control the energy we use, including the ability to lock in our commodity pricing for longer periods, |
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purchase renewable energy from economical resources and effectuate broader national policy change. We received Nevada regulatory approval in December of 2016, and since June 1, 2017, we have been buying our power directly from the national market, as opposed to buying it from the incumbent electrical power utility. We have seen savings from this direct national energy market participation. |
Our Values
Our core values govern how every Switch employee executes on our mission to power the sustainable growth of the connected world and include:
| Truth in Technology. Our customers place a significant level of trust in us to provide them the best technology solutions for their business. Our sales professionals are not paid on commission, and are not incentivized in any way to promote any particular configuration, product or business solutions pathway to our customers. |
| Sustainable by Design. Sustainably running the internet has been a core value since our founding. Our commitment does not stop there. We thoughtfully pursue the advancement of new, innovative policies that expand access to smart water, clean energy and the technological advances that are changing the way the world is powered. We focus on sustainability on multiple levels and have adopted internal policies focused on reducing plastic bottle waste, utilizing biodegradable tableware and recycling. |
| Committing to Our Communities through Economic Development. We believe in building strong communities wherever we operate. We drive and will continue to push economic development through the creation of Rob Roys InNEVation Centers. The centers were created by Rob Roy to support the Governors New Nevada Initiative. We like to say that we take the no out of innovation. These economic hubs support startups, growups and our customers in collaborating with non-profits, educators, community and thought leaders and innevators of all shapes and sizes to engage with each other and drive economic results in the communities in which we operate. |
| Leading the Industry and beyond in Gender Equality and Veteran Placement. We believe our workforce is richly diverse in its total composition at all levels and outpaces our industry in the number of women executives. Women hold high-level technical positions throughout our company, including chief responsibility for construction, sales, branding and customer services. Veterans provide another critical backbone of our workforce. We honor their service and actively recruit veterans to our mission-critical environment. Through our Switch University, we have pioneered strategic partnerships with community colleges to develop a work force that is prepared for the careers that run the Internet of Everything in our data centers. |
| Supporting Interdisciplinary Education Blending Technology and the Arts. We believe that combining education, technology and the arts creates a powerful platform for the future of our country and its market competiveness. We have collaborated with universities to bring about improvements in research through our donations of supercomputers and connectivity to help accelerate their standing in the critical world of higher education research. We are also passionate about funding programs that build school gardens to connect youth to science through hands-on experiential learning. We bring financial commitment and thought leadership to preparing the next generation of whole-mind thinkers through an unwavering commitment to interdisciplinary Science, Technology, Engineering, the Arts and Mathematics (STEAM) education programs in Nevada and Michigan and in any state where we operate. Switch proudly supports First Robotics winning teams in Nevada and Michigan, the STEAM Education Village at Art Prize in Grand Rapids, the Nevada Museum of the Arts STEAM School, and the Smith Center for Performing Arts STEAM Programs. We believe that the best creative problem |
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solvers who can integrate form and function with equal mastery through science, technology, engineering, arts and math education platforms will run the internet of absolutely everything with both form and function in mind. |
| Karma: Our culture is grounded in the philosophy of doing the right thing. Innovation, detail and excellence drives everything from the interior architecture of our environments to our delivery of 100% uptime. We do it all with dedication to providing world-renowned facilities, superior service for our customers, the best working experience in the industry, true technology leadership and deep caring for the communities where we operate and the planet where we live. Our logo mark was personally designed by Rob Roy to put the power of karma at the center of our company. We believe that if you put good energy out, you will get good energy back. |
Sales and Marketing
Our sales strategy is built around Truth in Technology. Our team works closely with each customer to identify that customers needs and to design a solution tailored to meet those needs. They also help to integrate each customer into our ecosystem, which provides access to Switch Connect and Switch Cloud and potentially the ability to connect directly with their existing and potential customers. Many of our customers encourage their customers, suppliers and business partners to place IT equipment in our data centers, which has created a network effect resulting in additional customer acquisitions. In addition, large network providers, cloud providers or managed services providers may refer customers to us as part of their total customer solution. These processes have resulted in significant customer growth with limited spend on sales and marketing. For the year ended December 31, 2016 and the three months ended March 31, 2017, we spent $11.8 million and $3.1 million, respectively, on selling and marketing expenses. Selling and marketing expenses include sales and marketing labor costs, direct branding and selling expenses, as well as administrative and travel and entertainment expenses for our marketing and sales departments. Selling and marketing expenses exclude sponsorships, contributions and lobbying expenses.
We use a direct sales force and selected partner relationships to market our offerings to global enterprises, content providers, financial companies and mobile and network service providers. As of June 1, 2017, our colocation sales team consisted of ten employees, who collectively have more than 45 years of experience as members of our team. No member of our sales team receives commissions, which fosters a team environment and allows our representatives to offer the customer the solution they need without artificial sales pressure. We believe that the strength of our product and market reputation are the single biggest reasons for increased sales activity. We generally will take on incremental sales headcount only when expanding into new geographies.
To support our sales efforts and to promote our brand proactively, we have a branding team and a marketing team. As of March 31, 2017, our branding team consisted of 11 employees, and our marketing team consisted of two employees. Our marketing strategies include active public relations and ongoing customer communications programs. We also regularly measure customer satisfaction levels and host key customer forums to identify and address customer needs. We believe our brand is one of our most valuable assets, and we strive to build recognition through our website, external blog and social media channels, by sponsoring or leading industry technical forums, by participating in internet industry standard-setting bodies and through advertising and online campaigns.
Competition
We offer a broad range of data center services and, as a result, we may compete with a wide range of data center service providers for some or all of the services we offer. We face competition
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from numerous developers, owners and operators in the data center industry, including managed services providers and REITs, such as CoreSite Realty Corporation, CyrusOne Inc., Digital Realty Trust Inc., Equinix, Inc. and QTS Realty Trust, Inc., some of which own or lease data centers, or may do so in the future, in markets in which our properties are located. Additionally, we are aware of other smaller companies that may compete against us in various geographies or that may be developing additional data center capabilities to compete with us. Our current and future competitors may vary by size and service offerings and geographic presence.
Competition is primarily centered on reputation and track record, quality and availability of data center space, quality of service, technical expertise, security, reliability, functionality, geographic coverage, financial strength and price. Some of our current and future competitors may have greater brand recognition, longer operating histories, stronger marketing, technical and financial resources and access to less expensive power than we do. As a result, some of our competitors may be able to:
| offer space at prices below current market rates or below the prices we currently charge our customers; |
| bundle colocation services with other services or equipment they provide at reduced prices; |
| develop superior products or services, gain greater market acceptance and expand their service offerings more efficiently or rapidly; |
| adapt to new or emerging technologies and changes in customer requirements more quickly; |
| take advantage of acquisition and other opportunities more readily; and |
| adopt more aggressive pricing policies and devote greater resources to the promotion, marketing and sales of their services. |
We operate in a competitive market, and we face pricing pressure for our services. Prices for our services are affected by a variety of factors, including supply and demand conditions and pricing pressures from our competitors. We may be required to lower our prices to remain competitive, which may decrease our margins and adversely affect our business prospects, financial condition and results of operations.
Employees
As of June 1, 2017, we had 658 employees. We collaborate with the local unions where applicable, such as construction and the trades, however, none of our direct employees are represented by a labor union or covered by a collective bargaining agreement. We believe our employee relations are good, and we have not experienced any work stoppages.
Regulation
General
Data centers in our markets are subject to various laws, ordinances and regulations. We believe that each of our properties has the necessary permits and approvals for us to operate our business.
Americans with Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties are public accommodations or commercial facilities as defined by the ADA. The ADA may require, for example, removal of structural barriers to access by
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persons with disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties and to make alterations as appropriate in this respect.
Environmental Matters
We are required to obtain a number of permits from various government agencies to construct a data center facility, including the customary zoning, land use and related permits, and are also subject to laws and regulations relating to the protection of the environment, the storage, management and disposal of hazardous materials, emissions to air and discharges to water, the cleanup of contaminated sites and health and safety matters. These include various regulations promulgated by the Environmental Protection Agency and other federal, state, and local regulatory agencies and legislative bodies relating to our operations, including those involving power generators, batteries, and fuel storage to support colocation infrastructure. While we believe that our operations are in substantial compliance with environmental, health, and human safety laws and regulations, as an owner or operator of property and in connection with the current and historical use of hazardous materials and other operations at its sites, we could incur significant costs, including fines, penalties and other sanctions, cleanup costs and third-party claims for property damages or personal injuries, as a result of violations of or liabilities under environmental laws and regulations. Fuel storage tanks are present at many of our properties, and if releases were to occur, we may be liable for the costs of cleaning up resulting contamination. Some of our sites also have a history of previous commercial operations, including past underground storage tanks.
Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing building materials be properly managed and maintained, and may impose fines and penalties on building owners or operators for failure to comply with these requirements.
Environmental consultants have conducted, as appropriate, Phase I or similar non-intrusive environmental site assessments on recently acquired properties and if appropriate, additional environmental inquiries and assessments on recently acquired properties. Nonetheless, we may acquire or develop sites in the future with unknown environmental conditions from historical operations. Although we are not aware of any sites at which we currently have material remedial obligations, the imposition of remedial obligations as a result of spill or the discovery of contaminants in the future could result in significant additional costs to us.
Our operations also require us to obtain permits and/or other governmental approvals and to develop response plans in connection with the use of our generators or other operations. These requirements could restrict our operations or delay the development of data centers in the future. In addition, from time to time, federal, state or local government regulators enact new or revise existing legislation or regulations that could affect us, either beneficially or adversely. As a result, we could incur significant costs in complying with environmental laws or regulations that are promulgated in the future.
Intellectual Property
Intellectual property is an important aspect of our business, and we actively seek protection for our intellectual property. To establish and protect our proprietary rights, we rely upon a combination of
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patent, trade secret, trademark and copyright laws. We also utilize contractual means such as confidentiality agreements, licenses and intellectual property assignment agreements. We maintain a robust policy requiring our employees, contractors, consultants and other third parties to enter into confidentiality and proprietary rights agreements to control access to our proprietary information. These laws, procedures and restrictions provide only limited protection, and any of our intellectual property rights may be challenged, invalidated, circumvented, infringed or misappropriated. Furthermore, the laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States, and we therefore may be unable to protect our proprietary technology in certain jurisdictions.
As of June 19, 2017, we have 11 granted or allowed U.S. patents by the USPTO comprising 221 allowed claims. We also have eight pending U.S. patent applications comprising more than 130 patent pending claims. The first of our patents begin expiring on or around September 11, 2028 subject to our ability to extend the term under applicable law. In addition to capturing additional innovations and inventions generated by Switch and its founder Rob Roy, we continually review our development efforts to assess the existence and patentability of new intellectual property. We actively pursue the registration of our domain names, trademarks and service marks in the United States, including new generic top-level domains, and in certain locations outside the United States. To protect our brand, we file trademark registrations in some international jurisdictions, and actively monitor online activities of others. As of June 19, 2017, we also have 113 registered trademarks and 182 pending trademarks. We have also registered over 500 domain names, including www.switch.com, www.switch.net, www.switch.org.
We have engaged in limited licensing of our intellectual property and there is the potential to further monetize our intellectual property in this manner in the future. Currently, we deploy our intellectual property for our own benefit and leverage our registrations to prevent mimicry by others.
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Legal Proceedings
In the ordinary course of our business, from time to time we are subject to claims and administrative proceedings. Currently there are no claims outstanding that we believe would have, individually or in the aggregate, a material adverse effect on our business, financial condition and results of operations, liquidity and cash flows.
Our Portfolio
The following chart provides various metrics relative to our portfolio as of March 31, 2017:
Campus(1) |
Year Operational | Gross Square Feet (up to)(2) |
Utilization % - By Campus(3) |
Utilization % - By Open Sector(3) |
Power Capacity (up to)(4) |
|||||||||||||||
The Core Campus |
||||||||||||||||||||
Current: 8 Facilities(5) |
2003-2017 | 2,000,000 | 80% | 91% | 275 MW | |||||||||||||||
Future: 1 Facility |
2018 | 340,000 | 40 MW | |||||||||||||||||
The Citadel Campus |
||||||||||||||||||||
Current: TAHOE RENO 1 |
2016 | 1,360,000 | 12% | 55% | 130 MW | |||||||||||||||
Future: 7 Facilities |
2019+ | 5,890,000 | 520 MW | |||||||||||||||||
The Pyramid Campus |
||||||||||||||||||||
Current: Switch PYRAMID |
2016 | |
430,000 (Office) |
|
||||||||||||||||
|
220,000 (Data Center) |
|
9% | 21% | 10 MW | |||||||||||||||
Future: 2 Facilities |
2019+ | 940,000 | 100 MW | |||||||||||||||||
The Keep Campus |
||||||||||||||||||||
Future |
2018 | 1,100,000 | 110 MW | |||||||||||||||||
U.S. Total (Current) |
4,010,000 | 415 MW | ||||||||||||||||||
U.S. Total (Future) |
8,270,000 | 770 MW |
(1) | SUPERNAP International has also deployed two additional data centers in Milan, Italy and Bangkok, Thailand that collectively provide up to 904,200 GSF of space, with up to 100 MW of power available to these facilities. We hold a 50% ownership interest in SUPERNAP International. |
(2) | Estimated square footage of all enclosed space at full build out. |
(3) | Utilization numbers are based on available cabinets. The Citadel Campus and The Pyramid Campus opened in the second half of 2016 and are in the first phase of development. Additional capital investment will be required to reach full build out. |
(4) | Defined as total power delivered to the data center at full build out. |
(5) | Current facilities at The Core Campus include LAS VEGAS 2, LAS VEGAS 4, LAS VEGAS 5, LAS VEGAS 7, LAS VEGAS 8, LAS VEGAS 9, LAS VEGAS 10 and LAS VEGAS 12. |
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Executive Officers and Directors
The following table provides information regarding our executive officers and members of our board of directors (ages as of June 1, 2017):
Name |
Age | Position(s) | ||
Executive Officers: | ||||
Rob Roy | 48 | Founder, Chief Executive Officer and Chairman | ||
Thomas Morton | 48 | President and General Counsel | ||
Gabe Nacht | 55 | Chief Financial Officer | ||
Non-Employee Directors: | ||||
Donald Snyder | 69 | Director | ||
Tom Thomas | 59 | Director | ||
Bryan Wolf | 53 | Director | ||
Larry Krause | 67 | Director | ||
Zareh Sarrafian | 53 | Director |
(1) | Member of the audit committee |
(2) | Member of the compensation committee |
(3) | Member of the nominating and governance committee |
Each executive officer serves at the discretion of our board of directors and holds office until his or her successor is duly elected and qualified or until his or her earlier resignation or removal. There are no familial relationships among any of our directors or executive officers.
Executive Officers
Rob Roy. Mr. Roy is our Founder and has served as Chief Executive Officer and as Chairman of the Board of Directors of Switch, Inc. since its formation and has served as Chief Executive Officer and as Chairman of the Board of Managers of Switch, Ltd. since 2003. Mr. Roy first began developing data center facilities in 2000, merging several predecessor companies into Switch, Ltd. after its formation. We believe that Mr. Roy is qualified to serve as a member of our Board of Directors based on the perspective and experience he brings as our Founder, Chief Executive Officer and Chairman as well as his widely recognized technological leadership in the industry.
Thomas Morton. Mr. Morton has served as President and General Counsel of Switch, Inc. since its formation and has served as President of Switch, Ltd. since January 2016 and as General Counsel of Switch, Ltd. since April 2008. Mr. Morton previously served as Chief Financial Officer of Switch, Ltd. from February 2014 until January 2016. Prior to joining Switch, Ltd., Mr. Morton was an attorney with Pillsbury Winthrop Shaw Pittman LLP from 2004 until 2008 and an attorney with Gray Cary (now DLA Piper) from 1999 until 2004. Mr. Morton received a B.A., Finance from the University of San Diego and a JD from the University of the Pacific McGeorge School of Law.
Gabe Nacht. Mr. Nacht has served as Chief Financial Officer of Switch, Inc. since its formation and has served as Chief Financial Officer of Switch, Ltd. since January 2016. Prior to joining Switch, Ltd., Mr. Nacht served as Chief Financial Officer of ClearCapital.com, Inc., a real estate valuations, data, analytics and technology company, from September 2011 to July 2015. Mr. Nacht has over 25 years of corporate finance experience and has served as Chief Financial Officer for several technology and media companies. Mr. Nacht holds an MBA, Corporate Finance from the DAmore-McKim School of Business at Northeastern and a B.A. in Political Science from Tufts University.
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Non-Employee Directors
Donald Snyder. Donald Snyder has served as a member of the Board of Directors of Switch, Inc. since its formation and has served as a member of the Board of Managers of Switch, Ltd. since 2006. His professional career began with 22 years at First Interstate Bancorp (now Wells Fargo), culminating as Chairman and Chief Executive Officer of the banks affiliate in Nevada. He moved to the casino hospitality industry, becoming a director and the president of Boyd Gaming Corporation from 1997 until his retirement in 2005 to pursue interests in community building and public service. Following service from 2010 as dean of the Harrah College of Hotel Administration at the University of Nevada, Las Vegas (UNLV), Mr. Snyder served as Acting President of UNLV in 2014. Since January 2015, he has served as Presidential Advisor at UNLV. Mr. Snyder serves as a director, chair of the Governance Committee, and member of the Risk Committee of Western Alliance Bancorporation, a publicly held commercial bank holding company, and as a director, chair of the Compensation Committee, and member of the Corporate Governance Committee of Tutor Perini Corporation, a publicly held construction company. He has served as a director on several public and private company boards, numerous non-profit entities, and several state and local public sector commissions and committees over the past 25 years. His current non-corporate service includes The Smith Center for the Performing Arts (Chairman), the Nathan Adelson Hospice (past Chairman), UNLV Foundation (past Chairman), Clark County School Districts Oversight Panel for School Facilities (Chairman), and the Regional Transportation Commissions Transportation Resource Advisory Committee (Chairman). Mr. Snyder holds a Bachelor of Science in Business Administration from the University of Wyoming and completed the Graduate School of Credit & Financial Management at Stanford University. We believe Mr. Snyder is qualified to serve as a member of our Board of Directors based on his understanding of our business, history and organization, as well as his leadership skills, banking and regulatory expertise and management expertise.
Tom Thomas. Mr. Thomas has served as a member of the Board of Directors of Switch, Inc. since its formation and has served as a member of the Board of Managers of Switch, Ltd. since 2004. Mr. Thomas held various executive positions with Valley Bank of Nevada until its merger with Bank of America in 1992. After the merger, he became managing partner of Thomas & Mack Co., an investment management and commercial real estate development company with properties and developments in Nevada, California, Arizona and Utah. He also serves as a director of Southwest Gas Holdings, Inc., a publicly held energy and construction company, where he is a member of the Nominating and Corporate Governance Committee. Mr. Thomas is actively involved in numerous charitable organizations including the Opportunity Village Foundation, the UNLV Foundation Advisory Board, the Las Vegas Rotary Club and the Las Vegas Area Council of the Boy Scouts of America. He is a member of the Nevada Bar Association and was instrumental in establishing the Thomas & Mack Legal Clinic and Moot Court Facility at the UNLV Boyd School of Law. Mr. Thomas holds a degree in Finance and a J.D. from the University of Utah. We believe Mr. Thomas is qualified to serve as a member of our Board of Directors based on his banking and business experience, his extensive service on public company boards and related committees, his experience with charitable organizations and his familiarity with influencers in our key data center markets.
Bryan Wolf. Mr. Wolf has served as a member of the Board of Directors of Switch, Inc. since its formation and has served as a member of the Board of Managers of Switch, Ltd. since January 2014. Since 1997, Mr. Wolf has served in various roles at Intel Capital, and has served as Managing Director, Data Center and Cloud Infrastructure since 2007. Since March 2014, Mr. Wolf has also served as Vice President of Intel Corporation. Mr. Wolf holds a Bachelor of Science degree in Political Science from the University of Oregon and an MBA from the University of Pennsylvanias Wharton School. We believe Mr. Wolf is qualified to serve as a member of our Board of Directors based on his service on the boards of numerous other high growth technology companies, his familiarity with data center and related technology industries and his familiarity with our company.
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Larry Krause. Larry Krause has served as a member of the Board of Directors of Switch, Inc. since its formation and has served as a non-manager member of the Board of Managers of Switch, Ltd. since January 2017, and as a member of the Audit Committee of Switch, Ltd. since May 2013. Mr. Krause served as the Managing Partner of Deloitte & Touche LLPs Nevada practice from 2008 through May 2012. He initially joined Deloitte & Touche LLP as an Audit Partner in 2002. From 1999 until May 2002, Mr. Krause was the Partner-in-Charge of Arthur Andersens Las Vegas audit practice. Mr. Krauses public accounting career spans nearly forty years with significant leadership positions in his firms hospitality and gaming industry practices. During this time, he served as lead client service partner for many publicly held clients, including Fortune 500 companies. Mr. Krause is a certified public accountant in Nevada and California. Mr. Krause previously served as a director and chairman of the Audit Committee of Tropicana Las Vegas Hotel and Casino Inc., then a publicly held company, until it was acquired by Penn National Gaming, Inc. in August 2015. He also previously served as a director and treasurer for the United Way of Southern Nevada. He has both a bachelor and master degree in business administration with a major in accounting from California State University, Northridge. We believe Mr. Krause is qualified to serve as a member of our Board of Directors and as chair of our Audit Committee based on his extensive financial, audit and accounting expertise with both public and private entities, his leadership of audit committees for publicly held companies and his familiarity with our company.
Zareh Sarrafian. Zareh Sarrafian has served as a member of the Board of Directors of Switch, Inc. since its formation and has served as a member of the Board of Managers of Switch, Ltd. since January 2017. He has served as the Chief Executive Officer of Riverside University Health System since May 2014. Prior to that, Mr. Sarrafian served as Chief Administrative Officer at Loma Linda Medical Center in Loma Linda, California from 1998 to 2014. He also serves as a director and member of the Nominating and Corporate Governance Committee of Pacific Premier Bancorp, Inc., or Pacific Premier, a publicly held commercial bank holding company, and as a member of the board of directors of Pacific Premiers banking subsidiary, Pacific Premier Bank. He previously served a director of Security California Bancorp and its banking subsidiary Security Bank of California until they were acquired by Pacific Premier. He also serves and has served on a number of not-for-profit and higher education boards. Mr. Sarrafian received his B.S. from California State Polytechnic University, Pomona, and his M.B.A. from California State University, San Bernardino. We believe Mr. Sarrafian is qualified to serve as a member of our Board of Directors based on his extensive executive leadership experience, his experience with regulated entities which are a significant portion of our customer base, his service as a board member of publicly held companies and his banking experience.
Corporate Governance
Composition of Our Board of Directors
Our business and affairs are managed under the direction of our board of directors. The number of directors will be fixed by our board of directors, subject to the terms of our amended and restated articles of incorporation and bylaws that will become effective immediately prior to the completion of this offering. Our board of directors currently consists of six directors.
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our business and structure, the board of directors focuses primarily on each persons background and experience as reflected in the information discussed in each of the directors individual biographies set forth above. We believe that our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
Upon completion of this offering, Mr. Rob Roy, our Founder, Chief Executive Officer and Chairman, together with his affiliates, will control a majority of the combined voting power of our
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outstanding capital stock. As a result, Mr. Roy will be able to control any action requiring the general approval of our stockholders, including the election of our board of directors.
Directors may only be removed by the affirmative vote of at least a majority of the combined voting power of our capital stock.
Director Independence
Prior to the completion of this offering, our board of directors undertook a review of the independence of our directors and considered whether any director has a material relationship with us that could compromise that directors ability to exercise independent judgment in carrying out that directors responsibilities. Our board of directors has affirmatively determined that are each an independent director, as defined under the applicable rules and regulations of the Exchange Act and the rules of the .
Lead Independent Director
Our board of directors adopted corporate governance guidelines which provide that one of our independent directors should serve as our Lead Independent Director at any time when our Chief Executive Officer serves as the Chairman of our board of directors or if the Chairman is not otherwise independent. Because Rob Roy is our Chairman and is not an independent director as defined in the listing standards of , our board of directors has appointed to serve as our Lead Independent Director. As Lead Independent Director, Mr. will preside over periodic meetings of our independent directors, serve as a liaison between our Chairman and our independent directors and perform such additional duties as our board of directors may otherwise determine and delegate.
Board Committees
Our board has established three standing committeesaudit, compensation, and nominating and corporate governanceeach of which operates under a charter that has been approved by our board of directors. Current copies of each committees charter are posted on our website, www.switch.com. The information on any of our websites is deemed not to be incorporated in this prospectus or to be part of this prospectus.
Upon completion of this offering, Mr. Rob Roy, our Founder, Chief Executive Officer and Chairman, together with his affiliates, will control a majority of the combined voting power of our outstanding capital stock. See Composition of our Board of Directors. As a result, we will be a controlled company under the corporate governance standards. As a controlled company, we would be permitted to opt out of certain corporate governance requirements, including the following requirements:
| that a majority of our board of directors consists of independent directors, as defined under the rules of the ; |
| that we have a nominating and corporate governance committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; |
| that we have a compensation committee that is composed entirely of independent directors with a written charter addressing the committees purpose and responsibilities; and |
| for an annual performance evaluation of the nominating and governance committee and compensation committee. |
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Although we intend to comply with these listing requirements whether or not we are a controlled company, there is no guarantee that we will not take advantage of these exemptions in the future. Accordingly, you may not have the same protections afforded to stockholders of companies that are subject to all of the corporate governance requirements.
Audit Committee
The audit committee will be responsible for, among other matters:
| appointing, compensating, retaining, evaluating, terminating and overseeing our independent registered public accounting firm; |
| discussing with our independent registered public accounting firm their independence from management; |
| reviewing with our independent registered public accounting firm the scope and results of their audit; |
| approving all audit and permissible non-audit services to be performed by our independent registered public accounting firm; |
| overseeing the financial reporting process and discussing with management and our independent registered public accounting firm the interim and annual financial statements that we file with the SEC; |
| reviewing and monitoring our accounting principles, accounting policies, financial and accounting controls and compliance with legal and regulatory requirements; and |
| establishing procedures for the confidential anonymous submission of concerns regarding questionable accounting, internal controls or auditing matters. |
Upon the closing of this offering, our audit committee will consist of Messrs. with Mr. serving as chair. Rule 10A-3 of the Exchange Act and the rules require us to have one independent audit committee member upon the listing of our common stock, a majority of independent directors on our audit committee within 90 days of the date of this prospectus and an audit committee composed entirely of independent directors within one year of the date of this prospectus. Our board of directors has affirmatively determined that Messrs. meet the definition of independent director for purposes of serving on an audit committee under Rule 10A-3 and the rules, and we intend to comply with the other independence requirements within the time periods specified. In addition, our board of directors has determined that Mr. will qualify as an audit committee financial expert, as such term is defined in Item 407(d)(5) of Regulation S-K. Upon the listing our common stock on , the audit committee will operate under a written charter that satisfies the applicable standards of the SEC and , which the audit committee will review and evaluate at least annually.
Compensation Committee
The compensation committees responsibilities include:
| reviewing and approving, or recommending that our board of directors approve, the compensation of our Chief Executive Officer and other executive officers; |
| reviewing and recommending to our board of directors the compensation of our directors; |
| selecting independent compensation consultants and advisors and assessing whether there are any conflicts of interest with any of the committees compensation advisors; and |
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| reviewing and approving, or recommending that our board of directors approve, incentive compensation and equity plans. |
Upon the completion of this offering, our compensation committee will consist of Messrs. with Mr. serving as chair. Each of Messrs. is (i) independent under the applicable rules and regulations of , (ii) an outside director, as defined pursuant to Section 162(m) of the Internal Revenue Code of 1986, as amended, or the Code, and (iii) a non-employee director, as defined in Rule 16b-3 promulgated under the Exchange Act. Upon the listing our common stock on , the compensation committee will operate under a written charter, which the compensation committee will review and evaluate at least annually.
Nominating and Corporate Governance Committee
The nominating and corporate governance committees responsibilities include:
| identifying individuals qualified to become members of our board of directors, consistent with criteria approved by our board of directors; and |
| developing and recommending to our board of directors a set of corporate governance guidelines and principles. |
The members of our nominating and corporate governance committee Messrs. with Mr. serving as chair. Each of Messrs. is independent under the applicable rules and regulations of . Upon the listing of our common stock on , the nominating and corporate governance committee will operate under a written charter, which the nominating and corporate governance committee will review and evaluate at least annually.
Risk Oversight
Our board of directors is responsible for overseeing our risk management process. Our board of directors focuses on our general risk management strategy, the most significant risks facing us, and oversees the implementation of risk mitigation strategies by management. Our board of directors is also apprised of particular risk management matters in connection with its general oversight and approval of corporate matters and significant transactions.
Risk Considerations in our Compensation Program
We conducted an assessment of our compensation policies and practices for our employees and concluded that these policies and practices are not reasonably likely to have a material adverse effect on us.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics that applies to our directors, officers and employees, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. We have posted a current copy of the code on our website, www.switch.com. In addition, we intend to post on our website all disclosures that are required by law or the listing standards concerning any amendments to, or waivers from, any provision of the code.
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This section discusses the material components of the executive compensation program for our executive officers who are named in the 2016 Summary Compensation Table below. In 2016, our named executive officers and their positions were as follows:
| Rob Roy, Chief Executive Officer; |
| Thomas Morton, President, General Counsel and Secretary; and |
| Gabe Nacht, Chief Financial Officer. |
This discussion may contain forward-looking statements that are based on our current plans, considerations, expectations and determinations regarding future compensation programs. Actual compensation programs that we adopt following the completion of this offering may differ materially from the currently planned programs summarized in this discussion.
2016 Summary Compensation Table
The following table sets forth information concerning the compensation of our named executive officers for the year ended December 31, 2016.
Name and Principal |
Salary ($) | Bonus ($) |
Stock Awards($)(1) |
All Other Compensation ($)(2) |
Total ($) | |||||||||||||||
Rob Roy |
1,000,000 | 1,255,000 | 1,000,557 | 25,360 | 3,280,917 | |||||||||||||||
Chief Executive Officer |
||||||||||||||||||||
Thomas Morton |
772,500 | 771,000 | 400,052 | 20,454 | 1,964,006 | |||||||||||||||
President, General Counsel and Secretary |
||||||||||||||||||||
Gabe Nacht |
329,808 | 300,000 | 517,226 | 6,077 | 1,153,111 | |||||||||||||||
Chief Financial Officer (3) |
(1) | Amounts reflect the grant-date fair value of Switch, Ltd. Common Units and incentive units granted during 2016 computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all Common Unit and incentive unit awards made to executive officers in Note 10, Equity Based Compensation, to our consolidated financial statements for 2016. For information regarding the number of Common Units awarded in 2016, see Narrative to Summary Compensation TableEquity Compensation below. For information regarding the equity awards awarded in 2016, see the Outstanding Equity Awards at Fiscal Year-End table below. |
(2) | Amounts include our match on the officers 401(k) contributions, reimbursement for the cost of annual gym membership fees, for Messrs. Roy and Morton, a car allowance, and for Mr. Roy, the incremental cost to the Company for the personal use of a company-leased aircraft. |
(3) | Mr. Nacht joined our Company in January 2016 as our Chief Financial Officer. |
Narrative to Summary Compensation Table
2016 Salaries
The named executive officers receive a base salary to compensate them for services rendered to our company. The base salary payable to each named executive officer is intended to provide a fixed component of compensation reflecting the executives skill set, experience, role and responsibilities.
The base salaries for Messrs. Roy, Morton and Nacht for 2016 were $1,000,000, $772,500 and $350,000, respectively. The compensation committee increased Mr. Nachts 2017 base salary to $385,000; the base salaries for Messrs. Roy and Morton remained unchanged for 2017.
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2016 Bonuses
Historically, the compensation committee has approved discretionary annual cash bonuses. In 2016, the compensation committee approved such bonuses for Messrs. Roy, Morton and Nacht; these discretionary cash bonuses were awarded in consideration of our performance in 2016, including with respect to revenue and Adjusted EBITDA growth, and each named executive officers individual contributions to that performance. The actual annual cash bonuses awarded to each named executive officer for 2016 performance are set forth above in the 2016 Summary Compensation Table in the column titled Bonus.
Equity Compensation
Certain of our named executive officers currently hold incentive units in Switch, Ltd., which are intended to constitute profits interests within the meaning of the relevant IRS Revenue Procedure guidance. Incentive unit awards generally vest annually over four or five years from the applicable grant date, subject to acceleration upon the occurrence of a change in control (as defined in the applicable award agreement), which includes a qualifying initial public offering. The vesting of each of Messrs. Roy, Morton and Nachts 2016 incentive units will accelerate in full in connection with the closing of the Transactions that will be consummated prior to this offering and will be converted to Common Units in Switch, Ltd. In addition, in 2016, certain of our named executive officers were granted awards of fully-vested Common Units in Switch, Ltd.
The following table sets forth the Switch, Ltd. Common Units and incentive units granted to our named executive officers in the 2016 fiscal year.
Named Executive Officer |
2016 Incentive Units Granted |
2016 Common Units Granted |
||||||
Rob Roy |
253,721 | 115,936 | ||||||
Thomas Morton |
146,562 | 34,960 | ||||||
Gabe Nacht |
500,000 | |
In addition, each of Mr. Roy and Mr. Morton was granted an award of fully-vested Common Units in Switch, Ltd. in January 2017, covering 115,968 and 34,912 Common Units, respectively.
In connection with the offering, all outstanding incentive units held by our named executive officers will accelerate in full in connection with the closing of the Transactions that will be consummated prior to this offering and will be converted to Common Units of Switch, Ltd.
We intend to adopt the 2017 Incentive Award Plan, or the 2017 Plan, in order to facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of our company and certain of its affiliates and to enable our company and certain of its affiliates to obtain and retain services of these individuals, which is essential to our long-term success. We expect that the 2017 Plan will be effective prior to the completion of this offering. For additional information about the 2017 Plan, please see the section titled 2017 Incentive Award Plan below.
Other Elements of Compensation
Retirement Plans
We currently maintain a 401(k) retirement savings plan for our employees, including our named executive officers, who satisfy certain eligibility requirements. Our named executive officers are eligible to participate in the 401(k) plan on the same terms as other full-time employees. The Code allows
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eligible employees to defer a portion of their compensation, within prescribed limits, on a pre-tax basis through contributions to the 401(k) plan. Currently, we match contributions made by participants in the 401(k) plan up to a specified percentage of the employee contributions, and these matching contributions vest over three years. We believe that providing a vehicle for tax-deferred retirement savings though our 401(k) plan, and providing matching contributions, adds to the overall desirability of our executive compensation package and further incentivizes our employees, including our named executive officers, in accordance with our compensation policies.
Employee Benefits and Perquisites
Health/Welfare Plans. All of our full-time employees, including our named executive officers, are eligible to participate in our health and welfare plans, including:
| medical, dental and vision benefits; |
| medical and dependent care flexible spending accounts; |
| short-term and long-term disability insurance; and |
| life insurance. |
In addition, we reimburse the named executive officers for the cost of annual gym membership fees and certain of our named executive officers receive a car allowance. In addition, from time to time, we may reimburse our named executive officers for certain taxes associated with the income they receive from Switch, Ltd.
We believe the perquisites described above are necessary and appropriate to provide a competitive compensation package to our named executive officers.
Outstanding Equity Awards at Fiscal Year-End
The following table summarizes the number of Switch, Ltd. Common Units underlying outstanding incentive unit awards for each named executive officer as of December 31, 2016.
Stock Awards(1) | ||||||||||||
Name |
Grant Date |
Number of Stock Awards That Have Not Vested (#) |
Market Value of Stock Awards That Have Not Vested ($)(2) |
|||||||||
Rob Roy |
10/1/13 | 300,000 | (3)(4) | 1,014,000 | ||||||||
2/20/15 | 502,179 | (5) | 1,732,518 | |||||||||
12/28/16 | 253,721 | (5) | 81,191 | |||||||||
Thomas Morton |
12/4/12 | 150,000 | (3)(4) | 657,000 | ||||||||
2/20/15 | 679,811 | (5) | 2,345,348 | |||||||||
12/1/16 | 109,665 | (5) | 35,093 | |||||||||
12/28/16 | 36,897 | (5) | 11,807 | |||||||||
Gabe Nacht |
1/13/16 | 500,000 | (5) | 1,090,000 |
(1) | The outstanding incentive units will accelerate in full in connection with the completion of the Transactions that will be consummated prior to this offering and will be converted to Common Units of Switch, Ltd. |
(2) | There is no public market for the incentive units. For purposes of this disclosure, we have valued the incentive units as of December 31, 2016 based on the then-fair market value of Switch, Ltd.s Common Units ($7.71 per unit) and taking into account the hurdle value (i.e., the value above which the recipient benefits from any appreciation in value of the incentive unit). |
(3) | In March 2016, our compensation committee approved the accelerated vesting of the incentive units subject to this award effective January 1, 2016, with 25% of the incentive units subject to this award vesting on each of the fourth and fifth anniversaries of the grant date, subject to continued service and acceleration upon the occurrence of a change in control (as defined in the applicable award agreement), which includes a qualifying initial public offering. |
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(4) | Amounts reflect the 3-to-1 unit split effected by Switch, Ltd. on November 1, 2014. |
(5) | 25% of the incentive units subject to this award vest annually on the first four anniversaries of the applicable grant date, subject to continued service and acceleration upon the occurrence of a change in control (as defined in the applicable award agreement), which includes a qualifying initial public offering. |
Executive Compensation Arrangements
Gabe Nacht Offer Letter
On January 7, 2016, we entered into an offer letter with Gabe Nacht, our Chief Financial Officer. Pursuant to the offer letter, Mr. Nacht receives an annual base salary, which was initially set at $350,000 (which has increased to $385,000 in 2017), and is eligible to receive an annual discretionary cash performance bonus, the amount of which will be determined based on the annual financial performance of Switch, Ltd. and individual performance, which will be determined at the discretion of Switch, Ltd. Pursuant to the offer letter, Mr. Nacht reports directly to Thomas Morton, our President and General Counsel.
In connection with entering into the offer letter, Mr. Nacht received a grant of 500,000 incentive units in Switch, Ltd., which vest in equal annual installments of 25% over four years beginning on the first anniversary of the grant date. In addition, Mr. Nacht is eligible to participate in customary health, welfare and fringe benefit plans. The offer letter was subject to Mr. Nacht executing a non-disclosure and inventions agreement and a confidentiality agreement.
Director Compensation
In July 2016, the board of managers of Switch, Ltd., or the Switch, Ltd. Board, approved a compensation program for our non-employee directors, or the Director Compensation Program. This program is intended to fairly compensate our directors for the time and effort necessary to serve on the Switch, Ltd. Board.
2016 Director Compensation Program
The 2016 Director Compensation Program consists of the components listed below:
| Annual Cash Retainer: $67,500 |
| Annual Equity Retainer: Valued on the date of grant at $87,500 and granted in fully vested Common Units of Switch, Ltd. As Mr. Wolf is an employee of Intel Corporation, or Intel, he is not eligible to receive this annual equity retainer. |
| Annual Committee Chair Retainers: |
| Audit: $20,000 |
| Compensation: $17,300 |
| Nominations and Governance: $15,000 |
| Annual Committee Member Retainers: |
| Audit: $5,000 |
| Compensation: $5,000 |
| Nominations and Governance $5,000 |
The annual cash retainer is paid in quarterly installments in arrears and the annual committee retainers are paid in one annual installment on or prior to the end of the calendar year in which such non-employee director served on the committee.
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Prior to approving and adopting the Director Compensation Program, each non-employee director was entitled to receive an annual cash retainer for his or her services of $55,000 and Common Units of Switch, Ltd. issuable during the fourth quarter of Switch, Ltd.s fiscal year, with a value of $15,000, based on the valuation of Switch, Ltd.s Common Units as of Switch, Ltd.s most recent valuation report. In lieu of fees for services rendered, any non-employee director of the Audit Committee received an annual cash retainer of $18,000. All cash retainers were paid in equal quarterly installments.
The following table contains information concerning the compensation of our non-employee directors in 2016 from Switch, Ltd.
Name(1) |
Fees Paid in Cash ($) |
Stock Awards ($)(2) |
Total ($) | |||||||||
Donald D. Snyder |
87,500 | 43,749 | 131,249 | |||||||||
Tom Thomas |
88,650 | 43,749 | 132,399 | |||||||||
Dennis Troesh |
82,500 | 43,749 | 126,249 | |||||||||
Bryan Wolf |
82,500 | (3) | | 82,500 | ||||||||
Larry Krause |
23,500 | (4) | | 23,500 |
(1) | Mr. Roy, our Chief Executive Officer, is not included in this table as he was an employee of the Company in 2016 and did not receive compensation for his services as a director. All compensation paid to Mr. Roy for the services he provided to us in 2016 is reflected in the 2016 Summary Compensation Table. |
(2) | Amounts reflect the grant-date fair value of Switch, Ltd. Common Units granted during 2016 computed in accordance with ASC Topic 718, rather than the amounts paid to or realized by the named individual. We provide information regarding the assumptions used to calculate the value of all incentive unit awards made to our non-employee directors in Note 10, Equity Based Compensation, to our consolidated financial statements for 2016. |
(3) | Fees that otherwise would have been granted to Mr. Wolf, who is an employee of Intel, were assigned to Intel. |
(4) | Amount reflects fees paid to Mr. Krause in cash for his service solely as Chairman of the Audit Committee in 2016 and includes $4,500 paid to Mr. Krause in 2016 with respect to his retainer for service as Chairman of the Audit Committee earned but not paid in 2015. Mr. Krause was not a full-time member of the Switch, Ltd. Board in 2016; and as a result did not receive the full Chairman of the Audit Committee retainer. |
The table below shows the aggregate number of unvested Switch, Ltd. equity awards held as of December 31, 2016 by each non-employee director who was serving as of December 31, 2016.
Name |
Unvested Common Units Outstanding at Fiscal Year End |
|||
Donald D. Snyder |
297,614 | |||
Tom Thomas |
| |||
Dennis Troesh |
| |||
Bryan Wolf |
| |||
Larry Krause |
|
Post-IPO Director Compensation Program
We intend to approve and implement a compensation program for our non-employee directors that consists of annual retainer fees and long-term equity awards. The program is expected to provide directors with a , subject to continued service on our board of directors. In addition, each non-employee director is expected to receive an annual cash retainer for his or her services in an amount equal to $ and an annual equity award in a denominated dollar value equal to $ .
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2017 Incentive Award Plan
We intend to adopt the 2017 Incentive Award Plan, or the 2017 Plan, subject to approval by our stockholders, under which we may grant cash and equity incentive awards to eligible service providers in order to attract, motivate and retain the talent for which we compete. The material terms of the 2017 Plan, as it is currently contemplated, are summarized below. Our board of directors is still in the process of developing, approving and implementing the 2017 Plan and, accordingly, this summary is subject to change.
Eligibility and Administration. Our employees, consultants and directors, and employees, consultants and directors of our subsidiaries will be eligible to receive awards under the 2017 Plan. Following our initial public offering, the 2017 Plan will be administered by our board of directors with respect to awards to non-employee directors and by our compensation committee with respect to other participants, each of which may delegate its duties and responsibilities to committees of our directors and/or officers (referred to collectively as the plan administrator below), subject to certain limitations that may be imposed under Section 162(m) of the Code, Section 16 of the Exchange Act, and/or stock exchange rules, as applicable. The plan administrator will have the authority to make all determinations and interpretations under, prescribe all forms for use with, and adopt rules for the administration of, the 2017 Plan, subject to its express terms and conditions. The plan administrator will also set the terms and conditions of all awards under the 2017 Plan, including any vesting and vesting acceleration conditions.
Limitation on Awards and Shares Available. An aggregate of shares of our common stock will be available for issuance under awards granted pursuant to the 2017 Plan, which shares may be authorized but unissued shares, or shares purchased in the open market. If an award under the 2017 Plan is forfeited, expires or is settled for cash, any shares subject to such award may, to the extent of such forfeiture, expiration or cash settlement, be used again for new grants under the 2017 Plan. However, the following shares may not be used again for grant under the 2017 Plan: (1) shares tendered or withheld to satisfy grant or exercise price or tax withholding obligations associated with an award; (2) shares subject to a stock appreciation right, or SAR, that are not issued in connection with the stock settlement of the stock appreciation right on its exercise; and (3) shares purchased on the open market with the cash proceeds from the exercise of options.
Awards granted under the 2017 Plan upon the assumption of, or in substitution for, awards authorized or outstanding under a qualifying equity plan maintained by an entity with which we enter into a merger or similar corporate transaction will not reduce the shares available for grant under the 2017 Plan. The maximum number of shares of our common stock that may be subject to one or more awards granted to any participant pursuant to the 2017 Plan during any calendar year will be and the maximum amount that may be paid under a cash award pursuant to the 2017 Plan to any one participant during any calendar year period will be $ . The transition period applicable to the 2017 Plan under Section 162(m) of the Code for compensation plans of corporations which are privately held and which become publicly-held in an initial public offering will expire on the earliest to occur of (i) our annual stockholders meeting in calendar year , (ii) a material modification or expiration of the 2017 Plan and (iii) the exhaustion of the shares or other compensation reserved for issuance under the 2017 Plan.
Awards. The 2017 Plan provides for the grant of stock options, including incentive stock options, or ISOs, and nonqualified stock options, or NSOs, restricted stock, dividend equivalents, stock payments, restricted stock units, or RSUs, performance shares, other incentive awards, stock appreciation rights, or SARs, and cash awards. No determination has been made as to the types or amounts of awards that will be granted to specific individuals pursuant to the 2017 Plan. Certain awards under the 2017 Plan may constitute or provide for a deferral of compensation, subject to
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Section 409A of the Code, which may impose additional requirements on the terms and conditions of such awards. All awards under the 2017 Plan will be set forth in award agreements, which will detail all terms and conditions of the awards, including any applicable vesting and payment terms and post-termination exercise limitations. Awards other than cash awards generally will be settled in shares of our common stock, but the plan administrator may provide for cash settlement of any award. A brief description of each award type follows.
| Stock Options. Stock options provide for the purchase of shares of our common stock in the future at an exercise price set on the grant date. ISOs, by contrast to NSOs, may provide tax deferral beyond exercise and favorable capital gains tax treatment to their holders if certain holding period and other requirements of the Code are satisfied. The exercise price of a stock option may not be less than 100% of the fair market value of the underlying share on the date of grant (or 110% in the case of ISOs granted to certain significant stockholders), except with respect to certain substitute options granted in connection with a corporate transaction. The term of a stock option may not be longer than ten years (or five years in the case of ISOs granted to certain significant stockholders). Vesting conditions determined by the plan administrator may apply to stock options and may include continued service, performance and/or other conditions. |
| SARs. SARs entitle their holder, upon exercise, to receive from us an amount equal to the appreciation of the shares subject to the award between the grant date and the exercise date. The exercise price of a SAR may not be less than 100% of the fair market value of the underlying share on the date of grant (except with respect to certain substitute SARs granted in connection with a corporate transaction) and the term of a SAR may not be longer than ten years. Vesting conditions determined by the plan administrator may apply to SARs and may include continued service, performance and/or other conditions. |
| Restricted Stock and RSUs. Restricted stock is an award of nontransferable shares of our common stock that remain forfeitable unless and until specified conditions are met, and which may be subject to a purchase price. RSUs are contractual promises to deliver shares of our common stock in the future, which may also remain forfeitable unless and until specified conditions are met, and may be accompanied by the right to receive the equivalent value of dividends paid on shares of our common stock prior to the delivery of the underlying shares. Delivery of the shares underlying RSUs may be deferred under the terms of the award or at the election of the participant, if the plan administrator permits such a deferral. Conditions applicable to restricted stock and RSUs may be based on continuing service, the attainment of performance goals and/or such other conditions as the plan administrator may determine. |
| Other Stock or Cash Based Awards. Other stock or cash based awards of cash, fully vested shares of our common stock and other awards valued wholly or partially by referring to, or otherwise based on, shares of our common stock. Other stock or cash based awards may be granted to participants and may also be available as a payment form in the settlement of other awards, as standalone payments and as payment in lieu of base salary, bonus, fees or other cash compensation otherwise payable to any individual who is eligible to receive awards. |
Performance Awards. Performance awards include any of the foregoing awards that are granted subject to vesting and/or payment based on the attainment of specified performance goals or other criteria the plan administrator may determine, which may or may not be objectively determinable. Performance criteria upon which performance goals are established by the plan administrator may include but are not limited to: (1) net earnings (either before or after one or more of the following: (a) interest, (b) taxes, (c) depreciation, (d) amortization and (e) non-cash equity-based compensation expense); (2) gross or net sales or revenue; (3) net income (either before or after taxes); (4) adjusted net income; (5) operating earnings or profit; (6) cash flow (including, but not limited to, operating cash flow and free cash flow); (7) return on assets; (8) return on capital; (9) return on stockholders equity;
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(10) total stockholder return; (11) return on sales; (12) gross or net profit or operating margin; (13) costs; (14) funds from operations; (15) expenses; (16) working capital; (17) earnings per share; (18) adjusted earnings per share; (19) price per share of common stock; (20) implementation or completion of critical projects; (21) market share; (22) economic value; (23) debt levels or reduction; (24) sales-related goals; (25) comparisons with other stock market indices; (26) operating efficiency; (27) employee satisfaction; (28) financing and other capital raising transactions; (29) recruiting and maintaining personnel; and (30) year-end cash, any of which may be measured either in absolute terms for us or any operating unit of our company or as compared to any incremental increase or decrease or as compared to results of a peer group or to market performance indicators or indices.
Certain Transactions. The plan administrator has broad discretion to take action under the 2017 Plan, as well as make adjustments to the terms and conditions of existing and future awards, to prevent the dilution or enlargement of intended benefits and facilitate necessary or desirable changes in the event of certain transactions and events affecting our common stock, such as stock dividends, stock splits, mergers, acquisitions, consolidations and other corporate transactions. In addition, in the event of certain non-reciprocal transactions with our stockholders known as equity restructurings, the plan administrator will make equitable adjustments to the 2017 Plan and outstanding awards. In the event of a change in control of our company (as defined in the 2017 Plan), to the extent that the surviving entity declines to continue, convert, assume or replace outstanding awards, then all such awards will become fully vested and exercisable in connection with the transaction. Upon or in anticipation of a change of control, the plan administrator may cause any outstanding awards to terminate at a specified time in the future and give the participant the right to exercise such awards during a period of time determined by the plan administrator in its sole discretion. Individual award agreements may provide for additional accelerated vesting and payment provisions.
Foreign Participants, Claw-Back Provisions, Transferability, and Participant Payments. The plan administrator may modify award terms, establish subplans and/or adjust other terms and conditions of awards, subject to the share limits described above, in order to facilitate grants of awards subject to the laws and/or stock exchange rules of countries outside of the United States. All awards will be subject to the provisions of any claw-back policy implemented by our company to the extent set forth in such claw-back policy and/or in the applicable award agreement. With limited exceptions for estate planning, domestic relations orders, certain beneficiary designations and the laws of descent and distribution, awards under the 2017 Plan are generally non-transferable prior to vesting, and are exercisable only by the participant. With regard to tax withholding, exercise price and purchase price obligations arising in connection with awards under the 2017 Plan, the plan administrator may, in its discretion, accept cash or check, shares of our common stock that meet specified conditions, a market sell order or such other consideration as it deems suitable.
Plan Amendment and Termination. Our board of directors may amend or terminate the 2017 Plan at any time; however, except in connection with certain changes in our capital structure, stockholder approval will be required for any amendment that increases the number of shares available under the 2017 Plan, reprices any stock option or SAR, or cancels any stock option or SAR in exchange for cash or another award when the option or SAR price per share exceeds the fair market value of the underlying shares. No award may be granted pursuant to the 2017 Plan after the tenth anniversary of the date on which our board of directors adopts the 2017 Plan.
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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Since January 1, 2014, we or Switch, Ltd. have engaged in certain transactions with our directors and executive officers and holders of more than 5% of our voting securities and affiliates of our directors, executive officers and holders of more than 5% of our voting securities.
The following are summaries of certain provisions of our related party agreements and are qualified in their entirety by reference to all of the provisions of such agreements. Because these descriptions are only summaries of the applicable agreements, they do not necessarily contain all of the information that you may find useful. We therefore urge you to review the agreements in their entirety. Copies of the agreements (or forms of the agreements) have been filed as exhibits to the registration statement of which this prospectus is a part, and are available electronically on the website of the SEC at www.sec.gov.
Related Party Agreements in Effect Prior to this Offering
Lease Agreements
A member of our board of directors and a manager of Switch, Ltd., Thomas A. Thomas, holds approximately 3% of the membership interests of Beltway Business Park Warehouse No. 1, LLC and approximately 4% of the membership interests of each of Beltway Business Park Office No. 1, LLC, Beltway Business Park Office No. 2, LLC, Beltway Business Park Warehouse No. 3, LLC, Beltway Business Park Warehouse No. 4, LLC and Beltway Business Park Warehouse No. 6, LLC, which we refer to collectively as Beltway, and is a manager of Thomas & Mack Beltway, LLC, which is a manager of Beltway. Switch, Ltd. is a party to certain real property lease agreements with Beltway, including, that certain (i) Standard Industrial Real Estate Lease, dated August 21, 2007, as amended, which governs the leasing of real property for our LAS VEGAS 7 facility and has a term ending on August 31, 2033, (ii) Lease Agreement, dated November 4, 2010, as amended, which governs the leasing of office space and has a term that ended in July 2015, (iii) Lease Agreement, dated April 1, 2011, as amended, which governs the leasing of office space and has a term ending on March 31, 2021, (iv) Land Lease, dated January 12, 2012, as amended, which governs the leasing of real property for our LAS VEGAS 8 facility and has a term ending on February 5, 2062, (v) Lease Agreement, dated April 24, 2012, as amended, which governs the leasing of office space and has a term ending on May 14, 2022, (vi) Standard Industrial Real Estate Lease, dated November 3, 2014, which governs the leasing of warehouse space and has a term ending on April 30, 2021, and (vii) Land Lease, dated June 21, 2016, as amended, which governs the leasing of real property for our planned LAS VEGAS 11 facility and has a term ending on June 19, 2066.
Since January 1, 2014, Switch, Ltd. has made periodic payments under the above agreements to Beltway totaling in the aggregate, and for each of the fiscal years ended December 31, 2014, 2015 and 2016, $3.3 million, $3.8 million and $4.2 million, respectively. We believe the terms of our real property lease agreements with Beltway are no less favorable to us than those that we could have obtained from an unaffiliated third party.
Other Transactions
See Executive Compensation for a description of certain arrangements with our executive officers and directors.
The Transactions
In connection with the Transactions, we will engage in certain transactions with certain of our directors, executive officers and other persons and entities which are or will become holders of 5% or
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more of our voting securities upon the completion of the Transactions, including the exchange of their ownership interest in Common Units by Former Members for shares of our Class A common stock in connection with this offering and entering into the Tax Receivable Agreement, the Switch Operating Agreement and the Registration Rights Agreement. These transactions are described in The Transactions.
Tax Receivable Agreement
We expect to obtain an increase in our share of the tax basis of the assets of Switch, Ltd. when a Continuing Member receives cash or shares of our Class A common stock in connection with a redemption or exchange of such Continuing Members Common Units for Class A common stock or cash (such basis increase, the Basis Adjustments). We intend to treat such acquisition of Common Units as our direct purchase of Common Units from a Continuing Member for U.S. federal income and other applicable tax purposes, regardless of whether such Common Units are surrendered by a Continuing Member to Switch, Ltd. for redemption or sold to us upon the exercise of our election to acquire such Common Units directly. Basis Adjustments may have the effect of reducing the amounts that we would otherwise pay in the future to various tax authorities. The Basis Adjustments may also decrease gains (or increase losses) on future dispositions of certain capital assets to the extent tax basis is allocated to those capital assets.
In connection with the Transactions described above, we will enter into the Tax Receivable Agreement with Switch, Ltd. and the Continuing Members. The Tax Receivable Agreement will provide for the payment by us to such persons of 85% of the amount of tax benefits, if any, that we actually realize, or in some circumstances are deemed to realize, as a result of the Transactions described above, including increases in the tax basis of the assets of Switch, Ltd. arising from such Transactions, and tax basis increases attributable to payments made under the Tax Receivable Agreement and deductions attributable to imputed interest and other payments of interest pursuant to the Tax Receivable Agreement. Switch, Ltd. will have in effect an election under Section 754 of the Code effective for each taxable year in which a redemption or exchange of Common Units for shares of our Class A common stock or cash occurs. These Tax Receivable Agreement payments are not conditioned upon any continued ownership interest in either Switch, Ltd. or us by any Continuing Member. The rights of each Continuing Member under the Tax Receivable Agreement are assignable to transferees of its Common Units (other than Switch as transferee pursuant to subsequent redemptions (or exchanges) of the transferred Common Units). We expect to benefit from the remaining 15% of tax benefits, if any, that we may actually realize.
The actual Basis Adjustments, as well as any amounts paid to the Continuing Members under the Tax Receivable Agreement, will vary depending on a number of factors, including:
| the timing of any subsequent redemptions or exchangesfor instance, the increase in any tax deductions will vary depending on the fair value, which may fluctuate over time, of the depreciable or amortizable assets of Switch, Ltd. at the time of each redemption or exchange; |
| the price of shares of our Class A common stock at the time of redemptions or exchangesthe Basis Adjustments, as well as any related increase in any tax deductions, is directly related to the price of shares of our Class A common stock at the time of each redemption or exchange; |
| the extent to which such redemptions or exchanges are taxableif a redemption or exchange is not taxable for any reason, increased tax deductions will not be available; and |
| the amount and timing of our incomethe Tax Receivable Agreement generally will require Switch to pay 85% of the tax benefits as and when those benefits are treated as realized under the terms of the Tax Receivable Agreement. If Switch does not have taxable income, it generally will not be required (absent a change of control or other circumstances requiring an |
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early termination payment) to make payments under the Tax Receivable Agreement for that taxable year because no tax benefits will have been actually realized. However, any tax benefits that do not result in realized tax benefits in a given taxable year will likely generate tax attributes that may be utilized to generate tax benefits in previous or future taxable years. The utilization of any such tax attributes will result in payments under the Tax Receivable Agreement. |
For purposes of the Tax Receivable Agreement, cash savings in income and franchise tax will be computed by comparing our actual income and franchise tax liability to the amount of such taxes that we would have been required to pay had there been no Basis Adjustments and had the Tax Receivable Agreement not been entered into. The Tax Receivable Agreement will generally apply to each of our taxable years, beginning with the first taxable year ending after the completion of the offering. There is no maximum term for the Tax Receivable Agreement; however, the Tax Receivable Agreement may be terminated by us pursuant to an early termination procedure that requires us to pay the Continuing Members an agreed upon amount equal to the estimated present value of the remaining payments to be made under the agreement (calculated based on certain assumptions, including regarding tax rates and utilization of the Basis Adjustments).
The payment obligations under the Tax Receivable Agreement are obligations of Switch and not of Switch, Ltd. Although the actual timing and amount of any payments that may be made under the Tax Receivable Agreement will vary, we expect that the payments that we may be required to make to the Continuing Members could be substantial. Any payments made by us to Continuing Members under the Tax Receivable Agreement will generally reduce the amount of overall cash flow that might have otherwise been available to us or to Switch, Ltd. and, to the extent that we are unable to make payments under the Tax Receivable Agreement for any reason, the unpaid amounts generally will be deferred and will accrue interest until paid by us.
Decisions made by us in the course of running our business, such as with respect to mergers, asset sales, other forms of business combinations or other changes in control, may influence the timing and amount of payments that are received by a Continuing Member under the Tax Receivable Agreement. For example, the earlier disposition of assets following a transaction that results in a Basis Adjustment will generally accelerate payments under the Tax Receivable Agreement and increase the present value of such payments.
The Tax Receivable Agreement provides that if (i) we materially breach any of our material obligations under the Tax Receivable Agreement, (ii) certain mergers, asset sales, other forms of business combination, or other changes of control were to occur, or (iii) we elect an early termination of the Tax Receivable Agreement, then our obligations, or our successors obligations, under the Tax Receivable Agreement would accelerate and become due and payable, based on certain assumptions, including an assumption that we would have sufficient taxable income to fully utilize all potential future tax benefits that are subject to the Tax Receivable Agreement.
As a result, (i) we could be required to make cash payments to the Continuing Members that are greater than the specified percentage of the actual benefits we ultimately realize in respect of the tax benefits that are subject to the Tax Receivable Agreement, and (ii) if we elect to terminate the Tax Receivable Agreement early, we would be required to make an immediate cash payment equal to the present value of the anticipated future tax benefits that are the subject of the Tax Receivable Agreement , which payment may be made significantly in advance of the actual realization, if any, of such future tax benefits. In these situations, our obligations under the Tax Receivable Agreement could have a material adverse effect on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combination, or other changes of control. There can be no assurance that we will be able to finance our obligations under the Tax Receivable Agreement.
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Payments under the Tax Receivable Agreement will be based on the tax reporting positions that we determine. If any such position is subject to a challenge by a taxing authority the outcome of which would reasonably be expected to materially affect a recipients payments under the Tax Receivable Agreement, then we will not be permitted to settle or fail to contest such challenge without the consent (not to be unreasonably withheld or delayed) of each Continuing Member that directly or indirectly owns at least 10% of the outstanding Common Units. We will not be reimbursed for any cash payments previously made to any Continuing Member pursuant to the Tax Receivable Agreement if any tax benefits initially claimed by us are subsequently challenged by a taxing authority and ultimately disallowed. Instead, in such circumstances, any excess cash payments made by us to a Continuing Member will be netted against any future cash payments that we might otherwise be required to make under the terms of the Tax Receivable Agreement. However, we might not determine that we have effectively made an excess cash payment to the Continuing Members for a number of years following the initial time of such payment and, if our tax reporting positions are challenged by a taxing authority, we will not be permitted to reduce any future cash payments under the Tax Receivable Agreement until any such challenge is finally settled or determined. As a result, it is possible that we could make cash payments under the Tax Receivable Agreement that are substantially greater than our actual cash tax savings.
Payments are generally due under the Tax Receivable Agreement within a specified period of time following the filing of our tax return for the taxable year with respect to which the payment obligation arises, although interest on such payments will begin to accrue at a rate of LIBOR plus 100 basis points from the due date (without extensions) of such tax return. Any late payments that may be made under the Tax Receivable Agreement will continue to accrue interest at LIBOR plus 500 basis points until such payments are made, including any late payments that we may subsequently make because we did not have enough available cash to satisfy our payment obligations at the time at which they originally arose.
Switch Operating Agreement
We will operate our business through Switch, Ltd. and its subsidiaries. In connection with the completion of this offering, we and the Original Members will enter into Switch, Ltd.s Fifth Amended and Restated Operating Agreement, which we refer to as the Switch Operating Agreement. Among the Original Members who will be party to the Switch Operating Agreement are the following officers, directors and 5% or greater stockholders: , , , and . The operations of Switch, Ltd., and the rights and obligations of the holders of Common Units, will be set forth in the Switch Operating Agreement.
Appointment as Manager. Under the Switch Operating Agreement, we will become a member and the managing member of Switch, Ltd. As the managing member, we will be able to control all of the day-to-day business affairs and decision-making of Switch, Ltd. without the approval of any other member, unless otherwise stated in the Switch Operating Agreement. As such, we, through our officers and directors, will be responsible for all operational and administrative decisions of Switch, Ltd. and the day-to-day management of Switch, Ltd.s business. Pursuant to the terms of the Switch Operating Agreement, we cannot, under any circumstances, be removed as the managing member of Switch, Ltd. except by our election.
Compensation. We will not be entitled to compensation for our services as manager. We will be entitled to reimbursement by Switch, Ltd. for fees and expenses incurred on behalf of Switch, Ltd., including all expenses associated with this offering and maintaining our corporate existence.
Capitalization. The Switch Operating Agreement provides for a single class of common membership units, which we refer to as the Common Units. The Switch Operating Agreement will reflect a split of Common Units such that one Common Unit can be acquired with the net proceeds
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received in the initial offering from the sale of one share of our Class A common stock. Each Common Unit will entitle the holder to a pro rata share of the net profits and net losses and distributions of Switch, Ltd.
Distributions. The Switch Operating Agreement will require tax distributions, as that term is defined in the Switch Operating Agreement, to be made by Switch, Ltd. to its members, as that term is defined in the Switch Operating Agreement. Tax distributions will be made at least annually to each member of Switch, Ltd., including us, based on such members allocable share of the taxable income of Switch, Ltd. and at a tax rate that will be determined by us. For this purpose, the taxable income of Switch, Ltd., and Switchs allocable share of such taxable income, shall be determined without regard to any tax basis adjustments that result from our deemed or actual purchase of Common Units from the Continuing Members (as described above under Tax Receivable Agreement). The tax rate used to determine tax distributions will apply regardless of the actual final tax liability of any such member. Tax distributions will also be made only to the extent all distributions from Switch, Ltd. for the relevant period were otherwise insufficient to enable each member to cover its tax liabilities as calculated in the manner described above. The Switch Operating Agreement will also allow for distributions to be made by Switch, Ltd. to its members on a pro rata basis out of distributable cash, as that term is defined in the Switch Operating Agreement. We expect Switch, Ltd. may make distributions out of distributable cash periodically to the extent permitted by our agreements governing our indebtedness and necessary to enable us to cover our operating expenses and other obligations, including our tax liability and obligations under the Tax Receivable Agreement, as well as to make dividend payments, if any, to the holders of our Class A common stock.
Common Unit Redemption Right. The Switch Operating Agreement provides a redemption right to the Continuing Members which entitles them to have their Common Units redeemed, at the election of each such person, for, at our option, as determined by or at the direction of the independent directors (within the meaning of the rules of ) of our board of directors who are disinterested, newly issued shares of our Class A common stock on a one-to-one basis or a cash payment equal to a volume weighted average market price of one share of Class A common stock for each Common Unit redeemed (subject to customary adjustments, including for stock splits, stock dividends and reclassifications). If we decide to make a cash payment, the Continuing Member has the option to rescind its redemption request within a specified time period. Upon the exercise of the redemption right, the redeeming member will surrender its Common Units to Switch, Ltd. for cancellation. The Switch Operating Agreement requires that we contribute cash or shares of our Class A common stock to Switch, Ltd. in exchange for an amount of Common Units in Switch, Ltd. that will be issued to us equal to the number of Common Units redeemed from the Continuing Member. Switch, Ltd. will then distribute the cash or shares of our Class A common stock to such Continuing Member to complete the redemption. In the event of such election by a Continuing Member, we may, at our option, effect a direct exchange of cash or our Class A common stock for such Common Units in lieu of such a redemption. Whether by redemption or exchange, we are obligated to ensure that at all times the number of Common Units that we own equals the number of shares of Class A common stock issued by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities).
Issuance of Common Units upon Exercise of Options or Issuance of Other Equity Compensation. Upon the exercise of options issued by us, or the issuance of other types of equity compensation by us (such as the issuance of restricted or non-restricted stock, payment of bonuses in stock or settlement of stock appreciation rights in stock), we will be required to acquire from Switch, Ltd. a number of Common Units equal to the number of shares of Class A common stock being issued in connection with the exercise of such options or issuance of other types of equity compensation. When we issue shares of Class A common stock in settlement of stock options granted to persons that are not officers or employees of Switch, Ltd. or its subsidiaries, we will make, or be deemed to make, a
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capital contribution to Switch, Ltd. equal to the aggregate value of such shares of Class A common stock, and Switch, Ltd. will issue to us a number of Common Units equal to the number of shares of Class A common stock we issued. When we issue shares of Class A common stock in settlement of stock options granted to persons that are officers or employees of Switch, Ltd. or its subsidiaries, we will be deemed to have sold directly to the person exercising such award a portion of the value of each share of Class A common stock equal to the exercise price per share, and we will be deemed to have sold directly to Switch, Ltd. (or the applicable subsidiary of Switch, Ltd.) the difference between the exercise price and market price per share for each such share of Class A common stock. In cases where we grant other types of equity compensation to employees of Switch, Ltd. or its subsidiaries, (i) on each applicable vesting date we will be deemed to have sold to Switch, Ltd. (or such subsidiary) the number of vested shares at a price equal to the market price per share, (ii) Switch, Ltd. (or such subsidiary) will deliver the shares to the applicable person and (iii) we will be deemed to have made a capital contribution in Switch, Ltd. equal to the purchase price for such shares in exchange for an equal number of Common Units.
Maintenance of one-to-one ratio of shares of Class A common stock and Common Units owned by Switch. Our amended and restated articles of incorporation and the Switch Operating Agreement will require that we and Switch, Ltd., respectively, at all times maintain (i) a ratio of one Common Unit owned by us for each share of Class A common stock issued by us (subject to certain exceptions for treasury shares and shares underlying certain convertible or exchangeable securities), (ii) a one-to-one ratio between the number of shares of Class B common stock owned by the Non-Founder Continuing Members and the number of Common Units owned by the Non-Founder Continuing Members and (iii) a one-to-one ratio between the number of shares of Class C common stock owned by the Founder Continuing Members and the number of Common Units owned by the Founder Continuing Members.
Transfer Restrictions. The Switch Operating Agreement generally does not permit transfers of Common Units by members, subject to limited exceptions. Any transferee of Common Units must assume, by operation of law or written agreement, all of the obligations of a transferring member with respect to the transferred units, even if the transferee is not admitted as a member of Switch, Ltd.
Dissolution. The Switch Operating Agreement will provide that the unanimous consent of all members holding voting units will be required to voluntarily dissolve Switch, Ltd. In addition to a voluntary dissolution, Switch, Ltd. will be dissolved upon a change of control transaction under certain circumstances, as well as upon the entry of a decree of judicial dissolution or other circumstances in accordance with Nevada law. Upon a dissolution event, the proceeds of a liquidation will be distributed in the following order: (i) first, to pay the expenses of winding up Switch, Ltd.; (ii) second, to pay debts and liabilities owed to creditors of Switch, Ltd., other than members; (iii) third, to pay debts and liabilities owed to members; and (iv) fourth, to the members pro-rata in accordance with their respective percentage ownership interests in Switch, Ltd. (as determined based on the number of Common Units held by a member relative to the aggregate number of all outstanding Common Units).
Confidentiality. Each member will agree to maintain the confidentiality of Switch, Ltd.s confidential information. This obligation excludes information independently obtained or developed by the members, information that is in the public domain or otherwise disclosed to a member, in either such case not in violation of a confidentiality obligation or disclosures required by law or judicial process or approved by our chief executive officer.
Indemnification and Exculpation. The Switch Operating Agreement provides for indemnification of the manager, employees and officers of Switch, Ltd. and their respective subsidiaries or affiliates. To the extent permitted by applicable law, Switch, Ltd. will indemnify us, as its managing member, its authorized officers, its other employees and agents from and against any
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losses, liabilities, damages, costs, expenses, fees or penalties incurred by any acts or omissions of these persons, provided that the acts or omissions of these indemnified persons are not the result of fraud, intentional misconduct or a violation of the implied contractual duty of good faith and fair dealing, or any lesser standard of conduct permitted under applicable law.
We, as the managing member, and the authorized officers and other employees and agents of Switch, Ltd. will not be liable to Switch, Ltd., its members or their affiliates for damages incurred by any acts or omissions of these persons, provided that the acts or omissions of these exculpated persons are not the result of fraud, or intentional misconduct.
Amendments. The Switch Operating Agreement may be amended with the consent of the holders of a majority in voting power of the outstanding Common Units; provided that if the managing member holds greater than 33% of the Common Units, then it may be amended with the consent of the managing member together with holders of a majority of the outstanding Common Units, excluding Common Units held by the managing member. Notwithstanding the foregoing, no amendment to any of the provisions that expressly require the approval or action of certain members may be made without the consent of such members and no amendment to the provisions governing the authority and actions of the managing member or the dissolution of Switch, Ltd. may be amended without the consent of the managing member.
Registration Rights Agreement
We intend to enter into a Registration Rights Agreement with the Original Members in connection with this offering. Among the Original Members who will be party to the Registration Rights Agreement are the following officers, directors and 5% or greater stockholders: , , , and . The Registration Rights Agreement will provide the Continuing Members the right, at any time from and after 180 days following the date of this prospectus, to require us to register under the Securities Act shares of Class A common stock issuable to them upon redemption or exchange of their Common Units, including on a short-form registration statement, if and when we are eligible to utilize such registration statement. The Registration Rights Agreement will also provide for piggyback registration rights for the Original Members.
Indemnification Agreements
Our bylaws, as will be in effect prior to the closing of this offering, provide that we will indemnify our directors and officers to the fullest extent permitted by the laws of the State of Nevada in effect from time to time, subject to certain exceptions contained in our bylaws. In addition, our articles of incorporation, as will be in effect prior to the closing of this offering, will provide that our directors will not be liable for monetary damages for breach of fiduciary duty.
Prior to the closing of this offering, we will enter into indemnification agreements with each of our executive officers and directors. The indemnification agreements will provide the executive officers and directors with contractual rights to indemnification, and expense advancement and reimbursement, to the fullest extent permitted under the laws of the State of Nevada in effect from time to time, subject to certain exceptions contained in those agreements.
There is no pending litigation or proceeding naming any of our directors or officers to which indemnification is being sought, and we are not aware of any pending litigation that may result in claims for indemnification by any director or officer.
Policies and Procedures for Related Person Transactions
Our board of directors recognizes the fact that transactions with related persons present a heightened risk of conflicts of interests and/or improper valuation (or the perception thereof). Prior to
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the closing of this offering, our board of directors will adopt a written policy on transactions with related persons that is in conformity with the requirements for issuers having publicly-held common stock that is listed on . Under the new policy:
| any related person transaction, and any material amendment or modification to a related person transaction, must be reviewed and approved or ratified by a committee of the board of directors composed solely of independent directors who are disinterested or by the disinterested members of the board of directors; and |
| any employment relationship or transaction involving an executive officer and any related compensation must be approved by the compensation committee of the board of directors or recommended by the compensation committee to the board of directors for its approval. |
In connection with the review and approval or ratification of a related person transaction:
| management must disclose to the committee or disinterested directors, as applicable, the name of the related person and the basis on which the person is a related person, the material terms of the related person transaction, including the approximate dollar value of the amount involved in the transaction, and all the material facts as to the related persons direct or indirect interest in, or relationship to, the related person transaction; |
| management must advise the committee or disinterested directors, as applicable, as to whether the related person transaction complies with the terms of our agreements governing our material outstanding indebtedness that limit or restrict our ability to enter into a related person transaction; |
| management must advise the committee or disinterested directors, as applicable, as to whether the related person transaction will be required to be disclosed in our applicable filings under the Securities Act or the Exchange Act, and related rules, and, to the extent required to be disclosed, management must ensure that the related person transaction is disclosed in accordance with such Acts and related rules; and |
| management must advise the committee or disinterested directors, as applicable, as to whether the related person transaction constitutes a personal loan for purposes of Section 402 of the Sarbanes-Oxley Act. |
In addition, the related person transaction policy provides that the committee or disinterested directors, as applicable, in connection with any approval or ratification of a related person transaction involving a non-employee director or director nominee, should consider whether such transaction would compromise the director or director nominees status as an independent, outside, or non-employee director, as applicable, under the rules and regulations of the SEC, , and the Code.
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The following table sets forth information with respect to the beneficial ownership of our Class A common stock, Class B common stock and Class C common stock, after the completion of the Transactions, including this offering, for:
| each person known by us to beneficially own more than 5% of our Class A common stock, Class B common stock or Class C common stock; |
| each of our directors; |
| each of our named executive officers; and |
| all of our executive officers and directors as a group. |
As described in The Transactions and Certain Relationships and Related Party Transactions, each Continuing Member will be entitled to have their Common Units redeemed for Class A common stock on a one-to-one basis, or, at our option, cash equal to the market value of the applicable number of our shares of Class A common stock. In addition, at our election, upon a redemption request, we may effect a direct exchange of such Class A common stock or such cash for such Common Units. In connection with this offering, we will issue (i) to each Non-Founder Continuing Member for nominal consideration one share of Class B common stock for each Common Unit it owns and (ii) to each Founder Continuing Member for nominal consideration one share of Class C common stock for each Common Unit it owns. As a result, the respective numbers of shares of Class B common stock and Class C common stock listed in the table below correlate to the number of Common Units each such Continuing Member will own immediately after this offering. See The Transactions.
The number of shares beneficially owned by each stockholder is determined under rules issued by the Securities and Exchange Commission and includes voting or investment power with respect to securities. Under these rules, beneficial ownership includes any shares as to which the individual or entity has sole or shared voting power or investment power. In computing the number of shares beneficially owned by an individual or entity and the percentage ownership of that person, shares of common stock subject to options or other rights held by such person that are currently exercisable or will become exercisable within 60 days of the date of this prospectus, are considered outstanding, although these shares are not considered outstanding for purposes of computing the percentage ownership of any other person. Notwithstanding the preceding sentence, for purposes of the following table, we assumed that that the Continuing Members were not entitled to have their Common Units redeemed for Class A common stock. Unless otherwise indicated, the address of all listed stockholders is c/o Switch, Inc., 7135 S. Decatur Boulevard, Las Vegas, NV 89118. Each of the stockholders listed has sole voting and investment power with respect to the shares beneficially owned by the stockholder unless noted otherwise, subject to community property laws where applicable.
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Shares of Class A Common Stock Beneficially Owned |
Shares of Class B Common Stock Beneficially Owned |
Shares of Class C Common Stock Beneficially Owned |
Total Common Stock Beneficially Owned |
Combined Voting Power |
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Name of Beneficial Owner |
Number | Percentage | Number | Percentage | Number | Percentage | Percentage | Percentage | ||||||||||||||||||||||||
5% Stockholders |
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% | % | | | % | % | |||||||||||||||||||||||||||
% | % | | | % | % | |||||||||||||||||||||||||||
% | % | | | % | % | |||||||||||||||||||||||||||
% | % | | | % | % | |||||||||||||||||||||||||||
% | % | | | % | % | |||||||||||||||||||||||||||
Named Executive Officers and Directors |
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Rob Roy |
| | | | % | % | % | |||||||||||||||||||||||||
Thomas Morton |
% | % | | | % | % | ||||||||||||||||||||||||||
Gabe Nacht |
% | % | | | % | % | ||||||||||||||||||||||||||
Larry Krause |
% | % | | | % | % | ||||||||||||||||||||||||||
Zareh Sarrafian |
% | % | | | % | % | ||||||||||||||||||||||||||
Donald Snyder |
% | % | | | % | % | ||||||||||||||||||||||||||
Tom Thomas |
% | % | | | % | % | ||||||||||||||||||||||||||
Bryan Wolf |
% | % | % | % | % | |||||||||||||||||||||||||||
All directors and executive officers as a group ( persons) |
% | % | % | % | % |
| Assumes no exercise by the underwriters of their option to purchase additional shares of Class A common stock. |
* | Represents beneficial ownership or voting power of less than 1%. |
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The following descriptions of our capital stock and provisions of our amended and restated articles of incorporation and our amended and restated bylaws, each of which will be in effect prior to the completion of this offering, are summaries and are qualified by reference to the amended and restated articles of incorporation and the amended and restated bylaws, which are filed as exhibits to the registration statement of which this prospectus forms a part.
Our current authorized capital stock consists of 1,000,000 shares of common stock, par value $0.001 per share. As of the completion of this offering, our authorized capital stock will consist of shares of Class A common stock, par value $0.001 per share, shares of Class B common stock, par value $0.001 per share, shares of Class C common stock, par value $0.001 per share, and shares of blank check preferred stock.
Common Stock
Upon completion of this offering, there will be shares of our Class A common stock issued and outstanding, shares of our Class B common stock issued and outstanding, and shares of our Class C common stock issued and outstanding.
Class A Common Stock
Voting Rights
Holders of our Class A common stock will be entitled to cast one vote per share. Holders of our Class A common stock will not be entitled to cumulate their votes in the election of directors. Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together as a single class. Except as otherwise provided by applicable law, amendments to our amended and restated articles of incorporation must be approved by a majority or, in some cases, two-thirds of the combined voting power of all shares entitled to vote, voting together as a single class.
Dividend Rights
Holders of Class A common stock will share ratably (based on the number of shares of Class A common stock held) if and when any dividend is declared by the board of directors out of funds legally available therefor, subject to restrictions, whether statutory or contractual (including with respect to any outstanding indebtedness), on the declaration and payment of dividends and to any restrictions on the payment of dividends imposed by the terms of any outstanding preferred stock.
Liquidation Rights
On our liquidation, dissolution or winding up, each holder of Class A common stock will be entitled to a pro rata distribution of the net assets, if any, available for distribution to common stockholders.
Other Matters
No shares of Class A common stock will be subject to redemption or have preemptive rights to purchase additional shares of Class A common stock. Holders of shares of our Class A common stock
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do not have subscription, redemption or conversion rights. Upon completion of this offering, all the outstanding shares of Class A common stock will be validly issued, fully paid and non-assessable.
Class B Common Stock
Issuance of Class B common stock with Common Units
Shares of Class B common stock will only be issued in the future to the extent necessary to maintain a one-to-one ratio between the number of Common Units held by Non-Founder Continuing Members and the number of shares of Class B common stock issued to Non-Founder Continuing Members. Shares of Class B common stock are transferable only together with an equal number of Common Units. A Non-Founder Continuing Members shares of Class B common stock will be cancelled on a one-to-one basis if such Non-Founder Continuing Member elects to redeem or exchange its Common Units pursuant to the terms of the Switch Operating Agreement.
Voting Rights
Holders of Class B common stock will be entitled to cast one vote per share, with the number of shares of Class B common stock held by each Non-Founder Continuing Member being equal to the number of Common Units held by such Non-Founder Continuing Member. Holders of our Class B common stock will not be entitled to cumulate their votes in the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together as a single class. Except as otherwise provided by applicable law, amendments to our amended and restated articles of incorporation must be approved by a majority or, in some cases, two-thirds of the combined voting power of all shares entitled to vote, voting together as a single class.
Dividend Rights
Holders of our Class B common stock will not participate in any dividend declared by the board of directors.
Liquidation Rights
On our liquidation, dissolution or winding up, holders of Class B common stock will not be entitled to receive any distribution of our assets.
Transfers
Pursuant to our amended and restated articles of incorporation and the Switch Operating Agreement, holders of our Class B common stock are subject to restrictions on transfer of such shares, including that:
| the holder will not transfer any shares of Class B common stock to any person unless the holder transfers an equal number of Common Units to the same person; and |
| in the event the holder transfers any Common Units to any person, the holder will transfer an equal number of shares of Class B common stock to the same person. |
Other Matters
No shares of Class B common stock will be subject to redemption rights or have preemptive rights to purchase additional shares of Class B common stock. Holders of shares of our Class B
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common stock do not have subscription, redemption or conversion rights. Upon completion of this offering, all outstanding shares of Class B common stock will be validly issued, fully paid and non-assessable.
Class C Common Stock
Issuance of Class C common stock with Common Units
Shares of Class C common stock will only be issued in the future to the extent necessary to maintain a one-to-one ratio between the number of Common Units held by Founder Continuing Members and the number of shares of Class C common stock issued to Founder Continuing Members. Shares of Class C common stock are transferable only together with an equal number of Common Units. A Founder Continuing Members shares of Class C common stock will be cancelled on a one-to-one basis if such Founder Continuing Member elects to redeem or exchange its Common Units pursuant to the terms of the Switch Operating Agreement.
Voting Rights
Holders of Class C common stock will be entitled to cast ten votes per share, with the number of shares of Class C common stock held by each Founder Continuing Member being equal to the number of Common Units held by such Founder Continuing Member. Holders of our Class C common stock will not be entitled to cumulate their votes in the election of directors.
Generally, all matters to be voted on by stockholders must be approved by a majority (or, in the case of election of directors, by a plurality) of the votes entitled to be cast by all stockholders present in person or represented by proxy, voting together as a single class. Except as otherwise provided by applicable law, amendments to our amended and restated articles of incorporation must be approved by a majority or, in some cases, two-thirds of the combined voting power of all shares entitled to vote, voting together as a single class.
Dividend Rights
Holders of our Class C common stock will not participate in any dividend declared by the board of directors.
Liquidation Rights
On our liquidation, dissolution or winding up, holders of Class C common stock will not be entitled to receive any distribution of our assets.
Transfers
Pursuant to our amended and restated articles of incorporation and the Switch Operating Agreement, holders of our Class C common stock are subject to restrictions on transfer of such shares, including that:
| the holder will not transfer any shares of Class C common stock to any person unless the holder transfers an equal number of Common Units to the same person; and |
| in the event the holder transfers any Common Units to any person, the holder will transfer an equal number of shares of Class C common stock to the same person. |
Other Matters
No shares of Class C common stock will be subject to redemption rights or have preemptive rights to purchase additional shares of Class C common stock. Holders of shares of our Class C
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common stock do not have subscription, redemption or conversion rights. Upon completion of this offering, all outstanding shares of Class C common stock will be validly issued, fully paid and non-assessable.
Preferred Stock
Our amended and restated articles of incorporation provide that our board of directors has the authority, without action by the stockholders, to designate and issue up to shares of preferred stock in one or more classes or series and to fix the powers, rights, preferences, and privileges of each class or series of preferred stock, including dividend rights, conversion rights, voting rights, terms of redemption, liquidation preferences, treatment in the case of a merger, business combination transaction, or sale of the companys assets substantially in their entirety, and the number of shares constituting any class or series, which may be greater than the rights of the holders of the common stock. There will be no shares of preferred stock outstanding immediately after this offering.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The simplified issuance of preferred stock, while providing flexibility in connection with possible acquisitions, future financings and other corporate purposes, could have the effect of making it more difficult for a third party to acquire, or could discourage a third party from seeking to acquire, a majority of our outstanding voting stock. Additionally, the issuance of preferred stock may adversely affect the holders of our Class A common stock by restricting dividends on the Class A common stock, diluting the voting power of the Class A common stock or subordinating the liquidation rights of the Class A common stock. As a result of these or other factors, the issuance of preferred stock could have an adverse impact on the market price of our Class A common stock.
Exclusive Forum for Disputes
Our amended and restated articles of incorporation, as they will be in effect upon the closing of this offering, will require that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of Nevada law or our amended and restated articles of incorporation or amended and restated bylaws or (iv) any action asserting a claim against us or any of our directors, officers or other employees governed by the internal affairs doctrine will have to be brought only in the Eighth Judicial District Court of Clark County, Nevada, or the Nevada Court. Although we believe this provision benefits us by providing increased consistency in the application of Nevada law in the types of lawsuits to which it applies, the provision may have the effect of discouraging lawsuits against our directors and officers.
Anti-Takeover Effects of Provisions of our Amended and Restated Articles of Incorporation and our Amended and Restated Bylaws
Our amended and restated articles of incorporation and amended and restated bylaws, as they will be in effect upon completion of this offering, also contain provisions that may delay, defer or discourage another party from acquiring control of us. We expect that these provisions, which are summarized below, will discourage coercive takeover practices or inadequate takeover bids. These provisions are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors, which we believe may result in an improvement of the terms of any such acquisition in favor of our stockholders. However, they also give our board of directors the power to discourage acquisitions that some stockholders may favor.
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Anti-Takeover Effects of Nevada Law
The State of Nevada, where we are incorporated, has enacted statutes that could prohibit or delay mergers or other takeover or change in control attempts and, accordingly, may discourage attempts to acquire us even though such a transaction may offer our stockholders the opportunity to sell their stock at a price above the prevailing market price. We have not opted out of these statutes.
Business Combinations
The business combination provisions of Sections 78.411 to 78.444, inclusive, of the Nevada Revised Statutes, or the NRS, generally prohibit a publicly traded Nevada corporation with at least 200 stockholders of record from engaging in various combination transactions with any interested stockholder for a period of four years after the date of the transaction in which the person became an interested stockholder, unless the transaction is approved by the board of directors before such person became an interested stockholder or the combination is approved by the board of directors and thereafter is approved at a meeting of the stockholders by the affirmative vote of stockholders representing at least 60% (for a combination within two years after becoming an interested stockholder) or a majority (for combinations between two and four years thereafter) of the outstanding voting power held by disinterested stockholders. Alternatively, a corporation may engage in a combination with an interested stockholder more than two years after becoming an interested stockholder if:
| if the consideration to be paid to the holders of the corporations stock, other than the interested stockholder, is at least equal to the highest of: (a) the highest price per share paid by the interested stockholder within the two years immediately preceding the date of the announcement of the combination or in the transaction in which it became an interested stockholder, whichever is higher, plus interest compounded annually, (b) the market value per share of common stock on the date of announcement of the combination and the date the interested stockholder acquired the shares, whichever is higher, or (c) for holders of preferred stock, the highest liquidation value of the preferred stock, if it is higher; and |
| the interested stockholder has not become the owner of any additional voting shares since the date of becoming an interested stockholder except by certain permitted transactions. |
A combination is generally defined to include (i) mergers or consolidations with the interested stockholder or an affiliate or associate of the interested stockholder, (ii) any sale, lease exchange, mortgage, pledge, transfer or other disposition of assets of the corporation, in one transaction or a series of transactions, to or with the interested stockholder or an affiliate or associate of the interested stockholder: (a) having an aggregate market value equal to 5% or more of the aggregate market value of the assets of the corporation, (b) having an aggregate market value equal to 5% or more of the aggregate market value of all outstanding shares of the corporation, or (c) representing more than 10% of the earning power or net income (determined on a consolidated basis) of the corporation, (iii) any issuance or transfer of securities to the interested stockholder or an affiliate or associate of the interested stockholder, in one transaction or a series of transactions, having an aggregate market value equal to 5% or more of the aggregate market value of all of the outstanding voting shares of the corporation (other than under the exercise of warrants or rights to purchase shares offered, or a dividend or distribution made pro rata to all stockholders of the corporation), (iv) adoption of a plan or proposal for liquidation or dissolution of the corporation with the interested stockholder or an affiliate or associate of the interested stockholder and (v) certain other transactions having the effect of increasing the proportionate share of voting securities beneficially owned by the interested stockholder or an affiliate or associate of the interested stockholder.
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In general, an interested stockholder means any person who (i) beneficially owns, directly or indirectly, 10% or more of the voting power of the outstanding voting shares of a corporation, or (ii) is an affiliate or associate of the corporation that beneficially owned, within two years prior to the date in question, 10% or more of the voting power of the then-outstanding shares of the corporation.
Control Share Acquisitions
The control share provisions of Sections 78.378 to 78.3793, inclusive, of the NRS apply to issuing corporations that are Nevada corporations doing business, directly or through an affiliate, in Nevada, and having least 200 stockholders of record, including at least 100 of whom have addresses in Nevada appearing on the stock ledger of the corporation. The control share statute prohibits an acquirer, under certain circumstances, from voting its control shares of an issuing corporations stock after crossing certain ownership threshold percentages, unless the acquirer obtains approval of the issuing corporations disinterested stockholders. The statute specifies three thresholds: one-fifth or more but less than one-third, one-third but less than a majority, and a majority or more, of the outstanding voting power. Generally, once an acquirer crosses one of the above thresholds, those shares in an offer or acquisition and acquired within 90 days thereof become control shares and such control shares are deprived of the right to vote until disinterested stockholders restore the right. In addition, the corporation, if provided in its articles of incorporation or bylaws, may cause the redemption of all of the control shares at the average price paid for such shares if the stockholders do not accord the control shares full voting rights. If control shares are accorded full voting rights and the acquiring person has acquired a majority or more of all voting power, all other stockholders who did not vote in favor of authorizing voting rights to the control shares are entitled to demand payment for the fair value of their shares in accordance with statutory procedures established for dissenters rights.
Anti-Takeover Provisions
Authorized but Unissued Shares
The authorized but unissued shares of Class A, B and C common stock and preferred stock are available for future issuance without stockholder approval, subject to any limitations imposed by the listing standards of the . These additional shares may be used for a variety of corporate finance transactions, acquisitions and employee benefit plans. The existence of authorized but unissued and unreserved common stock and preferred stock could make more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.
Requirements for Advance Notification of Stockholder Meetings, Nominations and Proposals
Our amended and restated articles of incorporation will provide that stockholders at an annual meeting may only consider proposals or nominations specified in the notice of meeting or brought before the meeting by or at the direction of our board of directors or by a qualified stockholder of record on the record date for the meeting, who is entitled to vote at the meeting and who has delivered timely written notice in proper form to our secretary of the stockholders intention to bring such business before the meeting. Our amended and restated articles of incorporation will provide that, subject to applicable law, special meetings of the stockholders may be called only by a resolution adopted by the affirmative vote of a majority of the directors then in office. Our amended and restated bylaws will prohibit the conduct of any business at a special meeting other than as specified in the notice for such meeting. In addition, any stockholder who wishes to bring business before an annual meeting or nominate directors must comply with the advance notice and duration of ownership requirements set forth in our amended and restated bylaws and provide us with certain information. These provisions may have the effect of deferring, delaying or discouraging hostile takeovers or changes in control of us or changes in our management.
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Stockholder Action by Written Consent
Nevada law permits stockholder action by written consent unless the corporations articles of incorporation or bylaws provide otherwise. Pursuant to Section 78.320 of the NRS, any action required to be taken at any annual or special meeting of the stockholders may be taken without a meeting, without prior notice and without a vote if a written consent to such action is signed by the holders of outstanding stock having at least a majority of the voting power of all classes entitled to vote, or such different proportion that would be required for action at a meeting of the stockholders. Our amended and restated articles of incorporation will provide that stockholder action by written consent will be permitted so long as the Founder Continuing Members beneficially own, directly or indirectly, at least % of our outstanding common stock, but only if the action to be effected by such written consent and the taking of such action by such written consent have been previously approved by the affirmative vote of a majority of the directors then in office. Once the Founder Continuing Members no longer beneficially own at least % of our outstanding common stock, all stockholder actions must be taken at a meeting of our stockholders.
Amendment of Amended and Restated Articles of Incorporation or Bylaws
Unless a corporations articles of incorporation or bylaws provide otherwise, Nevada law provides generally that the affirmative vote of a majority of the voting power of all classes entitled to vote, as well as a majority of any class adversely affected, is required to amend a corporations articles of incorporation and that the corporations bylaws may be amended by the board of directors. Upon completion of this offering, our amended and restated articles of incorporation will provide that they may be amended by the board of directors, in the manner, and subject to approval by stockholders as, now or hereafter prescribed by statute, except that any amendment to Article 8 regarding the stockholders right to act by written consent or Article 11 regarding corporate opportunities will require the affirmative vote of at least two-thirds of the votes which all our stockholders would be entitled to cast in an election of directors. Our amended and restated bylaws may be amended or repealed by a majority vote of our board of directors or by the affirmative vote of the holders of at least two-thirds of the votes which all our stockholders would be entitled to cast in an election of directors.
The foregoing provisions of our amended and restated articles of incorporation and amended and restated bylaws could discourage potential acquisition proposals and could delay or prevent a change in control. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board of directors and in the policies formulated by our board of directors and to discourage certain types of transactions that may involve an actual or threatened change of control. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares of Class A common stock that could result from actual or rumored takeover attempts. Such provisions also may have the effect of preventing changes in our management or delaying or preventing a transaction that might benefit you or other minority stockholders.
Limitations on Liability and Indemnification of Officers and Directors
Nevada law provides that our directors and officers will not be personally liable to us, our stockholders or our creditors for monetary damages for any act or omission of a director or officer other than in circumstances where the director or officer breaches his fiduciary duty to us or our stockholders and such breach involves intentional misconduct, fraud or a knowing violation of law. Nevada law allows the articles of incorporation of a corporation to provide for greater liability of the corporations directors and officers. Our amended and restated articles of incorporation do not provide for greater liability of the companys officers and directors than is provided under Nevada law.
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Our amended and restated articles of incorporation and bylaws provide indemnification for our directors and officers to the fullest extent permitted by Nevada law. Prior to the completion of this offering, we intend to enter into indemnification agreements with each of our directors that may, in some cases, be broader than the specific indemnification provisions contained under Nevada law. In addition, as permitted by Nevada law, our amended and restated articles of incorporation include provisions that eliminate the personal liability of our directors for monetary damages resulting from certain breaches of fiduciary duties as a director. The effect of these provisions is to restrict our rights and the rights of our stockholders in derivative suits to recover monetary damages against a director for breach of fiduciary duties as a director, except that a director will be personally liable for acts or omissions not in good faith or in a manner which he or she did not reasonably believe to be in or not opposed to the best interest of the corporation if, subject to certain exceptions, the act or failure to act constituted a breach of fiduciary duty and such breach involved intentional misconduct, fraud or knowing violations of law.
These provisions may be held not to be enforceable for certain violations of the federal securities laws of the United States.
Our amended and restated bylaws include provisions that require us to indemnify our directors or officers against monetary damages for actions taken as a director or officer. We are also expressly authorized to carry directors and officers insurance to protect our directors, officers, employees and agents against certain liabilities.
The limitation of liability and indemnification provisions under Nevada law and in our amended and restated articles of incorporation and amended and restated bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a directors fiduciary duties. Moreover, the provisions do not alter the liability of directors under the federal securities laws. In addition, your investment may be adversely affected to the extent that, in a class action or direct suit, we pay the costs of settlement and damage awards against directors and officers pursuant to these indemnification provisions.
Corporate Opportunities
In recognition that partners, principals, directors, officers, members, managers and/or employees of the Continuing Members and their affiliates and investment funds, which we refer to as the Corporate Opportunity Entities, may serve as our directors and/or officers, and that the Corporate Opportunity Entities may engage in activities or lines of business similar to those in which we engage, our amended and restated articles of incorporation provide for, to the fullest extent permitted under Nevada law, the renouncement by us of all interest and expectancy that we otherwise would be entitled to have in, and all rights to be offered an opportunity to participate in, any business opportunity that from time to time may be presented to a Corporate Opportunity Entity other than an employee of the Company or any of its subsidiaries. Specifically, none of the Corporate Opportunity Entities has any duty to refrain from engaging, directly or indirectly, in the same or similar business activities or lines of business that we do or otherwise competing with us. In the event that any Corporate Opportunity Entity that is not an employee of the Company or its subsidiaries acquires knowledge of a potential transaction or matter which may be a corporate opportunity for itself and us, we will not have any expectancy in such corporate opportunity, and the Corporate Opportunity Entity will not have any duty to communicate or offer such corporate opportunity to us and may pursue or acquire such corporate
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opportunity for itself or direct such opportunity to another person. In addition, if a director of our Company who is also a partner, principal, director, officer, member, manager or employee of any Corporate Opportunity Entity acquires knowledge of a potential transaction or matter which may be a corporate opportunity for us and a Corporate Opportunity Entity, we will not have any expectancy in such corporate opportunity. In the event that any director of ours who is not an employee of the Company or any of its subsidiaries acquires knowledge of a potential transaction or matter which may be a corporate opportunity for us we will not have any expectancy in such corporate opportunity unless such potential transaction or matter was expressly offered to such director in his or her capacity as such.
To the fullest extent permitted by Nevada law, no potential transaction or business opportunity may be deemed to be a potential corporate opportunity of the Company or its subsidiaries unless (a) the Company or its subsidiaries would be permitted to undertake such transaction or opportunity in accordance with the amended and restated articles of incorporation, (b) the Company or its subsidiaries at such time have sufficient financial resources to undertake such transaction or opportunity and (c) such transaction or opportunity would be in the same or similar line of business in which the Company or its subsidiaries are then engaged or a line of business that is reasonably related to, or a reasonable extension of, such line of business.
By becoming a stockholder in our Company, you will be deemed to have notice of and consented to these provisions of our amended and restated articles of incorporation. Any amendment to the foregoing provisions of our amended and restated articles of incorporation requires the affirmative vote of at least two-thirds of the votes which all our stockholders would be entitled to cast in an election of directors.
Dissenters Rights of Appraisal and Payment
Under Nevada law, with certain exceptions, our holders of our common stock will not have appraisal rights in connection with a merger or consolidation of Switch to the extent that such action does not require the holder to accept as consideration for such stock anything other than cash, certain publicly traded securities or securities of certain investment companies redeemable at the option of the holder. To the extent that dissenters rights may be available under Nevada law, stockholders who properly request and perfect appraisal rights in connection with such merger or consolidation will have the right to receive payment of the fair value of their shares as determined by the Nevada Court.
Stockholders Derivative Actions
Under Nevada law, any of our stockholders may bring an action in our name to procure a judgment in our favor, also known as a derivative action, provided that the stockholder bringing the action was a holder of our shares at the time of the transaction to which the action relates or such stockholders stock thereafter devolved by operation of law and such suit is brought in the Nevada Court. See Exclusive Forum for Disputes above.
Registration Rights Agreement
In connection with this offering, Switch will enter into the Registration Rights Agreement with the Original Members. Pursuant to the Registration Rights Agreement, the Continuing Members will have the right, at any time from and after 180 days following the date of this prospectus, to require us to register under the Securities Act shares of Class A common stock issuable to them upon redemption or exchange of their Common Units, including on a short-form registration statement, if and when we are
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eligible to utilize such registration statement. The Registration Rights Agreement will also provide for piggyback registration rights for the Original Members. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement.
Transfer Agent and Registrar
The transfer agent and registrar for our Class A common stock will be .
The Listing
We intend to apply to list our Class A common stock on the under the symbol SWCH.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
Amended and Restated Credit Agreement
On June 27, 2017, we entered into an amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent, and the lenders party thereto, which amended and restated our previous $725 million credit agreement to provide a $600 million term loan and a $500 million revolving credit facility. The term loan and revolving credit facility each bear interest, at our option, at either the prime rate or LIBOR plus, in each case, an applicable margin determined according to separate grids based on a consolidated total leverage ratio. We are required to repay the aggregate outstanding principal amount of the initial term loan under the term loan in consecutive quarterly installments equal to $1.50 million until final payment is made on the maturity date. The term loan and the revolving credit facility will mature and all remaining amounts outstanding thereunder will be due and payable on June 27, 2024 and June 27, 2022, respectively.
The amended and restated credit agreement permits the issuance of letters of credit upon our request of up to $30 million. As of June 27, 2017, we had $38 million of borrowings outstanding under the revolving credit facility and $462 million of availability. As of June 27, 2017, we had $600 million of borrowings outstanding under the term loan. Upon satisfying certain conditions, we are permitted to request to increase the amount available for borrowing under the term loan and revolving credit facility up to an aggregate of $75 million, plus an additional amount subject to certain leverage restrictions.
The term loan and revolving credit facility are secured by a first-priority security interest in substantially all of the assets of Switch, Ltd. and the guarantors (excluding stock in foreign subsidiaries in excess of 65% and assets of non-guarantors and subject to certain other exceptions). Obligations under the amended and restated credit agreement are guaranteed by certain of our wholly-owned material domestic subsidiary guarantors, or collectively, the Credit Parties.
The amended and restated credit agreement contains a number of covenants that, among other things, restrict our ability to, subject to specified exceptions and baskets, incur additional debt; incur additional liens, encumbrances or contingent liabilities; make investments in other persons or property; sell or dispose of our assets; merge with or acquire other companies; liquidate or dissolve ourselves or any of the Credit Parties; engage in any business that is not otherwise a related line of business; engage in certain transactions with affiliates; pay dividends or certain other restricted payments (with certain exceptions and baskets, including, among other things, a restricted payment basket of $15 million per fiscal year); and make loans, advances or guarantees.
Events of default under the amended and restated credit agreement, subject to specified thresholds, include but are not limited to: nonpayment of principal, interest, fees or any other payment obligations thereunder; failure to perform or observe covenants, conditions or agreements; material violation of any representation, warranty or certification; cross-defaults to certain material indebtedness; bankruptcy or insolvency of the Credit Parties; certain monetary judgments against the Credit Parties; and any change of control occurrence.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our Class A common stock. Future sales of substantial amounts of Class A common stock in the public market (including shares of Class A common stock issuable upon redemption or exchange of Common Units), or the perception that such sales may occur, could adversely affect the market price of our Class A common stock. Although we intend to apply to list our Class A common stock on , we cannot assure you that there will be an active public market for our Class A common stock.
Upon the closing of this offering, we will have outstanding an aggregate of shares of Class A common stock, assuming the issuance of shares of Class A common stock offered by us in this offering and the issuance of shares of Class A common stock to the Former Members in the Transactions. Of these shares, all shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act, except for any shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act, whose sales would be subject to the Rule 144 resale restrictions described below, other than the holding period requirement. The remaining shares of Class A common stock will be restricted securities, as that term is defined in Rule 144 under the Securities Act. These restricted securities are eligible for public sale only if they are registered under the Securities Act or if they qualify for an exemption from registration under Rules 144 or 701 under the Securities Act, which are summarized below.
In addition, each Common Unit held by the Continuing Members will be redeemable, at the election of such members, for newly issued shares of Class A common stock on a one-to-one basis. The Continuing Members may exercise such redemption right for as long as their Common Units remain outstanding. See Certain Relationships and Related Party TransactionsSwitch Operating Agreement. Upon completion of this offering, our Continuing Members will hold Common Units, all of which will be exchangeable for shares of our Class A common stock. The shares of Class A common stock we issue upon such exchanges would be restricted securities as defined in Rule 144 unless we register such issuances. However, we will enter into a Registration Rights Agreement with the Continuing Members that will require us to register under the Securities Act these shares of Class A common stock. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement.
Lock-Up Agreements
We, our executive officers, directors and holders of substantially all of our outstanding common stock and securities convertible into or exchangeable for shares of our common stock, have agreed that, subject to certain exceptions, for a period of 180 days from the date of this prospectus, we and they will not, without the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, dispose of or hedge any shares or any securities convertible into or exchangeable for shares of our capital stock. Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC, in their discretion, may release any of the securities subject to these lock-up agreements at any time. This agreement is further described as set forth in the section titled Underwriting. Upon the expiration of the applicable lock-up periods, substantially all of the shares subject to such lock-up restrictions will become eligible for sale, subject to the limitations discussed above.
Rule 144
Affiliate Resales of Restricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is an affiliate of ours, or who was an affiliate at any time during the
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90 days before a sale, who has beneficially owned shares of our Class A common stock for at least six months would be entitled to sell in brokers transactions or certain riskless principal transactions or to market makers, a number of shares within any three-month period that does not exceed the greater of:
| 1% of the number of shares of our Class A common stock then outstanding, which will equal approximately shares immediately after this offering; or |
| the average weekly trading volume in our Class A common stock on the during the four calendar weeks preceding the filing of a notice on Form 144 with respect to such sale. |
Affiliate resales under Rule 144 are also subject to the availability of current public information about us. In addition, if the number of shares being sold under Rule 144 by an affiliate during any three-month period exceeds 5,000 shares or has an aggregate sale price in excess of $50,000, the seller must file a notice on Form 144 with the Securities and Exchange Commission and the concurrently with either the placing of a sale order with the broker or the execution directly with a market maker.
Non-Affiliate Resales of Restricted Securities
In general, beginning 90 days after the effective date of the registration statement of which this prospectus is a part, a person who is not an affiliate of ours at the time of sale, and has not been an affiliate at any time during the 90 days preceding a sale, and who has beneficially owned shares of our Class A common stock for at least six months but less than a year, is entitled to sell such shares subject only to the availability of current public information about us. If such person has held our shares for at least one year, such person can resell under Rule 144(b)(1) without regard to any Rule 144 restrictions, including the 90-day public company requirement and the current public information requirement.
Non-affiliate resales are not subject to the manner of sale, volume limitation or notice filing provisions of Rule 144.
Rule 701
In general, under Rule 701, any of an issuers employees, directors, officers, consultants or advisors who purchases shares from the issuer in connection with a compensatory stock or option plan or other written agreement before the effective date of a registration statement under the Securities Act is entitled to sell such shares 90 days after such effective date in reliance on Rule 144. An affiliate of the issuer can resell shares in reliance on Rule 144 without having to comply with the holding period requirement, and non-affiliates of the issuer can resell shares in reliance on Rule 144 without having to comply with the current public information and holding period requirements.
Equity Plans
We intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of Class A common stock issued or issuable under our 2017 Plan. We expect to file the registration statement covering shares offered pursuant to our stock plans shortly after the date of this prospectus, permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act and the sale by affiliates in the public market subject to compliance with the resale provisions of Rule 144.
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Registration Rights
Beginning 180 days after the date of this prospectus, the holders of shares of Class A common stock or shares of Class A common stock, including shares of Class A common stock issuable upon redemption or exchange of Common Units, or their transferees will be entitled to various rights with respect to the registration of these shares under the Securities Act. Registration of these shares under the Securities Act would result in these shares becoming fully tradable without restriction under the Securities Act immediately upon the effectiveness of the registration. See Certain Relationships and Related Party TransactionsRegistration Rights Agreement for additional information. Shares covered by a registration statement will be eligible for sale in the public market upon the expiration or release from the terms of the lock-up agreement.
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MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following discussion is a summary of the material U.S. federal income tax consequences to Non-U.S. Holders (as defined below) of the purchase, ownership and disposition of our Class A common stock issued pursuant to this offering, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the U.S. Internal Revenue Code of 1986, as amended (the Code), Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the U.S. Internal Revenue Service (the IRS), in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a Non-U.S. Holder of our Class A common stock. We have not sought and will not seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a contrary position to that discussed below regarding the tax consequences of the purchase, ownership and disposition of our Class A common stock.
This discussion is limited to Non-U.S. Holders that hold our Class A common stock as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a Non-U.S. Holders particular circumstances, including the impact of the Medicare contribution tax on net investment income. In addition, it does not address consequences relevant to Non-U.S. Holders subject to special rules, including, without limitation:
| U.S. expatriates and former citizens or long-term residents of the United States; |
| persons subject to the alternative minimum tax; |
| persons holding our Class A common stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment; |
| banks, insurance companies, and other financial institutions; |
| brokers, dealers or traders in securities; |
| controlled foreign corporations, passive foreign investment companies, and corporations that accumulate earnings to avoid U.S. federal income tax; |
| partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes (and investors therein); |
| tax-exempt organizations or governmental organizations; |
| persons deemed to sell our Class A common stock under the constructive sale provisions of the Code; |
| persons who hold or receive our Class A common stock pursuant to the exercise of any employee stock option or otherwise as compensation; |
| persons that own, or are deemed to own, more than 5% of our Class A common stock (except to the extent specifically set forth below); |
| tax-qualified retirement plans; and |
| qualified foreign pension funds as defined in Section 897(l)(2) of the Code and entities all of the interests of which are held by qualified foreign pension funds. |
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds our Class A common stock, the tax treatment of a partner or beneficial owner of the entity will depend
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on the status of the owner, the activities of the entity and certain determinations made at the partner or beneficial owner level. Accordingly, entities treated as partnerships for U.S. federal income tax purposes holding our Class A common stock and the partners or beneficial owners in such entities should consult their tax advisors regarding the U.S. federal income tax consequences to them.
THIS DISCUSSION IS FOR INFORMATIONAL PURPOSES ONLY AND IS NOT TAX ADVICE. INVESTORS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
Definition of a Non-U.S. Holder
For purposes of this discussion, a Non-U.S. Holder is any beneficial owner of our Class A common stock that is neither a U.S. person nor an entity or arrangement treated as a partnership for U.S. federal income tax purposes. A U.S. person is any person that, for U.S. federal income tax purposes, is or is treated as any of the following:
| an individual who is a citizen or resident of the United States; |
| an entity created or organized under the laws of the United States, any state thereof, or the District of Columbia that is treated as a corporation for U.S. federal income tax purposes; |
| an estate, the income of which is subject to U.S. federal income tax regardless of its source; or |
| a trust that (1) is subject to the primary supervision of a U.S. court and the control of one or more United States persons (within the meaning of Section 7701(a)(30) of the Code), or (2) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes. |
Distributions
Distributions of cash or property that we may make on our Class A common stock will constitute dividends for U.S. federal income tax purposes to the extent paid from our current or accumulated earnings and profits, as determined under U.S. federal income tax principles. Amounts not treated as dividends for U.S. federal income tax purposes will first constitute a return of capital and be applied against and reduce a Non-U.S. Holders adjusted tax basis in its Class A common stock, but not below zero. Any excess will be treated as capital gain and will be treated as described below under Sale or Other Taxable Disposition.
Except as described below with respect to effectively connected dividends and subject to the discussions of backup withholding and Sections 1471 to 1474 of the Code (such Sections and related Treasury Regulations commonly referred to as the Foreign Account Tax Compliance Act, or FATCA), below, dividends paid to a Non-U.S. Holder of our Class A common stock will be subject to U.S. federal withholding tax at a rate of 30% of the gross amount of the dividends (or such lower rate specified by an applicable income tax treaty, provided the Non-U.S. Holder furnishes a valid IRS Form W-8BEN or W-8BEN-E (or other applicable documentation) certifying qualification for the lower treaty rate). If a Non-U.S. Holder holds the stock through a financial institution or other intermediary, the Non-U.S. Holder will be required to provide appropriate documentation to the intermediary, which then will be required to provide appropriate documentation to the applicable withholding agent, either directly or through other intermediaries. A Non-U.S. Holder that does not timely furnish the required
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documentation, but that qualifies for a reduced treaty rate, may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS. Non-U.S. Holders should consult their tax advisors regarding their entitlement to benefits under any applicable income tax treaty.
If dividends paid to a Non-U.S. Holder are effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such dividends are attributable), the Non-U.S. Holder will be exempt from the U.S. federal withholding tax described above. To claim the exemption, the Non-U.S. Holder must furnish to the applicable withholding agent a valid IRS Form W-8ECI, certifying that the dividends are effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States.
Any such effectively connected dividends will be subject to U.S. federal income tax generally in the same manner as if the Non-U.S. Holder were a U.S. person and be subject to regular graduated U.S. federal income tax rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on its effectively connected earnings and profits for the taxable year that are attributable to such dividends, as adjusted for certain items. Non-U.S. Holders should consult their tax advisors regarding any applicable tax treaties that may provide for different rules or rates.
Sale or Other Taxable Disposition
Subject to the discussions below regarding FATCA and backup withholding, a Non-U.S. Holder will not be subject to U.S. federal income tax on any gain realized upon the sale or other taxable disposition of our Class A common stock unless:
| the gain is effectively connected with the Non-U.S. Holders conduct of a trade or business within the United States (and, if required by an applicable income tax treaty, the Non-U.S. Holder maintains a permanent establishment in the United States to which such gain is attributable); |
| the Non-U.S. Holder is a nonresident alien individual present in the United States for 183 days or more during the taxable year of the disposition and certain other requirements are met; or |
| our Class A common stock constitutes a U.S. real property interest (USRPI) by reason of our status as a U.S. real property holding corporation (USRPHC), for U.S. federal income tax purposes. |
Gain described in the first bullet point above generally will be subject to U.S. federal income tax in the same manner as if the Non-U.S. Holder were a U.S. person and will be taxed at regular graduated U.S. federal income tax rates. A Non-U.S. Holder that is a corporation also may be subject to a branch profits tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty) on its effectively connected earnings and profits for the taxable year that are attributable to such gain, as adjusted for certain items.
Gain described in the second bullet point above will be subject to U.S. federal income tax at a rate of 30% (or such lower rate specified by an applicable income tax treaty), which may be offset by U.S. source capital losses of the Non-U.S. Holder (even though the individual is not considered a resident of the United States), provided the Non-U.S. Holder has timely filed U.S. federal income tax returns with respect to such losses.
With respect to the third bullet point above, we believe we currently are not, and do not anticipate becoming, a USRPHC. Because the determination of whether we are a USRPHC depends, however,
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on the fair market value of our USRPIs relative to the fair market value of our non-U.S. real property interests and our other business assets, there can be no assurance that we currently are not a USRPHC or that will not become a USRPHC in the future. Even if we are or were to become a USRPHC, our Class A common stock will not be treated as a USRPI if our Class A common stock is regularly traded, as defined by applicable Treasury Regulations, on an established securities market, and such Non-U.S. Holder owned, actually or constructively, 5% or less of our Class A common stock throughout the shorter of the five-year period ending on the date of the sale or other taxable disposition of, or the Non-U.S. Holders holding period for, our Class A common stock.
Non-U.S. Holders should consult their tax advisors regarding potentially applicable income tax treaties that may provide for different rules.
Information Reporting and Backup Withholding
Payments of dividends on our Class A common stock will not be subject to backup withholding, provided the applicable withholding agent does not have actual knowledge or reason to know the holder is a U.S. person and the holder either certifies its non-U.S. status, such as by furnishing a valid IRS Form W-8BEN, W-8BEN-E, W-8ECI or W-8EXP, or otherwise establishes an exemption. However, information returns are required to be filed with the IRS in connection with any dividends on our Class A common stock paid to the Non-U.S. Holder, regardless of whether any tax was actually withheld. In addition, proceeds of the sale or other taxable disposition of our Class A common stock within the United States or conducted through certain U.S.-related brokers generally will not be subject to backup withholding or information reporting, if the applicable withholding agent receives the certification described above and does not have actual knowledge or reason to know that such holder is a U.S. person, or the holder otherwise establishes an exemption. Proceeds of a disposition of our Class A common stock conducted through a non-U.S. office of a non-U.S. broker generally will not be subject to backup withholding or information reporting.
Copies of information returns that are filed with the IRS may also be made available under the provisions of an applicable treaty or agreement to the tax authorities of the country in which the Non-U.S. Holder resides or is established or organized.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a Non-U.S. Holders U.S. federal income tax liability, provided the required information is timely furnished to the IRS.
Additional Withholding Tax on Payments Made to Foreign Accounts
Withholding taxes may be imposed under FATCA on certain types of payments made to non-U.S. financial institutions and certain other non-U.S. entities. Specifically, a 30% withholding tax may be imposed on dividends on, or gross proceeds from the sale or other disposition of, our Class A common stock paid to a foreign financial institution (as defined by the Code to include, in addition to banks and traditional financial institutions, entities such as investment funds and certain holding companies) or a non-financial foreign entity (as defined in the Code), unless (1) the foreign financial institution undertakes certain diligence, reporting and withholding obligations, (2) the non-financial foreign entity either certifies it does not have any substantial United States owners (as defined in the Code) or furnishes identifying information regarding each substantial United States owner, or (3) the foreign financial institution or non-financial foreign entity otherwise qualifies for an exemption from these rules. If the payee is a foreign financial institution and is subject to the diligence, reporting and withholding requirements in (1) above, it must enter into an agreement with the U.S. Department of the Treasury requiring, among other things, that it undertake to identify accounts held by certain specified United
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States persons or United States-owned foreign entities (each as defined in the Code), annually report certain information about such accounts, and withhold 30% on certain payments to non-compliant foreign financial institutions and certain other account holders. Accordingly, the entity through which our Class A common stock is held will affect the determination of whether such withholding is required. Foreign financial institutions located in jurisdictions that have an intergovernmental agreement with the United States governing FATCA may be subject to different rules.
Under the applicable Treasury Regulations and related guidance published by the IRS, withholding under FATCA generally applies to payments of dividends on our Class A common stock and will apply to payments of gross proceeds from the sale or other disposition of such stock on or after January 1, 2019. The FATCA withholding tax will apply to all withholdable payments without regard to whether the beneficial owner of the payment would otherwise be entitled to an exemption from imposition of non-FATCA withholding tax pursuant to an applicable tax treaty with the United States or pursuant to U.S. domestic law.
Prospective investors should consult their tax advisors regarding the potential application of withholding under FATCA to their investment in our Class A common stock.
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We and the underwriters named below have entered into an underwriting agreement with respect to the shares of Class A common stock being offered. Subject to certain conditions, each underwriter has severally agreed to purchase the number of shares of Class A common stock indicated in the following table. Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, BMO Capital Markets Corp. and Wells Fargo Securities, LLC are the representatives of the underwriters.
Underwriters |
Number of Shares | |||
Goldman Sachs & Co. LLC |
||||
J.P. Morgan Securities LLC BMO Capital Markets Corp. |
||||
Wells Fargo Securities, LLC |
||||
Citigroup Global Markets Inc. |
||||
Credit Suisse Securities (USA) LLC |
||||
Jefferies LLC |
||||
BTIG, LLC |
||||
Raymond James & Associates, Inc. |
||||
Stifel, Nicolaus & Company, Inc. |
||||
William Blair & Company, LLC |
||||
|
|
|||
Total |
||||
|
|
The underwriters are committed to take and pay for all of the shares of Class A common stock being offered, if any are taken, other than the shares of Class A common stock covered by the option described below unless and until this option is exercised.
The underwriters have an option to buy up to an additional shares of Class A common stock from us to cover sales by the underwriters of a greater number of shares than the total number set forth in the table above. They may exercise that option for 30 days. If any shares of Class A common stock are purchased pursuant to this option, the underwriters will severally purchase shares in approximately the same proportion as set forth in the table above.
The following tables show the per share and total underwriting discounts and commissions to be paid to the underwriters by us. Such amounts are shown assuming both no exercise and full exercise of the underwriters option to purchase additional shares of Class A common stock.
No Exercise | Full Exercise | |||||||
Per Share |
$ | $ | ||||||
Total |
$ | $ |
Shares of Class A common stock sold by the underwriters to the public will initially be offered at the initial public offering price set forth on the cover of this prospectus. Any shares of Class A common stock sold by the underwriters to securities dealers may be sold at a discount of up to $ per share from the initial public offering price. After the initial offering of the shares, the representatives may change the offering price and the other selling terms. The offering of the shares of Class A common stock by the underwriters is subject to receipt and acceptance and subject to the underwriters right to reject any order in whole or in part.
We and our officers, directors, and holders of substantially all of our common stock, and securities convertible into shares of our common stock, have agreed with the underwriters, subject to certain exceptions, not to dispose of or hedge any of their common stock or securities convertible into
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or exchangeable for shares of common stock during the period from the date of this prospectus continuing through the date 180 days after the date of this prospectus, except with the prior written consent of Goldman Sachs & Co. LLC and J.P. Morgan Securities LLC. See Shares Available for Future Sale for a discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares of our Class A common stock. The initial public offering price has been negotiated among us and the representatives. Among the factors considered in determining the initial public offering price of the shares, in addition to prevailing market conditions, were our historical performance, estimates of our business potential and earnings prospects, an assessment of our management and the consideration of the above factors in relation to market valuation of companies in related businesses.
We intend to list our Class A common stock on the under the symbol SWCH.
In connection with the offering, the underwriters may purchase and sell shares of Class A common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering, and a short position represents the amount of such sales that have not been covered by subsequent purchases. A covered short position is a short position that is not greater than the amount of additional shares for which the underwriters option described above may be exercised. The underwriters may cover any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to cover the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase additional shares pursuant to the option described above. Naked short sales are any short sales that create a short position greater than the amount of additional shares for which the option described above may be exercised. The underwriters must cover any such naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the Class A common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of Class A common stock made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Purchases to cover a short position and stabilizing transactions, as well as other purchases by the underwriters for their own accounts, may have the effect of preventing or retarding a decline in the market price of the companys Class A common stock, and together with the imposition of the penalty bid, may stabilize, maintain or otherwise affect the market price of the Class A common stock. As a result, the price of the Class A common stock may be higher than the price that otherwise might exist in the open market. The underwriters are not required to engage in these activities and may end any of these activities at any time. These transactions may be effected on , in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five percent of the total number of shares offered. We have also agreed to reimburse the underwriters for certain FINRA-related expenses incurred by them in connection with the offering in an amount not to exceed $ as set forth in the underwriting agreement.
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We estimate that our share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $ .
We have agreed to indemnify the several underwriters against certain liabilities, including liabilities under the Securities Act of 1933.
The underwriters and their respective affiliates are full service financial institutions engaged in various activities, which may include sales and trading, commercial and investment banking, advisory, investment management, investment research, principal investment, hedging, market making, brokerage and other financial and non-financial activities and services. Certain of the underwriters and their respective affiliates have provided, and may in the future provide, a variety of these services to the issuer and to persons and entities with relationships with the issuer, for which they received or will receive customary fees and expenses. In particular, affiliates of Goldman Sachs & Co. LLC, J.P. Morgan Securities LLC, BMO Capital Markets Corp., Wells Fargo Securities, LLC, Citigroup Global Markets Inc., Credit Suisse Securities (USA) LLC and Raymond James & Associates, Inc. are lenders under our amended and restated credit agreement.
In the ordinary course of their various business activities, the underwriters and their respective affiliates, officers, directors and employees may purchase, sell or hold a broad array of investments and actively trade securities, derivatives, loans, commodities, currencies, credit default swaps and other financial instruments for their own account and for the accounts of their customers, and such investment and trading activities may involve or relate to assets, securities and/or instruments of the issuer (directly, as collateral securing other obligations or otherwise) and/or persons and entities with relationships with the issuer. The underwriters and their respective affiliates may also communicate independent investment recommendations, market color or trading ideas and/or publish or express independent research views in respect of such assets, securities or instruments and may at any time hold, or recommend to clients that they should acquire, long and/or short positions in such assets, securities and instruments.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relative Member State) an offer to the public of our common shares may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of our common shares may be made at any time under the following exemptions under the Prospectus Directive:
| to any legal entity which is a qualified investor as defined in the Prospectus Directive; |
| to fewer than 150 natural or legal persons (other than qualified investors as defined in the Prospectus Directive), subject to obtaining the prior consent of the representatives for any such offer; or |
| in any other circumstances falling within Article 3(2) of the Prospectus Directive; |
provided that no such offer of Class A common stock shall require the company or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive.
For the purposes of this provision, the expression an offer of Class A common stock to the public in relation to our class A common shares in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and our class A common shares to be offered so as to enable an investor to decide to purchase our common shares, as the same may be varied in that Member State by any measure implementing the
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Prospectus Directive in that Member State, the expression Prospectus Directive means Directive 2003/71/EC (as amended), including by Directive 2010/73/EU and includes any relevant implementing measure in the Relevant Member State.
This European Economic Area selling restriction is in addition to any other selling restrictions set out below.
United Kingdom
In the United Kingdom, this prospectus is only addressed to and directed as qualified investors who are (i) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the Order); or (ii) high net worth entities and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as relevant persons). Any investment or investment activity to which this prospectus relates is available only to relevant persons and will only be engaged with relevant persons. Any person who is not a relevant person should not act or relay on this prospectus or any of its contents.
Canada
The securities may be sold in Canada only to purchasers purchasing, or deemed to be purchasing, as principal that are accredited investors, as defined in National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), and are permitted clients, as defined in National Instrument 31-103 Registration Requirements, Exemptions, and Ongoing Registrant Obligations. Any resale of the securities must be made in accordance with an exemption form, or in a transaction not subject to, the prospectus requirements of applicable securities laws.
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if this offering memorandum (including any amendment thereto) contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser should refer to any applicable provisions of the securities legislation of the purchasers province or territory of these rights or consult with a legal advisor.
Pursuant to section 3A.3 of National Instrument 33-105 Underwriting Conflicts (NI 33-105), the underwriters are not required to comply with the disclosure requirements of NI 33-105 regarding underwriter conflicts of interest in connection with this offering.
Hong Kong
The shares may not be offered or sold in Hong Kong by means of any document other than (i) in circumstances which do not constitute an offer to the public within the meaning of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32 of the Laws of Hong Kong) (Companies (Winding Up and Miscellaneous Provisions) Ordinance) or which do not constitute an invitation to the public within the meaning of the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (Securities and Futures Ordinance), or (ii) to professional investors as defined in the Securities and Futures Ordinance and any rules made thereunder, or (iii) in other circumstances which do not result in the document being a prospectus as defined in the Companies (Winding Up and Miscellaneous Provisions) Ordinance, and no advertisement, invitation or document relating to the shares may be issued or may be in the possession of any person for the purpose of issue (in each case whether in Hong Kong or elsewhere), which is directed at, or the contents of which are likely to be accessed or read by, the public in Hong Kong (except if permitted to do so under the securities laws of
176
Hong Kong) other than with respect to shares which are or are intended to be disposed of only to persons outside Hong Kong or only to professional investors in Hong Kong as defined in the Securities and Futures Ordinance and any rules made thereunder.
Singapore
This prospectus has not been registered as a prospectus with the Monetary Authority of Singapore. Accordingly, this prospectus and any other document or material in connection with the offer or sale, or invitation for subscription or purchase, of the shares may not be circulated or distributed, nor may the shares be offered or sold, or be made the subject of an invitation for subscription or purchase, whether directly or indirectly, to persons in Singapore other than (i) to an institutional investor (as defined under Section 4A of the Securities and Futures Act, Chapter 289 of Singapore (the SFA)) under Section 274 of the SFA, (ii) to a relevant person (as defined in Section 275(2) of the SFA) pursuant to Section 275(1) of the SFA, or any person pursuant to Section 275(1A) of the SFA, and in accordance with the conditions specified in Section 275 of the SFA or (iii) otherwise pursuant to, and in accordance with the conditions of, any other applicable provision of the SFA, in each case subject to conditions set forth in the SFA.
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a corporation (which is not an accredited investor (as defined in Section 4A of the SFA)) the sole business of which is to hold investments and the entire share capital of which is owned by one or more individuals, each of whom is an accredited investor, the securities (as defined in Section 239(1) of the SFA) of that corporation shall not be transferable for 6 months after that corporation has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer in that corporations securities pursuant to Section 275(1A) of the SFA, (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32 of the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005 of Singapore (Regulation 32).
Where the shares are subscribed or purchased under Section 275 of the SFA by a relevant person which is a trust (where the trustee is not an accredited investor (as defined in Section 4A of the SFA)) whose sole purpose is to hold investments and each beneficiary of the trust is an accredited investor, the beneficiaries rights and interest (howsoever described) in that trust shall not be transferable for 6 months after that trust has acquired the shares under Section 275 of the SFA except: (1) to an institutional investor under Section 274 of the SFA or to a relevant person (as defined in Section 275(2) of the SFA), (2) where such transfer arises from an offer that is made on terms that such rights or interest are acquired at a consideration of not less than S$200,000 (or its equivalent in a foreign currency) for each transaction (whether such amount is to be paid for in cash or by exchange of securities or other assets), (3) where no consideration is or will be given for the transfer, (4) where the transfer is by operation of law, (5) as specified in Section 276(7) of the SFA, or (6) as specified in Regulation 32.
Japan
The securities have not been and will not be registered under the Financial Instruments and Exchange Act of Japan (Act No. 25 of 1948, as amended), or the FIEA. The securities may not be offered or sold, directly or indirectly, in Japan or to or for the benefit of any resident of Japan (including any person resident in Japan or any corporation or other entity organized under the laws of Japan) or to others for reoffering or resale, directly or indirectly, in Japan or to or for the benefit of any resident of Japan, except pursuant to an exemption from the registration requirements of the FIEA and otherwise in compliance with any relevant laws and regulations of Japan.
177
Certain legal matters will be passed upon for us by Latham & Watkins LLP, Costa Mesa, California and for the underwriters by Goodwin Procter LLP, Boston, Massachusetts. Greenberg Traurig, LLP, Las Vegas, Nevada, will, among other items, issue an opinion to us regarding certain matters of Nevada law, including the validity of the shares of Class A common stock offered hereby.
The financial statements of Switch, Ltd. as of December 31, 2016 and 2015 and for each of the two years in the period ended December 31, 2016 included in this prospectus have been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The balance sheet of Switch, Inc. as of June 13, 2017 included in this prospectus has been so included in reliance on the report of PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, or the SEC, a registration statement on Form S-1 under the Securities Act with respect to the shares of Class A common stock offered hereby. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement or the exhibits and schedules filed therewith. For further information about us and the Class A common stock offered hereby, we refer you to the registration statement and the exhibits and schedules filed thereto. Statements contained in this prospectus regarding the contents of any contract or any other document that is filed as an exhibit to the registration statement are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the registration statement. Upon the closing of this offering, we will be required to file periodic reports, proxy statements, and other information with the SEC pursuant to the Securities Exchange Act of 1934. You may read and copy this information at the Public Reference Room of the Securities and Exchange Commission, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website that contains reports, proxy statements and other information about registrants, like us, that file electronically with the SEC. The address of that site is www.sec.gov.
178
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SWITCH, INC. |
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F-2 | ||
F-3 | ||
F-4 | ||
SWITCH, LTD. AND SUBSIDIARIES |
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F-5 | ||
F-6 | ||
F-7 | ||
F-8 | ||
F-9 | ||
F-11 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Switch, Inc.
In our opinion, the accompanying balance sheet presents fairly, in all material respects, the financial position of Switch, Inc. as of June 13, 2017 in conformity with accounting principles generally accepted in the United States of America. The balance sheet is the responsibility of the Companys management. Our responsibility is to express an opinion on the balance sheet based on our audit. We conducted our audit of this balance sheet in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet, assessing the accounting principles used and significant estimates made by management, and evaluating the overall balance sheet presentation. We believe that our audit of the balance sheet provides a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
June 28, 2017
F-2
SWITCH, INC.
June 13, 2017
ASSETS |
$ | | ||
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Commitments and contingencies |
||||
STOCKHOLDERS EQUITY: |
||||
Common stock, $0.001 par value per share, 1,000,000 shares authorized, none issued or outstanding |
$ | | ||
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TOTAL STOCKHOLDERS EQUITY |
$ | | ||
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The accompanying notes are an integral part of this balance sheet.
F-3
Notes to Balance Sheet
1. Organization
Switch, Inc. (the Company) was formed as a Nevada corporation on June 13, 2017. The Company was formed for the purpose of completing a public offering and related transactions in order to carry on the business of Switch, Ltd. and its subsidiaries. As the managing member of Switch, Ltd., the Company is expected to operate and control all of the business and affairs of Switch, Ltd., and through Switch, Ltd. and its subsidiaries, continue to conduct the business now conducted by these subsidiaries.
2. Summary of Significant Accounting Policies
Basis of Presentation and Accounting
The balance sheet is presented in accordance with accounting principles generally accepted in the United States of America. Separate statements of income, comprehensive income, changes in stockholders equity, and cash flows have not been presented because there have been no activities in this entity.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the balance sheet. Actual results could differ from those estimates.
3. Stockholders Equity
The Company is authorized to issue 1,000,000 shares of common stock, par value $0.001 per share, none of which have been issued or are outstanding.
4. Subsequent Events
Subsequent events through June 28, 2017, the date on which the balance sheet was available to be issued, were evaluated by the Company to determine the need, if any, for recognition or disclosure in its balance sheet.
F-4
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Managers and Members of Switch, Ltd.
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of comprehensive income, of members equity and of cash flows present fairly, in all material respects, the financial position of Switch, Ltd. and its subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Las Vegas, Nevada
April 28, 2017, except for Note 13 and the effects of disclosing net income per unit information as discussed in Note 12 to the consolidated financial statements, as to which the date is June 28, 2017
F-5
SWITCH, LTD. AND SUBSIDIARIES
(in thousands, except for members equity units)
December 31, | March 31, 2017 |
|||||||||||
2015 | 2016 | |||||||||||
(Unaudited) | ||||||||||||
ASSETS |
||||||||||||
CURRENT ASSETS: |
||||||||||||
Cash and cash equivalents |
$ | 14,192 | $ | 22,713 | $ | 21,709 | ||||||
Accounts receivable, net of allowance of $240, $340 and $847 (unaudited) |
8,478 | 9,131 | 12,835 | |||||||||
Prepaid expenses |
4,108 | 3,921 | 5,144 | |||||||||
Other current assets |
1,930 | 2,052 | 2,486 | |||||||||
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|
|
|
|
|||||||
Total current assets |
28,708 | 37,817 | 42,174 | |||||||||
Property and equipment, net |
598,234 | 874,259 | 948,992 | |||||||||
Long term deposit |
4,440 | 4,440 | 4,440 | |||||||||
Investments |
10,393 | 169 | | |||||||||
Other assets |
5,803 | 4,330 | 4,342 | |||||||||
|
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|
|
|
|
|||||||
TOTAL ASSETS |
$ | 647,578 | $ | 921,015 | $ | 999,948 | ||||||
|
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|
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|
|||||||
LIABILITIES AND MEMBERS EQUITY |
||||||||||||
CURRENT LIABILITIES: |
||||||||||||
Long term debt, current portion |
$ | 9,358 | $ | 14,330 | $ | 16,830 | ||||||
Accounts payable |
14,839 | 1,663 | 34,133 | |||||||||
Accrued expenses |
5,630 | 13,127 | 7,359 | |||||||||
Accrued construction payables |
8,594 | 47,528 | 7,512 | |||||||||
Accrued Michigan building and land purchase |
| 23,916 | 23,477 | |||||||||
Accrued impact fee expense |
| 27,018 | 27,018 | |||||||||
Deferred revenue, current portion |
8,184 | 7,157 | 12,137 | |||||||||
Customer deposits |
5,579 | 6,939 | 7,346 | |||||||||
Capital lease obligations, current portion |
| 4,000 | 4,000 | |||||||||
|
|
|
|
|
|
|||||||
Total current liabilities |
52,184 | 145,678 | 139,812 | |||||||||
Long-term debt, net |
283,159 | 457,737 | 522,905 | |||||||||
Capital lease obligations |
19,466 | 19,466 | 19,466 | |||||||||
Accrued interest, capital lease obligations |
2,006 | 2,070 | 2,018 | |||||||||
Deferred revenue |
6,069 | 17,701 | 18,069 | |||||||||
|
|
|
|
|
|
|||||||
TOTAL LIABILITIES |
362,884 | 642,652 | 702,270 | |||||||||
|
|
|
|
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|
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Commitments and contingencies (Note 7 and Note 9) |
||||||||||||
MEMBERS EQUITY: |
||||||||||||
Members equity, 225,000,000 units authorized; and 197,301,304, 198,866,680 and 200,614,389 units issued and outstanding as of December 31, 2015 and 2016 and March 31, 2017 (unaudited), respectively |
285,301 | 279,056 | 298,099 | |||||||||
Accumulated other comprehensive loss |
(607 | ) | (693 | ) | (421 | ) | ||||||
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TOTAL MEMBERS EQUITY |
284,694 | 278,363 | 297,678 | |||||||||
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TOTAL LIABILITIES AND MEMBERS EQUITY |
$ | 647,578 | $ | 921,015 | $ | 999,948 | ||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-6
SWITCH, LTD. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(in thousands, except for units and per unit amounts)
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
Revenue |
$ | 265,870 | $ | 318,352 | $ | 73,966 | $ | 89,157 | ||||||||
Cost of revenue |
141,060 | 168,844 | 37,376 | 45,375 | ||||||||||||
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Gross profit |
124,810 | 149,508 | 36,590 | 43,782 | ||||||||||||
Selling, general and administrative expense |
45,251 | 71,420 | 16,777 | 19,343 | ||||||||||||
Impact fee expense |
| 27,018 | | | ||||||||||||
|
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|
|
|
|
|
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Income from operations |
79,559 | 51,070 | 19,813 | 24,439 | ||||||||||||
Other income (expense): |
||||||||||||||||
Interest expense, including $625, $922, $193 (unaudited) and $253 (unaudited), respectively, in amortization of debt issuance costs |
(7,682 | ) | (10,836 | ) | (2,197 | ) | (4,020 | ) | ||||||||
Equity in net earnings (losses) of investments |
821 | (10,138 | ) | (1,120 | ) | (441 | ) | |||||||||
Loss on extinguishment of debt |
(212 | ) | | | | |||||||||||
Gain on sale of asset |
248 | | | | ||||||||||||
Impairment of notes receivable |
| (2,371 | ) | | | |||||||||||
Gain on lease termination |
| 2,801 | ||||||||||||||
Other |
738 | 842 | 182 | 350 | ||||||||||||
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|
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Total other income (expense) |
(6,087 | ) | (19,702 | ) | (3,135 | ) | (4,111 | ) | ||||||||
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|
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Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
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|
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Net income per unit: |
||||||||||||||||
Basic |
$ | 0.37 | $ | 0.16 | $ | 0.08 | $ | 0.10 | ||||||||
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Diluted |
$ | 0.37 | $ | 0.15 | $ | 0.08 | $ | 0.10 | ||||||||
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Weighted-average units used in computing net income per unit: |
||||||||||||||||
Basic |
196,773,458 | 199,047,070 | 198,898,170 | 199,776,051 | ||||||||||||
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Diluted |
199,272,269 | 203,461,420 | 201,765,027 | 205,493,272 | ||||||||||||
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Other comprehensive (loss) income: |
||||||||||||||||
Foreign currency translation adjustments |
(607 | ) | (86 | ) | (329 | ) | 272 | |||||||||
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Comprehensive income |
$ | 72,865 | $ | 31,282 | $ | 16,349 | $ | 20,600 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-7
SWITCH, LTD. AND SUBSIDIARIES
Consolidated Statements of Members Equity
(in thousands, except for members equity units)
Members Equity Units |
Members Equity |
Notes Receivable Issued to Members |
Accumulated Other Comprehensive Loss |
Total Members Equity |
||||||||||||||||
Balance December 31, 2014 |
198,865,074 | $ | 245,981 | $ | (18,166 | ) | $ | | $ | 227,815 | ||||||||||
Net income |
| 73,472 | | | 73,472 | |||||||||||||||
Distributions |
| (18,212 | ) | 2 | | (18,210 | ) | |||||||||||||
Net settlement of recourse notes issued to members |
(4,285,528 | ) | | 18,164 | | 18,164 | ||||||||||||||
Net settlement of non-recourse notes issued to members |
1,875,003 | | | | | |||||||||||||||
Taxes paid on behalf of employees for option exercises |
(310,666 | ) | (1,558 | ) | | | (1,558 | ) | ||||||||||||
Net settlement of outstanding vested options |
(772,510 | ) | (3,878 | ) | | | (3,878 | ) | ||||||||||||
Issuance of membership units for net settlement |
1,758,000 | 3,878 | | | 3,878 | |||||||||||||||
Repurchase of member options |
| (18,301 | ) | | | (18,301 | ) | |||||||||||||
Repurchase of units |
(293,021 | ) | (1,393 | ) | | | (1,393 | ) | ||||||||||||
Equity-based compensation expense |
| 5,237 | | | 5,237 | |||||||||||||||
Common units awarded |
11,952 | | | | | |||||||||||||||
Incentive units vested |
408,000 | | | | | |||||||||||||||
Issuance of membership units upon exercise of unit options |
45,000 | 75 | | | 75 | |||||||||||||||
Foreign currency translation adjustments |
| | | (607 | ) | (607 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance December 31, 2015 |
197,301,304 | 285,301 | | (607 | ) | 284,694 | ||||||||||||||
Net income |
| 31,368 | | | 31,368 | |||||||||||||||
Distributions |
| (28,110 | ) | | | (28,110 | ) | |||||||||||||
Taxes paid on behalf of employees for option exercises |
(44,807 | ) | (290 | ) | | | (290 | ) | ||||||||||||
Net settlement of outstanding vested options |
(115,170 | ) | (744 | ) | | | (744 | ) | ||||||||||||
Issuance of membership units for net settlement |
279,000 | 744 | | | 744 | |||||||||||||||
Repurchase of member options and units |
(2,089,116 | ) | (15,148 | ) | | | (15,148 | ) | ||||||||||||
Equity-based compensation expense |
| 4,969 | | | 4,969 | |||||||||||||||
Common units awarded |
168,655 | 966 | | | 966 | |||||||||||||||
Incentive units vested |
3,366,814 | | | | | |||||||||||||||
Foreign currency translation adjustments |
| | | (86 | ) | (86 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance December 31, 2016 |
198,866,680 | 279,056 | | (693 | ) | 278,363 | ||||||||||||||
Net income (unaudited) |
| 20,328 | | | 20,328 | |||||||||||||||
Distributions (unaudited) |
| (3,535 | ) | | | (3,535 | ) | |||||||||||||
Equity-based compensation expense (unaudited) |
| 1,135 | | | 1,135 | |||||||||||||||
Common units awarded (unaudited) |
150,880 | 1,115 | | | 1,115 | |||||||||||||||
Incentive units vested (unaudited) |
1,596,829 | | | | | |||||||||||||||
Foreign currency translation adjustments (unaudited) |
| | | 272 | 272 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance March 31, 2017 (unaudited) |
200,614,389 | $ | 298,099 | $ | | $ | (421 | ) | $ | 297,678 | ||||||||||
|
|
|
|
|
|
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|
|
The accompanying notes are an integral part of these consolidated financial statements.
F-8
SWITCH, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(in thousands)
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||||||||||
Net income |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||||||||||
Depreciation and amortization of property and equipment |
55,355 | 66,591 | 15,311 | 20,037 | ||||||||||||
Loss on disposal of property and equipment |
1,307 | 1,994 | 133 | 20 | ||||||||||||
Amortization of debt issuance costs |
625 | 922 | 193 | 253 | ||||||||||||
Bad debts |
242 | 383 | (55 | ) | 507 | |||||||||||
Loss on extinguishment of debt |
212 | | | | ||||||||||||
Equity in (net earnings) losses on investments |
(821 | ) | 5,764 | 1,120 | 441 | |||||||||||
Gain on sale of asset |
(248 | ) | | | | |||||||||||
Planet3 impairment |
| 7,696 | | | ||||||||||||
Amortization of notes receivable discount |
| (267 | ) | | | |||||||||||
Interest income |
(147 | ) | | (3 | ) | | ||||||||||
Equity-based compensation |
5,237 | 5,935 | 2,208 | 2,250 | ||||||||||||
Changes in operating assets and liabilities: |
||||||||||||||||
Accounts receivable |
(3,566 | ) | (1,101 | ) | 637 | (4,215 | ) | |||||||||
Prepaid expenses |
(487 | ) | 187 | 562 | 127 | |||||||||||
Other current assets |
(781 | ) | (122 | ) | 18 | (433 | ) | |||||||||
Other assets |
(3,229 | ) | (463 | ) | 579 | (92 | ) | |||||||||
Accounts payable |
(1,155 | ) | 634 | 730 | 4,712 | |||||||||||
Accrued interest, capital lease obligations |
108 | 64 | 29 | (53 | ) | |||||||||||
Accrued expenses |
259 | 7,497 | 1,336 | (6,207 | ) | |||||||||||
Accrued impact fee expense |
| 27,018 | | | ||||||||||||
Deferred revenue |
1,797 | 10,605 | 1,684 | 5,347 | ||||||||||||
Customer deposits |
1,101 | 1,360 | 346 | 407 | ||||||||||||
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Net cash provided by operating activities |
129,281 | 166,065 | 41,506 | 43,429 | ||||||||||||
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|
|
|
|
|
|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||||||||||
Acquisition of property and equipment |
(190,113 | ) | (287,097 | ) | (50,115 | ) | (107,015 | ) | ||||||||
Acquisition of intangible assets |
(449 | ) | | | (13 | ) | ||||||||||
Escrow deposit |
| | | (1,350 | ) | |||||||||||
Proceeds from sale of property and equipment |
1,243 | | | | ||||||||||||
Proceeds from notes receivable |
| 468 | 213 | 7 | ||||||||||||
Purchase of notes receivable |
(485 | ) | (3,000 | ) | | | ||||||||||
Purchase of investments |
(6,540 | ) | (1,500 | ) | (1,500 | ) | | |||||||||
Purchase of Portfolio Energy Credits |
| (872 | ) | | (30 | ) | ||||||||||
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|
|
|
|
|
|
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Net cash used in investing activities |
(196,344 | ) | (292,001 | ) | (51,402 | ) | (108,401 | ) | ||||||||
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|
F-9
SWITCH, LTD. AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(in thousands)
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||||||||||
Proceeds from borrowings |
321,883 | 189,000 | 10,000 | 70,000 | ||||||||||||
Long-term deposits |
(4,440 | ) | | | | |||||||||||
Repayment of borrowings, including capital lease obligations |
(223,600 | ) | (10,000 | ) | (2,500 | ) | (2,500 | ) | ||||||||
Debt issuance costs on new loan |
(2,756 | ) | (1,005 | ) | | | ||||||||||
Issuance of membership units upon exercise of unit options |
75 | | | | ||||||||||||
Taxes paid for net settlement of exercised options |
(1,558 | ) | (290 | ) | | | ||||||||||
Cash distributions |
(20,519 | ) | (28,100 | ) | (3,205 | ) | (3,532 | ) | ||||||||
Repurchase of member options |
(1,392 | ) | (15,148 | ) | | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash provided by financing activities |
67,693 | 134,457 | 4,295 | 63,968 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
630 | 8,521 | (5,601 | ) | (1,004 | ) | ||||||||||
CASH AND CASH EQUIVALENTSBeginning of period |
13,562 | 14,192 | 14,192 | 22,713 | ||||||||||||
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|
|
|
|
|
|
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CASH AND CASH EQUIVALENTSEnd of period |
$ | 14,192 | $ | 22,713 | $ | 8,591 | $ | 21,709 | ||||||||
|
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|
|
|
|
|
|||||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
||||||||||||||||
Cash paid for interest, net of amounts capitalized |
$ | 7,123 | $ | 8,415 | $ | 1,682 | $ | 4,294 | ||||||||
|
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|
|
|
|
|
|
|||||||||
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING INFORMATION: |
||||||||||||||||
(Decrease) increase in liabilities incurred to acquire property and equipment |
$ | (3,125 | ) | $ | 51,413 | $ | 1,053 | $ | (12,227 | ) | ||||||
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|
|
|
|
|
|
|||||||||
Liability incurred upon acquisition of capital lease asset |
$ | | $ | 4,000 | $ | | $ | | ||||||||
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|
|
|
|
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Forgiveness of note receivable in exchange for capital lease asset |
$ | | $ | 2,100 | $ | 2,100 | $ | | ||||||||
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|
|
|
|
|
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Liability incurred related to investment in Planet3 |
$ | 1,500 | $ | | $ | | $ | | ||||||||
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|
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|
|
|
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Distributions declared but not paid |
$ | 623 | $ | 757 | $ | 225 | $ | 118 | ||||||||
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|
|
|
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Net settlement of recourse notes including interest issued to members |
$ | 18,256 | $ | | $ | | $ | | ||||||||
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|
|
|
|
|
|
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Net settlement of outstanding vested options |
$ | 3,878 | $ | 744 | $ | | $ | | ||||||||
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|
|
|
|
|
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Distributions used for payment of interest related to option loans |
$ | 9 | $ | 10 | $ | 2 | $ | 3 | ||||||||
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The accompanying notes are an integral part of these consolidated financial statements.
F-10
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Nature of Operations
Business Activities
Switch, Ltd. (Switch) and its subsidiaries (collectively, the Company) are limited liability companies that provide colocation space and related services to global enterprises, financial companies, government agencies, and others that conduct critical business on the internet. The Company develops and operates data centers in Nevada, which are Tier IV Gold certified, and Michigan delivering redundant services with low latency and super capacity transport environments.
2. Summary of Significant Accounting Policies
Basis of Presentation and Accounting
The accompanying consolidated financial statements are presented in accordance with generally accepted accounting principles in the United States of America (GAAP), and include the accounts of Switch and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated.
Unaudited Interim Financial Information
The accompanying interim consolidated balance sheet as of March 31, 2017, the interim consolidated statements of comprehensive income and cash flows for the three months ended March 31, 2016 and 2017, the interim consolidated statement of members equity for the three months ended March 31, 2017, and the consolidated financial data disclosed in these notes as of March 31, 2017 and for the three months ended March 31, 2016 and 2017 are unaudited. The unaudited interim consolidated financial statements have been prepared on the same basis as the annual consolidated financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary for the fair statement of these interim consolidated financial statements. The consolidated results of operations for the three months ended March 31, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017, or for any other future annual or interim period.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from these estimates. On an ongoing basis, the Company evaluates its estimates, including, but not limited to, those related to the allowance for doubtful accounts, collectability of notes receivable, useful lives of property and equipment, equity-based compensation, deferred revenue, fair value of leased property at inception of lease term, fair value of deliverables under multiple element arrangements, probability assessments of exercising renewal options on leases and other than temporary impairments on investments. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash equivalents consisted of $13.9 million of money market funds as of
F-11
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 2015. The Company did not have any cash equivalents as of December 31, 2016 and March 31, 2017 (unaudited). The cost basis of the Companys investments in money market funds approximated their fair value and was classified within Level 1 of the fair value hierarchy.
Investments
The Companys investments in entities where it holds at least a 20% ownership interest and has the ability to exercise significant influence, but not control, over the investee are accounted for using the equity method of accounting. Investments in entities where the Company holds less than a 20% ownership interest are generally accounted for using the cost method of accounting (Note 5).
In addition, the Company reviews its relationships with other entities to identify whether they are variable interest entities and to assess whether the Company is the primary beneficiary of such entity. If the determination is made that the Company is the primary beneficiary, then the entity is consolidated.
Fair Value Measurements
Financial assets and liabilities are recorded at fair value. The accounting guidance for fair value provides a framework for measuring fair value, clarifies the definition of fair value and expands disclosures regarding fair value measurements. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The accounting guidance establishes a fair value hierarchy, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1 | Quoted prices in active markets for identical assets or liabilities. |
Level 2 | Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
Level 3 | Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
Derivative Financial Instruments
A derivative is a financial instrument whose value changes in response to an underlying variable, requires little or no initial net investment and is settled at a future date. Derivatives are initially recognized at fair value on the date on which the derivatives are entered into and subsequently remeasured at fair value.
Embedded derivatives included in hybrid instruments are treated and disclosed as separate derivatives when their economic characteristics and risks are not closely related to those of the host contract, the terms of the embedded derivative are the same as those of a stand-alone derivative and the combined contract is not measured at fair value through earnings. The financial host contracts are accounted for and measured using the applicable GAAP of the relevant financial instrument category.
The method of recognizing fair value gains and losses depends on whether the derivatives are designated as hedging instruments, and if so, the nature of the hedge relationship. All gains and losses
F-12
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
from changes in the fair values of derivatives that do not qualify for hedge accounting are recognized immediately in earnings. As of December 31, 2016, and March 31, 2017 (unaudited), the Companys identified embedded derivative does not qualify for hedge accounting (Note 5).
During the three months ended March 31, 2017, the Company entered into an agreement for the purchase of electricity (Note 9). The accounting guidance for derivative instruments provides a scope exception for commodity contracts that meet the normal purchase and sales criteria specified in the standard. The normal purchases and normal sales exception requires, among other things, physical delivery in quantities expected to be used or sold over a reasonable period in the normal course of business. Contracts that are designated as normal purchases and normal sales are not recorded on the consolidated balance sheets at fair value.
Concentration of Credit and Other Risks
Although the Company operates primarily in Nevada, realization of its customer accounts receivable and its future operations and cash flows could be affected by adverse economic conditions, both regionally and elsewhere in the United States. During the years ended December 31, 2015 and 2016 and the three months ended March 31, 2016 and 2017, the Companys largest customer and its affiliates comprised 14%, 13%, 13% (unaudited), and 10% (unaudited), respectively, of the Companys revenue. One customer accounted for 17% of accounts receivable as of December 31, 2015. No single customer accounted for 10% or more of accounts receivable as of December 31, 2016 and March 31, 2017 (unaudited).
The Company generally carries cash and cash equivalents on deposit with financial institutions in excess of federally insured limits.
Through May 31, 2017, the Company was also exposed to a limited extent, to a risk of unfavorable price increases from its principal provider of power, Nevada Power Company dba NV Energy (NV Energy), whose rates are set by and services are regulated by the Public Utilities Commission of Nevada (PUCN). On June 1, 2017, the Company became an unbundled purchaser of energy (Note 15).
Accounts Receivable
Customer receivables are noninterest bearing, and the Company generally does not request collateral from its customers; however, it usually obtains a lien or other security interest in certain customers equipment placed in the Companys data center, and/or obtains a deposit. In the event collection is not reasonably assured at inception of a contract, recognition of related revenue is deferred generally until receipt of cash payment. The Company maintains an allowance for doubtful accounts for estimated losses up to the full amount of invoices based on the age of the invoices. If the financial condition of the Companys customers were to deteriorate or if they became insolvent, resulting in an impairment of their ability to make payments, greater allowances for doubtful accounts may be required. Management specifically analyzes accounts receivable and current economic news and trends, historical bad debt, customer concentrations, customer credit-worthiness and changes in customer payment terms when evaluating revenue recognition and the adequacy of the Companys reserves. Delinquent account balances are written-off after management has determined the likelihood of collection is not probable. The Company recorded bad debt expense (recovery) of $242,000, $383,000, ($55,000) (unaudited) and $507,000 (unaudited) for the years ended December 31, 2015 and 2016, and for the three months ended March 31, 2016 and 2017, respectively.
F-13
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Notes Receivable
Notes receivable are recorded at amortized cost using the interest method. The Company evaluates the collectability of both principal and interest based on an assessment of any significant changes in the amount and timing of the expected future cash flows. As of December 31, 2016, the Company fully impaired the carrying value of its notes receivable (Note 5).
Internal Use Software
The Company capitalizes certain costs incurred in connection with developing or obtaining internal use software. Capitalized software costs placed into service are included in computer equipment, furniture and fixtures within property and equipment, net on the consolidated balance sheets and are amortized on a straight-line basis over a three-year period. Software costs that do not meet capitalization criteria are expensed immediately. During the years ended December 31, 2015 and 2016, the Company capitalized $542,000 and $1.3 million, respectively, in internal use software costs. During the three months ended March 31, 2016 and 2017, the Company capitalized $197,000 (unaudited) and $690,000 (unaudited), respectively, in internal use software costs.
Property and Equipment
Property and equipment is stated at cost. Depreciation and amortization of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. The cost and accumulated depreciation of property and equipment retired or otherwise disposed of are eliminated from the respective accounts and any resulting gain or loss is included in operations. Costs of repairs and maintenance are expensed as incurred. For assets held under capital leases, the estimated useful lives are limited to the shorter of the useful life of the asset or the term of the lease, including renewal option periods if exercise is intended (Note 7). Amortization of assets that are recorded under capital leases is included in depreciation expense. For assets used in data center operations, the related depreciation and amortization are included in cost of revenue.
The Companys estimated useful lives of its property and equipment are as follows (in years):
Assets |
Estimated Useful Lives | |
Land improvements, buildings and building improvements |
20-40 | |
Data center equipment |
5-10 | |
Vehicles |
7 | |
Core network equipment |
5-7 | |
Cloud computing equipment |
5 | |
Fiber facilities |
20, 40 | |
Deferred installation charges |
3-5 | |
Computer equipment, furniture and fixtures |
3-5 |
In addition, the Company has capitalized interest costs during the construction phase of data centers. Once a data center or expansion project becomes operational, these costs are allocated to certain property and equipment categories and are depreciated over the estimated useful life of the underlying assets.
F-14
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Impairment of Long-Lived Assets
The Companys long-lived assets, such as property and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount of an asset group to estimated undiscounted future cash flows expected to be generated by the asset group. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset group exceeds the fair value of the asset group.
Portfolio Energy Credits
The Company recognizes portfolio energy credits (PECs) at their cost when purchased as an intangible asset, subject to impairment testing. PECs are not considered outputs by the Company. Amortization of PECs is recorded within cost of revenue on the consolidated statements of comprehensive income when PECs are utilized in operations.
Deferred Debt Issuance Costs
Costs incurred in obtaining certain debt financing are deferred and amortized over the terms of the related debt instruments using the interest method for term debt and the straight-line method for revolving debt.
Foreign Currency Translation
SUPERNAP International, S.A. (SUPERNAP International), an equity method investment of the Company, has investments in foreign subsidiaries. Gains or losses from translation of foreign operations where the local currency is the functional currency are included in other comprehensive income (loss).
Revenue Recognition
The Company derives more than 95% of its revenue from recurring revenue streams, consisting primarily of (1) colocation, which includes the licensing of cabinet space and power; and (2) connectivity services, which includes cross-connects, broadband services, and external connectivity. The remainder of the Companys revenue is from non-recurring revenue streams, which primarily include installation and contract settlements. Recurring revenue is generally billed monthly and recognized ratably over the period to which the service relates. The Companys contracts with its customers generally have terms of three to five years. Non-recurring installation fees, although generally paid in a lump sum upon installation, are deferred and recognized ratably over the expected life of the installation, which was 89 months, 73 months and 73 months as of December 31, 2015 and 2016 and March 31, 2017, respectively. Revenue from connectivity services is recognized on a gross basis in accordance with the accounting standard related to reporting revenue gross as a principal versus net as an agent, primarily because the Company acts as the principal in the transactions, takes title to services and bears credit risk. Revenue from contract settlements, which result when a customer wishes to terminate their contract early, is generally recognized when no remaining performance obligations exist, to the extent that the revenue has not previously been recognized.
The Company guarantees certain service levels, such as uptime, as outlined in individual customer contracts. If these service levels are not achieved, the Company reduces revenue for any
F-15
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
credits given to the customer as a result. There were no service level credits issued during the years ended December 31, 2015 or 2016 and the three months ended March 31, 2016 and 2017 (unaudited).
Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable and collection of the receivable is reasonably assured. It is the Companys customary business practice to obtain a signed colocation facility agreement and service order prior to recognizing revenue in an arrangement. The Company assesses collectability based on a number of factors, including past transaction history with the customer and the credit-worthiness of the customer. The Company generally does not request collateral from its customers except it usually obtains a lien and/or other security interest in a customers equipment placed in the Companys data centers or obtains a deposit. If the Company determines that collection of a fee is not reasonably assured, the fee is deferred and revenue is recognized at the time collection becomes reasonably assured, which is generally upon receipt of cash.
Multiple Element Arrangements. The Company enters into multiple element revenue arrangements in which a customer may purchase a combination of the right to use network capacity (e.g., conduit and fiber optic cables), maintenance services, and colocation services. Terms of performance, cancellation, termination, or refunds in these arrangements are similar to those for individual stand-alone deliverables. To the extent these revenue arrangements involve the use of property and equipment, they are evaluated under lease accounting guidance to determine whether the arrangement meets the definition of a lease. None of the multiple element arrangements entered into by the Company during any of the periods presented have met the definition of a lease.
The services offered under these revenue arrangements qualify as separate units of accounting. Multiple deliverables within revenue arrangements are allocated to separate units of accounting if the deliverables meet both of the following criteria:
| the delivered items have value to the customer on a stand-alone basis. The items have value on a stand-alone basis if they are sold separately by any vendor or the customer could resell the delivered items on a stand-alone basis; and |
| if the arrangement includes a general right of return relative to the delivered items, delivery or performance of the undelivered items is considered probable and substantially in the control of the Company. |
At the inception of a multiple element arrangement, the Company: (1) determines whether and when each unit of accounting has been delivered or performed; (2) determines the fair value of each unit of accounting using the selling price hierarchy of vendor-specific evidence of fair value (VSOE) if available, third-party evidence (TPE) if VSOE is not available, and managements best estimate of the selling price (BESP) if neither VSOE nor TPE is available; and (3) allocates the total price among the various units of accounting using the relative selling price method. Once the total price has been allocated among the various units of accounting, revenue is recognized when the relevant revenue recognition criteria are met for each element, which is upon acceptance or use of the services by the customer. VSOE generally exists when the deliverable is sold separately; however, in certain instances VSOE cannot be established if the deliverable cannot be priced within a narrow range or has a limited sales history. TPE is determined based on competitor prices for similar deliverables when sold separately. The Company determines BESP for a product or service by considering multiple factors including, but not limited to, pricing practices, market conditions, competitive landscape, type of customer, geographies, internal costs, and gross margin objectives. Revenue is allocated to rights to use network capacity and related colocation services and maintenance services under these
F-16
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
arrangements based on TPE. Revenue allocated to other colocation services provided under these arrangements is based on VSOE.
Income Taxes
Since limited liability companies are pass-through entities under the U.S. Internal Revenue Code, the members of the Company are taxed directly on their respective ownership interests in consolidated income, and, therefore, no provision or liability for federal income tax has been included in the accompanying consolidated financial statements.
Based on managements evaluations, since there are no conditions or uncertainties that present any material risk of loss of the pass-through status of the Company or other identified uncertain tax positions to be taken or taken in previously filed federal or state income tax returns that remain subject to examination by relevant tax authorities (presently consisting of those for tax years 2013 through 2016), the related provisions of GAAP relative to uncertain tax positions have had no effect on the Companys consolidated financial statements. The Companys policy is to record estimated probable penalties and interest to be assessed to the Company, if any, related to income tax matters as selling, general and administrative expense.
Advertising Costs
Advertising costs are expensed when incurred and are included in selling, general and administrative expense in the accompanying consolidated statements of comprehensive income. Advertising expense was $1.6 million and $2.2 million for the years ended December 31, 2015 and 2016, respectively, and $748,000 (unaudited) and $674,000 (unaudited) for the three months ended March 31, 2016 and 2017, respectively.
Equity-Based Compensation
Equity-based compensation cost is measured at the grant date for all equity-based awards made to employees and members based on the fair value of the awards and is recognized as expense on a straight-line basis over the requisite service period, which is generally the vesting period.
The Company grants equity awards to its employees and members and these equity awards generally have only a service condition. The Companys equity awards vest up to five years. The Company uses the Black-Scholes option-pricing model to determine the fair value of its equity awards. The determination of the fair value of equity awards is affected by assumptions regarding a number of complex and subjective variables including the fair value of the Companys member equity units, the expected price volatility of the member equity units over the term of the awards and actual and projected employee unit option exercise or purchase behaviors. The Companys member equity units fair value per unit is estimated using a weighted average approach of a combination of the following three methods: (1) publicly traded data center company multiples; (2) data center precedent transaction multiples; and (3) the discounted cash flow method based on the Companys five-year forecast. The weighting of these three methods varied over time. The Company estimates the expected volatility by analyzing the volatility of companies in the same industry and selecting volatility within the range. The risk-free interest rate is based on U.S. Treasury zero-coupon issues with remaining terms similar to the expected term of the equity awards. The expected dividend rate is determined at the grant date for each equity award. The expected term of the equity award is calculated by analyzing the historical exercise data and obtaining the weighted average of the holding period for the equity awards.
F-17
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Net Income per Unit
Basic net income per unit is computed by dividing net income by the weighted-average number of units outstanding during the period. Diluted net income per unit is computed giving effect to all potential weighted average dilutive units including options, and incentive units. The dilutive effect of outstanding awards, if any, is reflected in diluted earnings per unit by application of the treasury stock method. Refer to Note 12 for further information on net income per unit.
Recent Accounting Pronouncements
ASU 2014-09 Revenue from Contracts with Customers. In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (ASU 2014-09). The ASU replaces much of the current guidance regarding revenue recognition including most industry-specific guidance. The core principle of the ASU is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. An entity will be required to identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligation in the contract, and recognize revenue when (or as) the entity satisfies a performance obligation. In addition to the new revenue recognition requirements, entities will be required to disclose sufficient information to enable users of financial statements to understand the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. Entities may choose between two retrospective transition methods when applying the ASU. In July 2015, the FASB voted to defer the effective date by one year (ASU 2015-14) to December 15, 2018 for annual reporting periods beginning after that date, and interim periods within annual periods beginning after December 15, 2019, and permitted early adoption of the standard, but not before the original effective date of December 15, 2017. Companies may use either a full retrospective or a modified-retrospective approach to adopt the standard.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with CustomersPrincipal versus Agent Considerations Reporting (ASU 2016-08). The core principle of the guidance in Revenue from Contracts with Customers in ASU 2014-09 is not changed by the amendments in ASU 2016-08. The amendments clarify the implementation guidance on principal versus agent considerations. Per ASU 2016-08, when another party is involved in providing goods or services to a customer, an entity is required to determine whether the nature of its promise is to provide the specified good or service itself (principal) or to arrange for that good or service to be provided by the other party (agent). When an entity that is a principal satisfies a performance obligation, the entity recognizes revenue in the gross amount of consideration to which it expects to be entitled in exchange for the specified good or service transferred to the customer. When an entity that is an agent satisfies a performance obligation, the entity recognizes revenue in the amount of any fee or commission to which it expects to be entitled. The effective date and transition requirements for ASU 2016-08 are the same as the effective date and transition requirements for ASU 2014-09.
In April 2016 and May 2016, the FASB issued guidance which amends certain other aspects of ASU 2014-09. The amendments include the identification of performance obligations and the licensing implementation guidance (ASU 2016-10) and the collectability of revenue, presentation of sales tax and other similar taxes collected from customers, contracts containing noncash considerations, and contract modifications and completed contracts at transition (ASU 2016-12). In December 2016, the FASB amended ASU 2014-09 to make minor corrections and minor improvements to the guidance that
F-18
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
are not expected to have a significant effect on current accounting practice or create a significant administrative cost. The effective date and transition provisions in these amendments are aligned with the requirements of ASU 2014-09.
The Company is in the process of selecting a transition method and determining the effect of this guidance on its consolidated financial statements.
ASU 2014-15 Presentation of Financial StatementsGoing Concern. In August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern (ASU 2014-15), which provides guidance about managements responsibility to evaluate whether there is substantial doubt about an entitys ability to continue as a going concern and to provide related footnote disclosures. The adoption of ASU 2014-15 during the year ended December 31, 2016 did not impact the Companys consolidated financial statements.
ASU 2015-02 Consolidation (Topic 810): Amendments to the Consolidation Analysis. In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis (ASU 2015-02). This standard modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. The adoption of ASU 2015-02 in the first quarter of 2017 did not impact the Companys consolidated financial statements.
ASU 2016-02 Leases (Topic 842). On February 25, 2016, the FASB issued ASU 2016-02, Leases (ASU 2016-02). The principle of ASU 2016-02 is that a lessee should recognize the assets and liabilities that arise from leases. Lessees will need to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). The liability will be equal to the present value of lease payments. The asset will be based on the liability. For income statement purposes, ASU 2016-02 requires leases to be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. ASU 2016-02 is effective for fiscal years beginning after December 15, 2019. Early adoption is permitted. The new standard must be adopted using a modified-retrospective transition, and provides for certain practical expedients. The Company is evaluating the potential effects of the adoption of this ASU on its consolidated financial statements. The Company has not decided if early adoption will be considered.
ASU 2016-09 Stock CompensationImprovements to Employee Share-Based Payment Accounting. In March 2016, the FASB issued ASU 2016-09, Stock CompensationImprovements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 was issued to simplify accounting guidance by identifying, evaluating, and improving areas for which cost and complexity can be reduced while maintaining or improving the usefulness of the information provided to users of financial statements. The areas affected by ASU 2016-09 include accounting for income taxes, classification of excess tax benefits on the statement of cash flows, minimum statutory tax withholding requirements, and classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. In addition, under this guidance, an entity can make an accounting policy election to either estimate the number of awards that are expected to vest or account for forfeitures when they occur. Upon adoption of this guidance during the first quarter of 2017, the Company changed its policy to account for forfeitures as they occur. The adoption of this guidance during the first quarter of 2017 did not materially impact the Companys consolidated financial statements.
F-19
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
ASU 2016-13 Financial StatementsCredit Losses. In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (ASU 2016-13). Under this guidance, a company will be required to use a new forward-looking expected loss model for trade and other receivables that generally will result in the earlier recognition of allowances for losses. The amendments in ASU 2016-13 are effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021, and requires a modified-retrospective approach to adoption. Early adoption is permitted in fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is evaluating the potential effects the adoption of this standard will have on its consolidated financial statements. The Company has not decided if early adoption will be considered.
ASU 2016-15 Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (ASU 2016-15). The areas affected by ASU 2016-15 are debt prepayment and debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies (including bank-owned life insurance policies), distributions received from equity method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. Specifically, under this guidance, cash payments for debt prepayment or debt extinguishment costs will be classified as cash outflows for financing activities. The amendments in ASU 2016-15 are effective for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments in ASU 2016-15 will be applied using a retrospective transition method to each period presented. The adoption of ASU 2016-15 is not expected to materially impact the Companys consolidated financial statements. The Company has not decided if early adoption will be considered.
F-20
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
3. Property and Equipment, Net
Property and equipment, net, consists of the following as of:
December 31, | March 31, 2017 |
|||||||||||
2015 | 2016 | |||||||||||
(Unaudited) | ||||||||||||
(In thousands) | ||||||||||||
Land and land improvements |
$ | 31,991 | $ | 104,318 | $ | 114,640 | ||||||
Data center equipment |
461,239 | 591,085 | 613,537 | |||||||||
Capitalized leased assets |
19,575 | 36,408 | 36,550 | |||||||||
Buildings and building improvements |
153,998 | 248,680 | 256,581 | |||||||||
Cloud computing equipment |
5,661 | 5,661 | 5,661 | |||||||||
Fiber facilities |
4,461 | 6,344 | 7,026 | |||||||||
Computer equipment, furniture and fixtures |
13,403 | 21,007 | 24,911 | |||||||||
Vehicles |
947 | 1,241 | 1,435 | |||||||||
Construction in progress |
86,163 | 97,368 | 142,661 | |||||||||
Core network equipment |
19,457 | 23,859 | 27,402 | |||||||||
Deferred installation charges |
2,662 | 3,858 | 4,175 | |||||||||
|
|
|
|
|
|
|||||||
Property and equipment, gross |
799,557 | 1,139,829 | 1,234,579 | |||||||||
Less: accumulated depreciation and amortization |
(201,323 | ) | (265,570 | ) | (285,587 | ) | ||||||
|
|
|
|
|
|
|||||||
Total property and equipment, net |
$ | 598,234 | $ | 874,259 | $ | 948,992 | ||||||
|
|
|
|
|
|
During the years ended December 31, 2015 and 2016, depreciation and amortization expense was $55.4 million and $66.6 million, respectively. During the three months ended March 31, 2016 and 2017, depreciation and amortization expense was $15.3 million (unaudited) and $20.0 million (unaudited), respectively. Accumulated amortization for the capitalized leased assets totaled $5.7 million, $6.6 million and $7.0 million (unaudited) as of December 31, 2015 and 2016 and as of March 31, 2017, respectively.
During the years ended December 31, 2015 and 2016, capitalized interest was $1.4 million and $2.7 million, respectively. During the three months ended March 31, 2016 and 2017, capitalized interest was $375,000 (unaudited) and $588,000 (unaudited), respectively.
4. Long-Term Deposit
On March 10, 2015, NV Energy and the Company entered into a Substation Agreement (the Agreement) and related land purchase agreement for land owned by a wholly-owned subsidiary of Switch. Pursuant to the Agreement, NV Energy will design, construct, maintain, and own a substation and related feeders in connection with service to Switchs development of three of its data center facilities in Las Vegas. The substation was placed into service in April 2016. Switch has paid the associated costs and associated tax gross-up related to the development of the substation and related feeders as defined in the Agreement. These costs are subject to reimbursement based upon Switchs future power usage. Costs incurred as of December 31, 2015 and 2016 and March 31, 2017 (unaudited) totaled $6.2 million, of which $4.4 million are classified as long-term deposits and $1.8 million as property and equipment on the consolidated balance sheets.
F-21
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
5. Equity Method Investments
The Company currently holds two investments, SUPERNAP International and Planet3, Inc. (Planet3). As of December 31, 2015 and 2016 and March 31, 2017, the Company determined that it continued to have a variable interest in both SUPERNAP International and Planet3, as the entities do not have sufficient equity at risk. However, the Company concluded that it is not the primary beneficiary of SUPERNAP International or of Planet3 as it does not have deemed control of either entity. As a result, it does not consolidate either entity into its consolidated financial statements.
As of December 31, 2015 and 2016 and March 31, 2017, the investment in SUPERNAP International is accounted for under the equity method of accounting and the Companys share of the investees results of operations is included in equity in net earnings (losses) of investments and foreign currency translation adjustments are included in other comprehensive income (loss). SUPERNAP International is an investment of which the Company holds a 50% ownership interest. As of December 31, 2015 and 2016 and March 31, 2017 (unaudited), the Company had invested $1.3 million in SUPERNAP International. In 2015, SUPERNAP International recognized $10.0 million in revenue under a license agreement with a Thailand joint venture. As a result, the Company recognized equity in net earnings of SUPERNAP International of $2.8 million during the year ended December 31, 2015. The Companys share of net loss recorded for the year ended December 31, 2016 amounted to $2.1 million. The Companys share of net loss recorded for the three months ended March 31, 2016 and 2017 amounted to $410,000 (unaudited) and $441,000 (unaudited), respectively. As of March 31, 2017, the Companys carrying value of its investment in SUPERNAP International was reduced to zero as a result of recording its share of the investees losses. Accordingly, the Company discontinued the equity method of accounting for its investment in SUPERNAP International and will not provide for additional losses until its share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended. The Company does not have any guaranteed obligations and is not otherwise committed to provide further financial support to SUPERNAP International. As of December 31, 2015 and 2016 and March 31, 2017, the Company had recorded amounts consisting of reimbursable expenses due from SUPERNAP International of $330,000, $1.4 million, and $1.4 million (unaudited), respectively, within accounts receivable on the consolidated balance sheets.
Planet3 is an investment of which the Company holds a 45% ownership interest. As of December 31, 2015 and 2016 and March 31, 2017 (unaudited), the Company had invested $10.0 million in Planet3. The Companys share of net loss recorded for the years ended December 31, 2015 and 2016 amounted to $2.0 million and $3.7 million, respectively, and for the three months ended March 31, 2016 amounted to $710,000 (unaudited). As of December 31, 2016, the Company discontinued the equity method of accounting for its investment in Planet3 and will not provide for additional losses until its share of future net income, if any, equals the share of net losses not recognized during the period the equity method was suspended. The Company does not have any guaranteed obligations and is not otherwise committed to provide further financial support to Planet3.
On May 13, 2016, Switch entered into an agreement with Planet3 (the Note Purchase Agreement) pursuant to which Planet3 agreed to issue to Switch secured convertible promissory notes with an aggregate principal amount not to exceed $3.0 million. Interest accrues on the unpaid principal balance of the notes at 5% per annum. The notes, together with any then unpaid and accrued interest, mature on September 1, 2017. On the maturity date, the outstanding principal balance and accrued interest, if any, can be converted at the Companys option into ownership interests of Planet3. As of December 31, 2016, the Company had purchased notes having an aggregate principal amount of
F-22
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
$3.0 million. If a qualified financing, as defined in the notes, occurs on or prior to the maturity date, then, upon the closing of the qualified financing, the outstanding principal amount of the notes and all accrued and unpaid interest shall automatically convert into shares of the preferred stock issued by Planet3 at a discount. The Company had identified and separately accounted for an embedded derivative related to the automatic conversion feature of the secured convertible promissory notes. The estimated fair value of the embedded derivative was based on Level 3 inputs, such as the value of the preferred stock upon conversion, using a present value of future cash flow valuation technique that relies on management assumptions of the probability of occurrence, term, and the risk-free discount rate. The estimated fair value of the embedded derivative was immaterial as of December 31, 2016 and March 31, 2017 (unaudited).
As of December 31, 2016, the Company determined an other than temporary loss in value of its investment in Planet3 had occurred due to Planet3s continued operating losses and the release of a beta product that did not generate the projected sales activity. The Company fully impaired the carrying values of its investment in Planet3 of $4.4 million, notes receivable of $2.4 million, net of a $629,000 discount, interest receivable of $55,000, and related embedded derivative of $896,000 for a total write-down of $7.7 million. These charges were recorded on the consolidated statement of comprehensive income within equity in (losses) net earnings of investments, impairment of notes receivable, selling, general and administrative expense, and interest expense, respectively, for the year ended December 31, 2016. The estimated fair value of the Companys investment in Planet3 was based on Level 3 inputs, using a present value of future cash flow valuation technique that relies on management assumptions to derive an enterprise value.
The summarized financial information of the Companys equity method investments is as follows:
December 31, | ||||||||
2015 | 2016 | |||||||
(In thousands) | ||||||||
Current assets |
$ | 6,346 | $ | 5,683 | ||||
Noncurrent assets |
20,529 | 18,956 | ||||||
Current liabilities |
1,214 | 2,558 | ||||||
Noncurrent liabilities |
14,640 | 23,164 |
Years Ended December 31, |
||||||||
2015 | 2016 | |||||||
(In thousands) | ||||||||
Revenue |
$ | 10,866 | $ | 1,239 | ||||
Gross profit (loss) |
7,628 | (2,313 | ) | |||||
Net income (loss) |
1,412 | (12,353 | ) |
6. Long-Term Debt
On May 5, 2015, the Company entered into a credit agreement (Credit Agreement) with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, which replaced the Companys previous $250.0 million credit agreement. The Credit Agreement consists of a $200.0 million term loan facility (the Term Loan Facility) and a $400.0 million revolving credit facility (the Revolving Credit Facility, and, together with the Term Loan Facility, the Facilities), each with a term of five years.
F-23
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Upon satisfying certain conditions, the Credit Agreement provided that the Company could increase the amount available for borrowing under the Facilities no more than five times (up to an additional $125.0 million in total) during the term of the Credit Agreement. On May 2, 2016, the Company amended the Credit Agreement to increase the aggregate amount available for borrowing under the Facilities by an additional $125.0 million and to modify certain other terms and conditions. On the closing date of the amendment, the Company recorded additional deferred debt issuance costs of $1.0 million, of which $860,000 related to the Revolving Credit Facility and $145,000 related to the Term Loan Facility. Total deferred debt issuance costs as of December 31, 2015 totaled $3.3 million, net of accumulated amortization of $514,000, compared to deferred debt issuance costs as of December 31, 2016 of $3.4 million, net of accumulated amortization of $1.4 million. Deferred debt issuance costs as of March 31, 2017 totaled $3.1 million (unaudited), net of accumulated amortization of $1.7 million (unaudited). Net debt issuance costs related to the Term Loan Facility are presented together with long-term debt and were $2.8 million, $2.2 million and $2.1 million (unaudited) as of December 31, 2015 and 2016 and March 31, 2017, respectively. Net debt issuance costs associated with the Revolving Credit Facility are included within other assets and were $558,000, $1.1 million and $1.1 million (unaudited) as of December 31, 2015 and 2016 and March 31, 2017, respectively.
The Facilities are collateralized by substantially all of the Companys tangible and intangible personal property and guaranteed by certain of the Companys wholly-owned subsidiaries. Interest on the Facilities is calculated based on a base rate plus the applicable margin or a LIBOR rate plus the applicable margin, at the Companys election. Interest calculations are based on 365/366 days for a base rate loan and 360 days for a LIBOR loan. Base rate interest payments are due and payable in arrears on the last day of each calendar quarter, beginning December 31, 2015. LIBOR rate interest payments are due and payable on the last day of each selected interest period (not to extend beyond three-month intervals).
The Facilities have, among other things, financial and other covenants. Beginning with the fiscal quarter ended June 30, 2015, the Credit Agreement requires compliance with the consolidated total leverage and consolidated fixed charge coverage ratios (as defined in the Credit Agreement). As of December 31, 2016 and March 31, 2017 (unaudited), the maximum consolidated total leverage ratio was 4.25 to 1.00 and 4.00 to 1.00 (unaudited), respectively, and the minimum consolidated fixed charge coverage ratio was 1.50 to 1.00. The maximum consolidated total leverage ratio is subject to change periodically for future fiscal quarters. The Company was in compliance with these covenants as of December 31, 2016 and March 31, 2017 (unaudited).
The terms of the Facilities limit the Companys ability, among other things, to return capital to equity interest holders, grant liens on its assets, and incur additional debt. The Companys net assets are subject to restrictions, including the ability to pay distributions. As of December 31, 2016, and March 31, 2017 (unaudited), none of the Companys net assets were deemed restricted under the Facilities.
F-24
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
Long-term debt consists of the following as of:
December 31, | March 31, 2017 |
|||||||||||
2015 | 2016 | |||||||||||
(Unaudited) | ||||||||||||
(In thousands) | ||||||||||||
Term Loan Facility, interest paid at the defined LIBOR rate plus applicable interest margin (2.02%, 2.77% and 2.98% at December 31, 2015 and 2016 and March 31, 2017 (unaudited), respectively); matures May 2020 |
$ | 195,000 | $ | 185,000 | $ | 182,500 | ||||||
Less: unamortized debt issuance costs |
(2,783 | ) | (2,233 | ) | (2,065 | ) | ||||||
|
|
|
|
|
|
|||||||
$ | 192,217 | $ | 182,767 | $ | 180,435 | |||||||
|
|
|
|
|
|
|||||||
Revolving Credit Facility, interest paid at the defined LIBOR rate plus applicable interest margin (2.07%, 2.71% and 2.95% at December 31, 2015 and 2016 and March 31, 2017 (unaudited), respectively); matures May 2020 |
100,300 | 289,300 | 359,300 | |||||||||
|
|
|
|
|
|
|||||||
$ | 292,517 | $ | 472,067 | $ | 539,735 | |||||||
|
|
|
|
|
|
As of December 31, 2016, long-term debt maturities are as follows (in thousands):
2017 |
$ | 15,000 | ||
2018 |
20,000 | |||
2019 |
20,000 | |||
2020 |
419,300 | |||
|
|
|||
474,300 | ||||
Less: unamortized debt issuance costs |
(2,233 | ) | ||
|
|
|||
$ | 472,067 | |||
|
|
As of March 31, 2017, long-term debt maturities are as follows (unaudited, in thousands):
2017 (nine months remaining) |
$ | 12,500 | ||
2018 |
20,000 | |||
2019 |
20,000 | |||
2020 |
489,300 | |||
|
|
|||
541,800 | ||||
Less: unamortized debt issuance costs |
(2,065 | ) | ||
|
|
|||
$ | 539,735 | |||
|
|
7. Leases
Capital Leases
The Company leases the land and building for one of its data centers from an entity in which a member of the Companys Board of Managers has a beneficial ownership interest, under which the
F-25
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
building portion of the lease has been capitalized. Pursuant to GAAP, the lease attributable to the land is accounted for as an operating lease. The lease expires in 2033 with two subsequent 10-year and one five-year renewal option periods.
As of December 31, 2016, minimum payment obligations for this capital lease are as follows:
Related Party Building Lease* (In thousands) |
||||
2017 |
$ | 1,896 | ||
2018 |
1,952 | |||
2019 |
2,064 | |||
2020 |
2,124 | |||
2021 |
2,243 | |||
Thereafter |
33,636 | |||
|
|
|||
43,915 | ||||
Less: amount representing interest |
(24,449 | ) | ||
|
|
|||
Present value of minimum capital lease payments |
$ | 19,466 | ||
|
|
* | Until 2023, capital lease payments are applied only to accrued interest, thus, there is no current portion. |
In February 2016, a wholly-owned subsidiary of Switch acquired rights and interests to manage, construct and use the Nevada Broadband Telemedicine Initiative (NBTI) fiber network. The right to use the NBTI fiber network is accounted for as a capital lease. As of December 31, 2016, and March 31, 2017, capital lease assets related to the NBTI fiber network were $15.9 million and $16.0 million (unaudited), respectively, and related future minimum payment obligations are $4.0 million during the year ended December 31, 2017. The capital lease will expire 25 years from the date the network is accepted by the Nevada Hospital Association, the entity that holds title to the network, and has a 25-year renewal option. Acceptance is expected to take place during 2017.
The Company is the sole consumer of output from four feeders related to a substation owned by NV Energy (Note 4). The Company accounts for this arrangement as a capital lease. As of December 31, 2016, and March 31, 2017 (unaudited), capital lease assets related to the feeders were $930,000. There are no future minimum payment obligations related to this capital lease. The capital lease will expire 39 years from the date the substation was placed into service, which was April 2016.
Operating Lease Commitments
The Company leases land, warehouse storage space and data center buildings under operating leases (including the land portion of the capitalized building lease) that have non-cancellable terms expiring through 2066 with entities in which a member of the Companys Board of Managers has a beneficial ownership interest.
In addition, the Company leases warehouse storage space, storage yards for fiber and construction materials and equipment under operating leases in Nevada that have non-cancellable terms expiring through 2055.
F-26
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 2016, future minimum lease payments for all operating leases with remaining terms in excess of one year are as follows:
Related Parties |
Other | Total | ||||||||||
(In thousands) | ||||||||||||
2017 |
$ | 3,183 | $ | 2,157 | $ | 5,340 | ||||||
2018 |
2,960 | 2,072 | 5,032 | |||||||||
2019 |
2,994 | 2,069 | 5,063 | |||||||||
2020 |
2,997 | 2,063 | 5,060 | |||||||||
2021 |
2,352 | 191 | 2,543 | |||||||||
Thereafter |
58,705 | 662 | 59,367 | |||||||||
|
|
|
|
|
|
|||||||
$ | 73,191 | $ | 9,214 | $ | 82,405 | |||||||
|
|
|
|
|
|
As of March 31, 2017, future minimum lease payments for all operating leases with remaining terms in excess of one year are as follows:
Related Parties |
Other | Total | ||||||||||
(In thousands, unaudited) | ||||||||||||
2017 (nine months remaining) |
$ | 3,343 | $ | 1,618 | $ | 4,961 | ||||||
2018 |
4,697 | 2,073 | 6,770 | |||||||||
2019 |
4,784 | 2,069 | 6,853 | |||||||||
2020 |
4,841 | 2,063 | 6,904 | |||||||||
2021 |
4,251 | 191 | 4,442 | |||||||||
Thereafter |
59,516 | 663 | 60,179 | |||||||||
|
|
|
|
|
|
|||||||
$ | 81,432 | $ | 8,677 | $ | 90,109 | |||||||
|
|
|
|
|
|
During the years ended December 31, 2015 and 2016 and during the three months ended March 31, 2016 and 2017, rent expense related to operating leases was approximately $3.8 million, $8.7 million, $2.1 million (unaudited), and $1.7 million (unaudited), respectively. Related party rent included in these amounts was approximately $3.8 million, $4.2 million, $984,000 (unaudited), and $1.1 million (unaudited) for the years ended December 31, 2015 and 2016 and three months ended March 31, 2016 and 2017, respectively.
8. Retirement Benefit Plans
The Company has a defined contribution retirement plan that covers its eligible employees (the Plan). The Plan is qualified in accordance with section 401(k) of the Internal Revenue Code. Eligible employees can participate in the Companys pre-tax 401(k) plan or after-tax Roth 401(k) plan. As of February 2016, the Company makes matching contributions equal to 100% of the first 3% of compensation deferred by a participant. The Company may make a discretionary additional matching contribution. The Company recognized expense related to its contributions to the Plan of approximately $939,000 for the year ended December 31, 2016 and $105,000 (unaudited) and $266,000 (unaudited) for the three months ended March 31, 2016 and 2017, respectively.
F-27
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
9. Commitments and Contingencies
Purchase Commitments
On March 8, 2017, the Company entered into a firm Power Purchase & Sale Agreement of electricity with Morgan Stanley Capital Group Inc. to purchase a minimum of 40 megawatts per energy hour for a term of 36 months, or a minimum purchase commitment of $33.4 million during the term, starting the later of June 1, 2017 or the first day of the month following the date by which the Company has received all regulatory approvals upon becoming an unbundled purchaser of energy as described below.
In December 2016, the Company notified the landlord for its data center building and land in Michigan of its intent to exercise the purchase option pursuant to the lease agreement. The purchase price of $25.0 million, less 65% of all rent payments made to the landlord, will be payable upon closing of the sale by January 1, 2018. The Company has recorded the present value of the adjusted purchase price within accrued Michigan building and land purchase on the consolidated balance sheet as of December 31, 2016 and March 31, 2017 (unaudited).
In September 2016, the Company entered into a take-or-pay contract with a lit fiber transport services vendor whereby the Company will be required to purchase a minimum of $75,000 in eligible services on a monthly basis for a term equal to or greater than 24 months beginning 12 months after the eligible services are made available. As of December 31, 2016, and March 31, 2017 (unaudited), the eligible services had not yet been made available.
In June 2015, a wholly-owned subsidiary of the Company entered into an agreement for the purchase of three parcels of land in northern Nevada. The first closing on two of the land parcels was completed in August 2015 in accordance with the agreement. The second closing on the third land parcel with a purchase price of $5.4 million will occur on or before 36 months after the date of the first closing, or by August 1, 2018.
PEC Purchase Commitments
In November 2015, the Company entered into a five-year contract beginning January 1, 2016 with the Southern Nevada Water Authority (SNWA) to purchase an estimated 82 million in PECs, or a minimum remaining purchase commitment of $656,000 during the term, from the 14 megawatt solar photovoltaic generating plant constructed at SNWAs River Mountains Water Treatment Facility to meet its anticipated requirements under the State of Nevadas Renewable Portfolio Standard Statute.
In November 2015, the Company entered into a renewable energy agreement with NV Energy to purchase all PECs realized from Switch Station 2, a 79 megawatt photovoltaic solar generation facility currently under construction, for a minimum purchase commitment of $13.2 million during the term. The term of the renewable energy agreement is 20 years from the commercial operation date of Switch Station 2, which is projected to be September 30, 2017.
In June 2015, the Company entered into a renewable energy agreement with NV Energy to purchase all PECs realized from Switch Station 1, a 100 megawatt photovoltaic solar generation facility currently under construction, not to exceed the Companys total electric load from its data center facilities, for a minimum purchase commitment of $21.6 million during the term. The term of the renewable energy agreement is 20 years from the commercial operation date of Switch Station 1, which is projected to be July 31, 2017.
F-28
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
As of December 31, 2016, future minimum PEC purchase commitments are as follows (in thousands):
2017 |
$ | 871 | ||
2018 |
1,902 | |||
2019 |
1,902 | |||
2020 |
1,902 | |||
2021 |
1,738 | |||
Thereafter |
27,113 | |||
|
|
|||
$ | 35,428 | |||
|
|
Other Commitments
Effective September 12, 2012, to finance the operations of an unrelated entity that is a customer (the Borrower) of the Company, the Company extended to the Borrower a five-year, $1.1 million line-of-credit with interest at 8.5% accruing on outstanding balances. As of December 31, 2015 and 2016, and March 31, 2017, $250,000, $213,000 and $205,000 (unaudited), respectively, has been drawn by the Borrower. Following the third anniversary of the note, any part of the then outstanding principal and accrued interest, if any, can be converted at the Companys option into ownership interests of the Borrower of up to 49%. As of December 31, 2016, and March 31, 2017, the Company has not exercised this option. In addition to the line-of-credit, the Company simultaneously entered into a separate vendor agreement with the Borrower establishing the fee structure for commissions to be paid in connection with the services rendered. The Company believes the commission obligations approximate the fair value of the services to be rendered. Except for $250,000 which is guaranteed by the Borrower, the entire line-of-credit is collateralized by certain real and personal property.
Energy Litigation
In July 2016, Switch filed a lawsuit in the U.S. District Court for the District of Nevada against, among other parties, the PUCN and the former Commissioners of the PUCN, NV Energy, and the former General Counsel to the PUCN Commissioners. The lawsuit alleged, among other things, that the defendants violated state and federal law to conspire and defraud Switch so that NV Energy could unlawfully retain Switch as a customer of NV Energy and impair renewable energy development in the state of Nevada. Switch sought damages, attorneys fees, costs and preliminary injunctive relief. On December 21, 2016, Switch and NV Energy agreed to settle the lawsuit on confidential terms which do not create any material financial liability to Switch. On January 4, 2017, Switch filed a voluntary dismissal of the energy litigation lawsuit with the U.S. District Court for the District of Nevada.
Impact Fee Expense
On September 30, 2016, Switch filed its application with the PUCN to become an unbundled purchaser of energy, capacity, and/or ancillary services from a new provider of electric resources. The application was approved on December 28, 2016 and Switch elected to pay the impact fee to NV Energy, the Companys energy provider through May 31, 2017, of $27.0 million in a lump sum by the earlier of August 1, 2017 or the date by which Switch is able to secure all necessary rights and contracts, including its Network Integration Transmission Service agreements with NV Energy and other compliance items. As there is no future economic benefit to the Company from the impact fee, it was recognized as an expense within impact fee expense during the year ended December 31, 2016
F-29
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
in the consolidated statements of comprehensive income. The Company paid the accrued impact fee of $27.0 million on May 31, 2017 and became an unbundled purchaser of energy on June 1, 2017 (Note 15).
Self-Insurance Reserves (Unaudited)
Effective January 1, 2017, the Company is self-insured for various levels of employee health coverage. Insurance reserves include accruals for estimated settlements for known claims, as well as accruals for estimates of incurred but not reported claims. As of March 31, 2017, the estimated liabilities for unpaid and incurred but not reported claims totaled $292,000 (unaudited), which is included within accrued expenses on the consolidated balance sheet.
10. Equity-Based Compensation
2005 Common Membership Unit Plan
In 2005, the Company established the 2005 Common Membership Unit Plan (the Unit Option Plan) for the purpose of attracting and retaining the best available personnel for positions of substantial responsibility, to provide additional incentive to employees and consultants of the Company and to promote the success of the Companys business.
All options granted under the 2005 Option Plan are intended to be treated as non-statutory unit options under the Internal Revenue Code of 1986, as amended. The term of each option shall be the term stated in the option agreement; provided, however, that the term shall be no more than ten years from the date of grant.
Options exercised under the plan provide the purchaser with full rights equivalent to those of existing members and holders as of the date of exercise. Since the inception of the plan through December 31, 2016, members have exercised or exchanged 21,383,000 unit awards.
F-30
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The unit option activity under the Unit Option Plan is summarized as follows (number of units in thousands) as of:
Number of Units |
Weighted Average Exercise Price per Unit |
Weighted- Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value(1) (In thousands) |
|||||||||||||
Unit options outstandingDecember 31, 2014 |
6,752 | $ | 2.07 | |||||||||||||
Unit options exercised |
(2,575 | ) | 2.00 | |||||||||||||
Unit options settled |
(3,536 | ) | 2.04 | |||||||||||||
|
|
|
|
|||||||||||||
Unit options outstandingDecember 31, 2015 |
641 | 2.52 | 4.73 | $ | 1,930 | |||||||||||
Unit options exercised |
(119 | ) | (2.67 | ) | ||||||||||||
Unit options settled |
(160 | ) | (2.67 | ) | ||||||||||||
Unit options forfeited |
(195 | ) | (2.67 | ) | ||||||||||||
|
|
|
|
|||||||||||||
Unit options outstandingDecember 31, 2016 |
167 | 2.09 | 1.75 | 939 | ||||||||||||
|
|
|
|
|||||||||||||
Unit options outstandingMarch 31, 2017 (unaudited) |
167 | $ | 2.09 | 1.50 | $ | 1,446 | ||||||||||
|
|
|
|
|||||||||||||
Unit options vested and exercisableDecember 31, 2015 |
167 | $ | 2.09 | 2.75 | $ | 574 | ||||||||||
|
|
|
|
|||||||||||||
Unit options vested and exercisableDecember 31, 2016 |
167 | $ | 2.09 | 1.75 | $ | 939 | ||||||||||
|
|
|
|
|||||||||||||
Unit options vested and exercisableMarch 31, 2017 (unaudited) |
167 | $ | 2.09 | 1.50 | $ | 1,446 | ||||||||||
|
|
|
|
(1) | The intrinsic value is calculated as the difference between the fair value of the unit on December 31, 2015 and 2016 and March 31, 2017 and the exercise price of the option. |
The number and weighted average grant date fair value for options granted and outstanding are as follows (number of units in thousands) as of:
Number of Nonvested Options Outstanding |
Weighted Average Grant Date Fair Value per Option |
|||||||
Nonvested unit options outstandingDecember 31, 2014 |
1,398 | $ | 0.93 | |||||
Options vested |
(924 | ) | 0.90 | |||||
|
|
|||||||
Nonvested unit options outstandingDecember 31, 2015 |
474 | 0.97 | ||||||
Options forfeited |
(195 | ) | 0.97 | |||||
Unit options vested |
(279 | ) | 0.97 | |||||
|
|
|||||||
Nonvested unit options outstandingDecember 31, 2016 (unaudited) |
| $ | | |||||
|
|
There were no nonvested unit options outstanding as of March 31, 2017 (unaudited).
On February 20, 2015, the Company settled the outstanding notes receivable issued to members including accrued interest of $18.3 million by repurchasing 4,286,000 units from certain of its members. Additionally, the Company permitted employees holding 4,293,000 options to exercise their options by net share settling the exercise price through a repurchase of 2,433,000 units from those employees.
F-31
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
In addition, on November 20, 2015, the Company permitted employees holding 1,758,000 options to exercise their options by net share settling the exercise price of $3.9 million and related payroll taxes of $1.5 million, for a total value of $5.4 million.
The Company provides the following additional disclosures for unit options for the years ended December 31:
2015 | 2016 | |||||||
(In thousands) | ||||||||
Total fair value of unit options vested |
$ | 835 | $ | 271 | ||||
Total aggregate intrinsic value of unit options exercised(1) |
$ | 9,098 | $ | 601 |
(1) | The intrinsic value is calculated as the difference between the fair value of the unit on the date of the exercise and the exercise price of the option. |
2012 Incentive Unit Awards
In 2012, the Company began issuing incentive unit awards (Incentive Units). The Incentive Units contain a hurdle amount (similar to an exercise price) where employees will benefit from any appreciation in the value of their incentive awards above the hurdle amount. The hurdle amount ranged from $4.26 to $5.02 per incentive award issued for the year ended December 31, 2015 and from $5.02 to $7.71 per incentive award issued for the year ended December 31, 2016. There were no incentive units granted during the three months ended March 31, 2017 (unaudited).
The Incentive Unit activity is summarized below (number of units in thousands) as of:
Number of Units |
Weighted Average Hurdle Amount per Unit |
Weighted- Average Remaining Contractual Life (Years) |
Aggregate Intrinsic Value(1) (In thousands) |
|||||||||||||
Incentive Units outstandingDecember 31, 2014 |
8,760 | $ | 3.53 | |||||||||||||
Incentive Units granted |
10,444 | 4.35 | ||||||||||||||
Incentive Units forfeited |
(899 | ) | 3.71 | |||||||||||||
|
|
|||||||||||||||
Incentive Units outstandingDecember 31, 2015 |
18,305 | 3.99 | 2.85 | $ | 28,235 | |||||||||||
Incentive Units granted |
2,197 | 6.38 | ||||||||||||||
Incentive Units forfeited |
(1,109 | ) | 5.08 | |||||||||||||
|
|
|||||||||||||||
Incentive Units outstandingDecember 31, 2016 |
19,393 | 4.20 | 1.98 | $ | 68,139 | |||||||||||
Incentive Units forfeited (unaudited) |
(873 | ) | 4.62 | |||||||||||||
|
|
|||||||||||||||
Incentive Units outstandingMarch 31, 2017 (unaudited) |
18,520 | $ | 4.18 | 1.67 | $ | 121,739 | ||||||||||
|
|
|||||||||||||||
Incentive Units vestedDecember 31, 2015 |
1,191 | $ | 3.47 | 1.94 | $ | 2,454 | ||||||||||
|
|
|||||||||||||||
Incentive Units vestedDecember 31, 2016 |
4,558 | $ | 3.97 | 1.50 | $ | 17,053 | ||||||||||
|
|
|||||||||||||||
Incentive Units vestedMarch 31, 2017 (unaudited) |
6,155 | $ | 4.07 | 1.36 | $ | 41,105 | ||||||||||
|
|
(1) | The intrinsic value is calculated as the difference between the fair value of the unit on December 31, 2015 and 2016 and March 31, 2017 and the hurdle amount of the Incentive Unit. |
F-32
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average hurdle amounts for Incentive Units granted and vested, and the weighted average remaining time to vest for Incentive Units outstanding were as follows (number of units in thousands) as of:
December 31, 2015 |
||||||||||||||||
Incentive Units Outstanding |
Incentive Units Vested | |||||||||||||||
Number of Units |
Weighted Average Hurdle Amount |
Weighted Average Remaining Contractual Life (Years) |
Number of Units |
Hurdle Amount |
||||||||||||
6,510 |
$ | 3.33 | 1.91 | 1,027 | $ | 3.33 | ||||||||||
1,560 |
4.33 | 2.64 | 156 | 4.33 | ||||||||||||
150 |
4.67 | 3.86 | 8 | 4.67 | ||||||||||||
8,802 |
4.26 | 3.43 | | | ||||||||||||
200 |
4.62 | 3.46 | | | ||||||||||||
1,083 |
5.02 | 3.89 | | | ||||||||||||
|
|
|
||||||||||||||
18,305 |
$ | 3.99 | 2.85 | 1,191 | $ | 3.47 | ||||||||||
|
|
|
December 31, 2016 | ||||||||||||||||||
Incentive Units Outstanding | Incentive Units Vested | |||||||||||||||||
Number of Units |
Weighted Average Hurdle Amount |
Weighted Average Remaining Contractual Life (Years) |
Number of Units |
Hurdle Amount |
||||||||||||||
6,510 | $ | 3.33 | 0.92 | 1,680 | $ | 3.33 | ||||||||||||
1,560 | 4.33 | 1.06 | 954 | 4.33 | ||||||||||||||
150 | 4.67 | 2.86 | 15 | 4.67 | ||||||||||||||
8,325 | 4.26 | 2.38 | 1,692 | 4.26 | ||||||||||||||
200 | 4.62 | 3.46 | 10 | 4.62 | ||||||||||||||
1,066 | 5.02 | 3.42 | 207 | 5.02 | ||||||||||||||
500 | 5.53 | 3.04 | | | ||||||||||||||
260 | 6.46 | 3.81 | | | ||||||||||||||
130 | 7.26 | 4.65 | | | ||||||||||||||
692 | 7.39 | 4.32 | | | ||||||||||||||
|
|
|
|
|||||||||||||||
19,393 | $ | 4.20 | 1.98 | 4,558 | $ | 3.97 | ||||||||||||
|
|
|
|
F-33
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
March 31, 2017 (unaudited) | ||||||||||||||||||
Incentive Units Outstanding | Incentive Units Vested | |||||||||||||||||
Number of Units |
Weighted Average Hurdle Amount |
Weighted Average Remaining Contractual Life (Years) |
Number of Units |
Hurdle Amount |
||||||||||||||
6,510 | $ | 3.33 | 0.68 | 1,680 | $ | 3.33 | ||||||||||||
1,560 | 4.33 | 0.81 | 954 | 4.33 | ||||||||||||||
150 | 4.67 | 2.61 | 15 | 4.67 | ||||||||||||||
7,786 | 4.26 | 2.10 | 3,152 | 4.26 | ||||||||||||||
200 | 4.62 | 3.21 | 10 | 4.62 | ||||||||||||||
757 | 5.02 | 3.01 | 219 | 5.02 | ||||||||||||||
500 | 5.53 | 2.79 | 125 | 5.53 | ||||||||||||||
260 | 6.46 | 3.57 | | | ||||||||||||||
130 | 7.26 | 4.40 | | | ||||||||||||||
667 | 7.39 | 4.05 | | | ||||||||||||||
|
|
|
|
|||||||||||||||
18,520 | $ | 4.18 | 1.67 | 6,155 | $ | 4.07 | ||||||||||||
|
|
|
|
The number and weighted average grant date fair value for Incentive Units granted and outstanding are as follows (number of units in thousands) as of:
Number of Nonvested Incentive Units Outstanding |
Weighted Average Grant Date Fair Value per Incentive Unit |
|||||||
Nonvested Incentive Units outstandingDecember 31, 2014 |
7,977 | $ | 1.36 | |||||
Incentive Units granted |
10,444 | 1.18 | ||||||
Incentive Units forfeited |
(899 | ) | 1.26 | |||||
Incentive Units vested |
(408 | ) | 1.36 | |||||
|
|
|||||||
Nonvested Incentive Units outstandingDecember 31, 2015 |
17,114 | 1.26 | ||||||
Incentive Units granted |
2,197 | 2.04 | ||||||
Incentive Units forfeited |
(1,109 | ) | 1.75 | |||||
Incentive Units vested |
(3,367 | ) | 1.24 | |||||
|
|
|||||||
Nonvested Incentive Units outstandingDecember 31, 2016 |
14,835 | 1.34 | ||||||
Incentive Units forfeited (unaudited) |
(873 | ) | 0.97 | |||||
Incentive Units vested (unaudited) |
(1,597 | ) | 1.05 | |||||
|
|
|||||||
Nonvested Incentive Units outstandingMarch 31, 2017 (unaudited) |
12,365 | $ | 1.40 | |||||
|
|
F-34
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The weighted average assumptions used in estimating the grant date fair value of these units are listed in the table below:
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
Expected volatility |
35.1 | % | 39.8 | % | 37.7 | % | | |||||||||
Risk-free interest rate |
1.4 | % | 1.5 | % | 1.5 | % | | |||||||||
Expected term (in years) |
3.1 | 3.7 | 3.5 | | ||||||||||||
Dividend rate |
1.3 | % | 0.9 | % | 0.9 | % | |
Total fair value of Incentive Units vested for the years ended December 31, 2015 and 2016 was $555,000 and $4.2 million, respectively. Total fair value of Incentive Units vested for the three months ended March 31, 2016 and 2017 was $2.8 million (unaudited) and $1.7 million (unaudited), respectively.
As of December 31, 2016, the total unit-based compensation cost related to all unvested equity awards not yet recognized, net of estimated forfeitures, totaled $11.6 million. This is expected to be recognized over a weighted-average period of 2.7 years.
As of March 31, 2017, the total unit-based compensation cost related to all unvested equity awards not yet recognized totaled $9.6 million (unaudited). This is expected to be recognized over a weighted-average period of 2.4 years (unaudited).
During the year ended December 31, 2016, the Company awarded 168,655 fully vested common units and recorded $966,000 in equity-based compensation, comprised of 150,895 awards valued at a fair market value of $5.53 per unit and 17,760 awards valued at a fair market value of $7.39 per unit.
During the three-month period ended March 31, 2017, the Company awarded 150,880 (unaudited) fully vested common units at a fair market value of $7.39 per unit (unaudited) totaling $1.1 million (unaudited) in equity-based compensation.
The Companys total equity-based compensation recognized in the consolidated statements of comprehensive income for the Unit Option Plan, Incentive Units, and fully vested common units was $5.2 million and $5.9 million for the years ended December 31, 2015 and 2016, respectively, and $2.2 million (unaudited) and $2.3 million (unaudited) for the three months ended March 31, 2016 and 2017, respectively.
Total equity-based compensation is allocated as follows for each of the periods presented:
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands) | ||||||||||||||||
Cost of revenue |
$ | | $ | 181 | $ | | $ | 50 | ||||||||
Selling, general and administrative |
5,237 | 5,754 | 2,208 | 2,200 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total equity-based compensation expense |
$ | 5,237 | $ | 5,935 | $ | 2,208 | $ | 2,250 | ||||||||
|
|
|
|
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|
|
F-35
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
11. Fair Value of Financial Instruments
The carrying amounts as of December 31, 2016 and March 31, 2017 for cash, accounts receivable, accounts payable, and long-term debt approximate their estimated fair values due to the short maturity of these instruments, or because the related interest rates approximate current market rates.
Management has elected not to adopt the option available under GAAP to measure any of its eligible financial instruments or other items at fair value. Accordingly, the Company continues to measure all of its assets and liabilities on the historical cost basis of accounting except as otherwise required under GAAP.
12. Net Income Per Unit
The following table sets forth the calculation of basic and diluted net income per unit during the periods presented (in thousands, except unit and per unit data):
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
(In thousands, except unit and per unit data) | ||||||||||||||||
Net income per unit: |
||||||||||||||||
Numerator |
||||||||||||||||
Net incomebasic and diluted |
$ | 73,472 | $ | 31,368 | $ | 16,678 | $ | 20,328 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator |
||||||||||||||||
Weighted-average units outstandingbasic |
196,773,458 | 199,047,070 | 198,898,170 | 199,776,051 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per unitbasic |
$ | 0.37 | $ | 0.16 | $ | 0.08 | $ | 0.10 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Denominator |
||||||||||||||||
Weighted average units outstandingbasic |
196,773,458 | 199,047,070 | 198,898,170 | 199,776,051 | ||||||||||||
Weighted average effect of dilutive securities: |
||||||||||||||||
Effect of dilutive options |
1,498,228 | 230,511 | 349,420 | 129,065 | ||||||||||||
Effect of unvested incentive units |
1,000,583 | 4,183,839 | 2,517,437 | 5,588,156 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Weighted average units outstandingdiluted |
199,272,269 | 203,461,420 | 201,765,027 | 205,493,272 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per unitdiluted |
$ | 0.37 | $ | 0.15 | $ | 0.08 | $ | 0.10 | ||||||||
|
|
|
|
|
|
|
|
F-36
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
The following outstanding units were excluded from the computation of the diluted net income per unit for the periods presented because their effect would have been anti-dilutive. There were no antidilutive options outstanding for the periods presented below.
Years Ended December 31, |
Three Months Ended March 31, |
|||||||||||||||
2015 | 2016 | 2016 | 2017 | |||||||||||||
(Unaudited) | ||||||||||||||||
Incentive units |
4,233,993 | 533,390 | 2,442,567 | 491,450 | ||||||||||||
|
|
|
|
|
|
|
|
13. Segment Reporting
The Companys chief operating decision maker is its Chief Executive Officer. The Company manages its operations as a single operating segment for the purposes of assessing performance and making operating decisions. All of the Companys assets are maintained in the United States. The Company derives a substantial majority of its revenue from sales to customers in the United States, based upon the billing address of the customer. Revenue derived from customers outside the United States were less than 1% of revenue for each period presented.
14. Subsequent Events
Subsequent events through April 28, 2017, the date on which the consolidated financial statements were available to be issued, were evaluated by the Company to determine the need, if any, for recognition or disclosure in its consolidated financial statements.
The Company borrowed $45.0 million in January 2017, $25.0 million in March 2017, and $25.0 million in April 2017 from the Revolving Credit Facility.
On April 5, 2017, the Company purchased approximately 25.1 acres of real property, improvements and personal property located in Storey County, Nevada for a purchase price of $6.2 million.
15. Subsequent Events (Unaudited)
Subsequent events through June 28, 2017, the date on which the consolidated financial statements were available to be issued, were evaluated by the Company to determine the need, if any, for recognition or disclosure in its consolidated financial statements.
In May 2017, the Company borrowed $50.0 million from the Revolving Credit Facility.
The Company paid the accrued impact fee of $27.0 million on May 31, 2017 and became an unbundled purchaser of energy on June 1, 2017.
On June 1, 2017, the Company closed on the purchase of approximately 68.3 acres of land located in Atlanta, Georgia for a purchase price of $2.4 million.
On June 27, 2017, the Company entered into an amended and restated credit agreement with Wells Fargo Bank, National Association, as administrative agent, and certain other lenders, consisting of a $600.0 million term loan facility, maturing on June 27, 2024, and a $500.0 million revolving credit
F-37
SWITCH, LTD. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
facility, maturing on June 27, 2022, which replaced the Companys previous Credit Agreement. As of June 27, 2017, the outstanding amounts under the term loan facility and revolving credit facility were $600.0 million and $38.0 million, respectively. The term loan facility and the revolving credit facility each bears interest at either the prime rate plus an applicable margin or LIBOR plus an applicable margin, at the Companys option, determined according to a grid based on a consolidated total leverage ratio. The interest rates in effect at initial funding were 3.97% for the term loan facility and 3.47% for the revolving credit facility. The terms of the amended and restated credit agreement limit the Companys ability, among other things, to incur additional debt, incur additional liens, encumbrances or contingent liabilities, and pay distributions or make certain other restricted payments (with certain exceptions and baskets, including, among other things, a restricted payment basket of $15.0 million per fiscal year).
On June 28, 2017, the Company closed on the purchase of approximately 16 acres of land located in Atlanta, Georgia for a purchase price of $1.3 million.
F-38
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by us, other than underwriting discounts and commissions, in connection with this offering. All amounts shown are estimates except for the SEC registration fee, the FINRA filing fee and the listing fee.
SEC registration fee |
$ | * | ||
FINRA filing fee |
* | |||
listing fee |
* | |||
Printing and engraving expenses |
* | |||
Legal fees and expenses |
* | |||
Accounting fees and expenses |
* | |||
Custodian transfer agent and registrar fees |
* | |||
Miscellaneous |
* | |||
|
|
|||
Total |
$ | * | ||
|
|
* | To be filed by amendment. |
Item 14. Indemnification of Directors and Officers.
Nevada law provides us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests or the acts must not have constituted a breach of a fiduciary duty of such officer or director involving intentional misconduct, fraud or a knowing violation of law. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful. Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards. Our amended and restated articles of incorporation that will be in effect on the closing of this offering permits indemnification of our directors, officers, employees, and other agents to the maximum extent permitted by Nevada law, and our amended and restated bylaws that will be in effect on the closing of this offering provide that we will indemnify our directors and officers and permit us to indemnify our employees and other agents, in each case to the maximum extent permitted by Nevada law.
We have entered into indemnification agreements with our directors and officers, whereby we have agreed to indemnify our directors and officers to the fullest extent permitted by Nevada law, against expenses and liabilities incurred in legal proceedings to which the director or officer was, or is threatened to be made, a party by reason of the fact that such director or officer is or was a director, officer, employee, or agent of Switch. At present, there is no pending litigation or proceeding involving a director or officer of Switch regarding which indemnification is sought, nor is the registrant aware of any threatened litigation that may result in claims for indemnification.
We maintain insurance policies that indemnify our directors and officers against various liabilities arising under the Securities Act and the Securities Exchange Act of 1934, as amended, that might be incurred by any director or officer in his capacity as such.
The underwriters are obligated, under certain circumstances, under the underwriting agreement to be filed as Exhibit 1.1 hereto, to indemnify us and our officers and directors against liabilities under the Securities Act.
II-1
Item 15. Recent Sales of Unregistered Securities.
The registrant has not sold or granted unregistered securities.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
See the Exhibit Index on the page immediately following the signature page for a list of exhibits filed as part of this registration statement on Form S-1, which Exhibit Index is incorporated herein by reference.
(b) Financial Statement Schedules.
All financial statement schedules are omitted because the information required to be set forth therein is not applicable or is shown in the consolidated financial statements or the notes thereto.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes to provide to the underwriters at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of the registrant under the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer, or controlling person of the registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance on Rule 430A and contained in a form of prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under the Securities Act will be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus will be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time will be deemed to be the initial bona fide offering thereof.
II-2
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form S-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Las Vegas, Nevada on , 2017.
SWITCH, INC. | ||
By: | ||
Name: | Rob Roy | |
Title: |
Chief Executive Officer |
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoint Rob Roy, Thomas Morton, and Gabe Nacht, and each one of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him or her and in their name, place, and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to sign any registration statement for the same offering covered by this registration statement that is to be effective on filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended, and all post-effective amendments thereto, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date | ||
Rob Roy |
Chief Executive Officer and Director (Principal Executive Officer) |
, 2017 | ||
Gabe Nacht |
Chief Financial Officer (Principal Financial and Accounting Officer) |
, 2017 | ||
Larry Krause |
Director |
, 2017 | ||
Zareh Sarrafian |
Director |
, 2017 | ||
Donald Snyder |
Director |
, 2017 | ||
Tom Thomas |
Director |
, 2017 | ||
Bryan Wolf |
Director |
, 2017 |
II-3
EXHIBIT INDEX
Exhibit number |
Description of exhibit | |
1.1* | Form of Underwriting Agreement. | |
3.1* | Form of Amended and Restated Articles of Incorporation of Switch, Inc., to be effective upon the closing of this offering. | |
3.2* | Form of Amended and Restated Bylaws of Switch, Inc., to be effective upon the closing of this offering. | |
4.1* | Specimen Stock Certificate evidencing the shares of Class A common stock. | |
5.1* | Opinion of Greenberg Traurig, LLP. | |
10.1* | Form of Tax Receivable Agreement, to be effective upon the closing of this offering. | |
10.2* | Form of Registration Rights Agreement, to be effective upon the closing of this offering. | |
10.3* | Operating Agreement of Switch, Ltd., as currently in effect. | |
10.4* | Form of Fifth Amended and Restated Operating Agreement of Switch, Ltd., to be effective upon the closing of this offering. | |
10.5 | Amended and Restated Credit Agreement, dated as of June 27, 2017, by and among Switch, Ltd., as borrower, the lenders party thereto and Wells Fargo Bank, National Association, as administrative agent. | |
10.6 | Amended and Restated Collateral Agreement, dated as of June 27, 2017, by and among Switch, Ltd., as borrower, certain of its subsidiaries and Wells Fargo Bank, National Association, as administrative agent. | |
10.7 | Amended and Restated Subsidiary Guaranty Agreement, dated as of June 27, 2017, by and among Switch, Ltd., as borrower, certain of its subsidiaries and Wells Fargo Bank, National Association, as administrative agent. | |
10.8* | Switch, Inc. 2017 Incentive Award Plan. | |
10.9* | Offer Letter, dated January 7, 2016, by and between Switch, Ltd. and Gabe Nacht. | |
10.10* | Form of Indemnification Agreement to be entered into between Switch, Inc. and certain of its directors and officers, to be effective upon the closing of this offering. | |
10.11* | Standard Industrial Real Estate Lease, dated August 21, 2007, by and between Switch, Ltd. (f/k/a Switch Communications Group L.L.C.) and Beltway Business Park Warehouse No. 3, LLC, as amended by (i) First Amendment to Lease, dated January 25, 2008, (ii) Confirmation of Initial Lease Term and Amendment to Lease, dated April 28, 2008, (iii) Third Amendment to Lease, dated January 21, 2011, (iv) Fourth Amendment to Lease, dated August 9, 2013, and (v) Fifth Amendment to Lease, dated June 21, 2016. | |
10.12* | Lease Agreement, dated November 4, 2010, by and between Switch, Ltd. (f/k/a Switch Communications Group L.L.C.) and Beltway Business Park Office No. 1, LLC, as amended by (i) First Amendment to Lease, dated April 1, 2011, (ii) Second Amendment to Lease, dated September 25, 2012, and (iii) Third Amendment to Lease, dated February 1, 2014. | |
10.13* | Lease Agreement, dated April 1, 2011, by and between Switch, Ltd. (f/k/a Switch Communications Group L.L.C.) and Beltway Business Park Office No. 1, LLC, as amended by (i) First Amendment to Lease, dated July 23, 2014, and (ii) Second Amendment to Lease, dated May 27, 2016. |
II-4
Exhibit number |
Description of exhibit | |
10.14* | Land Lease, dated January 12, 2012, by and between Switch, Ltd. (f/k/a Switch Communications Group L.L.C.) and Beltway Business Park Warehouse No. 4, LLC, as amended by (i) Confirmation of Lease Term and Amendment to Lease, dated February 22, 2013, and (ii) First Amendment to Lease, dated June 21, 2016. | |
10.15* | Lease Agreement, dated April 24, 2012, by and between InNEVation L.L.C. and Beltway Business Park Office No. 2, LLC, as amended by (i) First Amendment to Lease, dated February 19, 2013, (ii) Second Amendment to Lease, dated March 14, 2013, (iii) Third Amendment to Lease, dated August 20, 2013, (iv) Fourth Amendment to Lease, dated September 1, 2013, (v) Fifth Amendment to Lease, dated January 12, 2015, (vi) Sixth Amendment to Lease, dated January 19, 2015, (vii) Seventh Amendment to Lease, dated November 15, 2015, and (viii) Eighth Amendment to Lease, dated January 17, 2017. | |
10.16* | Standard Industrial Real Estate Lease, dated November 3, 2014, by and between Switch, Ltd. and Beltway Business Park Warehouse No. 1, LLC. | |
10.17* | Land Lease, dated June 21, 2016, by and between Switch, Ltd. and Beltway Business Park Warehouse No. 6, LLC, as amended by Confirmation of Lease Term and Amendment to Lease, dated March 22, 2017. | |
21.1* | List of Subsidiaries of Switch, Inc. | |
23.1* | Consent of PricewaterhouseCoopers LLP as to Switch, Ltd. | |
23.2* | Consent of PricewaterhouseCoopers LLP as to Switch, Inc. | |
23.3* | Consent of Greenberg Traurig, LLP (included in Exhibit 5.1). | |
24.1* | Power of Attorney. |
* | To be filed by amendment. |
| Indicates a management contract or compensatory plan or arrangement. |
II-5
EXHIBIT 10.5
Published CUSIP Number: | 87104NAD3 | |||
Revolving Credit CUSIP Number: | 87104NAE1 | |||
Term Loan CUSIP Number: | 87104NAF8 |
$1,100,000,000
AMENDED AND RESTATED CREDIT AGREEMENT
dated as of June 27, 2017,
by and among
SWITCH, LTD.,
as Borrower,
the Lenders referred to herein,
as Lenders,
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Administrative Agent,
Swingline Lender and Issuing Lender,
BMO CAPITAL MARKETS CORP.,
GOLDMAN SACHS BANK USA and
JPMORGAN CHASE BANK, N.A.,
as Syndication Agents
and
CITIZENS BANK, N.A. and
U.S. BANK NATIONAL ASSOCIATION,
as Documentation Agents
WELLS FARGO SECURITIES, LLC, BMO CAPITAL MARKETS CORP., GOLDMAN SACHS BANK USA and JPMORGAN CHASE BANK, N.A., as Joint Lead Arrangers and Joint Bookrunners for |
BMO CAPITAL MARKETS CORP., WELLS FARGO SECURITIES, LLC, GOLDMAN SACHS BANK USA and JPMORGAN CHASE BANK, N.A., as Joint Lead Arrangers and Joint Bookrunners for |
TABLE OF CONTENTS
Page | ||||||
ARTICLE I DEFINITIONS | 1 | |||||
SECTION 1.1 |
Definitions |
1 | ||||
SECTION 1.2 |
Other Definitions and Provisions |
36 | ||||
SECTION 1.3 |
Accounting Terms |
36 | ||||
SECTION 1.4 |
UCC Terms |
37 | ||||
SECTION 1.5 |
Rounding |
37 | ||||
SECTION 1.6 |
References to Agreement and Laws |
37 | ||||
SECTION 1.7 |
Times of Day |
37 | ||||
SECTION 1.8 |
Letter of Credit Amounts |
37 | ||||
SECTION 1.9 |
Guarantees |
37 | ||||
SECTION 1.10 |
Covenant Compliance Generally |
37 | ||||
SECTION 1.11 |
Limited Condition Acquisitions |
38 | ||||
ARTICLE II REVOLVING CREDIT FACILITY | 39 | |||||
SECTION 2.1 |
Revolving Credit Loans |
39 | ||||
SECTION 2.2 |
Swingline Loans |
39 | ||||
SECTION 2.3 |
Procedure for Advances of Revolving Credit Loans and Swingline Loans |
41 | ||||
SECTION 2.4 |
Repayment and Prepayment of Revolving Credit and Swingline Loans |
42 | ||||
SECTION 2.5 |
Permanent Reduction of the Revolving Credit Commitment |
43 | ||||
SECTION 2.6 |
Termination of Revolving Credit Facility |
43 | ||||
ARTICLE III LETTER OF CREDIT FACILITY | 44 | |||||
SECTION 3.1 |
L/C Facility |
44 | ||||
SECTION 3.2 |
Procedure for Issuance of Letters of Credit |
44 | ||||
SECTION 3.3 |
Commissions and Other Charges |
45 | ||||
SECTION 3.4 |
L/C Participations |
45 | ||||
SECTION 3.5 |
Reimbursement Obligation of the Borrower |
46 | ||||
SECTION 3.6 |
Obligations Absolute |
47 | ||||
SECTION 3.7 |
Effect of Letter of Credit Application |
47 | ||||
SECTION 3.8 |
Removal and Resignation of Issuing Lenders |
47 | ||||
SECTION 3.9 |
Reporting of Letter of Credit Information and L/C Commitment |
48 | ||||
SECTION 3.10 |
Letters of Credit Issued for Subsidiaries |
48 |
i
TABLE OF CONTENTS
(continued)
Page | ||||||
ARTICLE IV TERM LOAN FACILITY | 48 | |||||
SECTION 4.1 |
Initial Term Loan |
48 | ||||
SECTION 4.2 |
Procedure for Advance of Term Loan |
49 | ||||
SECTION 4.3 |
Repayment of Term Loans |
49 | ||||
SECTION 4.4 |
Prepayments of Term Loans |
49 | ||||
SECTION 4.5 |
Reverse Dutch Auction Prepayments |
52 | ||||
ARTICLE V GENERAL LOAN PROVISIONS | 54 | |||||
SECTION 5.1 |
Interest |
54 | ||||
SECTION 5.2 |
Notice and Manner of Conversion or Continuation of Loans |
55 | ||||
SECTION 5.3 |
Fees |
56 | ||||
SECTION 5.4 |
Manner of Payment |
56 | ||||
SECTION 5.5 |
Evidence of Indebtedness |
57 | ||||
SECTION 5.6 |
Sharing of Payments by Lenders |
57 | ||||
SECTION 5.7 |
Administrative Agents Clawback |
58 | ||||
SECTION 5.8 |
Changed Circumstances |
59 | ||||
SECTION 5.9 |
Indemnity |
59 | ||||
SECTION 5.10 |
Increased Costs |
60 | ||||
SECTION 5.11 |
Taxes |
61 | ||||
SECTION 5.12 |
Mitigation Obligations; Replacement of Lenders |
65 | ||||
SECTION 5.13 |
Incremental Loans |
65 | ||||
SECTION 5.14 |
Cash Collateral |
68 | ||||
SECTION 5.15 |
Defaulting Lenders |
69 | ||||
SECTION 5.16 |
Refinancing Facilities |
71 | ||||
SECTION 5.17 |
Extensions of Term Loans and Revolving Credit Commitments |
75 | ||||
ARTICLE VI CONDITIONS OF CLOSING AND BORROWING | 78 | |||||
SECTION 6.1 |
Conditions to Closing and Initial Extensions of Credit |
78 | ||||
SECTION 6.2 |
Conditions to All Extensions of Credit |
81 | ||||
ARTICLE VII REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES | 82 | |||||
SECTION 7.1 |
Organization; Power; Qualification |
82 | ||||
SECTION 7.2 |
Ownership |
83 | ||||
SECTION 7.3 |
Authorization; Enforceability |
83 | ||||
SECTION 7.4 |
Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc. |
83 |
ii
TABLE OF CONTENTS
(continued)
Page | ||||||
SECTION 7.5 |
Compliance with Law; Governmental Approvals |
83 | ||||
SECTION 7.6 |
Tax Returns and Payments |
84 | ||||
SECTION 7.7 |
Intellectual Property Matters |
84 | ||||
SECTION 7.8 |
Environmental Matters |
84 | ||||
SECTION 7.9 |
Employee Benefit Matters |
85 | ||||
SECTION 7.10 |
Margin Stock |
86 | ||||
SECTION 7.11 |
Government Regulation |
86 | ||||
SECTION 7.12 |
[Reserved] |
86 | ||||
SECTION 7.13 |
Employee Relations |
86 | ||||
SECTION 7.14 |
Burdensome Provisions |
86 | ||||
SECTION 7.15 |
Financial Statements |
86 | ||||
SECTION 7.16 |
No Material Adverse Change |
87 | ||||
SECTION 7.17 |
Solvency |
87 | ||||
SECTION 7.18 |
Title to Properties |
87 | ||||
SECTION 7.19 |
Litigation |
87 | ||||
SECTION 7.20 |
Anti-Corruption Laws; Anti-Money Laundering Laws and Sanctions |
87 | ||||
SECTION 7.21 |
Absence of Defaults |
87 | ||||
SECTION 7.22 |
Disclosure |
88 | ||||
ARTICLE VIII AFFIRMATIVE COVENANTS | 88 | |||||
SECTION 8.1 |
Financial Statements and Budgets |
88 | ||||
SECTION 8.2 |
Certificates; Other Reports |
90 | ||||
SECTION 8.3 |
Notice of Litigation and Other Matters |
91 | ||||
SECTION 8.4 |
Preservation of Corporate Existence and Related Matters |
91 | ||||
SECTION 8.5 |
Maintenance of Property and Licenses |
92 | ||||
SECTION 8.6 |
Insurance |
92 | ||||
SECTION 8.7 |
Accounting Methods and Financial Records |
92 | ||||
SECTION 8.8 |
Payment of Taxes and Other Obligations |
92 | ||||
SECTION 8.9 |
Compliance with Laws and Approvals |
92 | ||||
SECTION 8.10 |
Environmental Laws |
93 | ||||
SECTION 8.11 |
Compliance with ERISA |
93 | ||||
SECTION 8.12 |
[Reserved] |
93 | ||||
SECTION 8.13 |
Visits and Inspections |
93 |
iii
TABLE OF CONTENTS
(continued)
Page | ||||||
SECTION 8.14 |
Additional Subsidiaries; Additional Real Property |
93 | ||||
SECTION 8.15 |
Use of Proceeds |
95 | ||||
SECTION 8.16 |
Compliance with Anti-Corruption Laws, Anti-Money Laundering Laws and Sanctions |
95 | ||||
SECTION 8.17 |
Further Assurances |
95 | ||||
SECTION 8.18 |
Maintenance of Debt Ratings |
95 | ||||
SECTION 8.19 |
Post-Closing Matters |
95 | ||||
ARTICLE IX NEGATIVE COVENANTS | 96 | |||||
SECTION 9.1 |
Indebtedness |
96 | ||||
SECTION 9.2 |
Liens |
98 | ||||
SECTION 9.3 |
Investments |
100 | ||||
SECTION 9.4 |
Fundamental Changes |
101 | ||||
SECTION 9.5 |
Asset Dispositions |
102 | ||||
SECTION 9.6 |
Restricted Payments |
103 | ||||
SECTION 9.7 |
Transactions with Affiliates |
105 | ||||
SECTION 9.8 |
Accounting Changes; Organizational Documents |
105 | ||||
SECTION 9.9 |
Payments and Modifications of Certain Indebtedness |
105 | ||||
SECTION 9.10 |
No Further Negative Pledges; Restrictive Agreements |
106 | ||||
SECTION 9.11 |
Nature of Business |
107 | ||||
SECTION 9.12 |
[Reserved |
107 | ||||
SECTION 9.13 |
Sale Leasebacks |
107 | ||||
SECTION 9.14 |
Financial Covenant |
107 | ||||
ARTICLE X DEFAULT AND REMEDIES | 107 | |||||
SECTION 10.1 |
Events of Default |
107 | ||||
SECTION 10.2 |
Remedies |
109 | ||||
SECTION 10.3 |
Rights and Remedies Cumulative; Non-Waiver; etc. |
110 | ||||
SECTION 10.4 |
Crediting of Payments and Proceeds |
111 | ||||
SECTION 10.5 |
Administrative Agent May File Proofs of Claim |
112 | ||||
SECTION 10.6 |
Credit Bidding |
112 | ||||
ARTICLE XI THE ADMINISTRATIVE AGENT | 113 | |||||
SECTION 11.1 |
Appointment and Authority |
113 | ||||
SECTION 11.2 |
Rights as a Lender |
113 | ||||
SECTION 11.3 |
Exculpatory Provisions |
113 |
iv
TABLE OF CONTENTS
(continued)
Page | ||||||
SECTION 11.4 |
Reliance by the Administrative Agent |
114 | ||||
SECTION 11.5 |
Delegation of Duties |
115 | ||||
SECTION 11.6 |
Resignation of Administrative Agent |
115 | ||||
SECTION 11.7 |
Non-Reliance on Administrative Agent and Other Lenders |
116 | ||||
SECTION 11.8 |
No Other Duties, Etc. |
116 | ||||
SECTION 11.9 |
Collateral and Guaranty Matters |
116 | ||||
SECTION 11.10 |
Secured Hedge Agreements and Secured Cash Management Agreements |
117 | ||||
ARTICLE XII MISCELLANEOUS | 118 | |||||
SECTION 12.1 |
Notices |
118 | ||||
SECTION 12.2 |
Amendments, Waivers and Consents |
120 | ||||
SECTION 12.3 |
Expenses; Indemnity |
122 | ||||
SECTION 12.4 |
Right of Setoff |
124 | ||||
SECTION 12.5 |
Governing Law; Jurisdiction, Etc. |
125 | ||||
SECTION 12.6 |
Waiver of Jury Trial |
126 | ||||
SECTION 12.7 |
Reversal of Payments |
126 | ||||
SECTION 12.8 |
Injunctive Relief |
126 | ||||
SECTION 12.9 |
Successors and Assigns; Participations |
126 | ||||
SECTION 12.10 |
Treatment of Certain Information; Confidentiality |
130 | ||||
SECTION 12.11 |
Performance of Duties |
131 | ||||
SECTION 12.12 |
All Powers Coupled with Interest |
131 | ||||
SECTION 12.13 |
Survival |
131 | ||||
SECTION 12.14 |
Titles and Captions |
132 | ||||
SECTION 12.15 |
Severability of Provisions |
132 | ||||
SECTION 12.16 |
Counterparts; Integration; Effectiveness; Electronic Execution |
132 | ||||
SECTION 12.17 |
Term of Agreement |
132 | ||||
SECTION 12.18 |
USA PATRIOT Act |
133 | ||||
SECTION 12.19 |
Independent Effect of Covenants |
133 | ||||
SECTION 12.20 |
No Advisory or Fiduciary Responsibility |
133 | ||||
SECTION 12.21 |
Inconsistencies with Other Documents |
134 | ||||
SECTION 12.22 |
Acknowledgement and Consent to Bail-In of EEA Financial Institutions |
134 | ||||
SECTION 12.23 |
Amendment and Restatement of Existing Credit Agreement; No Novation |
134 |
v
EXHIBITS | ||||
Exhibit A-1 | - | Form of Revolving Credit Note | ||
Exhibit A-2 | - | Form of Swingline Note | ||
Exhibit A-3 | - | Form of Term Loan Note | ||
Exhibit B | - | Form of Notice of Borrowing | ||
Exhibit C | - | Form of Notice of Account Designation | ||
Exhibit D | - | Form of Notice of Prepayment | ||
Exhibit E | - | Form of Notice of Conversion/Continuation | ||
Exhibit F | - | Form of Officers Compliance Certificate | ||
Exhibit G | - | Form of Assignment and Assumption | ||
Exhibit H-1 | - | Form of U.S. Tax Compliance Certificate (Non-Partnership Foreign Lenders) | ||
Exhibit H-2 | - | Form of U.S. Tax Compliance Certificate (Non-Partnership Foreign Participants) | ||
Exhibit H-3 | - | Form of U.S. Tax Compliance Certificate (Foreign Participant Partnerships) | ||
Exhibit H-4 | - | Form of U.S. Tax Compliance Certificate (Foreign Lender Partnerships) | ||
Exhibit I | - | Form of Auction Procedures | ||
SCHEDULES | ||||
Schedule 1.1(a) | - | Existing Letters of Credit | ||
Schedule 1.1(b) | - | Commitments and Commitment Percentages | ||
Schedule 7.1 | - | Jurisdictions of Organization and Qualification | ||
Schedule 7.2 | - | Subsidiaries and Capitalization | ||
Schedule 7.6 | - | Tax Matters | ||
Schedule 7.9 | - | ERISA Plans | ||
Schedule 7.13 | - | Labor and Collective Bargaining Agreements | ||
Schedule 7.18 | - | Real Property | ||
Schedule 7.19 | - | Litigation | ||
Schedule 8.19 | - | Post-Closing Matters | ||
Schedule 9.1 | - | Existing Indebtedness | ||
Schedule 9.2 | - | Existing Liens | ||
Schedule 9.3 | - | Existing Loans, Advances and Investments | ||
Schedule 9.7 | - | Transactions with Affiliates |
vi
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of June 27, 2017, by and among SWITCH, LTD., a Nevada limited liability company, as Borrower, the lenders who are party to this Agreement and the lenders who may become a party to this Agreement pursuant to the terms hereof, as Lenders, and WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Administrative Agent for the Lenders.
STATEMENT OF PURPOSE
The Borrower has requested, and subject to the terms and conditions set forth in this Agreement, the Administrative Agent and the Lenders have agreed to extend, certain credit facilities to the Borrower.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, such parties hereby agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1 Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below:
Acceptable Intercreditor Agreement means an intercreditor agreement, the terms of which are consistent with market terms governing security arrangements for the sharing of liens and/or arrangements relating to the distribution of payments, as applicable, (a) to the extent executed in connection with the incurrence of Indebtedness secured by Collateral intended to rank equal in priority to the Liens on the Collateral securing the Obligations, on a pari passu basis, (b) to the extent executed in connection with the incurrence of Indebtedness secured by Collateral intended to rank junior in priority to the Liens on the Collateral securing the Obligations, on a junior basis, and/or (c) to the extent executed in connection with the incurrence of Indebtedness intended to rank junior in rights to payment to the Obligations, on a junior basis, in each case at the time such intercreditor agreement is proposed to be established, as determined by the Administrative Agent and the Borrower in the exercise of reasonable judgment, among the Administrative Agent and one or more representatives for the holders of any such Indebtedness.
Acquisition means any transaction, or any series of related transactions, consummated on or after the date of this Agreement, by which any Credit Party or any of its Subsidiaries (a) acquires any going business or all or substantially all of the assets of any Person, or division thereof, whether through purchase of assets, merger or otherwise or (b) directly or indirectly acquires (in one transaction or as the most recent transaction in a series of transactions) at least a majority (in number of votes) of the securities of a corporation which have ordinary voting power for the election of directors (other than securities having such power only by reason of the happening of a contingency) or a majority (by percentage or voting power) of the outstanding ownership interests of a partnership or limited liability company.
Administrative Agent means Wells Fargo, in its capacity as Administrative Agent hereunder, and any successor thereto appointed pursuant to Section 11.6.
Administrative Agents Office means the office of the Administrative Agent specified in or determined in accordance with the provisions of Section 12.1(c).
Administrative Questionnaire means an administrative questionnaire in a form supplied by the Administrative Agent.
Affiliate means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified.
Agreement means this Amended and Restated Credit Agreement, as amended, restated, supplemented or otherwise modified from time to time.
All-In Yield means, as to any Indebtedness, the yield thereof, whether in the form of interest rate margins, original issue discount (OID), upfront fees and any LIBOR Rate floor (to the extent the operation of such floor would increase the yield on drawn amounts on the proposed date of incurrence thereof), or otherwise, in each case as reasonably determined by the Administrative Agent in consultation with the Borrower; provided that OID and upfront fees shall be equated to interest rate assuming a four-year life to maturity (or, if less, the stated Weighted Average Life to Maturity at the time of its incurrence of the applicable Indebtedness); and provided, further, that All-In Yield shall not include arrangement fees, commitment fees, structuring fees, underwriting fees, amendment fees or similar fees paid or payable to the applicable arrangers (or their affiliates) for such Indebtedness or any other fees not payable generally to the lenders providing such Indebtedness.
Anti-Corruption Laws means all laws, rules, and regulations of any jurisdiction applicable to the Borrower or its Subsidiaries from time to time concerning or relating to bribery or corruption, including, without limitation, the United States Foreign Corrupt Practices Act of 1977, as amended, and the rules and regulations thereunder.
Anti-Money Laundering Laws means any and all laws, statutes, regulations or obligatory government orders, decrees, ordinances or rules applicable to the Borrower and its Subsidiaries related to terrorism financing or money laundering, including any applicable provision of the PATRIOT Act and The Currency and Foreign Transactions Reporting Act (also known as the Bank Secrecy Act, 31 U.S.C. §§ 5311-5330 and 12 U.S.C. §§ 1818(s), 1820(b) and 1951-1959).
Applicable Law means all applicable provisions of constitutions, laws, statutes, ordinances, rules, treaties, regulations, permits, licenses, approvals, interpretations and orders of Governmental Authorities and all orders and decrees of all courts and arbitrators.
Applicable Margin means:
(a) with respect to the Term Loan Facility, the corresponding percentages per annum as set forth below based on the Consolidated Total Leverage Ratio:
Pricing |
Consolidated Total Leverage Ratio |
LIBOR + | Base Rate + | |||||||
I | Less than 4.00 to 1.00 |
2.50 | % | 1.50 | % | |||||
II | Greater than or equal to 4.00 to 1.00 |
2.75 | % | 1.75 | % |
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(b) with respect to the Revolving Credit Facility, the corresponding percentages per annum as set forth below based on the Consolidated Total Leverage Ratio:
Pricing |
Consolidated Total Leverage Ratio |
LIBOR + | Base Rate + | Commitment Fee |
||||||||||
I | Less than or equal to 1.50 to 1.00 |
1.50 | % | 0.50 | % | 0.25 | % | |||||||
II | Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 |
1.75 | % | 0.75 | % | 0.30 | % | |||||||
III | Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 |
2.00 | % | 1.00 | % | 0.35 | % | |||||||
IV | Greater than 3.00 to 1.00, but less than or equal to 4.00 to 1.00 |
2.25 | % | 1.25 | % | 0.40 | % | |||||||
V | Greater than 4.00 to 1.00 |
2.50 | % | 1.50 | % | 0.45 | % |
The Applicable Margin shall be determined and adjusted quarterly on the date five (5) Business Days after the day on which the Borrower provides an Officers Compliance Certificate pursuant to Section 8.2(a) for the most recently ended fiscal quarter of the Borrower (each such date, a Calculation Date); provided that (a) the Applicable Margin shall (x) with respect to the Revolving Credit Facility, be based on Pricing Level IV and (y) with respect to the Term Loan Facility, be based on Pricing Level II, in each case, until the first Calculation Date occurring after the Closing Date and, thereafter, in each case, the Pricing Level shall be determined by reference to the Consolidated Total Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Borrower preceding the applicable Calculation Date, and (b) if the Borrower fails to provide an Officers Compliance Certificate when due as required by Section 8.2(a) (taking into account any applicable cure periods) for the most recently ended fiscal quarter of the Borrower preceding the applicable Calculation Date, the Applicable Margin from the date on which such Officers Compliance Certificate was required to have been delivered (taking into account any applicable cure periods) shall (x) with respect to the Revolving Credit Facility, be based on Pricing Level V and (y) with respect to the Term Loan Facility, be based on Pricing Level II, in each case, until such time as such Officers Compliance Certificate is delivered, at which time the Pricing Level shall be determined by reference to the Consolidated Total Leverage Ratio as of the last day of the most recently ended fiscal quarter of the Borrower preceding such Calculation Date. The applicable Pricing Level shall be effective from one Calculation Date until the next Calculation Date. Any adjustment in the Pricing Level shall be applicable to all Extensions of Credit then existing or subsequently made or issued.
Notwithstanding the foregoing, in the event that any financial statement or Officers Compliance Certificate delivered pursuant to Section 8.1 or 8.2(a) is shown to be inaccurate (regardless of whether (i) this Agreement is in effect, (ii) any Commitments are in effect, or (iii) any Extension of Credit is outstanding when such inaccuracy is discovered or such financial statement or Officers Compliance Certificate was delivered), and such inaccuracy, if corrected, would have led to the application of a higher Applicable Margin for any period (an Applicable Period) than the Applicable Margin applied for such Applicable Period, then (A) the Borrower shall promptly deliver to the Administrative Agent a corrected Officers Compliance Certificate for such Applicable Period, (B) the Applicable Margin for such Applicable Period shall be determined as if the Consolidated Total Leverage Ratio in the corrected Officers Compliance Certificate were applicable for such Applicable Period, and (C) the Borrower shall promptly and retroactively be obligated to pay to the Administrative Agent the accrued additional interest and fees owing as a result of such increased Applicable Margin for such Applicable Period, which payment shall be promptly applied by the Administrative Agent in accordance with Section 5.4. Nothing in this paragraph shall limit the rights of the Administrative Agent and Lenders with respect to Sections 5.1(b) and 10.2 nor any of their other rights under this Agreement or any other Loan Document. The Borrowers obligations under this paragraph shall survive the termination of the Commitments and the repayment of all other Obligations hereunder.
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Approved Fund means any Fund that is administered or managed by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an Affiliate of an entity that administers or manages a Lender.
Arrangers means each of Wells Fargo Securities, LLC, BMO Capital Markets Corp., Goldman Sachs Bank USA and JPMorgan Chase Bank, N.A., in their capacities as joint lead arrangers and joint bookrunners.
Asset Disposition means the sale, transfer, license, lease or other disposition of any Property (including any disposition of Equity Interests) by any Credit Party or any Subsidiary thereof (or the granting of any option or other right to do any of the foregoing), and any issuance of Equity Interests by any Subsidiary of the Borrower to any Person that is not a Credit Party or any Subsidiary thereof.
Assignment and Assumption means an assignment and assumption entered into by a Lender and an Eligible Assignee (with the consent of any party whose consent is required by Section 12.9), and accepted by the Administrative Agent, in substantially the form attached as Exhibit G or any other form approved by the Administrative Agent.
Attributable Indebtedness means, on any date of determination, (a) in respect of any Capital Lease Obligation of any Person, the capitalized amount thereof that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP, and (b) in respect of any Synthetic Lease, the capitalized amount or principal amount of the remaining lease payments under the relevant lease that would appear on a balance sheet of such Person prepared as of such date in accordance with GAAP if such lease were accounted for as a Capital Lease Obligation.
Auction has the meaning assigned thereto in Section 4.5(a).
Auction Manager has the meaning assigned thereto in Section 4.5(a).
Auction Notice has the meaning assigned thereto in Exhibit I.
Auction Procedures means the procedures set forth in Exhibit I.
Available Amount means, on any date of determination, an amount equal to, without duplication:
(a) the sum of, without duplication:
(i) $50,000,000; plus
(ii) an amount, not less than zero in the aggregate, determined on a cumulative basis equal to the aggregate cumulative sum of (x) Excess Cash Flow for each Excess Cash Flow Period ending after the Closing Date times (y) 100% minus the ECF Percentage for each such Excess Cash Flow Period; plus
(iii) the Net Cash Proceeds received by the Borrower or any Subsidiary of any issuance of Qualified Equity Interests of the Borrower plus (x) cash contributions and (y) the fair market value, as reasonably determined by the Borrower, of Cash Equivalents, marketable securities or other property, in each case, received by the Borrower or any Subsidiary as a capital
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contribution as common Equity Interests, in each case, during the period from the Closing Date through and including such date, other than (A) the proceeds from an IPO and (B) the proceeds of capital contributions or issuances of Qualified Equity Interests to the extent specifically and contemporaneously utilized in connection with other transactions permitted pursuant to this Agreement; plus
(iv) the net cash proceeds received by the Borrower or any Subsidiary during the period from the Closing Date through and including such date in connection with (A) cash returns, cash profits, cash distributions and similar cash amounts, including cash principal repayments of loans, in each case received in respect of any Investment originally made using the Available Amount after the Closing Date and (B) sales of Investments that were originally made using the Available Amount (in each case, in an amount not to exceed the original amount of such Investment); plus
(v) the aggregate amount of Retained Declined Proceeds; minus
(b) the sum of, without duplication, all usage of the Available Amount pursuant to Sections 9.3(m), 9.6(f) and 9.9(b)(iv) on or prior to the date of determination.
Bail-In Action means the exercise of any Write-Down and Conversion Powers by the applicable EEA Resolution Authority in respect of any liability of an EEA Financial Institution.
Bail-In Legislation means, with respect to any EEA Member Country implementing Article 55 of Directive 2014/59/EU of the European Parliament and of the Council of the European Union, the implementing law for such EEA Member Country from time to time which is described in the EU Bail-In Legislation Schedule.
Base Rate means, at any time, the highest of (a) the Prime Rate, (b) the Federal Funds Rate plus 0.50% and (c) LIBOR for an Interest Period of one month plus 1%; each change in the Base Rate shall take effect simultaneously with the corresponding change or changes in the Prime Rate or, the Federal Funds Rate or LIBOR (provided that clause (c) shall not be applicable during any period in which LIBOR is unavailable or unascertainable).
Base Rate Loan means any Loan bearing interest at a rate based upon the Base Rate as provided in Section 5.1(a).
Borrower means Switch, Ltd., a Nevada limited liability company.
Borrower Materials has the meaning assigned thereto in Section 8.2.
Business Day means (a) for all purposes other than as set forth in clause (b) below, any day other than a Saturday, Sunday or legal holiday on which banks in Charlotte, North Carolina, Las Vegas, Nevada and New York, New York, are open for the conduct of their commercial banking business and (b) with respect to all notices and determinations in connection with, and payments of principal and interest on, any LIBOR Rate Loan, or any Base Rate Loan as to which the interest rate is determined by reference to LIBOR, any day that is a Business Day described in clause (a) and that is also a London Banking Day.
Calculation Date has the meaning assigned thereto in the definition of Applicable Margin.
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Capital Expenditures means, with respect to the Borrower and its Subsidiaries on a Consolidated basis, for any period, (i) the additions to property, plant and equipment and other capital expenditures that are (or would be) set forth in a consolidated statement of cash flows of such Person for such period prepared in accordance with GAAP and (ii) Capital Lease Obligations during such period, but excluding (a) expenditures for the restoration, substitution, repair or replacement of any fixed or capital asset which was destroyed or damaged, in whole or in part, to the extent financed (x) by the proceeds of an insurance policy maintained by such Person, or (y) with awards of compensation arising from the taking by eminent domain or condemnation of the assets being replaced, (b) expenditures that constitute Permitted Acquisitions, (c) interest required to be capitalized during such period determined in accordance with GAAP, (d) expenditures that are accounted for as Capital Expenditures of the Borrower or its Subsidiaries and that actually are paid for by a third party and for which the Borrower or any of its Subsidiaries has not provided or is required to provide or incur, directly or indirectly, any consideration or obligation to such third party or any other Person, and (e) the purchase price of equipment that is purchased substantially contemporaneously with the trade in of existing equipment to the extent that the gross amount of such purchase price is reduced by the credit granted by the seller of such equipment for the equipment being traded in at such time.
Capital Lease Obligations of any Person means, 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 the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP.
Cash Collateralize means, to deposit in a Controlled Account or to pledge and deposit with, or deliver to the Administrative Agent, or directly to the applicable Issuing Lender (with notice thereof to the Administrative Agent), for the benefit of one or more of the Issuing Lenders, the Swingline Lender or the Lenders, as collateral for L/C Obligations or obligations of the Lenders to fund participations in respect of L/C Obligations or Swingline Loans, cash or deposit account balances or, if the Administrative Agent and the applicable Issuing Lender and the Swingline Lender shall agree, in their sole discretion, other credit support, in each case pursuant to documentation in form and substance reasonably satisfactory to the Administrative Agent, such Issuing Lender and the Swingline Lender, as applicable. Cash Collateral shall have a meaning correlative to the foregoing and shall include the proceeds of such cash collateral and other credit support.
Cash Equivalents means, collectively, (a) marketable direct obligations issued or unconditionally guaranteed by the United States or any agency thereof maturing within one (1) year from the date of acquisition thereof, (b) commercial paper maturing no more than one hundred twenty (120) days from the date of creation thereof and currently having the highest rating obtainable from either S&P or Moodys, (c) certificates of deposit maturing no more than one hundred twenty (120) days from the date of creation thereof issued by commercial banks incorporated under the laws of the United States, each having combined capital, surplus and undivided profits of not less than $500,000,000 and having a rating of A or better by a nationally recognized rating agency; provided that the aggregate amount invested in such certificates of deposit shall not at any time exceed $5,000,000 for any one such certificate of deposit and $10,000,000 for any one such bank, (d) time deposits maturing no more than thirty (30) days from the date of creation thereof with commercial banks or savings banks or savings and loan associations each having membership either in the FDIC or the deposits of which are insured by the FDIC and in amounts not exceeding the maximum amounts of insurance thereunder, (e) solely in the case of a Foreign Subsidiary, instruments equivalent to those referred to in clauses (a) through (d) of this definition denominated in any foreign currency that is the local currency of such Foreign Subsidiary comparable in tenor and in credit quality to those referred to above and customarily used by corporations for cash management purposes in any jurisdiction outside the United States to the extent reasonably
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required in connection with any business conducted by such Foreign Subsidiary organized in such jurisdiction and (f) Investments, classified in accordance with GAAP as current assets of the Borrower or any Subsidiary, in money market investment programs which are registered under the Investment Company Act of 1940 or which are administered by financial institutions having capital of at least $250,000,000, and, in either case, the portfolios of which are limited such that substantially all of such investments are of the character, quality and maturity described in clauses (a) through (d) of this definition.
Cash Management Agreement means any agreement to provide cash management services, including treasury, depository, overdraft, credit or debit card (including non-card electronic payables), electronic funds transfer, automated clearing house and other cash management arrangements.
Cash Management Bank means any Person that, (a) at the time it enters into a Cash Management Agreement with a Credit Party, is a Lender, an Affiliate of a Lender, the Administrative Agent or an Affiliate of the Administrative Agent, or (b) at the time it (or its Affiliate) becomes a Lender (including on the Closing Date), is a party to a Cash Management Agreement with a Credit Party, in each case in its capacity as a party to such Cash Management Agreement.
CFC Holding Company means, as of any time of determination, a Domestic Subsidiary that at such time has no material assets other than the Equity Interests in one or more First-Tier Foreign Subsidiaries. For the avoidance of doubt, the Borrower shall not be treated as a CFC Holding Company.
Change in Control means an event or series of events by which:
(a) prior to an IPO, (i) the Permitted Investors shall fail to collectively own the Equity Interests of the Borrower representing more than fifty percent (50%) of (A) the economic interest of the Borrower and (B) the voting power of the Borrower entitled to vote in the election of members of the board of directors (or equivalent governing body) of the Borrower or (ii) the Roy Family shall fail to own the Equity Interests of the Borrower representing more than five percent (5%) of (A) the economic interest of the Borrower and (B) the voting power of the Borrower entitled to vote in the election of members of the board of directors (or equivalent governing body) of the Borrower;
(b) after an IPO, (i) any person or group (as such terms are used in Sections 13(d) and 14(d) of the Exchange Act, but excluding any employee benefit plan of such person or its Subsidiaries, and any person or entity acting in its capacity as trustee, agent or other fiduciary or administrator of any such plan) other than the Permitted Investors becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or indirectly, of more than thirty-three percent (33%) of all of the outstanding Equity Interests of the Parent Entity entitled to vote in the election of members of the board of directors (or equivalent governing body) of the Parent Entity, (ii) a majority of the members of the board of directors (or other equivalent governing body) of the Parent Entity shall not constitute Continuing Directors or (iii) the Parent Entity shall cease to be the sole managing member (or equivalent governing position) of the Borrower; or
(c) there shall have occurred under any indenture or other instrument evidencing any Indebtedness or Equity Interests in excess of $25,000,000 any change in control or similar provision (as set forth in the indenture, agreement or other evidence of such Indebtedness) obligating the Borrower or any of its Subsidiaries to repurchase, redeem or repay all or any part of the Indebtedness or Equity Interests provided for therein.
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Change in Law means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority or (c) the making or issuance of any request, rule, guideline or directive (whether or not having the force of law) by any Governmental Authority; provided that notwithstanding anything herein to the contrary, (i) the Dodd-Frank Wall Street Reform and Consumer Protection Act and all requests, rules, guidelines or directives thereunder or issued in connection therewith and (ii) all requests, rules, guidelines or directives promulgated by the Bank for International Settlements, the Basel Committee on Banking Supervision (or any successor or similar authority) or the United States or foreign regulatory authorities, in each case pursuant to Basel III, shall in each case be deemed to be a Change in Law, regardless of the date enacted, adopted or issued.
Class means (a) when used in reference to any Loan, whether such Loan is a Revolving Credit Loan, Swingline Loan, Term Loan, Extended Term Loan, Extended Revolving Credit Loan, Refinancing Revolving Loan of a given Refinancing Series or Refinancing Term Loan of a given Refinancing Series, (b) when used in reference to any Commitment, whether such Commitment is a Revolving Credit Commitment, Term Loan Commitment, commitment in respect of Incremental Term Loans, Extended Revolving Credit Commitment, Refinancing Revolving Credit Commitment of a given Refinancing Series and (c) when used in reference to Lenders, whether such Lenders have a Loan or Commitment with respect to a particular Class of Loans or Commitments.
Closing Date means the date of this Agreement.
Closing Date Dividend means the payment by the Borrower of a one-time dividend in an aggregate amount not to exceed $175,000,000 to be made within 30 days of the Closing Date.
Code means the Internal Revenue Code of 1986, and the rules and regulations promulgated thereunder.
Collateral means the collateral security for the Secured Obligations pledged or granted pursuant to the Security Documents.
Collateral Agreement means the amended and restated collateral agreement dated as of the Closing Date executed by the Credit Parties in favor of the Administrative Agent, for the ratable benefit of the Secured Parties, which shall be in form and substance reasonably acceptable to the Administrative Agent, as reaffirmed, amended, restated, supplemented or otherwise modified from time to time.
Commitment Fee has the meaning assigned thereto in Section 5.3(a).
Commitment Percentage means, as to any Lender, such Lenders Revolving Credit Commitment Percentage or Term Loan Percentage, as applicable.
Commitments means, collectively, as to all Lenders, the Revolving Credit Commitments and the Term Loan Commitments of such Lenders.
Commodity Exchange Act means the Commodity Exchange Act (7 U.S.C. § 1 et seq.).
Connection Income Taxes means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.
Consolidated means, when used with reference to financial statements or financial statement items of any Person, such statements or items on a consolidated basis in accordance with applicable principles of consolidation under GAAP.
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Consolidated EBITDA means, for any period, the sum of the following determined on a Consolidated basis, without duplication, for the Borrower and its Subsidiaries in accordance with GAAP: (a) Consolidated Net Income for such period plus (b) the sum of the following, without duplication, to the extent deducted in determining Consolidated Net Income for such period: (i) income and franchise taxes, (ii) Consolidated Interest Expense and (iii) amortization, depreciation and other non-cash charges (except to the extent that such non-cash charges are reserved for cash charges to be taken in the future), including non-cash compensation expenses for equity issuances, (iv) extraordinary losses (excluding extraordinary losses from discontinued operations), (v) one-time charges by the Public Utilities Commission of Nevada pursuant to Borrowers and its Subsidiaries application to purchase energy, generation, transmission, distribution, capacity or ancillary services from electric resources providers pursuant to Nevada Revised Statutes chapter 704B in an aggregate amount not to exceed $30,000,000; provided that no more than $10,000,000 of such charges may be taken after Fiscal Year 2017, (vi) net after-tax losses on Asset Dispositions other than in the ordinary course of business and (vii) Transaction Costs less (c) the sum of the following, without duplication, to the extent included in determining Consolidated Net Income for such period: (i) interest income, (ii) any extraordinary gains, (iii) net after-tax gains on Asset Dispositions other than in the ordinary course of business and (iv) non-cash gains or non-cash items increasing Consolidated Net Income.
For purposes of calculating Consolidated EBITDA hereunder for any period during which one or more Specified Transactions occurs, such Specified Transaction (and all other Specified Transactions that have been consummated during the applicable period) shall be deemed to have occurred as of the first day of the applicable period of measurement in such test or covenant such that:
(a) all income statement items (whether positive or negative) attributable to the Property or Person disposed of in a Specified Disposition shall be excluded and all income statement items (whether positive or negative) attributable to the Property or Person acquired in a Permitted Acquisition shall be included (provided that such income statement items to be included are reflected in financial statements or other financial data reasonably acceptable to the Administrative Agent and based upon reasonable assumptions and calculations which are expected to have a continuous impact); and
(b) non-recurring costs, extraordinary expenses and other pro forma adjustments (including anticipated cost savings) attributable to such Specified Transaction may be included to the extent that such costs, expenses or adjustments (i) are reasonably expected to be realized within twelve (12) months of such Specified Transaction as set forth in reasonable detail on a certificate of a Responsible Officer of the Borrower delivered to the Administrative Agent, (ii) are calculated on a basis consistent with GAAP and are, in each case, reasonably identifiable, factually supportable, and expected to have a continuing impact on the operations of the Borrower and its Subsidiaries, and (iii) are either (x) permitted as an adjustment pursuant to Article 11 of Regulation S-X under the Securities Act of 1933 or (y) represent less than five percent (5%) of Consolidated EBITDA (determined without giving effect to this clause (b) in the aggregate) for the most recently ended four (4) fiscal quarter period; provided that the foregoing costs, expenses, adjustments, cost savings and other synergies shall be without duplication of any costs, expenses or adjustments that are already included in the calculation of Consolidated EBITDA or clause (a) above.
Consolidated Interest Expense means, for any period, the sum of the following determined on a Consolidated basis, without duplication, for the Borrower and its Subsidiaries in accordance with GAAP, interest expense (including, without limitation, interest expense attributable to Capital Lease Obligations and all net payment obligations pursuant to Hedge Agreements) for such period.
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Consolidated Net Income means, for any period, the net income (or loss) of the Borrower and its Subsidiaries for such period, determined on a Consolidated basis, without duplication, in accordance with GAAP; provided, that in calculating Consolidated Net Income of the Borrower and its Subsidiaries for any period, there shall be excluded (without duplication) (a) the net income (or loss) of any Person (other than a Subsidiary which shall be subject to clause (c) below), in which the Borrower or any of its Subsidiaries has a joint interest with a third party, except to the extent such net income is actually paid in cash to the Borrower or any of its Subsidiaries by dividend or other distribution during such period, (b) the net income (or loss) of any Person accrued prior to the date it becomes a Subsidiary of the Borrower or any of its Subsidiaries or is merged into or consolidated with the Borrower or any of its Subsidiaries or that Persons assets are acquired by the Borrower or any of its Subsidiaries except to the extent included pursuant to the foregoing clause (a), and (c) the net income (if positive), of any Subsidiary to the extent that the declaration or payment of dividends or similar distributions by such Subsidiary to the Borrower or any of its Subsidiaries of such net income (i) is not at the time permitted by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to such Subsidiary or (ii) would be subject to any taxes payable on such dividends or distributions, but in each case only to the extent of such prohibition or taxes.
Consolidated Total Indebtedness means, as of any date of determination with respect to the Borrower and its Subsidiaries on a Consolidated basis without duplication, the sum of all Indebtedness (other than Indebtedness pursuant to clause (h) of such definition, and with respect to any Indebtedness of the type described in clause (f) of such definition, only to the extent of any drawing under a letter of credit that has not been reimbursed within one Business Day) of the Borrower and its Subsidiaries.
Consolidated Total Leverage Ratio means, as of any date of determination, the ratio of (a) the sum of Consolidated Total Indebtedness on such date to (b) Consolidated EBITDA for the fiscal quarter ending on or immediately prior to such date multiplied by four (4).
Continuing Directors means the directors (or equivalent governing body) of the Parent Entity on the effective date of any IPO and each other director of the Parent Entity, if, in each case, such other directors nomination for election to the board of directors (or equivalent governing body) of the Parent Entity is recommended by more than fifty percent (50%) of the then Continuing Directors.
Control means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. Controlling and Controlled have meanings correlative thereto.
Controlled Account means each deposit account and securities account that is subject to an account control agreement in form and substance satisfactory to the Administrative Agent and each of the applicable Issuing Lenders that is entitled to Cash Collateral hereunder at the time such control agreement is executed.
Credit Facility means, collectively, the Revolving Credit Facility, the Term Loan Facility, the Swingline Facility and the L/C Facility.
Credit Parties means, collectively, the Borrower and the Subsidiary Guarantors.
Current Assets means, with respect to the Borrower and its Subsidiaries on a Consolidated basis at any date of determination, all assets (other than cash, Cash Equivalents and current or deferred Taxes based on income or profits (including accrued amounts to pay Permitted Tax Distributions)) that would, in accordance with GAAP, be classified on a consolidated balance sheet of the Borrower and its Subsidiaries as current assets at such date of determination.
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Current Liabilities means, with respect to the Borrower and its Subsidiaries on a Consolidated basis at any date of determination, all liabilities that would, in accordance with GAAP, be classified on a consolidated balance sheet of the Borrower and its Subsidiaries as current liabilities at such date of determination, excluding, without duplication, (a) the current portion of any long-term Indebtedness, (b) outstanding Revolving Credit Loans, L/C Obligations and Swingline Loans, (c) accruals for current or deferred Taxes based on income or profits, (d) the current portion of accrued Consolidated Interest Expense and (e) accruals, if any, of transaction costs resulting from the Transactions.
Debt Issuance means the issuance of any Indebtedness for borrowed money by any Credit Party or any of its Subsidiaries.
Debt Ratings means the collective reference to (a) the public corporate family rating of the Borrower as determined by Moodys from time to time, (b) the public corporate credit rating of the Borrower as determined by S&P from time to time and (c) the public ratings with respect to the Credit Facility as determined by both Moodys and S&P from time to time, and Debt Rating means, as applicable, any of the foregoing.
Debtor Relief Laws means the Bankruptcy Code of the United States of America, and all other liquidation, conservatorship, bankruptcy, assignment for the benefit of creditors, moratorium, rearrangement, receivership, insolvency, reorganization, or similar debtor relief laws of the United States or other applicable jurisdictions from time to time in effect.
Declined Proceeds has the meaning assigned thereto in Section 4.4(b)(vi).
Default means any of the events specified in Section 10.1 which with the passage of time, the giving of notice or any other condition, would constitute an Event of Default.
Defaulting Lender means, subject to Section 5.15(b), any Lender that (a) has failed to (i) fund all or any portion of the Revolving Credit Loans, the Term Loan, participations in L/C Obligations or participations in Swingline Loans required to be funded by it hereunder within two Business Days of the date such Loans or participations were required to be funded hereunder unless such Lender notifies the Administrative Agent and the Borrower in writing that such failure is the result of such Lenders determination that one or more conditions precedent to funding (each of which conditions precedent, together with any applicable default, shall be specifically identified in such writing) has not been satisfied, or (ii) pay to the Administrative Agent, any Issuing Lender, the Swingline Lender or any other Lender any other amount required to be paid by it hereunder (including in respect of its participation in Letters of Credit or Swingline Loans) within two Business Days of the date when due, (b) has notified the Borrower, the Administrative Agent, any Issuing Lender or the Swingline Lender in writing that it does not intend to comply with its funding obligations hereunder, or has made a public statement to that effect (unless such writing or public statement relates to such Lenders obligation to fund a Loan hereunder and states that such position is based on such Lenders determination that a condition precedent to funding (which condition precedent, together with any applicable default, shall be specifically identified in such writing or public statement) cannot be satisfied), (c) has failed, within three Business Days after written request by the Administrative Agent or the Borrower, to confirm in writing to the Administrative Agent and the Borrower that it will comply with its prospective funding obligations hereunder (provided that such Lender shall cease to be a Defaulting Lender pursuant to this clause (c) upon receipt of such written confirmation by the Administrative Agent and the Borrower), or (d) has, or has a direct or indirect parent company that has, in each case after the Closing Date (i) become the subject of a proceeding under any Debtor Relief Law, (ii) had appointed for it a receiver, custodian, conservator, trustee, administrator, assignee for the benefit of creditors or similar Person charged with reorganization or liquidation of its business or assets, including the FDIC or any other state or federal regulatory authority acting in such a
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capacity or (iii) become the subject of a Bail-In Action; provided that a Lender shall not be a Defaulting Lender solely by virtue of the ownership or acquisition of any equity interest in that Lender or any direct or indirect parent company thereof by a Governmental Authority so long as such ownership interest does not result in or provide such Lender with immunity from the jurisdiction of courts within the United States or from the enforcement of judgments or writs of attachment on its assets or permit such Lender (or such Governmental Authority) to reject, repudiate, disavow or disaffirm any contracts or agreements made with such Lender. Any determination by the Administrative Agent that a Lender is a Defaulting Lender under any one or more of clauses (a) through (d) above shall be conclusive and binding absent manifest error, and such Lender shall be deemed to be a Defaulting Lender (subject to Section 5.15(b)) upon delivery of written notice of such determination to the Borrower, each Issuing Lender, the Swingline Lender and each Lender.
Disqualified Equity Interests means any Equity Interests that, by their terms (or by the terms of any security or other Equity Interest into which they are convertible or for which they are exchangeable) or upon the happening of any event or condition, (a) mature or are mandatorily redeemable (other than solely for Qualified Equity Interests), pursuant to a sinking fund obligation or otherwise (except as a result of a change of control or asset sale so long as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior repayment in full of the Loans and all other Obligations that are accrued and payable and the termination of the Commitments), (b) are redeemable at the option of the holder thereof (other than solely for Qualified Equity Interests) (except as a result of a change of control or asset sale so long as any rights of the holders thereof upon the occurrence of a change of control or asset sale event shall be subject to the prior repayment in full of the Loans and all other Obligations that are accrued and payable and the termination of the Commitments), in whole or in part, (c) provide for the scheduled payment of dividends in cash or (d) are or become convertible into or exchangeable for Indebtedness or any other Equity Interests that would constitute Disqualified Equity Interests, in each case, prior to the date that is 91 days after the Term Loan Maturity Date; provided that if such Equity Interests are issued to such officers or employees, such Equity Interests shall not constitute Disqualified Equity Interests solely because they may be required to be repurchased by the Borrower or its Subsidiaries in order to satisfy applicable statutory or regulatory obligations or upon a change in control or termination of employment.
Dollars or $ means, unless otherwise qualified, dollars in lawful currency of the United States.
Domestic Subsidiary means any Subsidiary organized under the laws of any political subdivision of the United States.
ECF Percentage means, with respect to any Fiscal Year, (a) 50%, if the Consolidated Total Leverage Ratio at the end of such Fiscal Year is greater than or equal to 3.50 to 1.00, (b) 25%, if the Consolidated Total Leverage Ratio at the end of such Fiscal Year is greater than or equal to 3.00 to 1.00 but less than 3.50 to 1.00 and (c) 0% , if the Consolidated Total Leverage Ratio at the end of such Fiscal Year is less than 3.00 to 1.00.
EEA Financial Institution means (a) any credit institution or investment firm established in any EEA Member Country which is subject to the supervision of an EEA Resolution Authority, (b) any entity established in an EEA Member Country which is a parent of an institution described in clause (a) of this definition, or (c) any financial institution established in an EEA Member Country which is a subsidiary of an institution described in clauses (a) or (b) of this definition and is subject to consolidated supervision with its parent.
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EEA Member Country means any of the member states of the European Union, Iceland, Liechtenstein, and Norway.
EEA Resolution Authority means any public administrative authority or any Person entrusted with public administrative authority of any EEA Member Country (including any delegee) having responsibility for the resolution of any EEA Financial Institution.
Eligible Assignee means any Person that meets the requirements to be an assignee under Section 12.9(b)(iii), (v) and (vi) (subject to such consents, if any, as may be required under Section 12.9(b)(iii)).
Employee Benefit Plan means (a) any employee benefit plan within the meaning of Section 3(3) of ERISA that is maintained for employees of any Credit Party or any ERISA Affiliate or (b) any Pension Plan or Multiemployer Plan that has at any time within the preceding seven (7) years been maintained, funded or administered for the employees of any Credit Party or any current or former ERISA Affiliate.
Engagement Letter means that certain Engagement Letter dated as of May 25, 2017, among the Arrangers and the Borrower, as amended, restated, supplemented or otherwise modified from time to time.
Environmental Claims means any and all administrative, regulatory or judicial actions, suits, demands, demand letters, claims, liens, accusations, allegations, notices of noncompliance or violation, investigations (other than internal reports prepared by any Person in the ordinary course of business and not in response to any third party action or request of any kind) or proceedings relating in any way to any actual or alleged violation of or liability under any Environmental Law or relating to any violation of any permit issued, or any approval given, under any such Environmental Law, including, without limitation, any and all claims by Governmental Authorities for enforcement, cleanup, removal, response, remedial or other actions or damages, contribution, indemnification, cost recovery, compensation or injunctive relief resulting from Hazardous Materials or arising from alleged injury or threat of injury to public health or the environment under any Environmental Laws.
Environmental Laws means any and all federal, foreign, state, provincial and local laws, statutes, ordinances, codes, rules, standards and regulations, permits, licenses, approvals, and orders of courts or Governmental Authorities, relating to the protection of public health or the environment, including, but not limited to, requirements pertaining to the manufacture, processing, distribution, use, treatment, storage, disposal, transportation, handling, reporting, licensing, permitting, investigation or remediation of Hazardous Materials.
Equity Interests means (a) in the case of a corporation, capital stock, (b) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of capital stock, (c) in the case of a partnership, partnership interests (whether general or limited), (d) in the case of a limited liability company, membership interests, (e) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person and (f) any and all warrants, rights or options to purchase any of the foregoing.
ERISA means the Employee Retirement Income Security Act of 1974, and the rules and regulations thereunder.
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ERISA Affiliate means any Person who together with any Credit Party or any of its Subsidiaries is treated as a single employer within the meaning of Section 414(b), (c), (m) or (o) of the Code or Section 4001(b) of ERISA.
EU Bail-In Legislation Schedule means the EU Bail-In Legislation Schedule published by the Loan Market Association (or any successor person), as in effect from time to time.
Eurodollar Reserve Percentage means, for any day, the percentage which is in effect for such day as prescribed by the Board of Governors of the Federal Reserve System (or any successor) for determining the maximum reserve requirement (including, without limitation, any basic, supplemental or emergency reserves) in respect of eurocurrency liabilities or any similar category of liabilities for a member bank of the Federal Reserve System in New York City.
Event of Default means any of the events specified in Section 10.1; provided that any requirement for passage of time, giving of notice, or any other condition, has been satisfied.
Excess Cash Flow means, for the Borrower and its Subsidiaries on a Consolidated basis, in accordance with GAAP for any Excess Cash Flow Period, the excess (if any) of:
(a) the sum, without duplication, of
(i) Consolidated Net Income for such Excess Cash Flow Period,
(ii) the amount of all non-cash charges or losses to the extent deducted in determining Consolidated Net Income for such Excess Cash Flow Period (excluding any non-cash charges representing an accrual or reserve for a potential cash charge in any future Fiscal Year or amortization of a prepaid cash gain that was paid in a prior Fiscal Year) and
(iii) decreases, if any, in Working Capital for such Excess Cash Flow Period, minus
(b) the sum, without duplication, of
(i) the aggregate amount of cash actually paid by the Borrower and its Subsidiaries during such Excess Cash Flow Period on account of Capital Expenditures, Permitted Acquisitions and other Investments made pursuant to Section 9.3(i), (n) or (o), in each case to the extent that such Capital Expenditures, Permitted Acquisitions or other Investments were financed with Internally Generated Cash and were not made by utilizing the Available Amount,
(ii) the aggregate amount of all scheduled principal payments or repayments of Indebtedness (other than voluntary prepayments of Loans and mandatory prepayments of Loans, except for repayments under Section 4.4(b)(ii) that resulted in an increase in Consolidated Net Income and not in excess of the amount of such increase) made by the Borrower and its Subsidiaries during such Excess Cash Flow Period, but only to the extent that such payments or repayments by their terms cannot be reborrowed or redrawn and do not occur in connection with a refinancing of all or any portion of such Indebtedness, in each case to the extent that such payments or prepayments of Indebtedness were financed with Internally Generated Cash and were not made by utilizing the Available Amount,
(iii) the amount of all non-cash credits or gains to the extent included in determining Consolidated Net Income for such Excess Cash Flow Period,
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(iv) increases, if any, to Working Capital for such Excess Cash Flow Period,
(v) the aggregate amount of non-cash gains on dispositions of Property by the Borrower or its Subsidiaries during such Excess Cash Flow Period, to the extent included in arriving at Consolidated Net Income,
(vi) the amount of Restricted Payments made by the Borrower in cash during such Excess Cash Flow Period pursuant to Section 9.6(c), (d) and (g), in each case to the extent that such Restricted Payments were financed with Internally Generated Cash, and
(vii) any fees and expenses paid in cash during such Excess Cash Flow Period in connection with any Investment, disposition, incurrence or repayment of Indebtedness, issuance of Equity Interests or amendment or modification of any debt instrument (including any amendment or other modification of this Agreement or the other Loan Documents) and including any such transaction undertaken but not completed, in each case to the extent not already deducted from the calculation of Consolidated Net Income.
Excess Cash Flow Period has the meaning assigned thereto in Section 4.4(b)(iv).
Exchange Act means the Securities Exchange Act of 1934.
Excluded Subsidiary means, collectively, (a) any Subsidiary that is not a Wholly Owned Subsidiary, (b) any direct or indirect Foreign Subsidiary, (c) any CFC Holding Company and (d) each Immaterial Subsidiary.
Excluded Swap Obligation means, with respect to any Credit Party, any Swap Obligation if, and to the extent that, all or a portion of the liability of such Credit Party for or the guarantee of such Credit Party of, or the grant by such Credit Party of a security interest to secure, such Swap Obligation (or any liability or guarantee thereof) is or becomes illegal under the Commodity Exchange Act or any rule, regulation or order of the Commodity Futures Trading Commission (or the application or official interpretation of any thereof) by virtue of such Credit Partys failure for any reason to constitute an eligible contract participant as defined in the Commodity Exchange Act and the regulations thereunder at the time the liability for or the guarantee of such Credit Party or the grant of such security interest becomes effective with respect to such Swap Obligation (such determination being made after giving effect to any applicable keepwell, support or other agreement for the benefit of the applicable Credit Party, including under the keepwell provisions of the Subsidiary Guaranty Agreement). If a Swap Obligation arises under a master agreement governing more than one swap, such exclusion shall apply only to the portion of such Swap Obligation that is attributable to swaps for which such guarantee or security interest is or becomes illegal for the reasons identified in the immediately preceding sentence of this definition.
Excluded Taxes means any of the following Taxes imposed on or with respect to a Recipient or required to be withheld or deducted from a payment to a Recipient, (a) Taxes imposed on or measured by net income (however denominated), franchise Taxes, and branch profits Taxes, in each case, (i) imposed as a result of such Recipient being organized under the laws of, or having its principal office or, in the case of any Lender, its applicable Lending Office located in, the jurisdiction imposing such Tax (or any political subdivision thereof) or (ii) that are Other Connection Taxes, (b) in the case of a Lender, United States federal withholding Taxes imposed on amounts payable to or for the account of such Lender with respect to an applicable interest in a Loan or Commitment pursuant to a law in effect on the date on which (i) such Lender acquires such interest in the Loan or Commitment (other than pursuant to an assignment request by the Borrower under Section 5.12(b)) or (ii) such Lender changes its Lending Office, except in
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each case to the extent that, pursuant to Section 5.11, amounts with respect to such Taxes were payable either to such Lenders assignor immediately before such Lender became a party hereto or to such Lender immediately before it changed its Lending Office, (c) Taxes attributable to such Recipients failure to comply with Section 5.11(g) and (d) any United States federal withholding Taxes imposed under FATCA.
Existing Credit Agreement means that certain Credit Agreement dated as of May 5, 2015, by and among the Borrower, the lenders party thereto and Wells Fargo, as administrative agent, as amended, restated, supplemented or otherwise modified from time to time prior to the Closing Date.
Existing Letters of Credit means those letters of credit existing on the Closing Date and identified on Schedule 1.1(a).
Extended Revolving Credit Commitment has the meaning assigned thereto in Section 5.17(a)(ii).
Extended Revolving Credit Loans has the meaning assigned thereto in Section 5.17(a)(ii).
Extended Term Loans has the meaning assigned thereto in Section 5.17(a)(iii).
Extending Revolving Credit Lender has the meaning assigned thereto in Section 5.17(a)(ii).
Extension has the meaning assigned thereto in Section 5.17(a).
Extension Offer has the meaning assigned thereto in Section 5.17(a).
Extensions of Credit means, as to any Lender at any time, (a) an amount equal to the sum of (i) the aggregate principal amount of all Revolving Credit Loans made by such Lender then outstanding, (ii) such Lenders Revolving Credit Commitment Percentage of the L/C Obligations then outstanding, (iii) such Lenders Revolving Credit Commitment Percentage of the Swingline Loans then outstanding and (iv) the aggregate principal amount of the Term Loan made by such Lender then outstanding, or (b) the making of any Loan or participation in any Letter of Credit by such Lender, as the context requires.
FATCA means Sections 1471 through 1474 of the Code, as of the date of this Agreement (or any amended or successor version that is substantively comparable and not materially more onerous to comply with), any current or future regulations or official interpretations thereof, any agreements entered into pursuant to Section 1471(b)(1) of the Code, any intergovernmental agreement entered into in connection with the implementation of such Sections of the Code and any fiscal or regulatory legislation, rules or practices adopted pursuant to such intergovernmental agreement.
FDIC means the Federal Deposit Insurance Corporation.
Federal Funds Rate means, for any day, the rate per annum equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System on such day (or, if such day is not a Business Day, for the immediately preceding Business Day), as published by the Federal Reserve Bank of New York on the Business Day next succeeding such day, provided that if such rate is not so published for any day which is a Business Day, the Federal Funds Rate shall be the average of the quotation for such day on such transactions received by the Administrative Agent from three federal funds brokers of recognized standing selected by the Administrative Agent. Notwithstanding the foregoing, if the Federal Funds Rate shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
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Financial Covenant means, on any date of determination, the applicable Consolidated Total Leverage Ratio covenant level required pursuant to Section 9.14 on such date.
First Tier Foreign Subsidiary means any Foreign Subsidiary that is a controlled foreign corporation within the meaning of Section 957 of the Code and the Equity Interests of which are owned directly by any Credit Party.
Fiscal Year means the fiscal year of Borrower and its Subsidiaries ending on December 31 of each calendar year.
Foreign Lender means a Lender that is not a U.S. Person.
Foreign Subsidiary means any Subsidiary that is not a Domestic Subsidiary.
Fronting Exposure means, at any time there is a Defaulting Lender, (a) with respect to any Issuing Lender, such Defaulting Lenders Revolving Credit Commitment Percentage of the outstanding L/C Obligations with respect to Letters of Credit issued by such Issuing Lender, other than such L/C Obligations as to which such Defaulting Lenders participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof and (b) with respect to the Swingline Lender, such Defaulting Lenders Revolving Credit Commitment Percentage of outstanding Swingline Loans other than Swingline Loans as to which such Defaulting Lenders participation obligation has been reallocated to other Lenders or Cash Collateralized in accordance with the terms hereof.
Fund means any Person (other than a natural Person) that is (or will be) engaged in making, purchasing, holding or otherwise investing in commercial loans, bonds and similar extensions of credit in the ordinary course of its activities.
GAAP means generally accepted accounting principles in the United States set forth in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or such other principles as may be approved by a significant segment of the accounting profession in the United States, that are applicable to the circumstances as of the date of determination, consistently applied.
Governmental Approvals means all authorizations, consents, approvals, permits, licenses and exemptions of, and all registrations and filings with or issued by, any Governmental Authorities.
Governmental Authority means the government of the United States or any other nation, or of any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government (including any supra-national bodies such as the European Union or the European Central Bank).
Guarantee of or by any Person (the guarantor) means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the primary obligor) in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance
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or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor so as to enable the primary obligor to pay such Indebtedness or other obligation, (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation or (e) for the purpose of assuming in any other manner the obligee in respect of such Indebtedness or other obligation of the payment or performance thereof or to protect such obligee against loss in respect thereof (whether in whole or in part).
Hazardous Materials means any substances or materials (a) which are or become defined as hazardous wastes, hazardous substances, pollutants, contaminants or toxic substances under any Environmental Law, (b) which are toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic, mutagenic or otherwise harmful to public health or the environment and are or become regulated by any Governmental Authority, (c) the presence of which require investigation or remediation under any Environmental Law, (d) the discharge or emission or release of which requires a permit or license under any Environmental Law or other Governmental Approval, or (e) which contain, without limitation, asbestos, polychlorinated biphenyls, urea formaldehyde foam insulation, petroleum hydrocarbons, petroleum derived substances or waste, crude oil, nuclear fuel, natural gas or synthetic gas.
Hedge Agreement means (a) any and all rate swap transactions, basis swaps, credit derivative transactions, forward rate transactions, commodity swaps, commodity options, forward commodity contracts, equity or equity index swaps or options, bond or bond price or bond index swaps or options or forward bond or forward bond price or forward bond index transactions, interest rate options, forward foreign exchange transactions, cap transactions, floor transactions, collar transactions, currency swap transactions, cross-currency rate swap transactions, currency options, spot contracts, or any other similar transactions or any combination of any of the foregoing (including any options to enter into any of the foregoing), whether or not any such transaction is governed by or subject to any master agreement, and (b) any and all transactions of any kind, and the related confirmations, which are subject to the terms and conditions of, or governed by, any form of master agreement published by the International Swaps and Derivatives Association, Inc., any International Foreign Exchange Master Agreement, or any other master agreement.
Hedge Bank means any Person that, (a) at the time it enters into a Hedge Agreement with a Credit Party permitted under Article IX, is a Lender, an Affiliate of a Lender, the Administrative Agent or an Affiliate of the Administrative Agent or (b) at the time it (or its Affiliate) becomes a Lender (including on the Closing Date), is a party to a Hedge Agreement with a Credit Party, in each case in its capacity as a party to such Hedge Agreement.
Hedge Termination Value means, in respect of any one or more Hedge Agreements, after taking into account the effect of any legally enforceable netting agreement relating to such Hedge Agreements, (a) for any date on or after the date such Hedge Agreements have been closed out and termination value(s) determined in accordance therewith, such termination value(s), and (b) for any date prior to the date referenced in clause (a), the amount(s) determined as the mark-to-market value(s) for such Hedge Agreements, as determined based upon one or more mid-market or other readily available quotations provided by any recognized dealer in such Hedge Agreements (which may include a Lender or any Affiliate of a Lender).
Immaterial Subsidiary means any Subsidiary that (a) together with its Subsidiaries, (i) has assets (excluding restricted cash and Cash Equivalents) representing no more than five percent (5%) of the Consolidated total assets (excluding restricted cash and Cash Equivalents) of the Borrower and its Subsidiaries or (ii) generates no more than five percent (5%) of the Consolidated revenues of the
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Borrower and its Subsidiaries, in each case, as reflected in the most recent financial statements delivered pursuant to Section 6.1(e)(i) or Sections 8.1(a) or (b), as applicable and (b) has been designated as an Immaterial Subsidiary by the Borrower in the manner provided below; provided that, if at any time, (A) the total assets of the Immaterial Subsidiaries (excluding restricted cash and Cash Equivalents), taken as a whole, as of the last day of the Borrowers most recently ended fiscal quarter shall be greater than ten percent (10%) of the Consolidated total assets (excluding restricted cash and Cash Equivalents) of the Borrower and its Subsidiaries or (B) ten percent (10%) the Consolidated total revenues of the Borrower and its Subsidiaries on such date, then the Borrower shall take such actions as may be necessary, including causing an Immaterial Subsidiary to become a Subsidiary Guarantor and grant security interests pursuant to Section 8.14, to comply with the requirements set forth in the preceding clauses (A) and (B). The Borrower may from time to time designate any Subsidiary (including a newly-created or newly-acquired Subsidiary) as an Immaterial Subsidiary by delivering to the Administrative Agent a certificate of a Responsible Officer making such designation and confirming that (x) such Subsidiary meets the requirements set forth in this definition and (y) immediately after giving effect to such designation, no Event of Default shall have occurred and be continuing. Notwithstanding the foregoing, in no event shall (x) NV NAP 2, LLC, a Nevada limited liability company, Sinap-Tix, LLC, a Nevada limited liability company or Switch Business Solutions, LLC, a Nevada limited liability company or (y) any Subsidiary that is an obligor or guarantor of any Refinancing Debt or Junior Indebtedness, be permitted to be designated as an Immaterial Subsidiary.
Increase Effective Date has the meaning assigned thereto in Section 5.13(c).
Incremental Amendment has the meaning assigned thereto in Section 5.13(d)(iii).
Incremental Increases has the meaning assigned thereto in Section 5.13(a).
Incremental Lender has the meaning assigned thereto in Section 5.13(b).
Incremental Term Loan has the meaning assigned thereto in Section 5.13(a).
Indebtedness means, with respect to any Person at any date and without duplication, the sum of the following:
(a) all liabilities, obligations and indebtedness for borrowed money including, but not limited to, obligations evidenced by bonds, debentures, notes or other similar instruments of any such Person;
(b) all obligations to pay the deferred purchase price of property or services of any such Person (including, without limitation, all payment obligations under non-competition, earn-out or similar agreements (but only once non-contingent and determinable)), except trade payables arising in the ordinary course of business not more than ninety (90) days past due, or that are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided for on the books of such Person;
(c) the Attributable Indebtedness of such Person with respect to such Persons Capital Lease Obligations and Synthetic Leases (regardless of whether accounted for as indebtedness under GAAP);
(d) all obligations of such Person under conditional sale or other title retention agreements relating to property purchased by such Person to the extent of the value of such property (other than customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business);
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(e) all Indebtedness of any other Person secured by a Lien on any asset owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements except trade payables arising in the ordinary course of business and customary reservations or retentions of title under agreements with suppliers entered into in the ordinary course of business), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse (but if not assumed, limited to the lesser of such Indebtedness or the value of the assets subject to such Lien);
(f) all obligations, contingent or otherwise, of any such Person relative to the face amount of letters of credit, whether or not drawn, including, without limitation, any Reimbursement Obligation, and bankers acceptances issued for the account of any such Person;
(g) all obligations of any such Person in respect of Disqualified Equity Interests;
(h) all net obligations of such Person under any Hedge Agreements; and
(i) all Guarantees of any such Person with respect to any of the foregoing.
For all purposes hereof, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture (other than a joint venture that is itself a corporation or limited liability company) in which such Person is a general partner or a joint venturer, unless such Indebtedness is expressly made non-recourse to such Person. The amount of any net obligation under any Hedge Agreement on any date shall be deemed to be the Hedge Termination Value thereof as of such date.
Indemnified Taxes means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by or on account of any obligation of any Credit Party under any Loan Document and (b) to the extent not otherwise described in clause (a), Other Taxes.
Initial Term Loan means the term loan made, or to be made, to the Borrower by the Term Loan Lenders pursuant to Section 4.1.
Insurance and Condemnation Event means the receipt by any Credit Party or any of its Subsidiaries of any cash insurance proceeds or condemnation award payable by reason of theft, loss, physical destruction or damage, taking or similar event with respect to any of their respective Property.
Interest Period means, as to each LIBOR Rate Loan, the period commencing on the date such LIBOR Rate Loan is disbursed or converted to or continued as a LIBOR Rate Loan and ending on the date one (1), two (2), three (3), or six (6) months thereafter, in each case as selected by the Borrower in its Notice of Borrowing or Notice of Conversion/Continuation and subject to availability; provided that:
(a) the Interest Period shall commence on the date of advance of or conversion to any LIBOR Rate Loan and, in the case of immediately successive Interest Periods, each successive Interest Period shall commence on the date on which the immediately preceding Interest Period expires;
(b) if any Interest Period would otherwise expire on a day that is not a Business Day, such Interest Period shall expire on the next succeeding Business Day; provided that if any Interest Period with respect to a LIBOR Rate Loan would otherwise expire on a day that is not a Business Day but is a day of the month after which no further Business Day occurs in such month, such Interest Period shall expire on the immediately preceding Business Day;
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(c) any Interest Period with respect to a LIBOR Rate Loan 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 the relevant calendar month at the end of such Interest Period;
(d) no Interest Period shall extend beyond the Revolving Credit Maturity Date or the Term Loan Maturity Date, as applicable, and Interest Periods shall be selected by the Borrower so as to permit the Borrower to make the quarterly principal installment payments pursuant to Section 4.3 without payment of any amounts pursuant to Section 5.9; and
(e) there shall be no more than eight (8) Interest Periods in effect at any time.
Internally Generated Cash means cash funds of the Borrower and its Subsidiaries not constituting (a) proceeds of the issuance of (or contributions in respect of) Equity Interests, (b) proceeds of the incurrence of long-term Indebtedness (other than the incurrence of Revolving Credit Loans or extensions of credit under any other revolving credit or similar facility) or (c) proceeds of Asset Dispositions and Insurance and Condemnation Events.
Investment has the meaning assigned thereto in Section 9.3.
IPO means an initial public offering of Equity Interests of the Parent Entity that has been registered with the SEC under the Securities Act of 1933.
IPO Documents means (a) a tax receivable agreement, exchange agreement and/or registration rights agreement, in each case as may be entered into by or among any of the Parent Entity, the Borrower and certain holders of the Equity Interests of the Borrower immediately prior to the IPO, and (b) the organizational documents of the Parent Entity, which documents pursuant to the foregoing clauses (a) and (b) shall be in form and substance reasonably acceptable to the Administrative Agent.
IRS means the United States Internal Revenue Service.
ISP98 means the International Standby Practices (1998 Revision, effective January 1, 1999), International Chamber of Commerce Publication No. 590.
Issuing Lenders means (a) with respect to Letters of Credit issued hereunder on or after the Closing Date, (i) Wells Fargo, (ii) BMO Harris Bank, N.A. and (iii) any other Revolving Credit Lender to the extent it has agreed, in its sole discretion, to act as an Issuing Lender hereunder and that has been approved in writing by the Borrower and the Administrative Agent (such approval by the Administrative Agent not to be unreasonably delayed or withheld), in each case in its capacity as issuer of any Letter of Credit hereunder or any successor thereto and (b) with respect to the Existing Letters of Credit, the applicable issuer thereof as set forth on Schedule 1.1(a).
Junior Indebtedness means (a) Subordinated Indebtedness, (b) unsecured Indebtedness and (c) Indebtedness secured by Liens that are junior to the Liens securing the Obligations.
L/C Commitment means the lesser of (a) $30,000,000 and (b) the Revolving Credit Commitment; provided that the maximum amount of the L/C Commitment for each Issuing Lender shall not exceed the L/C Commitment of such Issuing Lender as set forth on Schedule 1.1(a), or with respect to any other Lender that becomes an Issuing Lender pursuant to this Agreement, such amount as agreed to by such Issuing Lender.
L/C Facility means the letter of credit facility established pursuant to Article III.
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L/C Obligations means at any time, an amount equal to the sum of (a) the aggregate undrawn and unexpired amount of the then outstanding Letters of Credit and (b) the aggregate amount of drawings under Letters of Credit which have not then been reimbursed pursuant to Section 3.5.
L/C Participants means, with respect to any Letter of Credit, the collective reference to all the Revolving Credit Lenders other than the applicable Issuing Lender.
LCA Test Date has the meaning assigned thereto in Section 1.11.
Lender means each Person executing this Agreement as a Lender on the Closing Date and any other Person that shall have become a party to this Agreement as a Lender pursuant to an Assignment and Assumption or pursuant to Section 5.13, other than any Person that ceases to be a party hereto as a Lender pursuant to an Assignment and Assumption. Unless the context otherwise requires, the term Lenders includes the Swingline Lender.
Lending Office means, with respect to any Lender, the office of such Lender maintaining such Lenders Extensions of Credit.
Letter of Credit Application means an application, in the form specified by the applicable Issuing Lender from time to time, requesting such Issuing Lender to issue a Letter of Credit.
Letters of Credit means the collective reference to letters of credit issued pursuant to Section 3.1 and the Existing Letters of Credit.
LIBOR means,
(a) for any interest rate calculation with respect to a LIBOR Rate Loan, the rate of interest per annum determined on the basis of the rate for deposits in Dollars for a period equal to the applicable Interest Period as published by the ICE Benchmark Administration Limited, a United Kingdom company (or any applicable successor page), at approximately 11:00 a.m. (London time) two (2) London Banking Days prior to the first day of the applicable Interest Period. If, for any reason, such rate is not so published, then LIBOR shall be determined by the Administrative Agent to be the arithmetic average of the rate per annum at which deposits in Dollars would be offered by first class banks in the London interbank market to the Administrative Agent at approximately 11:00 a.m. (London time) two (2) London Banking Days prior to the first day of the applicable Interest Period for a period equal to such Interest Period, and
(b) for any interest rate calculation with respect to a Base Rate Loan, the rate of interest per annum determined on the basis of the rate for deposits in Dollars for an Interest Period equal to one month (commencing on the date of determination of such interest rate) as published by the ICE Benchmark Administration Limited, a United Kingdom company (or any applicable successor page), at approximately 11:00 a.m. (London time) on such date of determination, or, if such date is not a Business Day, then the immediately preceding Business Day. If, for any reason, such rate is not so published, then LIBOR for such Base Rate Loan shall be determined by the Administrative Agent to be the arithmetic average of the rate per annum at which deposits in Dollars would be offered by first class banks in the London interbank market to the Administrative Agent at approximately 11:00 a.m. (London time) on such date of determination for a period equal to one month commencing on such date of determination.
Each calculation by the Administrative Agent of LIBOR shall be conclusive and binding for all purposes, absent manifest error. Notwithstanding the foregoing, if LIBOR shall be less than zero, such rate shall be deemed to be zero for purposes of this Agreement.
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LIBOR Rate means a rate per annum determined by the Administrative Agent pursuant to the following formula:
LIBOR Rate = | LIBOR |
|||||
1.00-Eurodollar Reserve Percentage |
LIBOR Rate Loan means any Loan bearing interest at a rate based upon the LIBOR Rate as provided in Section 5.1(a).
Lien means, with respect to any asset, any mortgage, leasehold mortgage, lien, pledge, charge, security interest, hypothecation or encumbrance of any kind in respect of such asset. For the purposes of this Agreement, a Person shall be deemed to own subject to a Lien any asset which it has acquired or holds subject to the interest of a vendor or lessor under any conditional sale agreement, Capital Lease Obligation or other title retention agreement relating to such asset.
Limited Condition Acquisition means any Permitted Acquisition or other Investment permitted hereunder by the Borrower or any of its Subsidiaries, the consummation of which is not conditioned on the availability of, or on obtaining, third-party financing.
Loan Documents means, collectively, this Agreement, each Note, the Letter of Credit Applications, the Security Documents, the Subsidiary Guaranty Agreement, the Engagement Letter, each Acceptable Intercreditor Agreement, each Refinancing Amendment, each Incremental Amendment and each other document, instrument, certificate and agreement executed and delivered by the Credit Parties or any of their respective Subsidiaries in favor of or provided to the Administrative Agent or any Secured Party in connection with this Agreement (excluding any Secured Hedge Agreement and any Secured Cash Management Agreement).
Loans means the collective reference to the Revolving Credit Loans, the Term Loan and the Swingline Loans, and Loan means any of such Loans.
London Banking Day means any day on which dealings in Dollar deposits are conducted by and between banks in the London interbank Eurodollar market.
Material Adverse Effect means, with respect to the Borrower and its Subsidiaries, (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 ability of the Credit Parties, taken as a whole, to perform their obligations under the Loan Documents, (c) a material adverse effect on the rights and remedies of the Administrative Agent and the Lenders under the Loan Documents, or (d) a material impairment of the legality, validity, binding effect or enforceability against the Credit Parties, taken as a whole, of the Loan Documents to which they are a party.
Minimum Collateral Amount means, at any time, (a) with respect to Cash Collateral consisting of cash or deposit account balances, an amount equal to 103% of the sum of (i) the Fronting Exposure of the Issuing Lender with respect to Letters of Credit issued and outstanding at such time and (ii) the Fronting Exposure of the Swingline Lender with respect to all Swingline Loans outstanding at such time and (b) otherwise, an amount determined by the Administrative Agent and each of the applicable Issuing Lenders that is entitled to Cash Collateral hereunder at such time in their sole discretion.
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Moodys means Moodys Investors Service, Inc.
Multiemployer Plan means a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which any Credit Party or any ERISA Affiliate is making, or is accruing an obligation to make, or has accrued an obligation to make contributions within the preceding seven (7) years.
Negative Pledge Agreements means, a negative pledge agreement in form and substance reasonably acceptable to the Administrative Agent whereby the applicable Credit Party agrees not to grant any consensual Liens (other than Permitted Liens) on its owned real property, including each such negative pledge agreement in effect as of the Closing Date and each additional negative pledge agreement required pursuant to Section 8.14(d).
Net Cash Proceeds means, as applicable, (a) with respect to any Asset Disposition or Insurance and Condemnation Event, the gross proceeds received by any Credit Party or any of its Subsidiaries therefrom (including any cash, Cash Equivalents, deferred payment pursuant to, or by monetization of, a note receivable or otherwise, as and when received) less the sum of (i) in the case of an Asset Disposition, all income taxes and other taxes assessed by, or reasonably estimated to be payable to, a Governmental Authority as a result of such transaction (provided that if such estimated taxes exceed the amount of actual taxes required to be paid in cash in respect of such Asset Disposition, the amount of such excess shall constitute Net Cash Proceeds), (ii) all reasonable and customary out-of-pocket fees and expenses incurred in connection with such transaction or event and (iii) the principal amount of, premium, if any, and interest on any Indebtedness secured by a Lien on the asset (or a portion thereof) disposed of, which Indebtedness is required to be repaid in connection with such transaction or event, and (b) with respect to any Debt Issuance or issuance of Equity Interests, the gross cash proceeds received by any Credit Party or any of its Subsidiaries therefrom less all reasonable and customary out-of-pocket legal, underwriting and other fees and expenses incurred in connection therewith.
Non-Consenting Lender means any Lender that does not approve any consent, waiver, amendment, modification or termination that (a) requires the approval of all Lenders or all affected Lenders in accordance with the terms of Section 12.2 and (b) has been approved by the Required Lenders.
Non-Defaulting Lender means, at any time, each Lender that is not a Defaulting Lender at such time.
Non-Guarantor Subsidiary means any Subsidiary that is not a Subsidiary Guarantor.
Notes means the collective reference to the Revolving Credit Notes, the Swingline Note and the Term Loan Notes.
Notice of Account Designation has the meaning assigned thereto in Section 2.3(b).
Notice of Borrowing has the meaning assigned thereto in Section 2.3(a).
Notice of Conversion/Continuation has the meaning assigned thereto in Section 5.2.
Notice of Prepayment has the meaning assigned thereto in Section 2.4(c).
Obligations means, in each case, whether now in existence or hereafter arising: (a) the principal of and interest on (including interest accruing after the filing of any bankruptcy or similar petition) the Loans, (b) the L/C Obligations and (c) all other fees and commissions (including attorneys fees), charges, indebtedness, loans, liabilities, financial accommodations, obligations, covenants and duties owing by the
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Credit Parties to the Lenders, the Issuing Lenders or the Administrative Agent, in each case under any Loan Document, with respect to any Loan or Letter of Credit of every kind, nature and description, direct or indirect, absolute or contingent, due or to become due, contractual or tortious, liquidated or unliquidated, and whether or not evidenced by any note and including interest and fees that accrue after the commencement by or against any Credit Party of any proceeding under any Debtor Relief Laws, naming such Person as the debtor in such proceeding, regardless of whether such interest and fees are allowed claims in such proceeding.
OFAC means the U.S. Department of the Treasurys Office of Foreign Assets Control.
Officers Compliance Certificate means a certificate of the chief financial officer or the treasurer of the Borrower substantially in the form attached as Exhibit F.
Operating Lease means, as to any Person as determined in accordance with GAAP, any lease of Property (whether real, personal or mixed) by such Person as lessee which is not a capital lease.
Other Connection Taxes means, with respect to any Recipient, Taxes imposed as a result of a present or former connection between such Recipient and the jurisdiction imposing such Tax (other than connections arising from such Recipient having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).
Other Taxes means all present or future stamp, court, documentary, intangible, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document, except any such Taxes that are Other Connection Taxes imposed with respect to an assignment (other than an assignment made pursuant to Section 5.12).
Parent Entity means, at any time after an IPO, an entity incorporated under the laws of a political subdivision of the United States that holds Equity Interests in, and serves as the sole managing member of, the Borrower, the Equity Interests of which were sold pursuant to an IPO.
Participant has the meaning assigned thereto in Section 12.9(d).
Participant Register has the meaning assigned thereto in Section 12.9(d).
PATRIOT Act means the USA PATRIOT Act (Title III of Pub. L. 107-56 (signed into law October 26, 2001)).
PBGC means the Pension Benefit Guaranty Corporation or any successor agency.
Pension Plan means any Employee Benefit Plan, other than a Multiemployer Plan, which is subject to the provisions of Title IV of ERISA or Section 412 of the Code and which (a) is maintained, funded or administered for the employees of any Credit Party or any ERISA Affiliate or (b) has at any time within the preceding seven (7) years been maintained, funded or administered for the employees of any Credit Party or any current or former ERISA Affiliates.
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Permitted Acquisition means any Acquisition that meets all of the following requirements; provided that, in the case of a Permitted Acquisition that is a Limited Condition Acquisition, such requirements under clause (f) shall be subject to Section 1.11:
(a) no less than fifteen (15) Business Days (or such shorter period as agreed to by the Administrative Agent) prior to the proposed closing date of such Acquisition, the Borrower shall have delivered written notice of such Acquisition to the Administrative Agent, which notice shall include the proposed closing date of such Acquisition;
(b) such acquisition shall have been approved by the board of directors (or equivalent governing body) of the Person to be acquired (in the case of an acquisition of a Person) and such approval shall not have been withdrawn prior to the consummation thereof;
(c) the Person or business to be acquired shall be in a line of business not prohibited by Section 9.11;
(d) if such Acquisition is a merger or consolidation involving the Borrower or a Subsidiary Guarantor, the Borrower or a Subsidiary Guarantor shall be the surviving Person (or, other than in the case of the Borrower, the surviving Person shall become a Subsidiary Guarantor) and no Change in Control shall have been effected thereby;
(e) the Borrower shall have delivered to the Administrative Agent all documents required to be delivered pursuant to, and in accordance with, Section 8.14;
(f) after giving pro forma effect to such Acquisition and any Indebtedness incurred in connection therewith, as of the proposed closing date of such Acquisition and after giving effect thereto and any Indebtedness incurred in connection therewith, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Borrower shall be in pro forma compliance with the Financial Covenant for the most recently completed Reference Period;
(g) after giving effect to the Acquisition, the Borrower shall have an aggregate of at least $40,000,000 in unrestricted cash and Cash Equivalents plus availability under the Revolving Credit Facility;
(h) for any Acquisition with aggregate consideration (including cash, Cash Equivalents, Equity Interests and other deferred payment obligations) in excess of $50,000,000, no later than five (5) Business Days (or such shorter period as agreed to by the Administrative Agent) prior to the proposed closing date of such Acquisition, the Borrower shall have delivered to the Administrative Agent the following:
(i) an Officers Compliance Certificate for the most recent fiscal quarter end preceding such Acquisition for which financial statements are available demonstrating, in form and substance reasonably satisfactory to the Administrative Agent, compliance with clause (f)(ii) above;
(ii) copies of substantially final documentation entered into in connection with such Acquisition; and
(iii) forecasted balance sheets, profit and loss statements and cash flow statements for the Person to be acquired, all prepared on a basis consistent with such Persons historical financial statements, together with appropriate supporting details and a statement of underlying
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assumptions for the one (1) year period following the date of the proposed Acquisition, on a quarterly basis, in form and substance (including, without limitation, as to scope and underlying assumptions) reasonably satisfactory to the Administrative Agent; and
(i) not later than five (5) Business Days (or such later date as Administrative Agent may agree in its sole discretion) following the consummation of such Acquisition, the Borrower shall have delivered to the Administrative Agent a certificate of a Responsible Officer thereof certifying that all of the requirements set forth above have been satisfied.
Permitted Investors means, collectively, the Persons who hold the Equity Interests of the Borrower on the Closing Date.
Permitted Liens means the Liens permitted pursuant to Section 9.2.
Permitted Refinancing Indebtedness means any Indebtedness (the Refinancing Indebtedness), the proceeds of which are used to refinance, refund, renew, extend or replace outstanding Indebtedness (such outstanding Indebtedness, the Refinanced Indebtedness); provided that (a) the principal amount (or accreted value, if applicable) of such Refinancing Indebtedness is not greater than the principal amount (or accreted value, if applicable) of the Refinanced Indebtedness at the time of such refinancing, refunding, renewal, extension or replacement, except by an amount equal to unpaid accrued interests and premium thereon plus other reasonable amount paid, and fees and expenses reasonably incurred, in connection with such refinancing, refunding, renewal, extension or replacement, and by an amount equal to any existing commitments thereunder that have not been utilized at the time of such refinancing, refunding, renewal, extension or replacement, (b) the final maturity and Weighted Average Life to Maturity of such Refinancing Indebtedness shall not be prior to or shorter than that applicable to the Refinanced Indebtedness, (c) the primary obligor of such Refinancing Indebtedness shall be the same as the primary obligor of the Refinanced Indebtedness, (d) such Refinancing Indebtedness shall not be secured by (i) Liens on assets other than assets securing the Refinanced Indebtedness at the time of such refinancing, refunding, renewal, extension or replacement or (ii) Liens having a higher priority than the Liens, if any, securing the Refinanced Indebtedness, (e) such Refinancing Indebtedness shall not be guaranteed by or otherwise recourse to any Person other than the Person(s) to whom the Refinanced Indebtedness is recourse or by whom it is guaranteed, in each case as of the time of such refinancing, refunding, renewal, extension or replacement, (f) to the extent such Refinanced Indebtedness is subordinated in right of payment to the Obligations (or the Liens securing such Indebtedness were originally contractually subordinated to the Liens securing the Collateral pursuant to the Security Documents), such refinancing, refunding, renewal, extension or replacement is subordinated in right of payment to the Obligations (or the Liens securing such Indebtedness shall be subordinated to the Liens securing the Collateral pursuant to the Security Documents) on terms at least as favorable to the Lenders as those contained in the documentation governing such Refinanced Indebtedness, (g) the terms of such Refinancing Indebtedness, taken as a whole, are not materially more restrictive on the Borrower and its Subsidiaries than the terms of the Refinanced Indebtedness, taken as a whole, and (h) no Event of Default shall have occurred and be continuing at the time of such refinancing, refunding, renewal, extension or replacement.
Permitted Tax Distribution means for any calendar year or portion thereof during which the Borrower is a pass-through entity for U.S. federal income tax purposes, payments and distributions to the members or partners of the Borrower, on or prior to each estimated tax payment date as well as each other applicable due date, in an amount not to exceed the product of (i) the total aggregate taxable income of the Borrower and its Subsidiaries (or estimates thereof) which is allocable to its members or partners from the Borrower and its Subsidiaries during the relevant period calculated without regard to, for clarity, any adjustments under Code Section 743, multiplied by (ii) the highest combined marginal federal, state and
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local income tax rates applicable to any member or partner of the Borrower (or, if any of them are themselves a pass-through entity for U.S. federal income tax purposes, their members or partners) determined by taking into account the character of the income and loss allocable to the members or partners as it affects the applicable tax rate, after taking proper account of loss carryforwards resulting from losses allocated to the members or partners by the Borrower, to the extent not taken into account in prior periods, with such result being reduced by the aggregate Permitted Tax Distributions previously made with respect to such taxable periods; provided that, for the avoidance of doubt, taxable income of the Borrower and its Subsidiaries for any period shall include any increases thereto as a result of any tax examination, audit or adjustment, whether for taxable periods ending prior to or after the date of this Agreement.
Person means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity.
Platform means Debt Domain, Intralinks, SyndTrak or a substantially similar electronic transmission system.
Prime Rate means, at any time, the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate. Each change in the Prime Rate shall be effective as of the opening of business on the day such change in such prime rate occurs. The parties hereto acknowledge that the rate announced publicly by the Administrative Agent as its prime rate is an index or base rate and shall not necessarily be its lowest or best rate charged to its customers or other banks.
Property means any right or interest in or to property of any kind whatsoever, whether real, personal or mixed and whether tangible or intangible, including, without limitation, Equity Interests.
Public Lenders has the meaning assigned thereto in Section 8.2.
Qualified Equity Interests means any Equity Interests that are not Disqualified Equity Interests.
Recipient means (a) the Administrative Agent, (b) any Lender and (c) the Issuing Lender, as applicable.
Reference Period means, as of any date of determination, the period of four (4) consecutive fiscal quarters ended on or immediately prior to such date for which Borrower has delivered financial statements pursuant to Section 6.1(e)(i), 8.1(a) or 8.1(b), as applicable.
Refinance has the meaning assigned thereto in Section 5.16(a).
Refinancing Amendment has the meaning assigned thereto in Section 5.16(d).
Refinancing Debt means Refinancing Term Loans, Refinancing Revolving Loans and/or Refinancing Notes, as the context requires.
Refinancing Effective Date has the meaning assigned thereto in Section 5.16(b).
Refinancing Lender has the meaning assigned thereto in Section 5.16(c).
Refinancing Notes has the meaning assigned thereto in Section 5.16(a).
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Refinancing Revolving Credit Commitments has the meaning assigned thereto in Section 5.16(a).
Refinancing Revolving Loans has the meaning assigned thereto in Section 5.16(a).
Refinancing Series has the meaning assigned thereto in Section 5.16(c).
Refinancing Term Loans has the meaning assigned thereto in Section 5.16(a).
Register has the meaning assigned thereto in Section 12.9(c).
Reimbursement Obligation means the obligation of the Borrower to reimburse any Issuing Lender pursuant to Section 3.5 for amounts drawn under Letters of Credit issued by such Issuing Lender.
Related Parties means, with respect to any Person, such Persons Affiliates and the partners, directors, officers, employees, agents, trustees, administrators, managers, advisors and representatives of such Person and of such Persons Affiliates.
Repricing Transaction means (a) any prepayment or repayment of all or a portion of the Initial Term Loan with the proceeds of, or any conversion of any such Initial Term Loan into, any new or replacement bank Indebtedness or other credit facility (whether under this Agreement or otherwise), including, without limitation, any Refinancing Term Loans or Refinancing Notes, bearing interest with an All-In Yield less than the All-In Yield applicable to such Initial Term Loans subject to such event and (b) any repricing of any of the Initial Term Loans (whether pursuant to an amendment, amendment and restatement, mandatory assignment or otherwise) which reduces the All-In Yield applicable to all or a portion of such Initial Term Loans, in each case, other than in connection with the consummation of an Acquisition not permitted under this Agreement, initial public offering of the Borrower or a parent holdings company thereof or the occurrence of a Change in Control (so long as the primary purpose of the prepayment or repayment of, or amendment to such Initial Term Loans in connection therewith is not to reduce the All-In Yield applicable to such Initial Term Loans as certified by a financial officer of the Borrower in a certificate to the Administrative Agent (on which the Administrative Agent is expressly permitted to rely)).
Required Lenders means, at any time, Lenders having Total Credit Exposures representing more than fifty percent (50%) of the Total Credit Exposures of all Lenders. The Total Credit Exposure of any Defaulting Lender shall be disregarded in determining Required Lenders at any time.
Required Revolving Credit Lenders means, as of any date of determination, Revolving Credit Lenders holding more than fifty percent (50%) of the sum of the aggregate amount of the Revolving Credit Commitment; provided that if the Revolving Credit Commitment has been terminated, Required Revolving Credit Lenders shall mean Revolving Credit Lenders holding more than fifty percent (50%) of the Revolving Credit Outstandings (with the aggregate amount of each Revolving Credit Lenders risk participation and funded participation in L/C Obligations and Swingline Loans being deemed held by such Revolving Credit Lender for purposes of this definition); provided, further, that the unused Revolving Credit Commitment of, and the portion of the Revolving Credit Outstandings held or deemed held by, any Defaulting Lender shall be excluded for purposes of making a determination of Required Revolving Credit Lenders.
Responsible Officer means, as to any Person, the chief executive officer, president, chief financial officer, controller, treasurer or assistant treasurer of such Person or any other officer of such Person designated in writing by the Borrower and reasonably acceptable to the Administrative Agent.
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Any document delivered hereunder or under any other Loan Document that is signed by a Responsible Officer of a Person shall be conclusively presumed to have been authorized by all necessary corporate, partnership and/or other action on the part of such Person and such Responsible Officer shall be conclusively presumed to have acted on behalf of such Person.
Restricted Payments means any dividend on, or make any payment or other distribution on account of, or purchase, redeem, retire or otherwise acquire (directly or indirectly), or set apart assets for a sinking or other analogous fund for the purchase, redemption, retirement or other acquisition of, any class of capital stock of any Credit Party or any Subsidiary thereof, or make any distribution of cash, property or assets to the holders of shares of any capital stock of any Credit Party or any Subsidiary thereof on account of such capital stock.
Retained Declined Proceeds has the meaning assigned thereto in Section 4.4(b)(vi).
Revolving Credit Commitment means (a) as to any Revolving Credit Lender, the obligation of such Revolving Credit Lender to make Revolving Credit Loans to, and to purchase participations in L/C Obligations and Swingline Loans for the account of, the Borrower hereunder in an aggregate principal amount at any time outstanding not to exceed the amount set forth opposite such Revolving Credit Lenders name on the Register, as such amount may be modified at any time or from time to time pursuant to the terms hereof (including, without limitation, Section 5.13) and (b) as to all Revolving Credit Lenders, the aggregate commitment of all Revolving Credit Lenders to make Revolving Credit Loans, as such amount may be modified at any time or from time to time pursuant to the terms hereof (including, without limitation, Section 5.13). The aggregate Revolving Credit Commitment of all the Revolving Credit Lenders on the Closing Date shall be $500,000,000. The Revolving Credit Commitment of each Revolving Credit Lender as of the Closing Date is set forth opposite the name of such Lender on Schedule 1.1(b). The Revolving Credit Commitment of any Lender shall include the Extended Revolving Credit Commitment and Refinancing Revolving Credit Commitment of such Lender.
Revolving Credit Commitment Percentage means, with respect to any Revolving Credit Lender at any time, the percentage of the total Revolving Credit Commitments of all the Revolving Credit Lenders represented by such Revolving Credit Lenders Revolving Credit Commitment. If the Revolving Credit Commitments have terminated or expired, the Revolving Credit Commitment Percentages shall be determined based upon the Revolving Credit Commitments most recently in effect, giving effect to any assignments. The Revolving Credit Commitment Percentage of each Revolving Credit Lender as of the Closing Date is set forth opposite the name of such Lender on Schedule 1.1(b).
Revolving Credit Exposure means, as to any Revolving Credit Lender at any time, the aggregate principal amount at such time of its outstanding Revolving Credit Loans and such Revolving Credit Lenders participation in L/C Obligations and Swingline Loans at such time.
Revolving Credit Facility means the revolving credit facility established pursuant to Article II (including any increase in such revolving credit facility established pursuant to Section 5.13, any Refinance pursuant to Section 5.16 and any Extension pursuant to Section 5.17).
Revolving Credit Facility Increase has the meaning assigned thereto in Section 5.13(a).
Revolving Credit Lenders means, collectively, all of the Lenders with a Revolving Credit Commitment.
Revolving Credit Loan means any revolving loan made to the Borrower pursuant to Section 2.1, and all such revolving loans collectively as the context requires, and shall include any Refinancing Revolving Loans, any Extended Revolving Credit Loans and any loans extended pursuant to a Revolving Credit Facility Increase.
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Revolving Credit Maturity Date means the earliest to occur of (a) June 27, 2022, (b) the date of termination of the entire Revolving Credit Commitment by the Borrower pursuant to Section 2.5, and (c) the date of termination of the Revolving Credit Commitment pursuant to Section 10.2(a); provided, that the Revolving Credit Maturity Date applicable to Extended Revolving Credit Commitments and Refinancing Revolving Credit Commitments shall be the final maturity date specified in the relevant documentation for such Extended Revolving Credit Commitments or Refinancing Revolving Credit Commitments.
Revolving Credit Note means a promissory note made by the Borrower in favor of a Revolving Credit Lender evidencing the Revolving Credit Loans made by such Revolving Credit Lender, substantially in the form attached as Exhibit A-1, and any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part.
Revolving Credit Outstandings means the sum of (a) with respect to Revolving Credit Loans and Swingline Loans on any date, the aggregate outstanding principal amount thereof after giving effect to any borrowings and prepayments or repayments of Revolving Credit Loans and Swingline Loans, as the case may be, occurring on such date; plus (b) with respect to any L/C Obligations on any date, the aggregate outstanding amount thereof on such date after giving effect to any Extensions of Credit occurring on such date and any other changes in the aggregate amount of the L/C Obligations as of such date, including as a result of any reimbursements of outstanding unpaid drawings under any Letters of Credit or any reductions in the maximum amount available for drawing under Letters of Credit taking effect on such date.
Roy Family means (a) Rob Roy, (b) the spouse or widow or widower of Rob Roy, (c) a parent, sibling, or lineal descendant (or spouse of such descendant) of Rob Roy, (d) the estate or personal representative of Rob Roy, (e) any trust created for the benefit of anyone referenced in clauses (a), (b) or (c), and (f) any entity (including any corporation, venture (general or limited), partnership (general or limited), limited liability company, association, joint stock company, trust or other business entity or organization) controlled by one or more of the persons or trust(s) referenced in clauses (a), (b), (c) or (e).
S&P means Standard & Poors Financial Services LLC, a part of McGraw-Hill Financial and any successor thereto.
Sanctioned Country means at any time, a country or territory which is itself the subject or target of any Sanctions (which, as of the Closing Date, consists of Cuba, Iran, North Korea, Sudan, Syria and the Crimean Region).
Sanctioned Person means, at any time, (a) any Person subject to any Sanctions, (b) any Person operating, organized or resident in a Sanctioned Country or (c) any Person owned or controlled by any such Person or Persons described in clauses (a) and (b).
Sanctions means economic or financial sanctions or trade embargoes imposed, administered or enforced from time to time by the U.S. government (including those administered by OFAC), the United Nations Security Council, the European Union, Her Majestys Treasury, or other relevant sanctions authority.
SEC means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
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Secured Cash Management Agreement means any Cash Management Agreement between or among any Credit Party and any Cash Management Bank.
Secured Hedge Agreement means any Hedge Agreement between or among any Credit Party and any Hedge Bank.
Secured Obligations means, collectively, (a) the Obligations and (b) all existing or future payment and other obligations owing by any Credit Party under (i) any Secured Hedge Agreement (other than an Excluded Swap Obligation) and (ii) any Secured Cash Management Agreement.
Secured Parties means, collectively, the Administrative Agent, the Lenders, the Issuing Lender, the Hedge Banks, the Cash Management Banks, each co-agent or sub-agent appointed by the Administrative Agent from time to time pursuant to Section 11.5, any other holder from time to time of any of any Secured Obligations and, in each case, their respective successors and permitted assigns.
Security Documents means the collective reference to the Collateral Agreement, the Negative Pledge Agreements, and each other agreement or writing pursuant to which any Credit Party pledges or grants a security interest in any Property or assets securing the Secured Obligations.
Solvent and Solvency mean, with respect to any Person on any date of determination, that on such date (a) the fair value of the property of such Person is greater than the total amount of liabilities, including contingent liabilities, of such Person, (b) the present fair salable value of the assets of such Person is not less than the amount that will be required to pay the probable liability of such Person on its debts as they become absolute and matured, (c) such Person does not intend to, and does not believe that it will, incur debts or liabilities beyond such Persons ability to pay such debts and liabilities as they mature, (d) such Person is not engaged in business or a transaction, and is not about to engage in business or a transaction, for which such Persons property would constitute an unreasonably small capital, and (e) such Person is able to pay its debts and liabilities, contingent obligations and other commitments as they mature in the ordinary course of business. The amount of contingent liabilities at any time shall be computed as the amount that, in the light of all the facts and circumstances existing at such time, represents the amount that can reasonably be expected to become an actual or matured liability.
Specified Disposition means any Asset Disposition (other than pursuant to Sections 9.5(a) through 9.5(p)) having gross sales proceeds in excess of $5,000,000.
Specified Transactions means (a) any Specified Disposition and (b) any Permitted Acquisition.
Subordinated Indebtedness means the collective reference to any Indebtedness incurred by the Borrower or any of its Subsidiaries that is subordinated in right and time of payment to the Obligations on terms and conditions reasonably satisfactory to the Administrative Agent.
Subsidiary means as to any Person, any corporation, partnership, limited liability company or other entity of which more than fifty percent (50%) of the outstanding Equity Interests having ordinary voting power to elect a majority of the board of directors (or equivalent governing body) or other managers of such corporation, partnership, limited liability company or other entity is at the time owned by (directly or indirectly) or the management is otherwise controlled by (directly or indirectly) such Person (irrespective of whether, at the time, Equity Interests of any other class or classes of such corporation, partnership, limited liability company or other entity shall have or might have voting power by reason of the happening of any contingency). Unless otherwise qualified, references to Subsidiary or Subsidiaries herein shall refer to those of the Borrower.
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Subsidiary Guarantors means, collectively, all direct and indirect Wholly-Owned Domestic Subsidiaries of the Borrower (other than any Excluded Subsidiary) in existence on the Closing Date or which become a party to the Subsidiary Guaranty Agreement pursuant to Section 8.14.
Subsidiary Guaranty Agreement means the amended and restated unconditional guaranty agreement dated as of the Closing Date executed by the Subsidiary Guarantors in favor of the Administrative Agent, for the ratable benefit and the Secured Parties, which shall be in form and substance reasonably acceptable to the Administrative Agent.
Swap Obligation means, with respect to any Subsidiary Guarantor, any obligation to pay or perform under any agreement, contract or transaction that constitutes a swap within the meaning of section 1a(47) of the Commodity Exchange Act.
Swingline Commitment means the lesser of (a) $40,000,000 and (b) the Revolving Credit Commitment.
Swingline Facility means the swingline facility established pursuant to Section 2.2.
Swingline Lender means Wells Fargo in its capacity as swingline lender hereunder or any successor thereto.
Swingline Loan means any swingline loan made by the Swingline Lender to the Borrower pursuant to Section 2.2, and all such swingline loans collectively as the context requires.
Swingline Note means a promissory note made by the Borrower in favor of the Swingline Lender evidencing the Swingline Loans made by the Swingline Lender, substantially in the form attached as Exhibit A-2, and any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part.
Synthetic Lease means any synthetic lease, tax retention operating lease, off-balance sheet loan or similar off-balance sheet financing product where such transaction is considered borrowed money indebtedness for tax purposes but is classified as an Operating Lease in accordance with GAAP.
Taxes means all present or future taxes, levies, imposts, duties, deductions, withholdings (including backup withholding), assessments, fees or other charges imposed by any Governmental Authority, including any interest, fines, additions to tax or penalties applicable thereto.
Term Loan Commitment means (a) as to any Term Loan Lender, the obligation of such Term Loan Lender to make a portion of the Initial Term Loan and/or Incremental Term Loans, as applicable, to the account of the Borrower hereunder on the Closing Date (in the case of the Initial Term Loan) or the applicable borrowing date (in the case of any Incremental Term Loan) in an aggregate principal amount not to exceed the amount set forth opposite such Lenders name on Schedule 1.1(b), as such amount may be increased, reduced or otherwise modified at any time or from time to time pursuant to the terms hereof and (b) as to all Term Loan Lenders, the aggregate commitment of all Term Loan Lenders to make such Term Loans. The aggregate Term Loan Commitment with respect to the Initial Term Loan of all Term Loan Lenders on the Closing Date shall be $600,000,000. The Term Loan Commitment of each Term Loan Lender as of the Closing Date is set forth opposite the name of such Term Loan Lender on Schedule 1.1(b).
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Term Loan Facility means the term loan facility established pursuant to Article IV (including any new term loan facility established pursuant to Section 5.13, each facility providing for the borrowing of Refinancing Term Loans and each facility providing for the borrowing of Extended Term Loans).
Term Loan Lender means any Lender with a Term Loan Commitment and/or outstanding Term Loans.
Term Loan Maturity Date means the first to occur of (a) June 27, 2024, and (b) the date of acceleration of the Term Loans pursuant to Section 10.2(a); provided, that the Term Loan Maturity Date applicable to Incremental Term Loans, Extended Term Loans and Refinancing Term Loans shall be the final maturity date specified in the relevant documentation for such Incremental Term Loans, Extended Term Loans and Refinancing Term Loans.
Term Loan Note means a promissory note made by the Borrower in favor of a Term Loan Lender evidencing the portion of the Term Loans made by such Term Loan Lender, substantially in the form attached as Exhibit A-3, and any substitutes therefor, and any replacements, restatements, renewals or extension thereof, in whole or in part.
Term Loan Percentage means, with respect to any Term Loan Lender at any time, the percentage of the total outstanding principal balance of the Term Loans represented by the outstanding principal balance of such Term Loan Lenders Term Loans. The Term Loan Percentage of each Term Loan Lender as of the Closing Date is set forth opposite the name of such Lender on Schedule 1.1(b).
Term Loans means the Initial Term Loans, the Incremental Term Loans, the Refinancing Term Loans and the Extended Term Loans, and Term Loan means any of such Term Loans.
Termination Event means the occurrence of any of the following which, individually or in the aggregate, has resulted or could reasonably be expected to result in liability of the Borrower in an aggregate amount in excess of the Threshold Amount: (a) a Reportable Event described in Section 4043 of ERISA for which the thirty (30) day notice requirement has not been waived by the PBGC, or (b) the withdrawal of any Credit Party or any ERISA Affiliate from a Pension Plan during a plan year in which it was a substantial employer as defined in Section 4001(a)(2) of ERISA or a cessation of operations that is treated as such a withdrawal under Section 4062(e) of ERISA, or (c) the termination of a Pension Plan, the filing of a notice of intent to terminate a Pension Plan or the treatment of a Pension Plan amendment as a termination, under Section 4041 of ERISA, if the plan assets are not sufficient to pay all plan liabilities, or (d) the institution of proceedings to terminate, or the appointment of a trustee with respect to, any Pension Plan by the PBGC, or (e) any other event or condition which would constitute grounds under Section 4042(a) of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan, or (f) the imposition of a Lien pursuant to Section 430(k) of the Code or Section 303 of ERISA, or (g) the determination that any Pension Plan or Multiemployer Plan is considered an at-risk plan or plan in endangered or critical status with the meaning of Sections 430, 431 or 432 of the Code or Sections 303, 304 or 305 of ERISA or (h) the partial or complete withdrawal of any Credit Party or any ERISA Affiliate from a Multiemployer Plan if withdrawal liability is asserted by such plan, or (i) any event or condition which results in the reorganization or insolvency of a Multiemployer Plan under Sections 4241 or 4245 of ERISA, or (j) any event or condition which results in the termination of a Multiemployer Plan under Section 4041A of ERISA or the institution by PBGC of proceedings to terminate a Multiemployer Plan under Section 4042 of ERISA, or (k) the imposition of any liability under Title IV of ERISA, other than for PBGC premiums due but not delinquent under Section 4007 of ERISA, upon any Credit Party or any ERISA Affiliate.
Threshold Amount means $20,000,000.
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Total Credit Exposure means, as to any Lender at any time, the unused Commitments, Revolving Credit Exposure and outstanding Term Loans of such Lender at such time.
Transaction Costs means all transaction fees, charges and other amounts related to the Transactions (including, without limitation, any financing fees, legal fees and expenses, due diligence fees or any other fees and expenses in connection therewith), in each case to the extent paid within twelve (12) months of the closing of the Credit Facility.
Transactions means, collectively, (a) the refinancing in full of all Indebtedness outstanding under the Existing Credit Agreement, (b) the closing of the Credit Facility and the making of the initial Extensions of Credit, (c) the payment of the Closing Date Dividend and (d) the payment of the Transaction Costs incurred in connection with the foregoing.
UCC means the Uniform Commercial Code as in effect in the State of New York.
United States means the United States of America.
U.S. Person means any Person that is a United States person as defined in Section 7701(a)(30) of the Code.
U.S. Tax Compliance Certificate has the meaning assigned thereto in Section 5.11(g).
Weighted Average Life to Maturity means, when applied to any Indebtedness at any date, the number of years obtained by dividing: (a) the sum of the products obtained by multiplying (i) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by (ii) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment; by (b) the then outstanding principal amount of such Indebtedness.
Wells Fargo means Wells Fargo Bank, National Association, a national banking association.
Wholly-Owned means, with respect to a Subsidiary, that all of the Equity Interests of such Subsidiary are, directly or indirectly, owned or controlled by the Borrower and/or one or more of its Wholly-Owned Subsidiaries (except for directors qualifying shares or other shares required by Applicable Law to be owned by a Person other than the Borrower and/or one or more of its Wholly-Owned Subsidiaries).
Withholding Agent means the Borrower and the Administrative Agent.
Working Capital means, for the Borrower and its Subsidiaries on a Consolidated basis and calculated in accordance with GAAP, as of any date of determination, the excess of (a) Current Assets over (b) Current Liabilities; provided that, for purposes of calculating Excess Cash Flow, increases or decreases in Working Capital shall be calculated without regard to any changes in Current Assets or Current Liabilities as a result of (a) any reclassification in accordance with GAAP, of assets or liabilities, as applicable, between current and noncurrent or (b) the effects of recapitalization or purchase accounting, as the case may be.
Write-Down and Conversion Powers means, with respect to any EEA Resolution Authority, the write-down and conversion powers of such EEA Resolution Authority from time to time under the Bail-In Legislation for the applicable EEA Member Country, which write-down and conversion powers are described in the EU Bail-In Legislation Schedule.
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SECTION 1.2 Other Definitions and Provisions. With reference to this Agreement and each other Loan Document, unless otherwise specified herein or in such other Loan Document: (a) the definitions of terms herein shall apply equally to the singular and plural forms of the terms defined, (b) whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms, (c) the words include, includes and including shall be deemed to be followed by the phrase without limitation, (d) the word will shall be construed to have the same meaning and effect as the word shall, (e) any reference herein to any Person shall be construed to include such Persons successors and assigns, (f) the words herein, hereof and hereunder, and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (g) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement, (h) the words asset and property shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights, (i) the term documents includes any and all instruments, documents, agreements, certificates, notices, reports, financial statements and other writings, however evidenced, whether in physical or electronic form and (j) in the computation of periods of time from a specified date to a later specified date, the word from means from and including; the words to and until each mean to but excluding; and the word through means to and including.
SECTION 1.3 Accounting Terms.
(a) All accounting terms not specifically or completely defined herein shall be construed in conformity with, and all financial data (including financial ratios and other financial calculations) required to be submitted pursuant to this Agreement shall be prepared in conformity with GAAP, applied on a consistent basis, as in effect from time to time and in a manner consistent with that used in preparing the audited financial statements required by Section 8.1(a), except as otherwise specifically prescribed herein. Notwithstanding the foregoing, for purposes of determining compliance with any covenant (including the computation of any financial covenant) contained herein, Indebtedness of the Borrower and its Subsidiaries shall be deemed to be carried at 100% of the outstanding principal amount thereof, and the effects of FASB ASC 825 and FASB ASC 470-20 on financial liabilities shall be disregarded.
(b) If at any time any change in GAAP would affect the computation of any financial ratio or requirement set forth in any Loan Document, and either the Borrower or the Required Lenders shall so request, the Administrative Agent, the Lenders and the Borrower shall negotiate in good faith to amend such ratio or requirement to preserve the original intent thereof in light of such change in GAAP (subject to the approval of the Required Lenders); provided that, until so amended, (i) such ratio or requirement shall continue to be computed in accordance with GAAP prior to such change therein and (ii) the Borrower shall provide to the Administrative Agent and the Lenders financial statements and other documents required under this Agreement or as reasonably requested hereunder setting forth a reconciliation between calculations of such ratio or requirement made before and after giving effect to such change in GAAP.
(c) Notwithstanding anything to the contrary contained in Section 1.3(a) above or the definition of Capital Lease Obligations, in the event of an accounting change requiring all leases to be capitalized, only those leases that would have constituted capital leases on the date hereof (assuming for purposes hereof that they were in existence on the date hereof) shall be considered capital leases, and all calculations and deliverables under this Agreement or any other Loan Document shall be made in accordance therewith (provided that, in connection with all financial statements delivered to the Administrative Agent in accordance with the terms of this Agreement after the date of such accounting change, the Borrower shall provide to the Administrative Agent a schedule showing the adjustments necessary to reconcile such financial statements with GAAP as in effect immediately prior to such accounting change, which schedule may be included in the Officers Compliance Certificate).
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SECTION 1.4 UCC Terms. Terms defined in the UCC in effect on the Closing Date and not otherwise defined herein shall, unless the context otherwise indicates, have the meanings provided by those definitions. Subject to the foregoing, the term UCC refers, as of any date of determination, to the UCC then in effect.
SECTION 1.5 Rounding. Any financial ratios required to be maintained pursuant to this Agreement shall be calculated by dividing the appropriate component by the other component, carrying the result to one place more than the number of places by which such ratio or percentage is expressed herein and rounding the result up or down to the nearest number (with a rounding-up if there is no nearest number).
SECTION 1.6 References to Agreement and Laws. Unless otherwise expressly provided herein, (a) any definition or reference to formation documents, governing documents, agreements (including the Loan Documents) and other contractual documents or instruments shall be deemed to include all subsequent amendments, restatements, extensions, supplements and other modifications thereto, but only to the extent that such amendments, restatements, extensions, supplements and other modifications are not prohibited by any Loan Document; and (b) any definition or reference to any Applicable Law, including, without limitation, the Code, the Commodity Exchange Act, ERISA, the Exchange Act, the PATRIOT Act, Anti-Corruption Laws, Anti-Money Laundering Laws, Sanctions, the Securities Act of 1933, the UCC, the Investment Company Act of 1940, the Interstate Commerce Act, the Trading with the Enemy Act of the United States or any of the foreign assets control regulations of the United States Treasury Department, shall include all statutory and regulatory provisions consolidating, amending, replacing, supplementing or interpreting such Applicable Law.
SECTION 1.7 Times of Day. Unless otherwise specified, all references herein to times of day shall be references to Eastern time (daylight or standard, as applicable).
SECTION 1.8 Letter of Credit Amounts. Unless otherwise specified, all references herein to the amount of a Letter of Credit at any time shall be deemed to mean the maximum face amount of such Letter of Credit after giving effect to all increases thereof contemplated by such Letter of Credit or the Letter of Credit Application therefor (at the time specified therefor in such applicable Letter of Credit or Letter of Credit Application and as such amount may be reduced by (a) any permanent reduction of such Letter of Credit or (b) any amount which is drawn, reimbursed and no longer available under such Letter of Credit).
SECTION 1.9 Guarantees. Unless otherwise specified, the amount of any Guarantee shall be the lesser of the principal amount of the obligations guaranteed and still outstanding and the maximum amount for which the guaranteeing Person may be liable pursuant to the terms of the instrument embodying such Guarantee.
SECTION 1.10 Covenant Compliance Generally. For purposes of determining compliance under Sections 9.1, 9.2, 9.3 and 9.5, any amount in a currency other than Dollars will be converted to Dollars in a manner consistent with that used in calculating Consolidated Net Income in the most recent annual financial statements of the Borrower and its Subsidiaries delivered pursuant to Section 8.1(a). Notwithstanding the foregoing, for purposes of determining compliance with Sections 9.1, 9.2 and 9.3, with respect to any amount of Indebtedness or Investment in a currency other than Dollars, no breach of any basket contained in such sections shall be deemed to have occurred solely as a result of changes in rates of exchange occurring after the time such Indebtedness or Investment is incurred; provided that for the avoidance of doubt, the foregoing provisions of this Section 1.10 shall otherwise apply to such Sections, including with respect to determining whether any Indebtedness or Investment may be incurred at any time under such Sections.
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SECTION 1.11 Limited Condition Acquisitions. Notwithstanding anything in this Agreement to the contrary, if the Borrower notifies the Administrative Agent in writing prior to or concurrently with the execution of the definitive purchase agreement, merger agreement or other acquisition agreement governing a Limited Condition Acquisition (the time of such execution, the LCA Test Date) that in connection with such Limited Condition Acquisition the Borrower wishes to test the conditions to such Limited Condition Acquisition and/or the availability of Incremental Term Loans that are to be used to finance all or part of such Limited Condition Acquisition in accordance with this Section 1.11, then, if agreed by the Incremental Lenders providing such Incremental Term Loan and the Borrower, the following provisions shall apply:
(a) any condition to such Limited Condition Acquisition or such Incremental Term Loans that requires that no Default or Event of Default shall have occurred and be continuing at the time of such Limited Condition Acquisition or the incurrence of such Incremental Term Loans, shall be satisfied if (i) no Default or Event of Default shall have occurred and be continuing at the time of the LCA Test Date and (ii) no Event of Default under any of Section 10.1(a), 10.1(b), 10.1(i) or 10.1(j) would occur and be continuing, after giving effect to such Limited Condition Acquisition and any Indebtedness incurred in connection therewith (including any such Incremental Term Loans) and the use of proceeds thereof as of the date of consummation of such Limited Condition Acquisition;
(b) any financial ratio test or condition to be tested in connection with such Limited Condition Acquisition and the availability of such Incremental Term Loans will be tested as of the LCA Test Date, in each case, after giving effect to the relevant Limited Condition Acquisition and related incurrence of Indebtedness, on a pro forma basis where applicable; and
(c) in connection with any subsequent calculation of any ratio or basket on or following the relevant LCA Test Date and prior to the earlier of the date on which such Limited Condition Acquisition is consummated and the date that the definitive agreement for such Limited Condition Acquisition is terminated or expires without consummation of such Limited Condition Acquisition, any such ratio or basket shall be required to be satisfied (i) on a pro forma basis assuming such Limited Condition Acquisition and other transactions in connection therewith (including the incurrence or assumption of Indebtedness and use of proceeds thereof) have been consummated and (ii) assuming such Limited Condition Acquisition and other transactions in connection therewith (including the incurrence or assumption of Indebtedness and use of proceeds thereof) have not been consummated; provided that, notwithstanding the foregoing, any calculation (x) in connection with determining the Applicable Margin or the ECF Percentage and (y) determining whether or not the Borrower is in compliance with the Financial Covenant shall, in each case be calculated assuming such Limited Condition Acquisition and other transactions in connection therewith (including the incurrence or assumption of Indebtedness and the use of proceeds thereof) have not been consummated.
The foregoing provisions shall apply with similar effect during the pendency of multiple Limited Condition Acquisitions such that each of the possible scenarios is tested separately. Notwithstanding anything to the contrary herein, in no event shall there be more than two Limited Condition Acquisitions at any time outstanding.
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ARTICLE II
REVOLVING CREDIT FACILITY
SECTION 2.1 Revolving Credit Loans. Subject to the terms and conditions of this Agreement and the other Loan Documents, each Revolving Credit Lender severally agrees to make Revolving Credit Loans to the Borrower from time to time from the Closing Date to, but not including, the Revolving Credit Maturity Date as requested by the Borrower in accordance with the terms of Section 2.3; provided, that (a) the Revolving Credit Outstandings shall not exceed the Revolving Credit Commitment and (b) the Revolving Credit Exposure of any Revolving Credit Lender shall not at any time exceed such Revolving Credit Lenders Revolving Credit Commitment. Each Revolving Credit Loan by a Revolving Credit Lender shall be in a principal amount equal to such Revolving Credit Lenders Revolving Credit Commitment Percentage of the aggregate principal amount of Revolving Credit Loans requested on such occasion. Subject to the terms and conditions hereof, the Borrower may borrow, repay and reborrow Revolving Credit Loans hereunder until the Revolving Credit Maturity Date.
SECTION 2.2 Swingline Loans.
(a) Availability. Subject to the terms and conditions of this Agreement and the other Loan Documents, the Swingline Lender may, in its sole discretion, make Swingline Loans to the Borrower from time to time from the Closing Date to, but not including, the Revolving Credit Maturity Date; provided, that (a) after giving effect to any amount requested, the Revolving Credit Outstandings shall not exceed the Revolving Credit Commitment and (b) the aggregate principal amount of all outstanding Swingline Loans (after giving effect to any amount requested) shall not exceed the Swingline Commitment.
(b) Refunding.
(i) The Swingline Lender, at any time and from time to time in its sole and absolute discretion may, on behalf of the Borrower (which hereby irrevocably directs the Swingline Lender to act on its behalf), by written notice given no later than 12:00 p.m. on any Business Day request each Revolving Credit Lender to make, and each Revolving Credit Lender hereby agrees to make, a Revolving Credit Loan as a Base Rate Loan in an amount equal to such Revolving Credit Lenders Revolving Credit Commitment Percentage of the aggregate amount of the Swingline Loans outstanding on the date of such notice, to repay the Swingline Lender. Each Revolving Credit Lender shall make the amount of such Revolving Credit Loan available to the Administrative Agent in immediately available funds at the Administrative Agents Office not later than 2:00 p.m. on the day specified in such notice. The proceeds of such Revolving Credit Loans shall be immediately made available by the Administrative Agent to the Swingline Lender for application by the Swingline Lender to the repayment of the Swingline Loans. No Revolving Credit Lenders obligation to fund its respective Revolving Credit Commitment Percentage of a Swingline Loan shall be affected by any other Revolving Credit Lenders failure to fund its Revolving Credit Commitment Percentage of a Swingline Loan, nor shall any Revolving Credit Lenders Revolving Credit Commitment Percentage be increased as a result of any such failure of any other Revolving Credit Lender to fund its Revolving Credit Commitment Percentage of a Swingline Loan.
(ii) The Borrower shall pay to the Swingline Lender on demand the amount of such Swingline Loans to the extent amounts received from the Revolving Credit Lenders are not sufficient to repay in full the outstanding Swingline Loans requested or required to be refunded. In addition, the Borrower authorizes the Administrative Agent to charge any account maintained
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by the Borrower with the Swingline Lender (up to the amount available therein) in order to immediately pay the Swingline Lender the amount of such Swingline Loans to the extent amounts received from the Revolving Credit Lenders are not sufficient to repay in full the outstanding Swingline Loans requested or required to be refunded. If any portion of any such amount paid to the Swingline Lender shall be recovered by or on behalf of the Borrower from the Swingline Lender in bankruptcy or otherwise, the loss of the amount so recovered shall be ratably shared among all the Revolving Credit Lenders in accordance with their respective Revolving Credit Commitment Percentages.
(iii) If for any reason any Swingline Loan cannot be refinanced with a Revolving Credit Loan pursuant to Section 2.2(b)(i), each Revolving Credit Lender shall, on the date such Revolving Credit Loan was to have been made pursuant to the notice referred to in Section 2.2(b)(i), purchase for cash an undivided participating interest in the then outstanding Swingline Loans by paying to the Swingline Lender an amount (the Swingline Participation Amount) equal to such Revolving Lenders Revolving Credit Commitment Percentage of the aggregate principal amount of Swingline Loans then outstanding. Each Revolving Credit Lender will immediately transfer to the Swingline Lender, in immediately available funds, the amount of its Swingline Participation Amount. Whenever, at any time after the Swingline Lender has received from any Revolving Credit Lender such Revolving Credit Lenders Swingline Participation Amount, the Swingline Lender receives any payment on account of the Swingline Loans, the Swingline Lender will distribute to such Revolving Credit Lender its Swingline Participation Amount (appropriately adjusted, in the case of interest payments, to reflect the period of time during which such Lenders participating interest was outstanding and funded and, in the case of principal and interest payments, to reflect such Revolving Credit Lenders pro rata portion of such payment if such payment is not sufficient to pay the principal of and interest on all Swingline Loans then due); provided that in the event that such payment received by the Swingline Lender is required to be returned, such Revolving Credit Lender will return to the Swingline Lender any portion thereof previously distributed to it by the Swingline Lender.
(iv) Each Revolving Credit Lenders obligation to make the Revolving Credit Loans referred to in Section 2.2(b)(i) and to purchase participating interests pursuant to Section 2.2(b)(iii) shall be absolute and unconditional and shall not be affected by any circumstance, including (A) any setoff, counterclaim, recoupment, defense or other right that such Revolving Credit Lender or the Borrower may have against the Swingline Lender, the Borrower or any other Person for any reason whatsoever, (B) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article VI, (C) any adverse change in the condition (financial or otherwise) of the Borrower, (D) any breach of this Agreement or any other Loan Document by the Borrower, any other Credit Party or any other Revolving Credit Lender or (E) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
(v) If any Revolving Credit Lender fails to make available to the Administrative Agent for the account of the Swingline Lender any amount required to be paid by such Revolving Credit Lender pursuant to the foregoing provisions of this Section 2.2(b) by the time specified in Section 2.2(b)(i), the Swingline Lender shall be entitled to recover from such Revolving Credit Lender (acting through the Administrative Agent), on demand, such amount with interest thereon for the period from the date such payment is required to the date on which such payment is immediately available to the Swingline Lender at a rate per annum equal to the applicable Federal Funds Rate, plus any administrative, processing or similar fees customarily charged by the Swingline Lender in connection with the foregoing. If such Revolving Credit Lender pays such amount (with interest and fees as aforesaid), the amount so paid shall constitute such Revolving
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Credit Lenders Revolving Credit Loan or Swingline Participation Amount, as the case may be. A certificate of the Swingline Lender submitted to any Revolving Credit Lender (through the Administrative Agent) with respect to any amounts owing under this clause (v) shall be conclusive absent manifest error.
(c) Defaulting Lenders. Notwithstanding anything to the contrary contained in this Agreement, this Section 2.2 shall be subject to the terms and conditions of Section 5.14 and Section 5.15.
(d) Resignation of Swingline Lender. In connection with (i) any Refinancing Revolving Credit Commitments or (ii) any Extension of Revolving Credit Commitments, that has not been consented to by the Swingline Lender, the Swingline Lender may, in connection with such Refinancing Revolving Credit Commitments or Extension resign as Swingline Lender hereunder upon not less than five (5) Business Days prior notice to the Borrower and the Administrative Agent (or such shorter period of time as may be acceptable to the Borrower and the Administrative Agent). Following such notice of resignation, the Swingline Lender shall have no further obligations to make Swingline Loans pursuant to this Agreement.
SECTION 2.3 Procedure for Advances of Revolving Credit Loans and Swingline Loans.
(a) Requests for Borrowing. The Borrower shall give the Administrative Agent irrevocable prior written notice substantially in the form of Exhibit B (a Notice of Borrowing) not later than 12:00 p.m. (i) on the same Business Day as each Base Rate Loan and each Swingline Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan, of its intention to borrow, specifying (A) the date of such borrowing, which shall be a Business Day, (B) the amount of such borrowing, which shall be, (x) with respect to Base Rate Loans (other than Swingline Loans) in an aggregate principal amount of $1,000,000 or a whole multiple of $1,000,000 in excess thereof, (y) with respect to LIBOR Rate Loans in an aggregate principal amount of $5,000,000 or a whole multiple of $1,000,000 in excess thereof and (z) with respect to Swingline Loans in an aggregate principal amount of $500,000 or a whole multiple of $100,000 in excess thereof, (C) whether such Loan is to be a Revolving Credit Loan or Swingline Loan, (D) in the case of a Revolving Credit Loan whether the Loans are to be LIBOR Rate Loans or Base Rate Loans, and (E) in the case of a LIBOR Rate Loan, the duration of the Interest Period applicable thereto. If the Borrower fails to specify a type of Loan in a Notice of Borrowing, then the applicable Loans shall be made as Base Rate Loans. If the Borrower requests a borrowing of LIBOR Rate Loans in any such Notice of Borrowing, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month. A Notice of Borrowing received after 12:00 p.m. shall be deemed received on the next Business Day. The Administrative Agent shall promptly notify the Revolving Credit Lenders of each Notice of Borrowing.
(b) Disbursement of Revolving Credit and Swingline Loans. Not later than 2:00 p.m. on the proposed borrowing date, (i) each Revolving Credit Lender will make available to the Administrative Agent, for the account of the Borrower, at the office of the Administrative Agent in funds immediately available to the Administrative Agent, such Revolving Credit Lenders Revolving Credit Commitment Percentage of the Revolving Credit Loans to be made on such borrowing date and (ii) the Swingline Lender will make available to the Administrative Agent, for the account of the Borrower, at the office of the Administrative Agent in funds immediately available to the Administrative Agent, the Swingline Loans to be made on such borrowing date. The Borrower hereby irrevocably authorizes the Administrative Agent to disburse the proceeds of each borrowing requested pursuant to this Section in immediately available funds by crediting or wiring such proceeds to the deposit account of the Borrower identified in the most recent notice substantially in the form attached as Exhibit C (a Notice of Account Designation) delivered by the Borrower to the Administrative Agent or as may be otherwise agreed upon by the Borrower and the Administrative Agent from time to time. Subject to Section 5.7 hereof, the
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Administrative Agent shall not be obligated to disburse the portion of the proceeds of any Revolving Credit Loan requested pursuant to this Section to the extent that any Revolving Credit Lender has not made available to the Administrative Agent its Revolving Credit Commitment Percentage of such Loan. Revolving Credit Loans to be made for the purpose of refunding Swingline Loans shall be made by the Revolving Credit Lenders as provided in Section 2.2(b).
SECTION 2.4 Repayment and Prepayment of Revolving Credit and Swingline Loans.
(a) Repayment on Termination Date. The Borrower hereby agrees to repay the outstanding principal amount of (i) all Revolving Credit Loans in full on the Revolving Credit Maturity Date, and (ii) all Swingline Loans in accordance with Section 2.2(b) (but, in any event, no later than the Revolving Credit Maturity Date), together, in each case, with all accrued but unpaid interest thereon.
(b) Mandatory Prepayments. If at any time the Revolving Credit Outstandings exceed the Revolving Credit Commitment, the Borrower agrees to repay immediately upon notice from the Administrative Agent, by payment to the Administrative Agent for the account of the Revolving Credit Lenders, Extensions of Credit in an amount equal to such excess with each such repayment applied first, to the principal amount of outstanding Swingline Loans, second to the principal amount of outstanding Revolving Credit Loans and third, with respect to any Letters of Credit then outstanding, a payment of Cash Collateral into a Cash Collateral account opened by the Administrative Agent, for the benefit of the Revolving Credit Lenders, in an amount equal to such excess (such Cash Collateral to be applied in accordance with Section 10.2(b)).
(c) Optional Prepayments. The Borrower may at any time and from time to time prepay Revolving Credit Loans and Swingline Loans, in whole or in part, with irrevocable prior written notice to the Administrative Agent substantially in the form attached as Exhibit D (a Notice of Prepayment) given not later than 12:00 p.m. (i) on the same Business Day as each Base Rate Loan and each Swingline Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan, specifying the date and amount of prepayment and whether the prepayment is of LIBOR Rate Loans, Base Rate Loans, Swingline Loans or a combination thereof, and, if of a combination thereof, the amount allocable to each. Upon receipt of such notice, the Administrative Agent shall promptly notify each Revolving Credit Lender. If any such notice is given, the amount specified in such notice shall be due and payable on the date set forth in such notice. Partial prepayments shall be in an aggregate amount of $1,000,000 or a whole multiple of $1,000,000 in excess thereof with respect to Base Rate Loans (other than Swingline Loans), $5,000,000 or a whole multiple of $1,000,000 in excess thereof with respect to LIBOR Rate Loans and $500,000 or a whole multiple of $100,000 in excess thereof with respect to Swingline Loans. A Notice of Prepayment received after 12:00 p.m. shall be deemed received on the next Business Day. Each such repayment shall be accompanied by any amount required to be paid pursuant to Section 5.9 hereof. Notwithstanding the foregoing, any Notice of Prepayment delivered in connection with any refinancing of all of the Credit Facility with the proceeds of such refinancing or of any incurrence of Indebtedness or the occurrence of some other identifiable event or condition, may be, if expressly so stated to be, contingent upon the consummation of such refinancing or incurrence or occurrence of such other identifiable event or condition and may be revoked by the Borrower in the event such condition is not satisfied (provided that the failure of such contingency shall not relieve the Borrower from its obligations in respect thereof under Section 5.9).
(d) Prepayment of Excess Proceeds. In the event proceeds remain after the prepayments of Term Loan Facility pursuant to Section 4.4(b), the amount of such excess proceeds shall be used on the date of the required prepayment under Section 4.4(b) to prepay the outstanding principal amount of the Revolving Credit Loans, without a corresponding reduction of the Revolving Credit Commitment, with remaining proceeds, if any, refunded to the Borrower.
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(e) Limitation on Prepayment of LIBOR Rate Loans. The Borrower may not prepay any LIBOR Rate Loan on any day other than on the last day of the Interest Period applicable thereto unless such prepayment is accompanied by any amount required to be paid pursuant to Section 5.9 hereof.
(f) Hedge Agreements. No repayment or prepayment of the Loans pursuant to this Section shall affect any of the Borrowers obligations under any Hedge Agreement entered into with respect to the Loans.
SECTION 2.5 Permanent Reduction of the Revolving Credit Commitment.
(a) Voluntary Reduction. The Borrower shall have the right at any time and from time to time, upon at least three (3) Business Days prior irrevocable written notice to the Administrative Agent, to permanently reduce, without premium or penalty, (i) the entire Revolving Credit Commitment at any time or (ii) portions of the Revolving Credit Commitment, from time to time, in an aggregate principal amount not less than $1,000,000 or any whole multiple of $1,000,000 in excess thereof. Any reduction of the Revolving Credit Commitment shall be applied to the Revolving Credit Commitment of each Revolving Credit Lender according to its Revolving Credit Commitment Percentage. All Commitment Fees accrued until the effective date of any termination of the Revolving Credit Commitment shall be paid on the effective date of such termination. Notwithstanding the foregoing, any notice to reduce the Revolving Credit Commitment delivered in connection with any refinancing of all of the Credit Facility with the proceeds of such refinancing or of any incurrence of Indebtedness or the occurrence of some other identifiable event or condition, may be, if expressly so stated to be, contingent upon the consummation of such refinancing or incurrence or occurrence of such identifiable event or condition and may be revoked by the Borrower in the event such condition is not satisfied (provided that the failure of such contingency shall not relieve the Borrower from its obligations in respect thereof under Section 5.9).
(b) Corresponding Payment. Each permanent reduction permitted pursuant to this Section shall be accompanied by a payment of principal sufficient to reduce the aggregate outstanding Revolving Credit Loans, Swingline Loans and L/C Obligations, as applicable, after such reduction to the Revolving Credit Commitment as so reduced, and if the aggregate amount of all outstanding Letters of Credit exceeds the Revolving Credit Commitment as so reduced, the Borrower shall be required to deposit Cash Collateral in a Cash Collateral account opened by the Administrative Agent in an amount equal to such excess. Such Cash Collateral shall be applied in accordance with Section 10.2(b). Any reduction of the Revolving Credit Commitment to zero shall be accompanied by payment of all outstanding Revolving Credit Loans and Swingline Loans (and furnishing of Cash Collateral satisfactory to the Administrative Agent for all L/C Obligations) and shall result in the termination of the Revolving Credit Commitment and the Swingline Commitment and the Revolving Credit Facility. If the reduction of the Revolving Credit Commitment requires the repayment of any LIBOR Rate Loan, such repayment shall be accompanied by any amount required to be paid pursuant to Section 5.9 hereof.
SECTION 2.6 Termination of Revolving Credit Facility. The Revolving Credit Facility and the Revolving Credit Commitments shall terminate on the Revolving Credit Maturity Date (after giving effect to any Extension).
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ARTICLE III
LETTER OF CREDIT FACILITY
SECTION 3.1 L/C Facility.
(a) Availability. Subject to the terms and conditions hereof, each applicable Issuing Lender, in reliance on the agreements of the Revolving Credit Lenders set forth in Section 3.4(a), agrees to issue standby Letters of Credit in an aggregate amount not to exceed its L/C Commitment for the account of the Borrower or, subject to Section 3.10, any Subsidiary thereof. Letters of Credit may be issued on any Business Day from the Closing Date to, but not including the thirtieth (30th) Business Day prior to the Revolving Credit Maturity Date in such form as may be approved from time to time by the applicable Issuing Lender; provided, that no Issuing Lender shall issue any Letter of Credit if, after giving effect to such issuance, (a) the L/C Obligations would exceed the L/C Commitment or (b) the Revolving Credit Outstandings would exceed the Revolving Credit Commitment. Each Letter of Credit shall (i) be denominated in Dollars in a minimum amount of $100,000 (or such lesser amount as agreed to by the applicable Issuing Lender and the Administrative Agent), (ii) expire on a date no more than twelve (12) months after the date of issuance or last renewal of such Letter of Credit (subject to automatic renewal for additional one (1) year periods pursuant to the terms of the Letter of Credit Application or other documentation reasonably acceptable to the applicable Issuing Lender), which date shall be no later than the fifth (5th) Business Day prior to the Revolving Credit Maturity Date and (iii) be subject to the ISP98 as set forth in the Letter of Credit Application or as determined by the applicable Issuing Lender and, to the extent not inconsistent therewith, the laws of the State of New York. No Issuing Lender shall at any time be obligated to issue any Letter of Credit hereunder if (A) any order, judgment or decree of any Governmental Authority or arbitrator shall by its terms purport to enjoin or restrain such Issuing Lender from issuing such Letter of Credit, or any Applicable Law applicable to such Issuing Lender or any request or directive (whether or not having the force of law) from any Governmental Authority with jurisdiction over such Issuing Lender shall prohibit, or request that such Issuing Lender refrain from, the issuance of letters of credit generally or such Letter of Credit in particular or shall impose upon such Issuing Lender with respect to letters of credit generally or such Letter of Credit in particular any restriction or reserve or capital requirement (for which such Issuing Lender is not otherwise compensated) not in effect on the Closing Date, or any unreimbursed loss, cost or expense that was not applicable, in effect or known to such Issuing Lender as of the Closing Date and that such Issuing Lender in good faith deems material to it, (B) the conditions set forth in Section 6.2 are not satisfied or (C) the beneficiary of such Letter of Credit is a Sanctioned Person. References herein to issue and derivations thereof with respect to Letters of Credit shall also include extensions or modifications of any outstanding Letters of Credit, unless the context otherwise requires. As of the Closing Date, each of the Existing Letters of Credit shall constitute, for all purposes of this Agreement and the other Loan Documents, a Letter of Credit issued and outstanding hereunder.
(b) Defaulting Lenders. Notwithstanding anything to the contrary contained in this Agreement, Article III shall be subject to the terms and conditions of Section 5.14 and Section 5.15.
SECTION 3.2 Procedure for Issuance of Letters of Credit. The Borrower may from time to time request that any Issuing Lender issue a Letter of Credit by delivering to any Issuing Lender at its applicable office (with a copy to the Administrative Agent at the Administrative Agents Office) a Letter of Credit Application therefor, completed to the satisfaction of such Issuing Lender, and such other certificates, documents and other papers and information as such Issuing Lender or the Administrative Agent may reasonably request. Upon receipt of any Letter of Credit Application, such Issuing Lender shall process such Letter of Credit Application and the certificates, documents and other papers and information delivered to it in connection therewith in accordance with its customary procedures and shall,
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subject to Section 3.1 and Article VI, promptly issue the Letter of Credit requested thereby (but in no event shall such Issuing Lender be required to issue any Letter of Credit earlier than three (3) Business Days after its receipt of the Letter of Credit Application therefor and all such other certificates, documents and other papers and information relating thereto) by issuing the original of such Letter of Credit to the beneficiary thereof or as otherwise may be agreed by such Issuing Lender and the Borrower. The applicable Issuing Lender shall promptly furnish to the Borrower and the Administrative Agent a copy of such Letter of Credit and the Administrative Agent shall promptly notify each Revolving Credit Lender of the issuance and upon request by any Lender, furnish to such Revolving Credit Lender a copy of such Letter of Credit and the amount of such Revolving Credit Lenders participation therein.
SECTION 3.3 Commissions and Other Charges.
(a) Letter of Credit Commissions. Subject to Section 5.15(a)(iii)(B), the Borrower shall pay to the Administrative Agent, for the account of the applicable Issuing Lender and the L/C Participants, a letter of credit commission with respect to each Letter of Credit in the amount equal to the daily amount available to be drawn under such standby Letters of Credit times the Applicable Margin with respect to Revolving Credit Loans that are LIBOR Rate Loans (determined, in each case, on a per annum basis). Such commission shall be payable quarterly in arrears on the last Business Day of each calendar quarter, on the Revolving Credit Maturity Date and thereafter on demand of the Administrative Agent. The Administrative Agent shall, promptly following its receipt thereof, distribute to the applicable Issuing Lender and the L/C Participants all commissions received pursuant to this Section 3.3 in accordance with their respective Revolving Credit Commitment Percentages.
(b) Issuance Fee. In addition to the foregoing commission, the Borrower shall pay directly to the applicable Issuing Lender, for its own account, an issuance fee with respect to each Letter of Credit issued by such Issuing Lender in an amount equal to 0.125% per annum on the daily maximum amount available to be drawn under such Letter of Credit. Such issuance fee shall be payable quarterly in arrears on the last Business Day of each calendar quarter commencing with the first such date to occur after the issuance of such Letter of Credit, on the Revolving Credit Maturity Date and thereafter on demand of the applicable Issuing Lender. For the avoidance of doubt, such issuance fee shall be applicable to and paid upon each of the Existing Letters of Credit.
(c) Other Fees, Costs, Charges and Expenses. In addition to the foregoing fees and commissions, the Borrower shall pay or reimburse each Issuing Lender for such normal and customary fees, costs, charges and expenses as are incurred or charged by such Issuing Lender in issuing, effecting payment under, amending or otherwise administering any Letter of Credit issued by it.
SECTION 3.4 L/C Participations.
(a) Each Issuing Lender irrevocably agrees to grant and hereby grants to each L/C Participant, and, to induce each Issuing Lender to issue Letters of Credit hereunder, each L/C Participant irrevocably agrees to accept and purchase and hereby accepts and purchases from each Issuing Lender, on the terms and conditions hereinafter stated, for such L/C Participants own account and risk an undivided interest equal to such L/C Participants Revolving Credit Commitment Percentage in each Issuing Lenders obligations and rights under and in respect of each Letter of Credit issued by it hereunder and the amount of each draft paid by such Issuing Lender thereunder. Each L/C Participant unconditionally and irrevocably agrees with each Issuing Lender that, if a draft is paid under any Letter of Credit issued by such Issuing Lender for which such Issuing Lender is not reimbursed in full by the Borrower through a Revolving Credit Loan or otherwise in accordance with the terms of this Agreement, such L/C Participant shall pay to such Issuing Lender upon demand at such Issuing Lenders address for notices specified herein an amount equal to such L/C Participants Revolving Credit Commitment Percentage of the amount of such draft, or any part thereof, which is not so reimbursed.
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(b) Upon becoming aware of any amount required to be paid by any L/C Participant to any Issuing Lender pursuant to Section 3.4(a) in respect of any unreimbursed portion of any payment made by such Issuing Lender under any Letter of Credit, issued by it, such Issuing Lender shall notify the Administrative Agent of such unreimbursed amount and the Administrative Agent shall notify each L/C Participant (with a copy to the applicable Issuing Lender) of the amount and due date of such required payment and such L/C Participant shall pay to the Administrative Agent (which, in turn shall pay such Issuing Lender) the amount specified on the applicable due date. If any such amount is paid to such Issuing Lender after the date such payment is due, such L/C Participant shall pay to such Issuing Lender on demand, in addition to such amount, the product of (i) such amount, times (ii) the daily average Federal Funds Rate as determined by the Administrative Agent during the period from and including the date such payment is due to the date on which such payment is immediately available to such Issuing Lender, times (iii) a fraction the numerator of which is the number of days that elapse during such period and the denominator of which is 360. A certificate of such Issuing Lender with respect to any amounts owing under this Section shall be conclusive in the absence of manifest error. With respect to payment to such Issuing Lender of the unreimbursed amounts described in this Section, if the L/C Participants receive notice that any such payment is due (A) prior to 2:00 p.m. on any Business Day, such payment shall be due that Business Day, and (B) after 2:00 p.m. on any Business Day, such payment shall be due on the following Business Day.
(c) Whenever, at any time after any Issuing Lender has made payment under any Letter of Credit issued by it and has received from any L/C Participant its Revolving Credit Commitment Percentage of such payment in accordance with this Section, such Issuing Lender receives any payment related to such Letter of Credit (whether directly from the Borrower or otherwise), or any payment of interest on account thereof, such Issuing Lender will distribute to such L/C Participant its pro rata share thereof; provided, that in the event that any such payment received by such Issuing Lender shall be required to be returned by such Issuing Lender, such L/C Participant shall return to such Issuing Lender the portion thereof previously distributed by such Issuing Lender to it.
(d) Each L/C Participants obligation to make the Revolving Credit Loans referred to in Section 3.4(b) and to purchase participating interests pursuant to Section 3.4(a) shall be absolute and unconditional and shall not be affected by any circumstance, including (i) any setoff, counterclaim, recoupment, defense or other right that such Revolving Credit Lender or the Borrower may have against the Swingline Lender, the Borrower or any other Person for any reason whatsoever, (ii) the occurrence or continuance of a Default or an Event of Default or the failure to satisfy any of the other conditions specified in Article VI, (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 Credit Party or any other Revolving Credit Lender or (v) any other circumstance, happening or event whatsoever, whether or not similar to any of the foregoing.
SECTION 3.5 Reimbursement Obligation of the Borrower. In the event of any drawing under any Letter of Credit, the Borrower agrees to reimburse (either with the proceeds of a Revolving Credit Loan as provided for in this Section or with funds from other sources), in same day funds, the applicable Issuing Lender on each date on which such Issuing Lender notifies the Borrower of the date and amount of a draft paid by it under any Letter of Credit for the amount of (a) such draft so paid and (b) any amounts referred to in Section 3.3(c) incurred by such Issuing Lender in connection with such payment. Unless the Borrower shall immediately notify such Issuing Lender that the Borrower intends to reimburse such Issuing Lender for such drawing from other sources or funds, the Borrower shall be deemed to have timely given a Notice of Borrowing to the Administrative Agent requesting that the
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Revolving Credit Lenders make a Revolving Credit Loan as a Base Rate Loan on the applicable repayment date in the amount of (i) such draft so paid and (ii) any amounts referred to in Section 3.3(c) incurred by such Issuing Lender in connection with such payment, and the Revolving Credit Lenders shall make a Revolving Credit Loan as a Base Rate Loan in such amount, the proceeds of which shall be applied to reimburse such Issuing Lender for the amount of the related drawing and such fees and expenses. Each Revolving Credit Lender acknowledges and agrees that its obligation to fund a Revolving Credit Loan in accordance with this Section to reimburse such Issuing Lender for any draft paid under a Letter of Credit issued by it is absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, non-satisfaction of the conditions set forth in Section 2.3(a) or Article VI. If the Borrower has elected to pay the amount of such drawing with funds from other sources and shall fail to reimburse such Issuing Lender as provided above, or if the amount of such drawing is not fully refunded through a Base Rate Loan as provided above, the unreimbursed amount of such drawing shall bear interest at the rate which would be payable on any outstanding Base Rate Loans which were then overdue from the date such amounts become payable (whether at stated maturity, by acceleration or otherwise) until payment in full.
SECTION 3.6 Obligations Absolute. The Borrowers obligations under this Article III (including, without limitation, the Reimbursement Obligation) shall be absolute and unconditional under any and all circumstances and irrespective of any set off, counterclaim or defense to payment which the Borrower may have or have had against the applicable Issuing Lender or any beneficiary of a Letter of Credit or any other Person. The Borrower also agrees that the applicable Issuing Lender and the L/C Participants shall not be responsible for, and the Borrowers Reimbursement Obligation under Section 3.5 shall not be affected by, among other things, the validity or genuineness of documents or of any endorsements thereon, even though such documents shall in fact prove to be invalid, fraudulent or forged, or any dispute between or among the 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. No Issuing Lender shall 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 issued by it, except for errors or omissions caused by such Issuing Lenders gross negligence or willful misconduct, as determined by a court of competent jurisdiction by final nonappealable judgment. The Borrower agrees that any action taken or omitted by any Issuing Lender under or in connection with any Letter of Credit issued by it 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 applicable Issuing Lender or any L/C Participant to the Borrower. The responsibility of any Issuing Lender to the Borrower in connection with any draft presented for payment under any Letter of Credit issued to it 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 substantially conforms to the requirements under such Letter of Credit.
SECTION 3.7 Effect of Letter of Credit Application. To the extent that any provision of any Letter of Credit Application related to any Letter of Credit is inconsistent with the provisions of this Article III, the provisions of this Article III shall apply.
SECTION 3.8 Removal and Resignation of Issuing Lenders.
(a) The Borrower may at any time remove any Lender from its role as an Issuing Lender hereunder upon not less than thirty (30) days prior notice to such Issuing Lender and the Administrative Agent (or such shorter period of time as may be acceptable to such Issuing Lender and the Administrative Agent).
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(b) In connection with (i) any Refinancing Revolving Credit Commitments or (ii) any Extension of Revolving Credit Commitments, that has not been consented to by any Issuing Lender, such Issuing Lender may, in connection with such Refinancing Revolving Credit Commitments or Extension resign as an Issuing Lender hereunder upon not less than five (5) Business Days prior notice to the Borrower and the Administrative Agent (or such shorter period of time as may be acceptable to the Borrower and the Administrative Agent).
(c) Any removed or resigning Issuing Lender shall retain all the rights, powers, privileges and duties of an Issuing Lender hereunder with respect to all Letters of Credit issued by it that are outstanding as of the effective date of its removal or resignation as an Issuing Lender and all L/C Obligations with respect thereto (including, without limitation, the right to require the Revolving Credit Lenders to take such actions as are required under Section 3.4). Without limiting the foregoing, upon the removal or resignation of a Lender as an Issuing Lender hereunder, the Borrower may, or at the request of such removed or resigned Issuing Lender the Borrower shall, use commercially reasonable efforts to, arrange for one or more of the other Issuing Lenders to issue Letters of Credit hereunder in substitution for the Letters of Credit, if any, issued by such removed Issuing Lender and outstanding at the time of such removal or resignation, or make other arrangements satisfactory to the removed Issuing Lender to effectively cause another Issuing Lender to assume the obligations of the removed or resigned Issuing Lender with respect to any such Letters of Credit.
SECTION 3.9 Reporting of Letter of Credit Information and L/C Commitment. At any time that there is an Issuing Lender that is not also the financial institution acting as Administrative Agent, then (a) on the last Business Day of each calendar month, (b) on each date that a Letter of Credit is amended, terminated or otherwise expires, (c) on each date that a Letter of Credit is issued or the expiry date of a Letter of Credit is extended, and (d) upon the request of the Administrative Agent, each Issuing Lender (or, in the case of clauses (b), (c) or (d) of this Section, the applicable Issuing Lender) shall deliver to the Administrative Agent a report setting forth in form and detail reasonably satisfactory to the Administrative Agent information (including, without limitation, any reimbursement, Cash Collateral, or termination in respect of Letters of Credit issued by such Issuing Lender) with respect to each Letter of Credit issued by such Issuing Lender that is outstanding hereunder. In addition, each Issuing Lender shall provide notice to the Administrative Agent of its L/C Commitment, or any change thereto, promptly upon it becoming an Issuing Lender or making any change to its L/C Commitment. No failure on the part of any Issuing Lender to provide such information pursuant to this Section 3.9 shall limit the obligations of the Borrower or any Revolving Credit Lender hereunder with respect to its reimbursement and participation obligations hereunder.
SECTION 3.10 Letters of Credit Issued for Subsidiaries. Notwithstanding that a Letter of Credit issued or outstanding hereunder is in support of any obligations of, or is for the account of, a Subsidiary, the Borrower shall be obligated to reimburse, or to cause the applicable Subsidiary to reimburse, the applicable Issuing Lender hereunder for any and all drawings under such Letter of Credit. The Borrower hereby acknowledges that the issuance of Letters of Credit for the account of any of its Subsidiaries inures to the benefit of the Borrower and that the Borrowers business derives substantial benefits from the businesses of such Subsidiaries.
ARTICLE IV
TERM LOAN FACILITY
SECTION 4.1 Initial Term Loan. Subject to the terms and conditions of this Agreement and the other Loan Documents, and in reliance upon the representations and warranties set forth in this Agreement and the other Loan Documents, each Term Loan Lender severally agrees to make the Initial Term Loan to the Borrower on the Closing Date in a principal amount equal to such Lenders Term Loan Commitment as of the Closing Date.
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SECTION 4.2 Procedure for Advance of Term Loan.
(a) Initial Term Loan. The Borrower shall give the Administrative Agent an irrevocable Notice of Borrowing prior to 12:00 p.m. on the Closing Date requesting that the Term Loan Lenders make the Initial Term Loan as a Base Rate Loan on such date (provided that the Borrower may request, no later than three (3) Business Days prior to the Closing Date, that the Lenders make the Initial Term Loan as a LIBOR Rate Loan if the Borrower has delivered to the Administrative Agent a letter in form and substance reasonably satisfactory to the Administrative Agent indemnifying the Lenders in the manner set forth in Section 5.9 of this Agreement). Upon receipt of such Notice of Borrowing from the Borrower, the Administrative Agent shall promptly notify each Term Loan Lender thereof. Not later than 2:00 p.m. on the Closing Date, each Term Loan Lender will make available to the Administrative Agent for the account of the Borrower, at the Administrative Agents Office in immediately available funds, the amount of such Initial Term Loan to be made by such Term Loan Lender on the Closing Date. The Borrower hereby irrevocably authorizes the Administrative Agent to disburse the proceeds of the Initial Term Loan in immediately available funds by wire transfer to such Person or Persons as may be designated by the Borrower in writing.
(b) Incremental Term Loans. Any Incremental Term Loans shall be borrowed pursuant to, and in accordance with Section 5.13.
(c) Refinancing Term Loans. Any Refinancing Term Loans shall be borrowed pursuant to Section 5.16.
SECTION 4.3 Repayment of Term Loans.
(a) Initial Term Loan. The Borrower shall repay the aggregate outstanding principal amount of the Initial Term Loan in consecutive quarterly installments equal to $1,500,000 (except as the amounts of individual installments may be adjusted pursuant to Section 4.4 hereof) on the last Business Day of each of March, June, September and December commencing September 30, 2017; provided, however, that the final principal repayment installment of the Initial Term Loans shall be repaid on the Term Loan Maturity Date in an amount equal to the aggregate principal amount of all Initial Term Loans outstanding on such date.
(b) Incremental Term Loans. The Borrower shall repay the aggregate outstanding principal amount of each Incremental Term Loan (if any) as determined pursuant to, and in accordance with, Section 5.13.
SECTION 4.4 Prepayments of Term Loans.
(a) Optional Prepayments. Except as provided in Section 4.4(c), Borrower shall have the right at any time and from time to time, without premium or penalty, to prepay the Term Loans, in whole or in part, upon delivery to the Administrative Agent of a Notice of Prepayment not later than 12:00 p.m. (i) on the same Business Day as each Base Rate Loan and (ii) at least three (3) Business Days before each LIBOR Rate Loan, specifying the date and amount of repayment, whether the repayment is of LIBOR Rate Loans or Base Rate Loans or a combination thereof, and if a combination thereof, the amount allocable to each and whether the repayment is of the Initial Term Loan, an Incremental Term Loan or a combination thereof, and if a combination thereof, the amount allocable to each. Each optional prepayment of the Term Loans hereunder shall be in an aggregate principal
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amount of at least $1,000,000 or any whole multiple of $1,000,000 in excess thereof and shall be applied, on a pro rata basis, to the outstanding principal installments of the Initial Term Loan and, if applicable, any Incremental Term Loans as directed by the Borrower. Each repayment shall be accompanied by any amount required to be paid pursuant to Section 5.9 hereof. A Notice of Prepayment received after 12:00 p.m. shall be deemed received on the next Business Day. The Administrative Agent shall promptly notify the applicable Term Loan Lenders of each Notice of Prepayment. Notwithstanding the foregoing, any Notice of Prepayment delivered in connection with any refinancing of all of the Credit Facility with the proceeds of such refinancing or of any other incurrence of Indebtedness or the occurrence of some other identifiable event or condition, may be, if expressly so stated to be, contingent upon the consummation of such refinancing or incurrence or occurrence of such other identifiable event or condition and may be revoked by the Borrower in the event such condition is not satisfied; provided that the delay or failure of such contingency shall not relieve the Borrower from its obligations in respect thereof under Section 5.9.
(b) Mandatory Prepayments.
(i) Debt Issuances. The Borrower shall make mandatory principal prepayments of the Loans in the manner set forth in clause (v) below in an amount equal to one hundred percent (100%) of the aggregate Net Cash Proceeds from (A) any Refinancing Debt and (B) any Debt Issuance not otherwise permitted pursuant to Section 9.1. Such prepayment shall be made within five (5) Business Days after the date of receipt of the Net Cash Proceeds of any such Debt Issuance.
(ii) Asset Dispositions and Insurance and Condemnation Events. The Borrower shall make mandatory principal prepayments of the Loans in the manner set forth in clause (v) below in amounts equal to one hundred percent (100%) of the aggregate Net Cash Proceeds from (A) any Asset Disposition (other than any Asset Disposition permitted pursuant to, and in accordance with, clauses (a) through (p) of Section 9.5) or (B) any Insurance and Condemnation Event, to the extent that the aggregate amount of such Net Cash Proceeds, in the case of each of clauses (A) and (B), respectively, exceed $7,500,000 during any Fiscal Year. Such prepayments shall be made within three (3) Business Days after the date of receipt of the Net Cash Proceeds; provided that, so long as no Event of Default has occurred and is continuing, no prepayment shall be required under this Section 4.4(b)(ii) with respect to such portion of such Net Cash Proceeds that the Borrower shall have, or prior to such date given written notice to the Administrative Agent of its intent to reinvest in accordance with Section 4.4(b)(iii).
(iii) Reinvestment Option. With respect to any Net Cash Proceeds realized or received with respect to any Asset Disposition or any Insurance and Condemnation Event by any Credit Party of any Subsidiary thereof (in each case, to the extent not excluded pursuant to Section 4.4(b)(ii)), at the option of the Borrower, the Credit Parties may reinvest all or any portion of such Net Cash Proceeds in assets used or useful for the business of the Credit Parties and their Subsidiaries within (A) twelve (12) months following receipt of such Net Cash Proceeds or (B) if such Credit Party enters into a bona fide commitment to reinvest such Net Cash Proceeds within twelve (12) months following receipt thereof, within eighteen (18) months following receipt thereof; provided that if any Net Cash Proceeds are no longer intended to be or cannot be so reinvested at any time after delivery of a notice of reinvestment election, an amount equal to any such Net Cash Proceeds shall be applied within three (3) Business Days after the applicable Credit Party reasonably determines that such Net Cash Proceeds are no longer intended to be or cannot be so reinvested to the prepayment of the Loans as set forth in this Section 4.4(b). Pending the final application of any such Net Cash Proceeds, the applicable Credit Party may invest an amount equal to such Net Cash Proceeds in any manner that is not prohibited by this Agreement.
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(iv) Excess Cash Flow. After the end of each Fiscal Year (commencing with the Fiscal Year ending December 31, 2017; provided that Excess Cash Flow for such Fiscal Year shall include only the full fiscal quarters ending after the Closing Date and shall not include changes to Working Capital during such period) (each such Fiscal Year or portion thereof, as applicable, an Excess Cash Flow Period), within five (5) Business Days after the earlier to occur of (x) the actual delivery of the financial statements and related Officers Compliance Certificate for such Excess Cash Flow Period and (y) the date on which the financial statements and the related Officers Compliance Certificate for such Excess Cash Flow Period are required to be delivered pursuant to Section 8.1(a) and Section 8.2(a), the Borrower shall make mandatory principal prepayments of the Loans in the manner set forth in clause (v) below in an amount equal to (A) the applicable ECF Percentage for such Excess Cash Flow Period times Excess Cash Flow for such Excess Cash Flow Period minus (B) the aggregate amount of (i) all optional prepayments of Revolving Credit Loans during such Excess Cash Flow Period (solely to the extent accompanied by permanent optional reductions in the Revolving Credit Commitment) and (ii) all optional prepayments of any Term Loans (including any prepayments made pursuant to Section 4.5) during such Excess Cash Flow Period, in each case to the extent that such prepayments were financed with Internally Generated Cash.
(v) Notice; Manner of Payment. Upon the occurrence of any event triggering the prepayment requirement under clauses (i) through and including (iv) above, the Borrower shall promptly deliver a Notice of Prepayment to the Administrative Agent and upon receipt of such notice, the Administrative Agent shall promptly so notify the Lenders. Each prepayment of the Loans under clauses (i) through and including (iv) of this Section shall be applied as follows: first, ratably between the Initial Term Loans and (unless otherwise agreed to by the applicable Incremental Lenders) any Incremental Term Loans and second, to the extent of any excess, to repay the Revolving Credit Loans pursuant to Section 2.4(d), without a corresponding reduction in the Revolving Credit Commitment. Each such prepayment of the Initial Term Loans and any Incremental Term Loans shall be applied to reduce on a pro rata basis the next eight remaining scheduled amortization payments in direct order of maturity, then to the remaining scheduled principal installments of the Initial Term Loans and Incremental Term Loans (excluding the bullet payment due on the Term Loan Maturity Date), and then to the bullet payment due on the Term Loan Maturity Date. Proceeds of any Refinancing Debt shall be applied solely to prepay each applicable Class of Term Loans and/or Revolving Credit Loans subject to such Refinance. Notwithstanding the foregoing, with respect to any Net Cash Proceeds from any Asset Disposition or Insurance and Condemnation Event, the Borrower may prepay Term Loans and prepay or purchase any Refinancing Notes that are secured by the Collateral on a pari passu basis (at a purchase price no greater than par plus accrued and unpaid interest), to the extent required thereby, on a pro rata basis in accordance with the respective outstanding principal amounts of the Term Loans and such Refinancing Notes as of the time of the applicable Asset Disposition or Insurance and Condemnation Event.
(vi) Rejection Right. Each Term Loan Lender may reject all (but not less than all) of its pro rata share of any mandatory prepayment (except in the case of any prepayment of Term Loans in accordance with Section 4.4(b)(i) with the proceeds of Refinancing Debt) (such declined amounts, the Declined Proceeds) of Term Loans required to be made pursuant to Section 4.4(b) by providing written notice to the Administrative Agent no later than 5:00 p.m. one Business Day after the date of such Lenders receipt of notice from the Administrative Agent regarding such prepayment. If a Lender fails to deliver a notice of rejection to the Administrative Agent within
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the time frame specified above, any such failure will be deemed an acceptance of the total amount of such mandatory prepayment of Term Loans. Any Declined Proceeds remaining after offering such Declined Proceeds to the Lenders in accordance with the terms hereof shall be retained by the Borrower and used for any purpose not prohibited by this Agreement (Retained Declined Proceeds).
(vii) Prepayment of LIBOR Rate Loans. Each prepayment shall be accompanied by any amount required to be paid pursuant to Section 5.9; provided that, so long as no Default or Event of Default shall have occurred and be continuing, if any prepayment of LIBOR Rate Loans is required to be made under this Section 4.4(b) prior to the last day of the Interest Period therefor, in lieu of making any payment pursuant to this Section 4.4(b) in respect of any such LIBOR Rate Loan prior to the last day of the Interest Period therefor, the Borrower may, in its sole discretion, deposit an amount sufficient to make any such prepayment otherwise required to be made thereunder together with accrued interest to the last day of such Interest Period into an account held at, and subject to the sole control of, the Administrative Agent until the last day of such Interest Period, at which time the Administrative Agent shall be authorized (without any further action by or notice to or from the Borrower or any other Credit Party) to apply such amount to the prepayment of such Term Loans in accordance with this Section 4.4(b). Upon the occurrence and during the continuance of any Default or Event of Default, the Administrative Agent shall also be authorized (without any further action by or notice to or from the Borrower or any other Credit Party) to apply such amount to the prepayment of the outstanding Term Loans in accordance with the relevant provisions of this Section 4.4(b).
(viii) No Reborrowings. Amounts prepaid under the Term Loan pursuant to this Section may not be reborrowed.
(c) Call Premium. In connection with any Repricing Transaction that is consummated in respect of all or any portion of the Initial Term Loans, during the six (6) month period following the Closing Date, the Borrower shall pay to the Administrative Agent, for the ratable benefit each Term Loan Lender, a fee equal to 1.0% of the aggregate principal amount of the Initial Term Loans of such Term Loan Lender subject to such Repricing Transaction. Such fees shall be due and payable within five (5) Business Days of the date of the effectiveness of such Repricing Transaction.
SECTION 4.5 Reverse Dutch Auction Prepayments.
(a) Notwithstanding anything to the contrary contained in this Agreement, the Borrower may at any time and from time to time after the Closing Date conduct reverse Dutch auctions in order to prepay Initial Term Loans, and, if applicable, any Incremental Term Loans below par value on a non-pro rata basis (each, an Auction, and each such Auction to be managed exclusively by the Administrative Agent or another investment bank of recognized standing selected by the Borrower and acceptable to the Administrative Agent (in such capacity, the Auction Manager)), subject to the following:
(i) each Auction shall be conducted in accordance with the procedures, terms and conditions set forth in this Section and the Auction Procedures;
(ii) no Default or Event of Default shall have occurred and be continuing or would result therefrom on the date of the delivery of each Auction Notice and at the time of prepayment of any Term Loans in connection with any Auction and after giving effect to any Indebtedness incurred in connection therewith;
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(iii) the principal amount (calculated on the face amount thereof) of all Term Loans that the Borrower offers to repay in any such Auction shall be no less than $10,000,000 and whole increments of $1,000,000 in excess thereof (unless another amount is agreed to by the Administrative Agent and Auction Manager);
(iv) after giving effect to any prepayment of the applicable Term Loans pursuant to this Section and any Indebtedness incurred in connection therewith, the Borrower shall be in pro forma compliance with the Financial Covenant for the most recently completed Reference Period, as applicable;
(v) the Borrower shall not make any drawing under the Revolving Credit Facility immediately prior to and immediately after giving effect to any prepayment of the applicable Term Loans pursuant to this Section and any Indebtedness incurred in connection therewith and shall not use the proceeds of any Revolving Credit Loan in connection with any such prepayment;
(vi) the aggregate principal amount (calculated on the face amount thereof) of all Term Loans so prepaid by the Borrower shall automatically be cancelled and retired by the Borrower on the settlement date of the relevant prepayment;
(vii) no more than one Auction may be ongoing at any one time;
(viii) the Borrower represents and warrants that, at the time of each such Auction and at the time of any prepayment of the applicable Term Loans pursuant to such Auction, neither the Borrower nor any of its Subsidiaries shall have any material non-public information (within the meaning of the United States federal securities laws, MNPI) with respect to the Borrower or any of its Subsidiaries, any securities of the Borrower or any of its Subsidiaries, the Borrowers ability to perform any obligations under this Agreement or any other Loan Document or any other matter that may be material to a decision by any Lender to participate in any such Auction, in any case, that has not been previously disclosed in writing to the Administrative Agent and the Lenders (other than because such Lender does not wish to receive MNPI) prior to such time;
(ix) at the time of each prepayment of the applicable Term Loans subject to the Auction, the Borrower shall have delivered to the Administrative Agent and the Auction Manager an officers certificate executed by a Responsible Officer of the Borrower certifying as to compliance with the preceding clauses (ii), (iv), (v) and (viii); and
(x) any Auction shall be offered to all Lenders with outstanding Term Loans of the applicable tranche that are to be prepaid on a pro rata basis.
(b) The Borrower must terminate an Auction if it fails to satisfy one or more of the conditions set forth above which are required to be met at the time which otherwise would have been the time of prepayment of the applicable Term Loans pursuant to the respective Auction. If the Borrower commences any Auction (and all relevant requirements set forth above which are required to be satisfied at the time of the commencement of the respective Auction have in fact been satisfied), and if at such time of commencement the Borrower reasonably believes that all required conditions set forth above which are required to be satisfied at the time of the prepayment of the applicable Term Loans pursuant to such Auction shall be satisfied, then the Borrower shall have no liability to any Lender for any termination of the respective Auction as a result of its failure to satisfy one or more of the conditions set forth above which are required to be met at the time which otherwise would have been the time of prepayment of the Term Loans pursuant to the respective Auction, and any such failure shall not result in any Default or Event of Default hereunder. With respect to all prepayments
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of Term Loans made by the Borrower pursuant to this Section, (i) the Borrower shall pay on the settlement date of each such prepayment all accrued and unpaid interest and fees (except to the extent otherwise set forth in the relevant offering documents), if any, on the prepaid Term Loans up to the settlement date of such prepayment and (ii) such prepayments shall not constitute voluntary or mandatory payments or prepayments for purposes of this Agreement, including, without limitation, Section 2.5 or 4.4.
(c) The Administrative Agent and the Lenders hereby consent to any Auction and the other transactions contemplated by this Section (provided that no Lender shall have an obligation to participate in any such Auctions) and hereby waive the requirements of any provision of this Agreement (including, without limitation, Sections 4.4 and 5.6) that may otherwise prohibit any Auction or any other transaction contemplated by this Section. The parties hereto understand and acknowledge that prepayments of the Term Loans by the Borrower contemplated by this Section shall not constitute Investments by the Borrower. The Auction Manager acting in its capacity as such hereunder shall be entitled to the benefits of the provisions of Article XI and Section 12.3 mutatis mutandis as if each reference therein to the Administrative Agent were a reference to the Auction Manager, and the Administrative Agent shall cooperate with the Auction Manager as reasonably requested by the Auction Manager in order to enable it to perform its responsibilities and duties in connection with each Auction. Notwithstanding anything to the contrary contained herein (including in the definitions of Consolidated Net Income and Consolidated EBITDA) any non-cash gains or income in respect of cancellation of indebtedness resulting from the prepayment and cancellation of any Term Loans by the Borrower or any of its Subsidiaries pursuant to this Section shall be excluded from the determination of Consolidated Net Income and Consolidated EBITDA.
ARTICLE V
GENERAL LOAN PROVISIONS
SECTION 5.1 Interest.
(a) Interest Rate Options. Subject to the provisions of this Section, at the election of the Borrower, (i) Revolving Credit Loans and the Term Loans shall bear interest at (A) the Base Rate plus the Applicable Margin or (B) the LIBOR Rate plus the Applicable Margin (provided that the LIBOR Rate shall not be available until three (3) Business Days (or four (4) Business Days with respect to a LIBOR Rate based on a twelve month Interest Period) after the Closing Date unless the Borrower has delivered to the Administrative Agent a letter in form and substance reasonably satisfactory to the Administrative Agent indemnifying the Lenders in the manner set forth in Section 5.9 of this Agreement) and (ii) any Swingline Loan shall bear interest at the Base Rate plus the Applicable Margin. The Borrower shall select the rate of interest and Interest Period, if any, applicable to any Loan at the time a Notice of Borrowing is given or at the time a Notice of Conversion/Continuation is given pursuant to Section 5.2.
(b) Default Rate. Subject to Section 10.3, (i) immediately upon the occurrence and during the continuance of an Event of Default under Section 10.1(a), (b), (i) or (j), or (ii) at the election of the Required Lenders, upon the occurrence and during the continuance of any other Event of Default, (A) the Borrower shall no longer have the option to request LIBOR Rate Loans, Swingline Loans or Letters of Credit, (B) the overdue principal amount of any outstanding LIBOR Rate Loans shall bear interest at a rate per annum of two percent (2%) in excess of the rate (including the Applicable Margin) then applicable to LIBOR Rate Loans, (C) the overdue principal amount of any outstanding Base Rate Loans and other overdue Obligations arising hereunder or under any other Loan Document shall bear
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interest at a rate per annum equal to two percent (2%) in excess of the rate (including the Applicable Margin) then applicable to Base Rate Loans or such other Obligations arising hereunder or under any other Loan Document and (D) all accrued and unpaid interest shall be due and payable on demand of the Administrative Agent. Interest shall continue to accrue on the Obligations after the filing by or against the Borrower of any petition seeking any relief in bankruptcy or under any Debtor Relief Law.
(c) Interest Payment and Computation. Interest on each Base Rate Loan shall be due and payable in arrears on the last Business Day of each calendar quarter commencing September 30, 2017; and interest on each LIBOR Rate Loan shall be due and payable on the last day of each Interest Period applicable thereto, and if such Interest Period extends over three (3) months, at the end of each three (3) month interval during such Interest Period. All computations of interest for Base Rate Loans when the Base Rate is determined by the Prime Rate shall be made on the basis of a year of 365 or 366 days, as the case may be, and actual days elapsed. All other computations of fees and interest provided hereunder shall be made on the basis of a 360-day year and actual days elapsed (which results in more fees or interest, as applicable, being paid than if computed on the basis of a 365/366-day year).
(d) Maximum Rate. In no contingency or event whatsoever shall the aggregate of all amounts deemed interest under this Agreement charged or collected pursuant to the terms of this Agreement exceed the highest rate permissible under any Applicable Law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that the Lenders have charged or received interest hereunder in excess of the highest applicable rate, the rate in effect hereunder shall automatically be reduced to the maximum rate permitted by Applicable Law and the Lenders shall at the Administrative Agents option (i) promptly refund to the Borrower any interest received by the Lenders in excess of the maximum lawful rate or (ii) apply such excess to the principal balance of the Obligations. It is the intent hereof that the Borrower not pay or contract to pay, and that neither the Administrative Agent nor any Lender receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by the Borrower under Applicable Law.
SECTION 5.2 Notice and Manner of Conversion or Continuation of Loans. Provided that no Default or Event of Default has occurred and is then continuing, the Borrower shall have the option to (a) convert at any time following the third Business Day after the Closing Date all or any portion of any outstanding Base Rate Loans (other than Swingline Loans) in a principal amount equal to $5,000,000 or any whole multiple of $1,000,000 in excess thereof into one or more LIBOR Rate Loans and (b) upon the expiration of any Interest Period, (i) convert all or any part of its outstanding LIBOR Rate Loans in a principal amount equal to $1,000,000 or a whole multiple of $1,000,000 in excess thereof into Base Rate Loans (other than Swingline Loans) or (ii) continue such LIBOR Rate Loans as LIBOR Rate Loans. Whenever the Borrower desires to convert or continue Loans as provided above, the Borrower shall give the Administrative Agent irrevocable prior written notice in the form attached as Exhibit E (a Notice of Conversion/Continuation) not later than 12:00 p.m. three (3) Business Days before the day on which a proposed conversion or continuation of such Loan is to be effective specifying (A) the Loans to be converted or continued, and, in the case of any LIBOR Rate Loan to be converted or continued, the last day of the Interest Period therefor, (B) the effective date of such conversion or continuation (which shall be a Business Day), (C) the principal amount of such Loans to be converted or continued, and (D) the Interest Period to be applicable to such converted or continued LIBOR Rate Loan. If the Borrower fails to give a timely Notice of Conversion/Continuation prior to the end of the Interest Period for any LIBOR Rate Loan, then the applicable LIBOR Rate Loan shall be converted to a Base Rate Loan. Any such automatic conversion to a Base Rate Loan shall be effective as of the last day of the Interest Period then in effect with respect to the applicable LIBOR Rate Loan. If the Borrower requests a conversion to, or continuation of, LIBOR Rate Loans, but fails to specify an Interest Period, it will be deemed to have specified an Interest Period of one month. Notwithstanding anything to the contrary herein, a Swingline Loan may not be converted to a LIBOR Rate Loan. The Administrative Agent shall promptly notify the affected Lenders of such Notice of Conversion/Continuation.
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SECTION 5.3 Fees.
(a) Commitment Fee. Commencing on the Closing Date, subject to Section 5.15(a)(iii)(A), the Borrower shall pay to the Administrative Agent, for the account of the Revolving Credit Lenders, a non-refundable commitment fee (the Commitment Fee) at a rate per annum equal to the Applicable Margin on the average daily unused portion of the Revolving Credit Commitment of the Revolving Credit Lenders (other than the Defaulting Lenders, if any); provided, that the amount of outstanding Swingline Loans shall not be considered usage of the Revolving Credit Commitment for the purpose of calculating the Commitment Fee. The Commitment Fee shall be payable in arrears on the last Business Day of each calendar quarter during the term of this Agreement commencing September 30, 2017 and ending on the date upon which all Obligations (other than contingent indemnification obligations not then due) arising under the Revolving Credit Facility shall have been indefeasibly and irrevocably paid and satisfied in full, all Letters of Credit have been terminated or expired (or been Cash Collateralized) and the Revolving Credit Commitment has been terminated. The Commitment Fee shall be distributed by the Administrative Agent to the Revolving Credit Lenders (other than any Defaulting Lender) pro rata in accordance with such Revolving Credit Lenders respective Revolving Credit Commitment Percentages.
(b) Other Fees. The Borrower shall pay to each Arranger and the Administrative Agent for their own respective accounts fees in the amounts and at the times specified in the Engagement Letter. The Borrower shall pay to the Lenders such fees as shall have been separately agreed upon in writing in the amounts and at the times so specified.
SECTION 5.4 Manner of Payment. Each payment by the Borrower on account of the principal of or interest on the Loans or of any fee, commission or other amounts (including the Reimbursement Obligation) payable to the Lenders under this Agreement shall be made not later than 1:00 p.m. on the date specified for payment under this Agreement to the Administrative Agent at the Administrative Agents Office for the account of the Lenders entitled to such payment in Dollars, in immediately available funds and shall be made without any set off, counterclaim or deduction whatsoever. Any payment received after such time but before 2:00 p.m. on such day shall be deemed a payment on such date for the purposes of Section 10.1, but for all other purposes shall be deemed to have been made on the next succeeding Business Day. Any payment received after 2:00 p.m. shall be deemed to have been made on the next succeeding Business Day for all purposes. Upon receipt by the Administrative Agent of each such payment, the Administrative Agent shall distribute to each such Lender at its address for notices set forth herein its Commitment Percentage in respect of the relevant Credit Facility (or other applicable share as provided herein) of such payment and shall wire advice of the amount of such credit to each Lender. Each payment to the Administrative Agent on account of the principal of or interest on the Swingline Loans or of any fee, commission or other amounts payable to the Swingline Lender shall be made in like manner, but for the account of the Swingline Lender. Each payment to the Administrative Agent of any Issuing Lenders fees or L/C Participants commissions shall be made in like manner, but for the account of such Issuing Lender or the L/C Participants, as the case may be. Each payment to the Administrative Agent of Administrative Agents fees or expenses shall be made for the account of the Administrative Agent and any amount payable to any Lender under Sections 5.9, 5.10, 5.11 or 12.3 shall be paid to the Administrative Agent for the account of the applicable Lender. Subject to the definition of Interest Period, if any payment under this Agreement shall be specified to be made upon a day which is not a Business Day, it shall be made on the next succeeding day which is a Business Day and such extension of time shall in such case be included in computing any interest if payable along with such payment. Notwithstanding the foregoing, if there exists a Defaulting Lender each payment by the Borrower to such Defaulting Lender hereunder shall be applied in accordance with Section 5.15(a)(ii).
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SECTION 5.5 Evidence of Indebtedness.
(a) Extensions of Credit. The Extensions of Credit made by each Lender and each Issuing Lender shall be evidenced by one or more accounts or records maintained by such Lender or such Issuing Lender and by the Administrative Agent in the ordinary course of business. The accounts or records maintained by the Administrative Agent and each Lender or each Issuing Lender shall be conclusive absent manifest error of the amount of the Extensions of Credit made by the Lenders or such Issuing Lender to the Borrower and its Subsidiaries and the interest and payments thereon. Any failure to so record or any error in doing so shall not, however, limit or otherwise affect the obligation of the Borrower hereunder to pay any amount owing with respect to the Obligations. In the event of any conflict between the accounts and records maintained by any Lender or any Issuing Lender and the accounts and records of the Administrative Agent in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error. Upon the request of any Lender made through the Administrative Agent, the Borrower shall execute and deliver to such Lender (through the Administrative Agent) a Revolving Credit Note, Term Loan Note and/or Swingline Note, as applicable, which shall evidence such Lenders Revolving Credit Loans, Term Loans and/or Swingline Loans, as applicable, in addition to such accounts or records. Each Lender may attach schedules to its Notes and endorse thereon the date, amount and maturity of its Loans and payments with respect thereto.
(b) Participations. In addition to the accounts and records referred to in subsection (a), each Revolving Credit Lender and the Administrative Agent shall maintain in accordance with its usual practice accounts or records evidencing the purchases and sales by such Revolving Credit Lender of participations in Letters of Credit and Swingline Loans. In the event of any conflict between the accounts and records maintained by the Administrative Agent and the accounts and records of any Revolving Credit Lender in respect of such matters, the accounts and records of the Administrative Agent shall control in the absence of manifest error.
SECTION 5.6 Sharing of Payments by Lenders. If any Lender shall, by exercising any right of setoff or counterclaim or otherwise, obtain payment in respect of any principal of or interest on any of its Loans or other obligations hereunder resulting in such Lenders receiving payment of a proportion of the aggregate amount of its Loans and accrued interest thereon or other such obligations (other than pursuant to Sections 5.9, 5.10, 5.11 or 12.3) greater than its pro rata share thereof as provided herein, then the Lender receiving such greater proportion shall (a) notify the Administrative Agent of such fact, and (b) purchase (for cash at face value) participations in the Loans and such other obligations of the other Lenders, or make such other adjustments as shall be equitable, so that the benefit of all such payments shall be shared by the Lenders ratably in accordance with the aggregate amount of principal of and accrued interest on their respective Loans and other amounts owing them; provided that:
(i) if any such participations are purchased and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and
(ii) the provisions of this paragraph shall not be construed to apply to (A) any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement (including the application of funds arising from the existence of a Defaulting Lender), (B) the application of Cash Collateral provided for in Section 5.14 or (C) any payment obtained by a Lender as consideration for the assignment of or sale of a participation in any of its Loans or participations in Swingline Loans and Letters of Credit to any assignee or participant, other than to the Borrower or any of its Subsidiaries or Affiliates (as to which the provisions of this paragraph shall apply).
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Each Credit Party consents to the foregoing and agrees, to the extent it may effectively do so under Applicable Law, that any Lender acquiring a participation pursuant to the foregoing arrangements may exercise against each Credit Party rights of setoff and counterclaim with respect to such participation as fully as if such Lender were a direct creditor of each Credit Party in the amount of such participation.
SECTION 5.7 Administrative Agents Clawback.
(a) Funding by Lenders; Presumption by Administrative Agent. Unless the Administrative Agent shall have received notice from a Lender (i) in the case of Base Rate Loans, not later than 12:00 noon on the date of any proposed borrowing and (ii) otherwise, prior to the proposed date of any borrowing that such Lender will not make available to the Administrative Agent such Lenders share of such borrowing, the Administrative Agent may assume that such Lender has made such share available on such date in accordance with Sections 2.3(b) and 4.2 and may, in reliance upon such assumption, make available to the Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of the applicable borrowing available to the Administrative Agent, then the applicable Lender and the Borrower severally agree to pay to the Administrative Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to the Borrower to but excluding the date of payment to the Administrative Agent, at (A) in the case of a payment to be made by such Lender, the greater of the daily average Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation and (B) in the case of a payment to be made by the Borrower, the interest rate applicable to Base Rate Loans. If the Borrower and such Lender shall pay such interest to the Administrative Agent for the same or an overlapping period, the Administrative Agent shall promptly remit to the Borrower the amount of such interest paid by the Borrower for such period. If such Lender pays its share of the applicable borrowing to the Administrative Agent, then the amount so paid shall constitute such Lenders Loan included in such borrowing. Any payment by the Borrower shall be without prejudice to any claim the Borrower may have against a Lender that shall have failed to make such payment to the Administrative Agent.
(b) Payments by the Borrower; Presumptions by Administrative Agent. Unless the Administrative Agent shall have received notice from the Borrower prior to the date on which any payment is due to the Administrative Agent for the account of the Lenders, any Issuing Lender or the Swingline Lender hereunder that the Borrower will not make such payment, the Administrative Agent may assume that the Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders, such Issuing Lender or the Swingline Lender, as the case may be, the amount due. In such event, if the Borrower has not in fact made such payment, then each of the Lenders, each Issuing Lender or the Swingline Lender, as the case maybe, severally agrees to repay to the Administrative Agent forthwith on demand the amount so distributed to such Lender, Issuing Lender or the Swingline Lender, with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to the Administrative Agent, at the greater of the Federal Funds Rate and a rate determined by the Administrative Agent in accordance with banking industry rules on interbank compensation.
(c) Nature of Obligations of Lenders Regarding Extensions of Credit. The obligations of the Lenders under this Agreement to make the Loans and issue or participate in Letters of Credit are several and are not joint or joint and several. The failure of any Lender to make available its Commitment Percentage of any Loan requested by the Borrower shall not relieve it or any other
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Lender of its obligation, if any, hereunder to make its Commitment Percentage of such Loan available on the borrowing date, but no Lender shall be responsible for the failure of any other Lender to make its Commitment Percentage of such Loan available on the borrowing date.
SECTION 5.8 Changed Circumstances.
(a) Circumstances Affecting LIBOR Rate Availability. In connection with any request for a LIBOR Rate Loan or a conversion to or continuation thereof, if for any reason (i) the Administrative Agent shall determine (which determination shall be conclusive and binding absent manifest error) that Dollar deposits are not being offered to banks in the London interbank Eurodollar market for the applicable amount and Interest Period of such Loan, (ii) the Administrative Agent shall determine (which determination shall be conclusive and binding absent manifest error) that reasonable and adequate means do not exist for the ascertaining the LIBOR Rate for such Interest Period with respect to a proposed LIBOR Rate Loan or (iii) the Required Lenders shall determine (which determination shall be conclusive and binding absent manifest error) that the LIBOR Rate does not adequately and fairly reflect the cost to such Lenders of making or maintaining such Loans during such Interest Period, then the Administrative Agent shall promptly give notice thereof to the Borrower. Thereafter, until the Administrative Agent notifies the Borrower that such circumstances no longer exist, the obligation of the Lenders to make LIBOR Rate Loans and the right of the Borrower to convert any Loan to or continue any Loan as a LIBOR Rate Loan shall be suspended, and the Borrower shall either (A) repay in full (or cause to be repaid in full) the then outstanding principal amount of each such LIBOR Rate Loan together with accrued interest thereon (subject to Section 5.1(d)), on the last day of the then current Interest Period applicable to such LIBOR Rate Loan; or (B) convert the then outstanding principal amount of each such LIBOR Rate Loan to a Base Rate Loan as of the last day of such Interest Period.
(b) Laws Affecting LIBOR Rate Availability. If, after the date hereof, the introduction of, or any change in, any Applicable Law or any change in the interpretation or administration thereof by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any of the Lenders (or any of their respective Lending Offices) with any request or directive (whether or not having the force of law) of any such Governmental Authority, central bank or comparable agency, shall make it unlawful or impossible for any of the Lenders (or any of their respective Lending Offices) to honor its obligations hereunder to make or maintain any LIBOR Rate Loan, such Lender shall promptly give notice thereof to the Administrative Agent and the Administrative Agent shall promptly give notice to the Borrower and the other Lenders. Thereafter, until the Administrative Agent notifies the Borrower that such circumstances no longer exist, (i) the obligations of the Lenders to make LIBOR Rate Loans, and the right of the Borrower to convert any Loan to a LIBOR Rate Loan or continue any Loan as a LIBOR Rate Loan shall be suspended and thereafter the Borrower may select only Base Rate Loans and (ii) if any of the Lenders may not lawfully continue to maintain a LIBOR Rate Loan to the end of the then current Interest Period applicable thereto, the applicable Loan shall immediately be converted to a Base Rate Loan for the remainder of such Interest Period.
SECTION 5.9 Indemnity. The Borrower hereby indemnifies each of the Lenders against any loss or expense (including any loss or expense arising from the liquidation or reemployment of funds obtained by it to maintain a LIBOR Rate Loan or from fees payable to terminate the deposits from which such funds were obtained but excluding the Applicable Margin or any profit) which may arise or be attributable to each Lenders obtaining, liquidating or employing deposits or other funds acquired to effect, fund or maintain any Loan (a) as a consequence of any failure by the Borrower to make any payment when due of any amount due hereunder in connection with a LIBOR Rate Loan, (b) due to any failure of the Borrower to borrow or continue a LIBOR Rate Loan or convert to a LIBOR Rate Loan on a
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date specified therefor in a Notice of Borrowing or Notice of Conversion/Continuation or (c) due to any payment, prepayment or conversion of any LIBOR Rate Loan on a date other than the last day of the Interest Period therefor. The amount of such loss or expense shall be determined, in the applicable Lenders sole discretion, based upon the assumption that such Lender funded its Commitment Percentage of the LIBOR Rate Loans in the London interbank market and using any reasonable attribution or averaging methods which such Lender deems appropriate and practical. A certificate of such Lender setting forth the basis for determining such amount or amounts necessary to compensate such Lender shall be forwarded to the Borrower through the Administrative Agent and shall be conclusively presumed to be correct save for manifest error.
SECTION 5.10 Increased Costs.
(a) Increased Costs Generally. If any Change in Law shall:
(i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of, or advances, loans or other credit extended or participated in by, any Lender (except any reserve requirement reflected in the LIBOR Rate) or any Issuing Lender;
(ii) subject any Recipient to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (b) through (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or
(iii) impose on any Lender or any Issuing Lender or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or LIBOR Rate Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender, the Issuing Lender or such other Recipient of making, converting to, continuing or maintaining any Loan (or of maintaining its obligation to make any such Loan), or to increase the cost to such Lender, such Issuing Lender or such other Recipient of participating in, issuing or maintaining any Letter of Credit (or of maintaining its obligation to participate in or to issue any Letter of Credit), or to reduce the amount of any sum received or receivable by such Lender, such Issuing Lender or such other Recipient hereunder (whether of principal, interest or any other amount) then, upon written request of such Lender, such Issuing Lender or other Recipient, the Borrower shall promptly pay to any such Lender, such Issuing Lender or other Recipient, as the case may be, such additional amount or amounts as will compensate such Lender, such Issuing Lender or other Recipient, as the case may be, for such additional costs incurred or reduction suffered.
(b) Capital Requirements. If any Lender or the Issuing Lender determines that any Change in Law affecting such Lender or such Issuing Lender or any Lending Office of such Lender or such Lenders or such Issuing Lenders holding company, if any, regarding capital or liquidity requirements, has or would have the effect of reducing the rate of return on such Lenders or such Issuing Lenders capital or on the capital of such Lenders or such Issuing Lenders holding company, if any, as a consequence of this Agreement, the Revolving Credit Commitment of such Lender or the Loans made by, or participations in Letters of Credit or Swingline Loans held by, such Lender, or the Letters of Credit issued by such Issuing Lender, to a level below that which such Lender or such Issuing Lender or such Lenders or such Issuing Lenders holding company could have achieved but for such Change in Law (taking into consideration such Lenders or such Issuing Lenders policies and the policies of such Lenders or such Issuing Lenders holding company with respect to capital
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adequacy and liquidity), then from time to time upon written request of such Lender or such Issuing Lender the Borrower shall promptly pay to such Lender or such Issuing Lender, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Lender or such Lenders or such Issuing Lenders holding company for any such reduction suffered.
(c) Certificates for Reimbursement. A certificate of a Lender, or an Issuing Lender or such other Recipient setting forth the amount or amounts necessary to compensate such Lender or such Issuing Lender, such other Recipient or any of their respective holding companies, as the case may be, as specified in paragraph (a) or (b) of this Section and delivered to the Borrower, shall be conclusive absent manifest error. The Borrower shall pay such Lender or such Issuing Lender or such other Recipient, as the case may be, the amount shown as due on any such certificate within ten (10) days after receipt thereof.
(d) Delay in Requests. Failure or delay on the part of any Lender or any Issuing Lender or such other Recipient to demand compensation pursuant to this Section shall not constitute a waiver of such Lenders or such Issuing Lenders or such other Recipients right to demand such compensation; provided that the Borrower shall not be required to compensate any Lender or an Issuing Lender or any other Recipient pursuant to this Section for any increased costs incurred or reductions suffered more than nine (9) months prior to the date that such Lender or such Issuing Lender or such other Recipient, as the case may be, notifies the Borrower of the Change in Law giving rise to such increased costs or reductions, and of such Lenders or such Issuing Lenders or such other Recipients intention to claim compensation therefor (except that if the Change in Law giving rise to such increased costs or reductions is retroactive, then the nine-month period referred to above shall be extended to include the period of retroactive effect thereof).
SECTION 5.11 Taxes.
(a) Defined Terms. For purposes of this Section 5.11, the term Lender includes any Issuing Lender and the term Applicable Law includes FATCA.
(b) Payments Free of Taxes. Any and all payments by or on account of any obligation of any Credit Party under any Loan Document shall be made without deduction or withholding for any Taxes, except as required by Applicable Law. If any Applicable Law (as determined in the good faith discretion of an applicable Withholding Agent) requires the deduction or withholding of any Tax from any such payment by a Withholding Agent, then the applicable Withholding Agent shall be entitled to make such deduction or withholding and shall timely pay the full amount deducted or withheld to the relevant Governmental Authority in accordance with Applicable Law and, if such Tax is an Indemnified Tax, then the sum payable by the applicable Credit Party shall be increased as necessary so that, after such deduction or withholding has been made (including such deductions and withholdings applicable to additional sums payable under this Section), the applicable Recipient receives an amount equal to the sum it would have received had no such deduction or withholding been made.
(c) Payment of Other Taxes by the Credit Parties. The Credit Parties shall timely pay to the relevant Governmental Authority in accordance with Applicable Law, or at the option of the Administrative Agent timely reimburse it for the payment of, any Other Taxes.
(d) Indemnification by the Credit Parties. The Credit Parties shall jointly and severally indemnify each Recipient, within ten (10) days after demand therefor, for the full amount of any Indemnified Taxes (including Indemnified Taxes imposed or asserted on or attributable to amounts payable under this Section) payable or paid by such Recipient or required to be withheld or deducted
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from a payment to such Recipient and any reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by a Recipient (with a copy to the Administrative Agent), or by the Administrative Agent on its own behalf or on behalf of a Recipient, shall be conclusive absent manifest error.
(e) Indemnification by the Lenders. Each Lender shall severally indemnify the Administrative Agent, within ten (10) days after demand therefor, for (i) any Indemnified Taxes attributable to such Lender (but only to the extent that any Credit Party has not already indemnified the Administrative Agent for such Indemnified Taxes and without limiting the obligation of the Credit Parties to do so), (ii) any Taxes attributable to such Lenders failure to comply with the provisions of Section 12.9(d) relating to the maintenance of a Participant Register and (iii) any Excluded Taxes attributable to such Lender, in each case, that are payable or paid by the Administrative Agent in connection with any Loan Document, and any reasonable expenses arising therefrom or with respect thereto, whether or not such Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to any Lender by the Administrative Agent shall be conclusive absent manifest error. Each Lender hereby authorizes the Administrative Agent to set off and apply any and all amounts at any time owing to such Lender under any Loan Document or otherwise payable by the Administrative Agent to the Lender from any other source against any amount due to the Administrative Agent under this paragraph (e).
(f) Evidence of Payments. As soon as practicable after any payment of Taxes by any Credit Party to a Governmental Authority pursuant to this Section 5.11, such Credit Party shall deliver to the Administrative Agent the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Administrative Agent.
(g) Status of Lenders.
(i) Any Lender that is entitled to an exemption from or reduction of withholding Tax with respect to payments made under any Loan Document shall deliver to the Borrower and the Administrative Agent, at the time or times reasonably requested by the Borrower or the Administrative Agent, such properly completed and executed documentation reasonably requested by the Borrower or the Administrative Agent as will permit such payments to be made without withholding or at a reduced rate of withholding. In addition, any Lender, if reasonably requested by the Borrower or the Administrative Agent, shall deliver such other documentation prescribed by Applicable Law or reasonably requested by the Borrower or the Administrative Agent as will enable the Borrower or the Administrative Agent to determine whether or not such Lender is subject to backup withholding or information reporting requirements. Notwithstanding anything to the contrary in the preceding two sentences, the completion, execution and submission of such documentation (other than such documentation set forth in Section 5.11(g)(ii)(A), (ii)(B) and (ii)(D) below) shall not be required if in the Lenders reasonable judgment such completion, execution or submission would subject such Lender to any material unreimbursed cost or expense or would materially prejudice the legal or commercial position of such Lender.
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(ii) Without limiting the generality of the foregoing:
(A) Any Lender that is a U.S. Person shall deliver to the Borrower and the Administrative Agent on or prior to the date on which such Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed copies of IRS Form W-9 certifying that such Lender is exempt from United States federal backup withholding tax;
(B) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), whichever of the following is applicable:
(1) in the case of a Foreign Lender claiming the benefits of an income tax treaty to which the United States is a party (x) with respect to payments of interest under any Loan Document, executed copies of IRS Form W-8BEN-E establishing an exemption from, or reduction of, United States federal withholding Tax pursuant to the interest article of such tax treaty and (y) with respect to any other applicable payments under any Loan Document, IRS Form W-8BEN-E establishing an exemption from, or reduction of, United States federal withholding Tax pursuant to the business profits or other income article of such tax treaty;
(2) executed copies of IRS Form W-8ECI;
(3) in the case of a Foreign Lender claiming the benefits of the exemption for portfolio interest under Section 881(c) of the Code, (x) a certificate substantially in the form of Exhibit H-1 to the effect that such Foreign Lender is not a bank within the meaning of Section 881(c)(3)(A) of the Code, a 10 percent shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code, or a controlled foreign corporation described in Section 881(c)(3)(C) of the Code (a U.S. Tax Compliance Certificate) and (y) executed copies of IRS Form W-8BEN-E; or
(4) to the extent a Foreign Lender is not the beneficial owner, executed copies of IRS Form W-8IMY, accompanied by IRS Form W-8ECI, IRS Form W-8BEN-E, a U.S. Tax Compliance Certificate substantially in the form of Exhibit H-2 or Exhibit H-3, IRS Form W-9, and/or other certification documents from each beneficial owner, as applicable; provided that if the Foreign Lender is a partnership and one or more direct or indirect partners of such Foreign Lender are claiming the portfolio interest exemption, such Foreign Lender may provide a U.S. Tax Compliance Certificate substantially in the form of Exhibit H-4 on behalf of each such direct and indirect partner;
(C) any Foreign Lender shall, to the extent it is legally entitled to do so, deliver to the Borrower and the Administrative Agent (in such number of copies as shall be requested by the recipient) on or prior to the date on which such Foreign Lender becomes a Lender under this Agreement (and from time to time thereafter upon the reasonable request of the Borrower or the Administrative Agent), executed copies of any other form prescribed by Applicable Law as a basis for claiming exemption from or a reduction in United States federal withholding Tax, duly completed, together with such supplementary documentation as may be prescribed by Applicable Law to permit the Borrower or the Administrative Agent to determine the withholding or deduction required to be made; and
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(D) if a payment made to a Lender under any Loan Document would be subject to United States federal withholding Tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower and the Administrative Agent at the time or times prescribed by law and at such time or times reasonably requested by the Borrower or the Administrative Agent such documentation prescribed by Applicable Law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower or the Administrative Agent as may be necessary for the Borrower and the Administrative Agent to comply with their obligations under FATCA and to determine that such Lender has complied with such Lenders obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (D), FATCA shall include any amendments made to FATCA after the date of this Agreement.
Each Lender agrees that if any form or certification it previously delivered expires or becomes obsolete or inaccurate in any respect, it shall update such form or certification or promptly notify the Borrower and the Administrative Agent in writing of its legal inability to do so.
(h) Treatment of Certain Refunds. If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Taxes as to which it has been indemnified pursuant to this Section 5.11 (including by the payment of additional amounts pursuant to this Section 5.11), it shall pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this paragraph (h) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this paragraph (h), in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this paragraph (h) the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the Tax subject to indemnification and giving rise to such refund had not been deducted, withheld or otherwise imposed and the indemnification payments or additional amounts with respect to such Tax had never been paid. This paragraph shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.
(i) Survival. Each partys obligations under this Section 5.11 shall survive the resignation or replacement of the Administrative Agent or any assignment of rights by, or the replacement of, a Lender, the termination of the Commitments and the repayment, satisfaction or discharge of all obligations under any Loan Document.
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SECTION 5.12 Mitigation Obligations; Replacement of Lenders.
(a) Designation of a Different Lending Office. If any Lender requests compensation under Section 5.10, or requires the Borrower to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 5.11, then such Lender shall, at the request of the Borrower, use reasonable efforts to designate a different Lending Office for funding or booking its Loans hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of such Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 5.10 or Section 5.11, as the case may be, in the future and (ii) would not subject such Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to such Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by any Lender in connection with any such designation or assignment.
(b) Replacement of Lenders. If any Lender requests compensation under Section 5.10, or if the Borrower is required to pay any Indemnified Taxes or additional amounts to any Lender or any Governmental Authority for the account of any Lender pursuant to Section 5.11, and, in each case, such Lender has declined or is unable to designate a different Lending Office in accordance with Section 5.12(a), or if any Lender is a Defaulting Lender or a Non-Consenting Lender, then the Borrower may, at its sole expense and effort, upon notice to such Lender and the Administrative Agent, require such Lender to assign and delegate, without recourse (in accordance with and subject to the restrictions contained in, and consents required by, Section 12.9), all of its interests, rights (other than its existing rights to payments pursuant to Section 5.10 or Section 5.11) and obligations under this Agreement and the related Loan Documents to an Eligible Assignee that shall assume such obligations (which assignee may be another Lender, if a Lender accepts such assignment); provided that:
(i) the Borrower shall have paid to the Administrative Agent the assignment fee (if any) specified in Section 12.9;
(ii) such Lender shall have received payment of an amount equal to the outstanding principal of its Loans and funded participations in Letters of Credit and Swingline Loans, accrued interest thereon, accrued fees and all other amounts payable to it hereunder and under the other Loan Documents (including any amounts under Section 5.9) from the assignee (to the extent of such outstanding principal and accrued interest and fees) or the Borrower (in the case of all other amounts);
(iii) in the case of any such assignment resulting from a claim for compensation under Section 5.10 or payments required to be made pursuant to Section 5.11, such assignment will result in a reduction in such compensation or payments thereafter;
(iv) such assignment does not conflict with Applicable Law; and
(v) in the case of any assignment resulting from a Lender becoming a Non-Consenting Lender, the applicable assignee shall have consented to the applicable amendment, waiver or consent.
A Lender shall not be required to make any such assignment or delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Borrower to require such assignment and delegation cease to apply.
SECTION 5.13 Incremental Loans.
(a) Request for Increase. At any time after the Closing Date, upon written notice to the Administrative Agent, the Borrower may, from time to time, request (i) one or more incremental term loans (an Incremental Term Loan) or (ii) one or more increases in the Revolving Credit
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Commitments (a Revolving Credit Facility Increase and, together with the initial principal amount of the Incremental Term Loans, the Incremental Increases); provided that (A) the aggregate principal amount for all such Incremental Increases shall not exceed the sum of (1) $75,000,000 plus (2) an amount which, after giving pro forma effect to such Incremental Increase (assuming that the entire Incremental Increase is funded on the effective date thereof and after giving effect to the use of proceeds thereof) pursuant to this clause (2), would not cause the Consolidated Total Leverage Ratio, as of the most recently completed Reference Period, to exceed the lesser of (x) 4.50 to 1.00 and (y) the Financial Covenant (in each case, as demonstrated by the Borrower in a written certification to the Administrative Agent), (B) any such request for an increase shall be in a minimum amount of $10,000,000 for any Incremental Term Loan and $10,000,000 for any Revolving Credit Facility Increase or, if less, the remaining amount permitted pursuant to the foregoing clause (A) and (C) no more than five (5) Incremental Increases shall be permitted to be requested during the term of this Agreement. Unless the Borrower otherwise notifies the Administrative Agent, if all or any portion of any Incremental Increase would be permitted to be incurred under clause (A)(2) above on the applicable date of determination, such Incremental Increase (or the relevant portion thereof) shall be deemed to have been incurred in reliance on clause (A)(2) above prior to the utilization of any amount available under clause (A)(1) above.
(b) Incremental Lenders. Each notice from the Borrower pursuant to this Section shall set forth the requested amount and proposed terms of the relevant Incremental Increase. Incremental Increases may be provided by any existing Lender or by any other Persons (an Incremental Lender); provided that the Administrative Agent, each Issuing Lender and/or each Swingline Lender, as applicable, shall have consented (not to be unreasonably withheld, conditioned or delayed) to such Incremental Lenders providing such Incremental Increases to the extent any such consent would be required under Section 12.9(b) for an assignment of Loans or Revolving Credit Commitments, as applicable, to such Incremental Lender. At the time of sending such notice, the Borrower (in consultation with the Administrative Agent) shall specify the time period within which each Incremental Lender is requested to respond, which shall in no event be less than ten (10) Business Days from the date of delivery of such notice to the proposed Incremental Lenders. Each proposed Incremental Lender may elect or decline, in its sole discretion, and shall notify the Administrative Agent within such time period whether it agrees, to provide an Incremental Increase and, if so, whether by an amount equal to, greater than or less than requested. Any Person not responding within such time period shall be deemed to have declined to provide an Incremental Increase.
(c) Increase Effective Date and Allocations. The Administrative Agent and the Borrower shall determine the effective date (the Increase Effective Date) and the final allocation of such Incremental Increase (limited in the case of the Incremental Lenders to their own respective allocations thereof). The Administrative Agent shall promptly notify the Borrower and the Incremental Lenders of the final allocation of such Incremental Increases and the Increase Effective Date.
(d) Conditions to Effectiveness of Increase. Any Incremental Increase shall become effective as of such Increase Effective Date, which, in the case of an Incremental Term Loan incurred to finance a Limited Condition Acquisition, shall be subject to Section 1.11; provided that:
(i) no Default or Event of Default shall exist on such Increase Effective Date, or the LCA Test Date, as applicable, immediately prior to or after giving effect to (A) such Incremental Increase or (B) the making of any Extensions of Credit pursuant thereto;
(ii) the Administrative Agent shall have received from the Borrower, an Officers Compliance Certificate demonstrating that the Borrower is in pro forma compliance with the Financial Covenant for the most recently completed Reference Period after giving effect to such Incremental Increase (assuming that the entire applicable Incremental Increase is fully funded on the effective date thereof) and the use of proceeds thereof;
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(iii) each such Incremental Increase shall be effected pursuant to an amendment (an Incremental Amendment) to this Agreement and, as appropriate, the other Loan Documents, executed by the Credit Parties, the Administrative Agent and the applicable Incremental Lenders, which Incremental Amendment may, without the consent of any other Lenders, effect such amendments to this Agreement and the other Loan Documents as may be necessary or appropriate, in the reasonable opinion of the Administrative Agent, to effect the provisions of this Section 5.13;
(iv) all of the representations and warranties set forth in Article VII shall be true and correct in all material respects (or if qualified by materiality or Material Adverse Effect, in all respects) as of such Increase Effective Date, or if such representation speaks as of an earlier date, as of such earlier date, except, in the case of an Incremental Term Loan being used to consummate a Limited Condition Acquisition, (A) as of the date of consummation of such Limited Condition Acquisition (i) the representations and warranties under the relevant definitive agreement governing such Limited Condition Acquisition as are material to the Incremental Lenders providing such Incremental Term Loan shall be true and correct, but only to the extent that the Borrower or its applicable Subsidiary has the right to terminate its obligations under such agreement prior to consummation of such Limited Condition Acquisition as a result of a breach of such representations and warranties and (ii) the representations set forth in Sections 7.1(a) (with respect to the organizational existence of the Credit Parties and each of its Subsidiaries only), 7.1(c), 7.3, 7.4(b), 7.10, 7.11 (with respect to the Investment Company Act of 1940), 7.17 and 7.20 shall be true and correct in all material respects (except for any representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty shall be true and correct in all respects), or if such representation speaks as of an earlier date, as of such earlier date and (B) all representations and warranties in this Agreement and the other Loan Documents shall be true and correct in all material respects (except for any representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty shall be true and correct in all respects) as of the LCA Test Date, or if such representation speaks as of an earlier date, as of such earlier date;
(v) in the case of each Incremental Term Loan (the terms of which shall be set forth in the relevant Incremental Amendment):
(A) such Incremental Term Loan will mature and amortize in a manner reasonably acceptable to the Incremental Lenders making such Incremental Term Loan and the Borrower, but will not in any event have a shorter Weighted Average Life to Maturity than the remaining Weighted Average Life to Maturity of the Initial Term Loan or a maturity date earlier than the Term Loan Maturity Date;
(B) the All-In Yield for such Incremental Term Loan shall be determined by the applicable Incremental Lenders and the Borrower on the applicable Increase Effective Date; provided that if the All-In Yield in respect of any Incremental Term Loan incurred on or prior to the date that is twelve (12) months after the Closing Date (determined with reference to each pricing tier of any applicable pricing grid) exceeds the All-In Yield for the Initial Term Loan (as reasonably determined by the Administrative Agent) by more than 0.50%, then the Applicable Margin for the Initial Term Loan shall be increased (at each tier of the pricing grid) so that the All-In Yield in respect of such Initial Term Loan is equal to the All-In Yield for such Incremental Term Loan minus 0.50% (determined at each level of each applicable pricing grid);
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(C) unless otherwise agreed to by the applicable Incremental Lenders, such Incremental Term Loan shall share on a pro rata basis with prepayments of the Initial Term Loan; and
(D) except as provided above, all other terms and conditions applicable to any Incremental Term Loan shall be consistent with the terms and conditions applicable to the Initial Term Loan or otherwise reasonably satisfactory to the Administrative Agent;
(vi) in the case of each Revolving Credit Facility Increase (the terms of which shall be set forth in the relevant Incremental Amendment):
(A) Revolving Credit Loans made with respect to the Revolving Credit Facility Increase shall mature on the Revolving Credit Maturity Date and shall bear interest at the rate applicable to the Revolving Credit Loans;
(B) the outstanding Revolving Credit Loans and Revolving Credit Commitment Percentages of Swingline Loans and L/C Obligations will be reallocated by the Administrative Agent on the applicable Increase Effective Date among the Revolving Credit Lenders (including the Incremental Lenders providing such Revolving Credit Facility Increase) in accordance with their revised Revolving Credit Commitment Percentages (and the Revolving Credit Lenders (including the Incremental Lenders providing such Revolving Credit Facility Increase) agree to make all payments and adjustments necessary to effect such reallocation and the Borrower shall pay any and all costs required pursuant to Section 5.9 in connection with such reallocation as if such reallocation were a repayment); and
(C) all of the terms and conditions applicable to such Revolving Credit Facility Increase (including Applicable Margin and Commitment Fees, but excluding upfront fees and arrangement fees) shall be identical to the terms and conditions applicable to the Revolving Credit Facility; provided that the interest rate margins and/or commitment fees in respect of any Revolving Credit Facility Increase may be higher than the interest rate margins and/or commitment fees for any other Revolving Credit Commitments, so long as the interest rate margins and/or commitment fees, as applicable, for such other Revolving Credit Commitments shall be increased so that the interest rate margins and/or commitment fees, as applicable, are equal to the interest rate margins and/or commitment fees for such Revolving Credit Facility Increase; and
(vii) each Incremental Increase shall constitute Obligations of the Borrower and shall be secured and guaranteed with the other Extensions of Credit on a pari passu basis and no Incremental Increase shall be secured by any assets or guaranteed by any Person that does not also secure or guarantee the other Obligations.
SECTION 5.14 Cash Collateral. At any time that there shall exist a Defaulting Lender, within one Business Day following the written request of the Administrative Agent, any Issuing Lender (with a copy to the Administrative Agent) or the Swingline Lender (with a copy to the Administrative Agent), the Borrower shall Cash Collateralize the Fronting Exposure of such Issuing Lender and/or the Swingline Lender, as applicable, with respect to such Defaulting Lender (determined after giving effect to Section 5.15(a)(iv) and any Cash Collateral provided by such Defaulting Lender) in an amount not less than the Minimum Collateral Amount.
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(a) Grant of Security Interest. The Borrower, and to the extent provided by any Defaulting Lender, such Defaulting Lender, hereby grants to the Administrative Agent, for the benefit of each Issuing Lender and the Swingline Lender, and agrees to maintain, a first priority security interest in all such Cash Collateral as security for the Defaulting Lenders obligation to fund participations in respect of L/C Obligations and Swingline Loans, to be applied pursuant to subsection (b) below. If at any time the Administrative Agent determines that Cash Collateral is subject to any right or claim of any Person other than the Administrative Agent, each Issuing Lender and the Swingline Lender as herein provided (other than specify applicable Permitted Liens), or that the total amount of such Cash Collateral is less than the Minimum Collateral Amount, the Borrower will, promptly upon demand by the Administrative Agent, pay or provide to the Administrative Agent additional Cash Collateral in an amount sufficient to eliminate such deficiency (after giving effect to any Cash Collateral provided by the Defaulting Lender).
(b) Application. Notwithstanding anything to the contrary contained in this Agreement, Cash Collateral provided under this Section 5.14 or Section 5.15 in respect of Letters of Credit and Swingline Loans shall be applied to the satisfaction of the Defaulting Lenders obligation to fund participations in respect of L/C Obligations and Swingline Loans (including, as to Cash Collateral provided by a Defaulting Lender, any interest accrued on such obligation) for which the Cash Collateral was so provided, prior to any other application of such property as may otherwise be provided for herein.
(c) Termination of Requirement. Cash Collateral (or the appropriate portion thereof) provided to reduce the Fronting Exposure of any Issuing Lender and/or the Swingline Lender, as applicable, shall no longer be required to be held as Cash Collateral pursuant to this Section 5.14 following (i) the elimination of the applicable Fronting Exposure (including by the termination of Defaulting Lender status of the applicable Lender), or (ii) the determination by the Administrative Agent, the Issuing Lenders and the Swingline Lender that there exists excess Cash Collateral; provided that, subject to Section 5.15, the Person providing Cash Collateral, the Issuing Lenders and the Swingline Lender may agree that Cash Collateral shall be held to support future anticipated Fronting Exposure or other obligations; and provided further that to the extent that such Cash Collateral was provided by the Borrower, such Cash Collateral shall remain subject to the security interest granted pursuant to the Loan Documents.
SECTION 5.15 Defaulting Lenders.
(a) Defaulting Lender Adjustments. Notwithstanding anything to the contrary contained in this Agreement, if any Lender becomes a Defaulting Lender, then, until such time as such Lender is no longer a Defaulting Lender, to the extent permitted by Applicable Law:
(i) Waivers and Amendments. Such Defaulting Lenders 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 and Section 12.2.
(ii) Defaulting Lender Waterfall. Any payment of principal, interest, fees or other amounts received by the Administrative Agent for the account of such Defaulting Lender (whether voluntary or mandatory, at maturity, pursuant to Article X or otherwise) or received by the Administrative Agent from a Defaulting Lender pursuant to Section 12.4 shall be applied at such time or times as may be determined by the Administrative Agent as follows: first, to the
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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 Lenders or the Swingline Lender hereunder; third, to Cash Collateralize the Fronting Exposure of the Issuing Lenders and the Swingline Lender with respect to such Defaulting Lender in accordance with Section 5.14; fourth, as the Borrower may request (so long as no Default or Event of Default exists), to the funding of any Loan or funded participation 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 deposit account and released pro rata in order to (A) satisfy such Defaulting Lenders potential future funding obligations with respect to Loans and funded participations under this Agreement and (B) Cash Collateralize the Issuing Lenders future Fronting Exposure with respect to such Defaulting Lender with respect to future Letters of Credit and Swingline Loans issued under this Agreement, in accordance with Section 5.14; sixth, to the payment of any amounts owing to the Lenders, the Issuing Lenders or the Swingline Lender as a result of any judgment of a court of competent jurisdiction obtained by any Lender, any Issuing Lender or the Swingline Lender against such Defaulting Lender as a result of such Defaulting Lenders breach of its obligations under this Agreement; seventh, so long as no Default or Event of Default exists, 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 Lenders 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 (1) such payment is a payment of the principal amount of any Loans or funded participations in Letters of Credit or Swingline Loans in respect of which such Defaulting Lender has not fully funded its appropriate share, and (2) such Loans were made or the related Letters of Credit or Swingline Loans were issued at a time when the conditions set forth in Section 6.2 were satisfied or waived, such payment shall be applied solely to pay the Loans of, and funded participations in Letters of Credit or Swingline Loans owed to, all Non-Defaulting Lenders on a pro rata basis prior to being applied to the payment of any Loans of, or funded participations in Letters of Credit or Swingline Loans owed to, such Defaulting Lender until such time as all Loans and funded and unfunded participations in L/C Obligations and Swingline Loans are held by the Lenders pro rata in accordance with the Revolving Credit Commitments under the applicable Revolving Credit Facility without giving effect to Section 5.15(a)(iv). Any payments, prepayments or other amounts paid or payable to a Defaulting Lender that are applied (or held) to pay amounts owed by a Defaulting Lender or to post Cash Collateral pursuant to this Section 5.15(a)(ii) shall be deemed paid to and redirected by such Defaulting Lender, and each Lender irrevocably consents hereto.
(iii) Certain Fees.
(A) No Defaulting Lender shall be entitled to receive any Commitment Fee 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 that Defaulting Lender).
(B) Each Defaulting Lender shall be entitled to receive letter of credit commissions pursuant to Section 3.3 for any period during which that Lender is a Defaulting Lender only to the extent allocable to its Revolving Credit Commitment Percentage of the stated amount of Letters of Credit for which it has provided Cash Collateral pursuant to Section 5.14.
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(C) With respect to any Commitment Fee not required to be paid to any Defaulting Lender pursuant to clause (A) or (B) above, the Borrower shall (1) pay to each Non-Defaulting Lender that portion of any such fee otherwise payable to such Defaulting Lender with respect to such Defaulting Lenders participation in L/C Obligations or Swingline Loans that has been reallocated to such Non-Defaulting Lender pursuant to clause (iv) below, (2) pay to each applicable Issuing Lender and Swingline Lender, as applicable, the amount of any such fee otherwise payable to such Defaulting Lender to the extent allocable to such Issuing Lenders or Swingline Lenders Fronting Exposure to such Defaulting Lender, and (3) not be required to pay the remaining amount of any such fee.
(iv) Reallocation of Participations to Reduce Fronting Exposure. All or any part of such Defaulting Lenders participation in L/C Obligations and Swingline Loans shall be reallocated among the Non-Defaulting Lenders in accordance with their respective Revolving Credit Commitment Percentages (calculated without regard to such Defaulting Lenders Revolving Credit Commitment) but only to the extent that such reallocation does not cause the aggregate Revolving Credit Exposure of any Non-Defaulting Lender to exceed such Non-Defaulting Lenders Revolving Credit Commitment. Subject to Section 12.22, no reallocation hereunder shall constitute a waiver or release of any claim of any party hereunder against a Defaulting Lender arising from that Lender having become a Defaulting Lender, including any claim of a Non-Defaulting Lender as a result of such Non-Defaulting Lenders increased exposure following such reallocation.
(v) Cash Collateral, Repayment of Swingline Loans. If the reallocation described in clause (iv) above cannot, or can only partially, be effected, the Borrower shall, without prejudice to any right or remedy available to it hereunder or under law, (x) first, repay Swingline Loans in an amount equal to the Swingline Lenders Fronting Exposure and (y) second, Cash Collateralize the Issuing Lenders Fronting Exposure in accordance with the procedures set forth in Section 5.14.
(b) Defaulting Lender Cure. If the Borrower, the Administrative Agent, the Issuing Lenders and the Swingline Lender agree in writing that a Lender is no longer a Defaulting Lender, the Administrative Agent will so notify the parties hereto, whereupon as of the effective date specified in such notice and subject to any conditions set forth therein (which may include arrangements with respect to any Cash Collateral), such Lender will, to the extent applicable, purchase at par that portion of outstanding Loans of the other Lenders or take such other actions as the Administrative Agent may determine to be necessary to cause the Loans and funded and unfunded participations in Letters of Credit and Swingline Loans to be held pro rata by the Lenders in accordance with the Commitments under the applicable Credit Facility (without giving effect to Section 5.15(a)(iv)), whereupon such Lender will cease to be a Defaulting Lender; provided that no adjustments will be made retroactively with respect to fees accrued or payments made by or on behalf of the 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 Lenders having been a Defaulting Lender.
SECTION 5.16 Refinancing Facilities.
(a) The Borrower may by written notice to the Administrative Agent elect to request the establishment of (i) one or more additional tranches or Classes of term loans under this Agreement (Refinancing Term Loans) or one or more series of debt securities (Refinancing Notes), which
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refinance, renew, replace, defease or refund (collectively, Refinance) one or more Classes of Term Loans under this Agreement or (ii) one or more additional revolving facilities under this Agreement providing for revolving commitments (Refinancing Revolving Credit Commitments and the revolving loans thereunder, Refinancing Revolving Loans) which Refinances one or more Classes of Revolving Credit Commitments (and Revolving Credit Loans thereunder) under this Agreement; provided that:
(i) no Default or Event of Default has occurred and is continuing or would result therefrom;
(ii) the principal amount of such Refinancing Debt or Refinancing Revolving Credit Commitments may not exceed the aggregate principal amount of the Term Loans or Revolving Credit Commitments being Refinanced plus accrued and unpaid interest thereon, any prepayment premiums applicable thereto and reasonable fees and expenses incurred in connection therewith;
(iii) the final maturity date of such Refinancing Debt or Refinancing Revolving Credit Commitments shall not be earlier than the maturity date of the Term Loans (or, in the case of any unsecured or junior lien Refinancing Debt, no earlier than the date that is 91 days after the latest final maturity date of the Term Loans existing at the time of such refinancing or replacement) or Revolving Credit Commitments being Refinanced, and the Weighted Average Life to Maturity of such Refinancing Debt shall be no earlier than the then remaining Weighted Average Life to Maturity of each Class of Term Loans being refinanced;
(iv) the other terms and conditions of such Refinancing Debt or Refinancing Revolving Credit Commitments (except as otherwise provided in clause (iii) above and with respect to pricing, interest rate margins, premiums, discounts, fees, rate floors and optional prepayment or redemption terms), taken as a whole shall (as reasonably determined by the Borrower) be substantially similar to, or (taken as a whole) not materially less favorable to the Borrower and its Subsidiaries than, the terms, taken as a whole, applicable to Term Loans or Revolving Credit Commitments being Refinanced, except to the extent such covenants and other terms apply solely to any period after the latest final Term Loan Maturity Date or Revolving Credit Maturity Date of the Term Loans and/or Revolving Credit Commitments being Refinanced (or, in the case of any unsecured or junior lien Refinancing Debt, after the date that is 91 days after such latest final Term Loan Maturity Date or Revolving Credit Maturity Date);
(v) the proceeds of such Refinancing Debt, Refinancing Revolving Credit Commitments or Refinancing Revolving Loans shall be applied, concurrently or substantially concurrently with the incurrence thereof (in accordance with Section 4.4(b)(i)), solely to the repayment of the outstanding amount of one or more Classes of Term Loans or permanently reduce one or more Classes of Revolving Credit Commitments and Revolving Credit Loans, as the case may be, being Refinanced thereby;
(vi) each Class of Refinancing Term Loans or Refinancing Revolving Credit Commitments shall be in an aggregate amount of $5,000,000 or any whole multiple of $1,000,000 in excess thereof (or such other amount necessary to repay or replace any Class of outstanding Term Loans or Refinancing Revolving Credit Commitments in full);
(vii) no Subsidiary that is not also a Subsidiary Guarantor may be a borrower or a guarantor with respect to such Refinancing Debt, Refinancing Revolving Credit Commitments and/or Refinancing Revolving Loans;
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(viii) Refinancing Debt, Refinancing Revolving Credit Commitments and/or Refinancing Revolving Loans may be unsecured or may only be secured by the Collateral and may rank pari passu or junior in right of payment and/or security with the remaining Revolving Credit Commitments, Revolving Credit Loans and/or Term Loans, so long as the holders of any Refinancing Debt, Refinancing Revolving Credit Commitments and/or Refinancing Revolving Loans that are junior in right of payment and/or security are subject to an Acceptable Intercreditor Agreement;
(ix) such Refinancing Debt or Refinancing Revolving Credit Commitments shall not be secured by any asset of the Borrower and its Subsidiaries other than the Collateral;
(x) in the case of any Refinancing Revolving Credit Commitments, substantially concurrently with the effectiveness thereof, all the Revolving Credit Commitments then in effect shall be terminated, and all the Revolving Credit Loans then outstanding, together with all interest thereon, and all other amounts accrued for the benefit of the Revolving Credit Lenders, shall be repaid or paid (it being understood, however, that any Letters of Credit may continue to be outstanding hereunder), and the aggregate amount of such Refinancing Revolving Credit Commitments does not exceed the aggregate amount of the Revolving Credit Commitments so terminated; and
(xi) any mandatory prepayment requirements, in the case of any Refinancing Term Loans, may provide that such Refinancing Term Loans may participate in any mandatory prepayment on a pro rata basis with any Class of existing Term Loans, but may not provide for prepayment requirements that are more favorable to the Lenders holding such Refinancing Term Loans than to the Lenders holding such Class of Term Loans.
(b) Each such notice shall specify the date (each, a Refinancing Effective Date) on which the Borrower proposes that the Refinancing Debt be made or the Refinancing Revolving Credit Commitments shall become effective, which shall be a date not less than three (3) Business Days (or such shorter period as may be agreed to by the Administrative Agent) after the date on which such notice is delivered to the Administrative Agent.
(c) The Borrower may approach any Lender or any other Person that would be an Eligible Assignee of the applicable Class of Loans or Commitments pursuant to Section 12.9(b) to provide all or a portion of the Refinancing Term Loans or Refinancing Revolving Credit Commitments (a Refinancing Lender); provided that any Lender offered or approached to provide all or a portion of the Refinancing Term Loans may elect or decline, in its sole discretion, to provide a Refinancing Term Loan. Any Refinancing Term Loans or Refinancing Revolving Credit Commitment made on any Refinancing Effective Date shall be designated a series (a Refinancing Series) of Refinancing Term Loans or Refinancing Revolving Credit Commitments for all purposes of this Agreement; provided that (i) any Refinancing Term Loans may, to the extent provided in the applicable Refinancing Amendment, be designated as an increase in any previously established Refinancing Series of Refinancing Term Loans made to the Borrower and (ii) any Refinancing Revolving Credit Commitments may, to the extent provided in the applicable Refinancing Amendment, be designated as an increase in any previously established Refinancing Series of Refinancing Revolving Credit Commitments.
(d) The Administrative Agent and the Lenders hereby consent to the transactions contemplated by this Section 5.16 (including, for the avoidance of doubt, the payment of interest, fees, amortization or premium in respect of the Refinancing Term Loans and Refinancing Revolving Credit Commitments, and Refinancing Revolving Loans on the terms specified by the Borrower) and hereby waive the requirements of this Agreement (including, but not limited to, Section 5.6 and Section 12.2) or
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any other Loan Document that may otherwise prohibit such Refinance or any other transaction contemplated by this Section 5.16. The Refinancing Term Loans and Refinancing Revolving Credit Commitments shall be established pursuant to an amendment to this Agreement among the Borrower and the applicable Refinancing Lenders providing such Refinancing Term Loans or Refinancing Revolving Credit Commitments (a Refinancing Amendment) which shall be consistent with the provisions set forth in this Section 5.16. The Refinancing Notes shall be established pursuant to documentation which shall be consistent with the provisions set forth in Section 5.16(a). Each Refinancing Amendment shall be binding on the Lenders, the Administrative Agent, the Credit Parties party thereto and the other parties hereto without the consent of any other Lender (except with respect to Refinancing Revolving Credit Commitments as provided above) and the Lenders hereby irrevocably authorize the Administrative Agent to enter into amendments to this Agreement and the other Loan Documents as may be necessary or appropriate in the reasonable opinion of the Administrative Agent and the Borrower, to effect the provisions of this Section 5.16, including in order to establish new tranches or sub-tranches in respect of the Refinancing Term Loans or Refinancing Revolving Credit Commitments and Refinancing Revolving Loans and such technical amendments as may be necessary or appropriate in connection therewith and to adjust the amortization schedule in Section 4.3(a) (insofar as such schedule relates to payments due to Lenders, the Term Loans of which are Refinanced; provided that no such amendment shall reduce the pro rata share of any such payment that would have otherwise been payable to the Lenders, the Term Loans of which are not Refinanced). The Administrative Agent shall be permitted, and is hereby authorized, to enter into such Refinancing Amendments with the Borrower to effect the foregoing. The effectiveness of any Refinancing Amendment shall be subject to the satisfaction on the date thereof of conditions as may be required by the Refinancing Lenders providing such Refinancing Amendment.
(e) If any Refinancing Revolving Credit Commitment is designated as an increase in any previously established Refinancing Revolving Credit Commitment, on the Refinancing Effective Date, subject to the satisfaction of the foregoing terms and conditions, each of the Refinancing Lenders with Refinancing Revolving Credit Commitments of such Refinancing Series shall purchase from each of the other Lenders with Refinancing Revolving Credit Commitments of such Refinancing Series, at the principal amount thereof and in the applicable currencies, such interests in the Revolving Credit Loans under such Refinancing Revolving Credit Commitments outstanding immediately prior to such Refinancing as shall be necessary in order that, after giving effect to all such assignments and purchases, the Refinancing Revolving Loans of such Refinancing Series will be held by Refinancing Lenders thereunder ratably in accordance with the percentage of the total Refinancing Revolving Credit Commitments of all Refinancing Lenders represented by each such Refinancing Lenders Refinancing Revolving Credit Commitment. After giving effect to any Refinancing Revolving Credit Commitments, all outstanding Swingline Loans and Letters of Credit shall be participated on a pro rata basis by all Lenders with a Revolving Credit Commitment in accordance with their revised Revolving Credit Commitment Percentages.
(f) The Administrative Agent is authorized to enter into any Acceptable Intercreditor Agreement (and any amendments, amendments and restatements, restatements or waivers of or supplements to or other modifications to, such agreements) and to take all actions (and execute all documents) required (or otherwise deemed advisable by the Administrative Agent) in connection with the incurrence by any Credit Party of any Refinancing Debt, in order to permit such Refinancing Debt to be secured by a valid, perfected lien and the parties hereto acknowledge that any Acceptable Intercreditor Agreement will be binding upon them. Each Lender (i) hereby agrees that it will be bound by and will take no actions contrary to the provisions of any Acceptable Intercreditor Agreement and (ii) hereby authorizes and instructs the Administrative Agent to enter into any Acceptable Intercreditor Agreement (and any amendments, amendments and restatements, restatements or waivers of or supplements to or other modifications to, such agreements) in connection with the incurrence by any Credit Party of any Refinancing Debt, in order to permit such Refinancing Debt to be secured by a valid, perfected lien and to subject the Liens on the Collateral securing the Secured Obligations to the provisions thereof.
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(g) Notwithstanding the terms of Sections 5.13, 5.16 and 5.17, in no event shall there be more than (i) four (4) tranches of revolving facilities in the aggregate in effect at any time (including the Revolving Credit Commitments, any Extended Revolving Credit Commitments and any Refinancing Revolving Credit Commitments) and (ii) six (6) tranches of term loans (including the Initial Term Loan, any Extended Term Loans, any Incremental Term Loans and any Refinancing Term Loans), in each case under this Agreement.
SECTION 5.17 Extensions of Term Loans and Revolving Credit Commitments.
(a) Notwithstanding anything to the contrary in this Agreement, pursuant to one or more offers (each, an Extension Offer) made from time to time by the Borrower to all Lenders of any tranche of Term Loans with a like maturity date or Revolving Credit Commitments with a like maturity date, in each case on a pro rata basis (based on the aggregate outstanding principal amount of the respective tranche of Term Loans or Revolving Credit Commitments with a like maturity date, as the case may be) and on the same terms to each such Lender, the Borrower is hereby permitted to consummate from time to time transactions with individual Lenders that accept the terms contained in such Extension Offers to extend the maturity date of each such Lenders Term Loans of such tranche and/or Revolving Credit Commitments and otherwise modify the terms of such Term Loans and/or Revolving Credit Commitments pursuant to the terms of the relevant Extension Offer (including, without limitation, by increasing the interest rate or fees payable in respect of such Term Loans and/or Revolving Credit Commitments (and related outstandings) and/or modifying the amortization schedule in respect of such Term Loans) (each, an Extension, and each group of Term Loans or Revolving Credit Commitments, as applicable, in each case as so extended, as well as the original Term Loans and the original Revolving Credit Commitments (in each case not so extended), being a separate tranche; any Extended Term Loans shall constitute a separate tranche of Term Loans from the tranche of Term Loans from which they were converted, and any Extended Revolving Credit Commitments shall constitute a separate tranche of Revolving Credit Commitments from the tranche of Revolving Credit Commitments from which they were converted), so long as the following terms are satisfied:
(i) no Default shall have occurred and be continuing at the time the offering document in respect of an Extension Offer is delivered to the Lenders or immediately prior to, and immediately after, the effectiveness of such Extension;
(ii) except as to interest rates, fees and final maturity (which shall be determined by the Borrower and set forth in the relevant Extension Offer), the Revolving Credit Commitment of any Revolving Credit Lender that agrees to an Extension with respect to such Revolving Credit Commitment (an Extending Revolving Credit Lender) extended pursuant to an Extension (an Extended Revolving Credit Commitment), and the related outstandings, shall be a Revolving Credit Commitment (or related outstandings, as the case may be) with the same terms as the original Revolving Credit Commitments (and related outstandings); provided that:
(A) the borrowing and repayment (except for (1) payments of interest and fees at different rates on Extended Revolving Credit Commitments (and related outstandings), (2) repayments required upon the maturity date of the non-extending Revolving Credit Commitments and (3) repayment to any Lender that is not an Extending Revolving Credit Lender made in connection with a permanent repayment and termination of commitments) of Loans with respect to Extended Revolving Credit Commitments after the applicable Extension date shall be made on a pro rata basis with all other Revolving Credit Commitments;
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(B) all Swingline Loans and Letters of Credit shall be participated on a pro rata basis by all Lenders with Revolving Credit Commitments in accordance with their Revolving Credit Commitment Percentages;
(C) the permanent repayment of Revolving Credit Loans with respect to, and termination of, Extended Revolving Credit Commitments after the applicable Extension date shall be made on a pro rata basis with all other Revolving Credit Commitments, except that the Borrower shall be permitted to permanently repay and terminate commitments of any such tranche on a better than a pro rata basis as compared to any other tranche with a later maturity date than such tranche; and
(D) assignments and participations of Extended Revolving Credit Commitments and loans extended pursuant thereto (Extended Revolving Credit Loans) shall be governed by the same assignment and participation provisions applicable to Revolving Credit Commitments and Revolving Credit Loans;
(iii) except as to interest rates, fees, amortization, final maturity date, premium, required prepayment dates and participation in prepayments (which shall, subject to immediately succeeding clauses (iv), (v) and (vi), be determined by the Borrower and set forth in the relevant Extension Offer), the Term Loans of any Lender that agrees to an Extension with respect to such Term Loans extended pursuant to any Extension (Extended Term Loans) shall have the same terms as the tranche of Term Loans subject to such Extension Offer, provided that:
(A) the final maturity date of any Extended Term Loans shall be no earlier than the latest maturity date hereunder;
(B) the Weighted Average Life to Maturity of any Extended Term Loans shall be no shorter than the remaining Weighted Average Life to Maturity of the applicable tranche of Term Loans extended thereby;
(C) any Extended Term Loans may participate on a pro rata basis or a less than pro rata basis (but not greater than a pro rata basis) in any voluntary or mandatory repayments or prepayments hereunder, in each case as specified in the respective Extension Offer;
(iv) if the aggregate principal amount of Term Loans (calculated on the face amount thereof) or Revolving Credit Commitments, as the case may be, in respect of which Lenders shall have accepted the relevant Extension Offer shall exceed the maximum aggregate principal amount of Term Loans or Revolving Credit Commitments, as the case may be, offered to be extended by the Borrower pursuant to such Extension Offer, then the Term Loans or Revolving Credit Loans, as the case may be, of such Lenders shall be extended ratably up to such maximum amount based on the respective principal amounts (but not to exceed actual holdings of record) with respect to which such Lenders have accepted such Extension Offer;
(v) all documentation in respect of such Extension shall be consistent with the foregoing; and
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(vi) notwithstanding the terms of Sections 5.13, 5.16 and 5.17, in no event shall there be more than (i) four (4) tranches of revolving facilities in the aggregate in effect at any time (including the Revolving Credit Commitments, any Extended Revolving Credit Commitments and any Refinancing Revolving Credit Commitments) and (ii) six (6) tranches of term loans (including the Initial Term Loan, any Extended Term Loans any Incremental Term Loans and any Refinancing Term Loans), in each case under this Agreement.
(b) With respect to all Extensions consummated by the Borrower pursuant to this Section, (i) such Extensions shall not constitute voluntary or mandatory payments or prepayments for purposes of Section 4.4 and (ii) unless otherwise agreed to by the Administrative Agent, each Extension Offer shall be in a minimum principal amount (to be specified in the relevant Extension Offer) for the applicable tranche to be extended of (A) $100,000,000 with respect to Term Loans and (B) $50,000,000 with respect to Revolving Credit Commitments (in each case, or, if less, the remaining amount of such tranche). The Administrative Agent and the Lenders hereby consent to the transactions contemplated by this Section (including, for the avoidance of doubt, payment of any interest, fees or premium in respect of any Extended Term Loans and/or Extended Revolving Credit Commitments on the such terms as may be set forth in the relevant Extension Offer) and hereby waive the requirements of any provision of this Agreement or any other Loan Document that may otherwise prohibit any such Extension or any other transaction contemplated by this Section.
(c) No consent of any Lender or the Administrative Agent shall be required to effectuate any Extension, other than the consent of each Lender agreeing to such Extension with respect to one or more of its Term Loans and/or Revolving Credit Commitments (or a portion thereof). All Extended Term Loans, Extended Revolving Credit Commitments and all obligations in respect thereof shall be Obligations under this Agreement and the other Loan Documents that are secured by the Collateral on a pari passu basis with all other applicable Secured Obligations under this Agreement and the other Loan Documents. The Lenders hereby irrevocably authorize the Administrative Agent to enter into amendments to this Agreement and the other Loan Documents with the Borrower as may be necessary in order to establish new tranches or sub-tranches in respect of Revolving Credit Commitments or Term Loans so extended and such technical amendments as may be necessary or appropriate in the reasonable opinion of the Administrative Agent and the Borrower in connection with the establishment of such new tranches or sub-tranches, in each case on terms consistent with this Section. In addition, if so provided in such amendment and with the consent of each Issuing Lender, participations in Letters of Credit expiring on or after the maturity date of any Revolving Credit Commitments that are not extended shall be re-allocated from Lenders holding Revolving Credit Commitments to Lenders holding Extended Revolving Credit Commitments in accordance with the terms of such amendment; provided, however, that such participation interests shall, upon receipt thereof by the relevant Lenders holding Revolving Credit Commitments, be deemed to be participation interests in respect of such Revolving Credit Commitments and the terms of such participation interests (including, without limitation, the commission applicable thereto) shall be adjusted accordingly.
(d) In connection with any Extension, the Borrower shall provide the Administrative Agent at least ten (10) Business Days (or such shorter period as may be agreed by the Administrative Agent) prior written notice thereof, and shall agree to such procedures (including, without limitation, regarding timing, rounding and other adjustments and to ensure reasonable administrative management of the credit facilities hereunder after such Extension), if any, as may be established by, or acceptable to, the Administrative Agent, in each case acting reasonably to accomplish the purposes of this Section.
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ARTICLE VI
CONDITIONS OF CLOSING AND BORROWING
SECTION 6.1 Conditions to Closing and Initial Extensions of Credit. The obligation of the Lenders to close this Agreement and to make the initial Loans or issue or participate in the initial Letter of Credit, if any, is subject to the satisfaction of each of the following conditions:
(a) Executed Loan Documents. This Agreement, a Revolving Credit Note in favor of each Revolving Credit Lender requesting a Revolving Credit Note, a Term Loan Note in favor of each Term Loan Lender requesting a Term Loan Note, a Swingline Note in favor of the Swingline Lender (in each case, if requested thereby), the Security Documents and the Subsidiary Guaranty Agreement, together with any other applicable Loan Documents, shall have been duly authorized, executed and delivered to the Administrative Agent by the parties thereto, shall be in full force and effect and no Default or Event of Default shall exist hereunder or thereunder.
(b) Closing Certificates; Etc. The Administrative Agent shall have received each of the following in form and substance reasonably satisfactory to the Administrative Agent:
(i) Officers Certificate. A certificate from a Responsible Officer of the Borrower to the effect that (A) all representations and warranties of the Credit Parties contained in this Agreement and the other Loan Documents are true, correct and complete in all material respects (except to the extent any such representation and warranty is qualified by materiality or reference to Material Adverse Effect, in which case, such representation and warranty shall be true, correct and complete in all respects, and except for any such representation and warranty that by its terms is made only as of an earlier date, which such representation and warranty shall remain true and correct in all material respects as of such earlier date, except for any representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty shall be true and correct in all respects as of such earlier date); (B) after giving effect to the Transactions, no Default or Event of Default has occurred and is continuing; (C) since December 31, 2016, no event has occurred or condition arisen, either individually or in the aggregate, that has had or could reasonably be expected to have a Material Adverse Effect; and (D) each of the Credit Parties, as applicable, has satisfied each of the conditions set forth in Section 6.1 and Section 6.2, to the extent such conditions are not subject to the discretion or approval of the Administrative Agent or any Lender.
(ii) Certificate of Secretary of each Credit Party. A certificate of a Responsible Officer of each Credit Party certifying as to the incumbency and genuineness of the signature of each officer of such Credit Party executing Loan Documents to which it is a party and certifying that attached thereto is a true, correct and complete copy of (A) the articles or certificate of incorporation or formation (or equivalent), as applicable, of such Credit Party and all amendments thereto, certified as of a recent date by the appropriate Governmental Authority in its jurisdiction of incorporation, organization or formation (or equivalent), as applicable, (B) the bylaws or other governing document of such Credit Party as in effect on the Closing Date, (C) resolutions duly adopted by the board of directors (or other governing body) of such Credit Party authorizing and approving the transactions contemplated hereunder and the execution, delivery and performance of this Agreement and the other Loan Documents to which it is a party, and (D) each certificate required to be delivered pursuant to Section 6.1(b)(iii).
(iii) Certificates of Good Standing. Certificates as of a recent date of the good standing of each Credit Party under the laws of its jurisdiction of incorporation, organization or formation (or equivalent), as applicable, and, to the extent reasonably requested by the Administrative Agent, each other jurisdiction where such Credit Party is qualified to do business.
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(iv) Opinions of Counsel. Opinions of counsel (including in-house counsel for any Credit Party organized in the State of Michigan on the Closing Date) to the Credit Parties addressed to the Administrative Agent and the Lenders with respect to the Credit Parties, the Loan Documents and such other matters as the Administrative Agent shall reasonably request.
(c) Collateral.
(i) Filings and Recordings. To the extent not previously delivered in connection with the Existing Credit Agreement and still in effect, the Administrative Agent shall have received all filings and recordations that are necessary to perfect the security interests of the Administrative Agent, on behalf of the Secured Parties, in the Collateral and the Administrative Agent shall have received evidence reasonably satisfactory to the Administrative Agent that upon such filings and recordations such security interests constitute valid and perfected first priority Liens thereon (subject to Permitted Liens).
(ii) Pledged Collateral. To the extent not previously delivered in connection with the Existing Credit Agreement, the Administrative Agent shall have received (A) original stock certificates or other certificates evidencing the certificated Equity Interests pledged pursuant to the Security Documents, together with an undated stock power for each such certificate duly executed in blank by the registered owner thereof and (B) each original promissory note pledged pursuant to the Security Documents together with an undated allonge for each such promissory note duly executed in blank by the holder thereof.
(iii) Lien Search. The Administrative Agent shall have received the results of a Lien search (including a search as to judgments, bankruptcy, tax and intellectual property matters), in form and substance reasonably satisfactory thereto, made against the Credit Parties under the Uniform Commercial Code (or applicable judicial docket) as in effect in each jurisdiction in which filings or recordations under the Uniform Commercial Code should be made to evidence or perfect security interests in all assets of such Credit Party, indicating among other things that the assets of each such Credit Party are free and clear of any Lien (except for Permitted Liens).
(iv) Property and Liability Insurance. The Administrative Agent shall have received, in each case in form and substance reasonably satisfactory to the Administrative Agent, evidence of property, business interruption and liability insurance covering each Credit Party (with appropriate endorsements naming the Administrative Agent as lenders loss payee (and mortgagee, as applicable) on all policies for property hazard insurance and as additional insured on all policies for liability insurance), and if reasonably requested by the Administrative Agent, copies of such insurance policies.
(v) Negative Pledge Agreements. The Negative Pledge Agreements in effect as of the Closing Date remain effective and filed in the applicable real property records.
(vi) Intellectual Property. To the extent not previously delivered in connection with the Existing Credit Agreement and still in effect, the Administrative Agent shall have received security agreements duly executed by the applicable Credit Parties for all copyrights, patents and trademarks in proper form for filing with the U.S. Patent and Trademark Office or U.S. Copyright Office, as applicable.
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(vii) Control Agreements. To the extent not previously delivered in connection with the Existing Credit Agreement and still in effect, the Administrative Agent shall have received control agreements duly executed by the appropriate parties, for each deposit account and securities account required by the Collateral Agreement.
(viii) Other Collateral Documentation. The Administrative Agent shall have received any documents reasonably requested thereby or as required by the terms of the Security Documents to evidence its security interest in the Collateral.
(d) Consents; Defaults.
(i) Governmental and Third Party Approvals. The Credit Parties shall have received all governmental, shareholder and third party consents and approvals necessary in connection with the transactions contemplated by this Agreement and the other Loan Documents and all applicable waiting periods shall have expired without any action being taken by any Person that could reasonably be expected to restrain, prevent or impose any material adverse conditions on any of the Credit Parties or such other transactions or that could seek or threaten any of the foregoing.
(ii) No Litigation. No action, suit, investigation or proceeding shall have been pending or, to the knowledge of the Borrower, threatened in writing in any court or before any arbitrator or Governmental Authority that could reasonably be expected to have a Material Adverse Effect.
(e) Financial Matters.
(i) Financial Statements. The Administrative Agent shall have received the audited Consolidated balance sheet of the Borrower and its Subsidiaries for the Fiscal Years ended December 31, 2013, December 31, 2014, December 31, 2015 and December 31, 2016, respectively, and the related audited statements of income and retained earnings and cash flows for such Fiscal Years then ended, along with the interim unaudited Consolidated balance sheet of the Borrower and its Subsidiaries for each fiscal quarter ended since the last date for which audited financial statements are available, and the related unaudited statements of income and retained earnings and cash flows for such fiscal quarters then ended.
(ii) Financial Projections. The Administrative Agent shall have received a pro forma balance sheet for the Borrower and its Subsidiaries, and projections prepared by management of the Borrower, of balance sheets, income statements and cash flow statements on a quarterly basis for the first two years following the Closing Date and on an annual basis for the remainder of the term of the Credit Facility, which shall not be materially inconsistent with any financial information or projections previously delivered to the Administrative Agent.
(iii) Financial Condition/Solvency Certificate. The Borrower shall have delivered to the Administrative Agent a certificate, in form and substance reasonably satisfactory to the Administrative Agent, and certified as accurate by the chief financial officer of the Borrower, that (A) after giving effect to the Transactions, the Borrower and its Subsidiaries, on a Consolidated basis, are Solvent, (B) attached thereto are calculations evidencing compliance on a pro forma basis after giving effect to the Transactions with the Financial Covenant (based on the financial statements for the fiscal quarter ended March 31, 2017), (C) the financial projections previously delivered to the Administrative Agent represent the good faith estimates (utilizing reasonable assumptions) of the financial condition and operations of the Borrower and its Subsidiaries and (D) attached thereto is a calculation of the Applicable Margin.
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(iv) No Material Adverse Effect. Since December 31, 2016, there shall not have occurred any event or condition that has had or could be reasonably expected, either individually or in the aggregate, to have a Material Adverse Effect.
(v) Payment at Closing. The Borrower shall have paid or made arrangements to pay contemporaneously with closing (A) to the Administrative Agent, each Arranger and the Lenders the fees set forth or referenced in Section 5.3 and any other accrued and unpaid fees or commissions due hereunder, (B) all reasonable and documented fees, charges and disbursements of counsel to the Administrative Agent as permitted pursuant to Section 12.3(a) (directly to such counsel if requested by the Administrative Agent) and (C) to any other Person such amount as may be due thereto in connection with the transactions contemplated hereby, including all taxes, fees and other charges in connection with the execution, delivery, recording, filing and registration of any of the Loan Documents.
(f) Miscellaneous.
(i) Notice of Account Designation. The Administrative Agent shall have received a Notice of Account Designation specifying the account or accounts to which the proceeds of any Loans made on or after the Closing Date are to be disbursed.
(ii) Existing Credit Agreement. All Indebtedness outstanding under the Existing Credit Agreement shall have been refinanced, or shall be refinanced substantially simultaneously with the initial Extension of Credit.
(iii) PATRIOT Act, etc. The Borrower and each of the Subsidiary Guarantors shall have provided to the Administrative Agent and the Lenders the documentation and other information requested by the Administrative Agent in order to comply with requirements of the PATRIOT Act, applicable know your customer and anti-money laundering rules and regulations.
(iv) Other Documents. All opinions, certificates and other instruments and all proceedings in connection with the transactions contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent. The Administrative Agent shall have received copies of all other documents, certificates and instruments reasonably requested thereby, with respect to the transactions contemplated by this Agreement.
Without limiting the generality of the provisions of the last paragraph of Section 11.3, for purposes of determining compliance with the conditions specified in this Section 6.1, the Administrative Agent and each Lender that has signed this Agreement shall be deemed to have consented to, approved or accepted or to be satisfied with, each document or other matter required thereunder to be consented to or approved by or acceptable or satisfactory to a Lender unless the Administrative Agent shall have received notice from such Lender prior to the proposed Closing Date specifying its objection thereto.
SECTION 6.2 Conditions to All Extensions of Credit. The obligations of the Lenders to make or participate in any Extensions of Credit (including the initial Extension of Credit) and/or any Issuing Lender to issue or extend any Letter of Credit are subject to the satisfaction of the following conditions precedent on the relevant borrowing, issuance or extension date:
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(a) Continuation of Representations and Warranties. Subject to Section 1.11 with respect to any Incremental Term Loan incurred to finance a Limited Condition Acquisition, the representations and warranties contained in this Agreement and the other Loan Documents shall be true and correct in all material respects, except for any representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty shall be true and correct in all respects, on and as of such borrowing, issuance or extension date with the same effect as if made on and as of such date (except for any such representation and warranty that by its terms is made only as of an earlier date, which representation and warranty shall remain true and correct in all material respects as of such earlier date, except for any representation and warranty that is qualified by materiality or reference to Material Adverse Effect, which such representation and warranty shall be true and correct in all respects as of such earlier date).
(b) No Existing Default. Subject to Section 1.11 with respect to any Incremental Term Loan incurred to finance a Limited Condition Acquisition, no Default or Event of Default shall have occurred and be continuing (i) on the borrowing date with respect to such Loan or after giving effect to the Loans to be made on such date or (ii) on the issuance or extension date with respect to such Letter of Credit or after giving effect to the issuance or extension of such Letter of Credit on such date.
(c) Notices. The Administrative Agent shall have received a Notice of Borrowing or Letter of Credit Application, as applicable, from the Borrower in accordance with Section 2.3(a), Section 3.2, Section 4.2, as applicable.
(d) New Swingline Loans/Letters of Credit. So long as any Lender is a Defaulting Lender, (i) the Swingline Lender shall not be required to fund any Swingline Loans unless it is satisfied that it will have no Fronting Exposure after giving effect to such Swingline Loan and (ii) no Issuing Lender shall be required to issue, extend, renew or increase any Letter of Credit unless it is satisfied that it will have no Fronting Exposure after giving effect thereto.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES OF THE CREDIT PARTIES
To induce the Administrative Agent and Lenders to enter into this Agreement and to induce the Lenders to make Extensions of Credit, the Credit Parties hereby represent and warrant to the Administrative Agent and the Lenders both before and after giving effect to the transactions contemplated hereunder, which representations and warranties shall be deemed made on the Closing Date and as otherwise set forth in Section 6.2, that:
SECTION 7.1 Organization; Power; Qualification. Each Credit Party and each Subsidiary thereof (a) is duly organized, validly existing and to the extent applicable in good standing under the laws of the jurisdiction of its incorporation or formation, (b) has the power and authority to own its Properties and to carry on its business as now being and hereafter proposed to be conducted and (c) is duly qualified and authorized to do business in each jurisdiction in which the character of its Properties or the nature of its business requires such qualification and authorization except in jurisdictions where the failure to be so qualified or in good standing could not reasonably be expected to result in a Material Adverse Effect. The jurisdictions in which each Credit Party and each Subsidiary thereof are organized and qualified to do business as of the Closing Date are described on Schedule 7.1.
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SECTION 7.2 Ownership. Each Subsidiary of each Credit Party as of the Closing Date is listed on Schedule 7.2. As of the Closing Date, the capitalization of each Credit Party and its Subsidiaries consists of the number of shares, authorized, issued and outstanding, of such classes and series, with or without par value, described on Schedule 7.2. All such outstanding shares have been duly authorized and validly issued and are fully paid and nonassessable (to the extent such concepts are applicable to such entity) and, as of the Closing Date, are not subject to any preemptive or similar rights, except as described in Schedule 7.2. As of the Closing Date, there are no outstanding stock purchase warrants, subscriptions, options, securities, instruments or other rights of any type or nature whatsoever, which are convertible into, exchangeable for or otherwise provide for or require the issuance of Equity Interests of any Credit Party or any Subsidiary thereof, except as described on Schedule 7.2.
SECTION 7.3 Authorization; Enforceability. Each Credit Party has the right, power and authority and has taken all necessary corporate and other action to authorize the execution, delivery and performance of this Agreement and each of the other Loan Documents to which it is a party in accordance with their respective terms. This Agreement and each of the other Loan Documents have been duly executed and delivered by the duly authorized officers of each Credit Party that is a party thereto, and each such document constitutes the legal, valid and binding obligation of each Credit Party that is a party thereto, enforceable in accordance with its terms, except as such enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar state or federal Debtor Relief Laws from time to time in effect which affect the enforcement of creditors rights in general and the availability of equitable remedies.
SECTION 7.4 Compliance of Agreement, Loan Documents and Borrowing with Laws, Etc. The execution, delivery and performance by each Credit Party of the Loan Documents to which each such Person is a party, in accordance with their respective terms, the Extensions of Credit hereunder and the transactions contemplated hereby or thereby do not and will not, by the passage of time, the giving of notice or otherwise, (a) require any Governmental Approval or violate any Applicable Law relating to any Credit Party where the failure to obtain such Governmental Approval or such violation could reasonably be expected to have a Material Adverse Effect, (b) conflict with, result in a breach of or constitute a default under the articles of incorporation, bylaws or other organizational documents of any Credit Party, (c) conflict with, result in a breach of or constitute a default under any indenture, agreement or other instrument to which such Person is a party or by which any of its properties may be bound or any Governmental Approval relating to such Person, which could, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (d) result in or require the creation or imposition of any Lien upon or with respect to any property now owned or hereafter acquired by such Person other than Permitted Liens or (e) require any consent or authorization of, filing with, or other act in respect of, an arbitrator or Governmental Authority and no consent of any other Person is required in connection with the execution, delivery, performance, validity or enforceability of this Agreement, other than (i) consents, authorizations, filings or other acts or consents previously obtained or for which the failure to obtain or make could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect and (ii) consents or filings under the UCC or other security filings.
SECTION 7.5 Compliance with Law; Governmental Approvals. Each Credit Party and each Subsidiary thereof (a) has all Governmental Approvals required by any Applicable Law for it to conduct its business, each of which is in full force and effect, is final and not subject to review on appeal and is not the subject of any pending or, to its knowledge, threatened (in writing) attack by direct or collateral proceeding, (b) is in compliance with each Governmental Approval applicable to it and in compliance with all other Applicable Laws relating to it or any of its respective properties and (c) has timely filed all material reports, documents and other materials required to be filed by it under all Applicable Laws with any Governmental Authority and has retained all material records and documents required to be retained by it under Applicable Law except in each case of clauses (a), (b) or (c) where the failure to have, comply or file could not reasonably be expected to have a Material Adverse Effect.
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SECTION 7.6 Tax Returns and Payments. Each Credit Party and each Subsidiary thereof has duly filed or caused to be filed all federal, state, local and other tax returns required by Applicable Law to be filed (or obtained extensions therefor), and has paid, or made adequate provision for the payment of, all federal, state, local and other taxes, assessments and governmental charges or levies upon it and its property, income, profits and assets which are due and payable except, in each case, (a) Taxes that are being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided for on the books of the relevant Credit Party or Subsidiary or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. As of the Closing Date, except as set forth on Schedule 7.6, there is no ongoing audit or examination or, to the knowledge of the Borrower, other investigation by any Governmental Authority of the tax liability of any Credit Party or any Subsidiary thereof that could reasonably be expected to result in a Material Adverse Effect.
SECTION 7.7 Intellectual Property Matters. Each Credit Party and each Subsidiary thereof owns or possesses rights to use all material franchises, licenses, copyrights, copyright applications, patents, patent rights or licenses, patent applications, trademarks, trademark rights, service mark, service mark rights, trade names, trade name rights, copyrights and other rights with respect to the foregoing which are reasonably necessary to conduct its business. No event has occurred which permits, or after notice or lapse of time or both would permit, the revocation or termination of any such rights, and, to the knowledge of any Credit Party, no Credit Party nor any Subsidiary thereof is liable to any Person for infringement under Applicable Law with respect to any such rights as a result of its business operations, except, in each case, as could not reasonably be expected to have a Material Adverse Effect.
SECTION 7.8 Environmental Matters. Except as could not reasonably be expected, individually or in the aggregate, to have a Material Adverse Effect:
(a) The real properties owned, leased or operated by each Credit Party and each Subsidiary thereof now or in the past do not contain, and to the knowledge of each Credit Party have not previously contained, any Hazardous Materials in amounts or concentrations which constitute or constituted a violation of applicable Environmental Laws by any Credit Party or any Subsidiary thereof;
(b) To the knowledge of each Credit Party, each Credit Party and each Subsidiary thereof and such real properties owned, leased or operated by each Credit Party and each Subsidiary thereof and all operations conducted in connection therewith are in compliance, and have been in compliance, with all applicable Environmental Laws, and there is no contamination at, under or about such real properties or such operations which could interfere with the continued operation of Borrower or its Subsidiary of such properties or impair the fair saleable value thereof;
(c) No Credit Party nor any Subsidiary thereof has received any written notice of violation, alleged violation, non-compliance, liability or potential liability by such Credit Party or any Subsidiary thereof regarding environmental matters, Hazardous Materials, or compliance with Environmental Laws;
(d) To the knowledge of each Credit Party, Hazardous Materials have not been transported or disposed of to or from the properties owned, leased or operated by any Credit Party or any Subsidiary thereof in violation of, or in a manner or to a location which could give rise to liability of any Credit Party or any Subsidiary thereof, Environmental Laws, nor have any Hazardous Materials been generated, treated, stored or disposed of at, on or under any of such properties in violation of, or in a manner that could give rise to liability of any Credit Party or any Subsidiary thereof under, any applicable Environmental Laws;
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(e) No judicial proceedings or governmental or administrative action is pending, or, to the knowledge of the Borrower, threatened in writing, under any Environmental Law to which any Credit Party or any Subsidiary thereof is or will be named as a potentially responsible party with respect to such properties or operations conducted in connection therewith, 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 applicable Environmental Law with respect to any Credit Party, any Subsidiary thereof, with respect to any real property owned, leased or operated by any Credit Party or any Subsidiary thereof; and
(f) There has been no release of Hazardous Materials at or from real properties owned, leased or operated by any Credit Party or any Subsidiary, now or, to any Credit Partys knowledge, in the past, in violation of or in amounts or in a manner that could give rise to liability of any Credit Party or any Subsidiary thereof under applicable Environmental Laws.
SECTION 7.9 Employee Benefit Matters.
(a) As of the Closing Date, no Credit Party nor any ERISA Affiliate maintains or contributes to, or has any obligation under, any Employee Benefit Plans other than those identified on Schedule 7.9;
(b) Each Credit Party and each ERISA Affiliate is in compliance with all applicable provisions of ERISA, the Code and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans except for any required amendments for which the remedial amendment period as defined in Section 401(b) of the Code has not yet expired and except where a failure to so comply could not reasonably be expected to have a Material Adverse Effect. No liability has been incurred by any Credit Party or any ERISA Affiliate which remains unsatisfied for any taxes or penalties assessed with respect to any Employee Benefit Plan or any Multiemployer Plan except for a liability that could not reasonably be expected to have a Material Adverse Effect;
(c) As of the Closing Date, no Pension Plan has been terminated, nor has any Pension Plan become subject to funding based benefit restrictions under Section 436 of the Code, nor has any funding waiver from the IRS been received or requested with respect to any Pension Plan, nor has any Credit Party or any ERISA Affiliate failed to make any contributions or to pay any amounts due and owing as required by Sections 412 or 430 of the Code, Section 302 of ERISA or the terms of any Pension Plan on or prior to the due dates of such contributions under Sections 412 or 430 of the Code or Section 302 of ERISA, nor has there been any event requiring any disclosure under Section 4041(c)(3)(C) or 4063(a) of ERISA with respect to any Pension Plan;
(d) Except where the failure of any of the following representations to be correct could not reasonably be expected to have a Material Adverse Effect, no Credit Party nor any ERISA Affiliate has: (i) engaged in a nonexempt prohibited transaction described in Section 406 of the ERISA or Section 4975 of the Code, (ii) incurred any liability to the PBGC which remains outstanding other than the payment of premiums and there are no premium payments which are due and unpaid, (iii) failed to make a required contribution or payment to a Multiemployer Plan, or (iv) failed to make a required installment or other required payment under Sections 412 or 430 of the Code; and
(e) Except where the failure of any of the following representations to be correct could not reasonably be expected to have a Material Adverse Effect, no proceeding, claim (other than a benefits claim in the ordinary course of business), lawsuit and/or investigation is existing or, to the knowledge of any Credit Party, threatened in writing concerning or involving (i) any employee welfare benefit plan (as defined in Section 3(1) of ERISA) currently maintained or contributed to by any Credit Party or any ERISA Affiliate, (ii) any Pension Plan or (iii) any Multiemployer Plan.
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SECTION 7.10 Margin Stock. No Credit Party nor any Subsidiary thereof is engaged principally or as one of its activities in the business of extending credit for the purpose of purchasing or carrying any margin stock (as each such term is defined or used, directly or indirectly, in Regulation U of the Board of Governors of the Federal Reserve System). No part of the proceeds of any of the Loans or Letters of Credit will be used for purchasing or carrying margin stock in violation of the provisions of Regulation T, U or X of such Board of Governors. Following the application of the proceeds of each Extension of Credit, not more than twenty-five percent (25%) of the value of the assets (either of the Borrower only or of the Borrower and its Subsidiaries on a Consolidated basis) subject to the provisions of Section 9.2 or Section 9.5 or subject to any restriction contained in any agreement or instrument between the Borrower and any Lender or any Affiliate of any Lender relating to Indebtedness in excess of $5,000,000 will be margin stock.
SECTION 7.11 Government Regulation. No Credit Party nor any Subsidiary thereof is an investment company or a company controlled by an investment company (as each such term is defined or used in the Investment Company Act of 1940) and no Credit Party nor any Subsidiary thereof is, or after giving effect to any Extension of Credit will be, subject to regulation under the Interstate Commerce Act, or any other Applicable Law which limits its ability to incur the Indebtedness contemplated hereby.
SECTION 7.12 [Reserved].
SECTION 7.13 Employee Relations. As of the Closing Date, no Credit Party or any Subsidiary thereof is party to any collective bargaining agreement, nor has any labor union been recognized as the representative of its employees except as set forth on Schedule 7.13. The Borrower knows of no strikes, work stoppage or other collective labor disputes involving its employees or those of its Subsidiaries that, individually or in the aggregate, could reasonably be expected to have a Material Adverse Effect.
SECTION 7.14 Burdensome Provisions. No Subsidiary is party to any agreement or instrument or otherwise subject to any restriction or encumbrance that restricts or limits its ability to make dividend payments or other distributions in respect of its Equity Interests to the Borrower or any Subsidiary or to transfer any of its assets or properties to the Borrower or any other Subsidiary in each case other than existing under or by reason of the Loan Documents or Applicable Law or as permitted under Section 9.10.
SECTION 7.15 Financial Statements. The audited and unaudited financial statements delivered pursuant to Section 6.1(e)(i) fairly present in all material respects on a Consolidated basis the assets, liabilities and financial condition of the Borrower and its Subsidiaries as at such dates, and the results of the operations and changes of financial condition for the periods then ended (other than customary year-end adjustments for unaudited financial statements and the absence of footnotes from unaudited financial statements). All such financial statements, including the related schedules and notes thereto, have been prepared in all material respects in accordance with GAAP. Such financial statements show in all material respects all material indebtedness and other material liabilities, direct or contingent, of the Borrower and its Subsidiaries as of the date thereof, including material liabilities for taxes, material commitments, and Indebtedness, in each case, to the extent required to be disclosed under GAAP. The projections delivered pursuant to Section 6.1(e)(ii) and were prepared in good faith on the basis of the assumptions believed to be reasonable at the time delivered and in light of then existing conditions, it being understood that (1) actual results may vary materially from the projections, (2) the projections relate
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to future events and are not to be viewed as facts, (3) the projections are subject to significant uncertainties, many of which are beyond the control of the Borrower, (4) no assurance can be given that the projections will be realized, and (5) such financial projections and statements are subject to normal year end closing and audit adjustments.
SECTION 7.16 No Material Adverse Change. Since December 31, 2016, no event has occurred or condition arisen, either individually or in the aggregate, that could reasonably be expected to have a Material Adverse Effect.
SECTION 7.17 Solvency. The Borrower and its Subsidiaries, on a Consolidated basis, are Solvent.
SECTION 7.18 Title to Properties. As of the Closing Date, the real property listed on Schedule 7.18 constitutes all of the real property that is owned, leased or subleased by any Credit Party or any of its Subsidiaries. Each Credit Party and each Subsidiary thereof has such title to the real property owned or leased by it as is necessary or desirable to the conduct of its business and valid and legal title to all of its personal property and assets, except those which have been disposed of by the Credit Parties and their Subsidiaries subsequent to such date which dispositions have been in the ordinary course of business or as otherwise expressly permitted hereunder and except as could not reasonably be expected to have a Material Adverse Effect.
SECTION 7.19 Litigation. Except for matters existing on the Closing Date and set forth on Schedule 7.19, there are no actions, suits or proceedings pending nor, to the knowledge of the Borrower, threatened in writing against or in any other way relating adversely to or affecting any Credit Party or any Subsidiary thereof or any of their respective properties in any court or before any arbitrator of any kind or before or by any Governmental Authority that could reasonably be expected to have a Material Adverse Effect.
SECTION 7.20 Anti-Corruption Laws; Anti-Money Laundering Laws and Sanctions.
(a) None of the Borrower, any Subsidiary or any of their respective directors or officers or, to the knowledge of the Borrower, employees or affiliates, (i) is a Sanctioned Person or currently the subject or target of any Sanctions, (ii) is owned or controlled by a Sanctioned Person or (iii) is located, organized or resident in a Sanctioned Country.
(b) The Borrower has implemented and maintains in effect policies and procedures designed to promote and achieve compliance in all material respects by the Borrower and its Subsidiaries and their respective directors, officers, employees and agents with all Anti-Corruption Laws, Anti-Money Laundering Laws and applicable Sanctions.
(c) Each of the Borrower and its Subsidiaries, and to the knowledge of the Borrower, each director, officer, employee, agent and Controlled Affiliate of the Borrower and each such Subsidiary, is in compliance with all Anti-Corruption Laws and Anti-Money Laundering Laws in all material respects and applicable Sanctions.
(d) No proceeds of any Extension of Credit have been used, by the Borrower or any of its Subsidiaries in violation of Section 8.15.
SECTION 7.21 Absence of Defaults. No event has occurred or is continuing (a) which constitutes a Default or an Event of Default, or (b) which constitutes, or which with the passage of time or giving of notice or both would constitute, a default or event of default by any Credit Party or any
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Subsidiary thereof under any judgment, decree or order to which any Credit Party or any Subsidiary thereof is a party or by which any Credit Party or any Subsidiary thereof or any of their respective properties may be bound that could, either individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
SECTION 7.22 Disclosure. No financial statement, material report, material certificate or other material information furnished by or on behalf of any Credit Party or any Subsidiary thereof to the Administrative Agent or any Lender in connection with the transactions contemplated hereby and the negotiation of this Agreement or delivered hereunder (as modified or supplemented by other information so furnished), taken together as a whole, contains any untrue statement of a material fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading; provided that, (a) with respect to projected financial information, pro forma financial information, estimated financial information and other projected or estimated information, such information was prepared in good faith based upon assumptions believed to be reasonable at the time delivered and in light of then existing conditions, it being understood that (i) such information shall be subject to normal year end closing and audit adjustments, (ii) actual results may vary materially from the projections, (iii) the projections relate to future events and are not to be viewed as facts, (iv) the projections are subject to significant uncertainties, many of which are beyond the control of the Borrower, and (v) no assurance can be given that the projections will be realized.
ARTICLE VIII
AFFIRMATIVE COVENANTS
Until all of the Obligations (other than contingent indemnification obligations not then due) have been paid and satisfied in full in cash, all Letters of Credit have been terminated or expired (or been Cash Collateralized) and the Commitments terminated, each Credit Party will, and will cause each of its Subsidiaries to:
SECTION 8.1 Financial Statements and Budgets. Deliver to the Administrative Agent, in form and detail reasonably satisfactory to the Administrative Agent (which shall promptly make such information available to the Lenders in accordance with its customary practice):
(a) Annual Financial Statements. As soon as practicable and in any event within one hundred twenty (120) days (or, if earlier, on the date of any required public filing thereof) after the end of each Fiscal Year (commencing with the Fiscal Year ended December 31, 2017), an audited Consolidated balance sheet of the Borrower and its Subsidiaries as of the close of such Fiscal Year and audited Consolidated statements of income, retained earnings and cash flows including the notes thereto, all in reasonable detail setting forth in comparative form the corresponding figures as of the end of and for the preceding Fiscal Year and prepared in accordance with GAAP and, if applicable, containing disclosure of the effect on the financial position or results of operations of any change in the application of accounting principles and practices during the year. Such annual financial statements shall be audited by an independent certified public accounting firm of recognized national standing reasonably acceptable to the Administrative Agent, and accompanied by a report and opinion thereon by such certified public accountants prepared in accordance with generally accepted auditing standards that is not subject to any going concern or similar qualification or exception (other than with respect to the current maturity of the Obligations within the immediately succeeding twelve (12) month period) or any qualification as to the scope of such audit or with respect to accounting principles followed by the Borrower or any of its Subsidiaries not in accordance with GAAP.
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(b) Quarterly Financial Statements. As soon as practicable and in any event within forty-five (45) days (or, if earlier, on the date of any required public filing thereof) after the end of the first three fiscal quarters of each Fiscal Year (commencing with the fiscal quarter ended June 30, 2017), an unaudited Consolidated balance sheet of the Borrower and its Subsidiaries as of the close of such fiscal quarter and unaudited Consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and that portion of the Fiscal Year then ended, including the notes thereto, all in reasonable detail setting forth in comparative form the corresponding figures as of the end of and for the corresponding period in the preceding Fiscal Year and prepared by the Borrower in accordance with GAAP and, if applicable, containing disclosure of the effect on the financial position or results of operations of any change in the application of accounting principles and practices during the period, and certified by the chief financial officer of the Borrower to present fairly in all material respects the financial condition of the Borrower and its Subsidiaries on a Consolidated basis as of their respective dates and the results of operations of the Borrower and its Subsidiaries for the respective periods then ended, subject to normal year-end adjustments and the absence of footnotes.
(c) Annual Business Plan and Budget. As soon as practicable and in any event within forty-five (45) days after the end of each Fiscal Year, (i) a business plan and operating and capital budget of the Borrower and its Subsidiaries for the ensuing four (4) fiscal quarters, such plan to be prepared in accordance with GAAP and to include, on a quarterly basis, the following: a quarterly operating and capital budget, a projected income statement, and balance sheet, calculations demonstrating projected compliance with the Financial Covenant, and (ii) a plan and budget for the ensuing four (4) fiscal quarters and to include the proposed Capital Expenditures of the Borrower and its Subsidiaries for such four (4) fiscal quarters, along with a reasonable description of such Capital Expenditures and the property location at which such Capital Expenditure is directed.
(d) March 31, 2017 Financial Statements. As soon as practicable and in any event within forty-five (45) days (or, if earlier, on the date of any required public filing thereof) after the end of the fiscal quarter ended March 31, 2017, an unaudited Consolidated balance sheet of the Borrower and its Subsidiaries as of the close of such fiscal quarter and unaudited Consolidated statements of income, retained earnings and cash flows for the fiscal quarter then ended and that portion of the Fiscal Year then ended, including the notes thereto, all in reasonable detail setting forth in comparative form the corresponding figures as of the end of and for the corresponding period in the preceding Fiscal Year and prepared by the Borrower in accordance with GAAP and, if applicable, containing disclosure of the effect on the financial position or results of operations of any change in the application of accounting principles and practices during the period, and certified by the chief financial officer of the Borrower to present fairly in all material respects the financial condition of the Borrower and its Subsidiaries on a Consolidated basis as of their respective dates and the results of operations of the Borrower and its Subsidiaries for the respective periods then ended, subject to normal year-end adjustments and the absence of footnotes.
(e) SEC Filings. Notwithstanding the foregoing, the obligations in paragraphs (a) and (b) of this Section may be satisfied with respect to financial information of the Borrower and its Subsidiaries by furnishing (i) the applicable financial statements of the Borrower or the Parent Entity, as applicable, or (ii) the Parent Entitys Form 10-K or Form 10-Q, as applicable, filed with the SEC, which may be delivered electronically and if so delivered, shall be deemed to have been delivered on the date on which such documents are posted on an Internet or intranet website to which each Lender and the Administrative Agent have access; provided that, with respect to clauses (i) and (ii), (A) to the extent such information relates to the Parent Entity, such information is accompanied by consolidating information that explains in reasonable detail the differences between the information relating to the Parent Entity and its Subsidiaries, on the one hand, and the information relating to the Borrower and its Subsidiaries on a standalone basis, on the other hand, and (B) to the extent such information is in lieu
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of information required to be provided under Section 8.1(a), such financial statements shall be audited by an independent certified public accounting firm of recognized national standing reasonably acceptable to the Administrative Agent, and accompanied by a report and opinion thereon by such certified public accountants prepared in accordance with generally accepted auditing standards that is not subject to any going concern or similar qualification or exception (other than with respect to the current maturity of the Obligations within the immediately succeeding twelve (12) month period) or any qualification as to the scope of such audit or with respect to accounting principles followed by the Parent Entity or any of its Subsidiaries not in accordance with GAAP.
SECTION 8.2 Certificates; Other Reports. Deliver to the Administrative Agent (which shall promptly make such information available to the Lenders in accordance with its customary practice):
(a) at each time financial statements are delivered pursuant to Section 8.1(a) or (b), a duly completed Officers Compliance Certificate signed by the chief executive officer, chief financial officer, treasurer or controller of the Borrower, which will include, as of the date of such financial statements (i) calculations showing compliance with the Financial Covenant, (ii) determination of the Applicable Margin, (iii) calculations of Immaterial Subsidiaries and (iv) a reasonably detailed calculation of the Available Amount;
(b) promptly upon receipt thereof, copies of all reports, if any, submitted to the Borrower or its board of directors by its independent public accountants in connection with their auditing function, including, without limitation, any management report and any management responses thereto;
(c) promptly after the furnishing thereof, copies of any statement or report furnished to any holder of Indebtedness of any Credit Party or any Subsidiary thereof in excess of $25,000,000 pursuant to the terms of any indenture, loan or credit or similar agreement;
(d) promptly after the assertion or occurrence thereof, notice of any action or proceeding against or of any noncompliance by any Credit Party or any Subsidiary thereof with any Environmental Law that could reasonably be expected to have a Material Adverse Effect;
(e) promptly upon the request thereof, such other information and documentation required by bank regulatory authorities under applicable know your customer and anti-money laundering rules and regulations (including, without limitation, the PATRIOT Act), as from time to time reasonably requested by the Administrative Agent or any Lender (through the Administrative Agent); and
(f) such other information regarding the operations, business affairs and financial condition of any Credit Party or any Subsidiary thereof as the Administrative Agent or any Lender (through the Administrative Agent) may reasonably request.
The Borrower hereby acknowledges that (a) the Administrative Agent and/or the Arrangers will make available to the Lenders and the Issuing Lenders materials and/or information provided by or on behalf of the Borrower hereunder (collectively, Borrower Materials) by posting the Borrower Materials on the Platform and (b) certain of the Lenders may be public-side Lenders (i.e., Lenders that do not wish to receive material non-public information with respect to the Borrower or its securities) (each, a Public Lender). The Borrower hereby agrees that it will use commercially reasonable efforts to identify that portion of the Borrower Materials that may be distributed to the Public Lenders and that (w) all such Borrower Materials shall be clearly and conspicuously marked PUBLIC which, at a minimum, means that the word PUBLIC shall appear prominently on the first page thereof; (x) by marking Borrower Materials PUBLIC, the Borrower shall be deemed to have authorized the Administrative Agent, the Arrangers, the Issuing Lenders and the Lenders to treat such Borrower Materials as not containing any
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material non-public information (although it may be sensitive and proprietary) with respect to the Borrower or its securities for purposes of United States Federal and state securities laws (provided, however, that to the extent such Borrower Materials constitute Information, they shall be treated as set forth in Section 12.10); (y) all Borrower Materials marked PUBLIC are permitted to be made available through a portion of the Platform designated Public Investor; and (z) the Administrative Agent and the Arrangers shall be entitled to treat any Borrower Materials that are not marked PUBLIC as being suitable only for posting on a portion of the Platform not designated Public Investor. Notwithstanding the foregoing, the Borrower shall be under no obligation to mark any Borrower Materials PUBLIC.
SECTION 8.3 Notice of Litigation and Other Matters. Promptly (but in no event later than ten (10) days after any Responsible Officer of any Credit Party obtains knowledge thereof) notify the Administrative Agent in writing of (which shall promptly make such information available to the Lenders in accordance with its customary practice):
(a) the occurrence of any Default or Event of Default;
(b) the commencement of all proceedings and investigations by or before any Governmental Authority and all actions and proceedings in any court or before any arbitrator against or involving any Credit Party or any Subsidiary thereof or any of their respective properties, assets or businesses in each case that if adversely determined could reasonably be expected to result in a Material Adverse Effect;
(c) any notice of any violation received by any Credit Party or any Subsidiary thereof from any Governmental Authority including, without limitation, any notice of violation of Environmental Laws which in any such case could reasonably be expected to have a Material Adverse Effect; and
(d) (i) any unfavorable determination letter from the IRS regarding the qualification of an Employee Benefit Plan under Section 401(a) of the Code (along with a copy thereof), (ii) all notices received by any Credit Party or any ERISA Affiliate of the PBGCs intent to terminate any Pension Plan or to have a trustee appointed to administer any Pension Plan, (iii) all notices received by any Credit Party or any ERISA Affiliate from a Multiemployer Plan sponsor concerning the imposition or amount of withdrawal liability pursuant to Section 4202 of ERISA and (iv) the Borrower obtaining knowledge or reason to know that any Credit Party or any ERISA Affiliate has filed or intends to file a notice of intent to terminate any Pension Plan under a distress termination within the meaning of Section 4041(c) of ERISA that would result in liability above the Threshold Amount.
Each notice pursuant to Section 8.3 shall be accompanied by a statement of a Responsible Officer of the Borrower setting forth details of the occurrence referred to therein and stating what action the Borrower has taken and proposes to take with respect thereto. Each notice pursuant to Section 8.3(a) shall describe with particularity any and all provisions of this Agreement and any other Loan Document that have been breached.
SECTION 8.4 Preservation of Corporate Existence and Related Matters. Except as permitted by Section 9.4, preserve and maintain (a) its separate corporate existence (or equivalent form), except, in the case of a Subsidiary of the Borrower, where the failure to do so could not reasonably be expected to have a Material Adverse Effect, and (b) all rights, franchises, licenses and privileges necessary to the normal conduct of its business except where the failure to do so could not reasonably be expected to have a Material Adverse Effect, and qualify and remain qualified as a foreign corporation or other entity authorized to do business in each jurisdiction in which the failure to so qualify could reasonably be expected to have a Material Adverse Effect.
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SECTION 8.5 Maintenance of Property and Licenses.
(a) (i) Protect and preserve all Properties necessary in and material to its business, including copyrights, patents, trade names, service marks and trademarks; (ii) maintain in good working order and condition, ordinary wear and tear excepted, all buildings, equipment and other tangible real and personal property; and (iii) from time to time make or cause to be made all repairs, renewals and replacements thereof and additions to such Property necessary for the normal conduct of its business, so that the business carried on in connection therewith may be conducted in a commercially reasonable manner, in each case for clauses (i) through (iii) above except as such action or inaction could not reasonably be expected to result in a Material Adverse Effect.
(b) Maintain, in full force and effect in all material respects, each and every license, permit, certification, qualification, approval or franchise issued by any Governmental Authority required for each of them to conduct their respective businesses as presently conducted, except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
SECTION 8.6 Insurance. Maintain insurance (subject to customary deductibles and retentions) with financially sound and reputable insurance companies against at least such risks and in at least such amounts as are customarily maintained by similar businesses operating in similar industries and locations (including, without limitation, hazard and business interruption insurance). All such insurance shall, (a) provide that if such policies are cancelled before their respective expiration dates, notice will be delivered to the Administrative Agent in accordance with such policy provisions, (b) in the case of general liability insurance policies, name the Administrative Agent as an additional insured party, and (c) in the case of each casualty insurance policy, name the Administrative Agent as lenders loss payee. On the Closing Date and from time to time thereafter deliver to the Administrative Agent upon its request information in reasonable detail as to the insurance then in effect, stating the names of the insurance companies, the amounts of the insurance, the dates of the expiration thereof and the properties and risks covered thereby.
SECTION 8.7 Accounting Methods and Financial Records. Maintain a system of accounting, and keep proper books, records and accounts (which shall be accurate and complete in all material respects) as may be required or as may be necessary to permit the preparation of financial statements in accordance with GAAP and in compliance with the regulations of any Governmental Authority having jurisdiction over it or any of its Properties.
SECTION 8.8 Payment of Taxes and Other Obligations. Pay and perform all taxes, assessments and other governmental charges that may be levied or assessed upon it or any of its Property; provided, however, that such payment and discharge shall not be required with respect to any such tax, assessment, charge, or levy so long as (a) the validity or amount thereof shall be contested in good faith by appropriate proceedings, which suspend the collection thereof and which have the effect of preventing the forfeiture or sale of the property or assets subject to such Lien, and such Person, as applicable, shall have set aside on its books reserves in accordance with GAAP with respect thereto, or (b) the failure to make such payment and discharge could not reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect.
SECTION 8.9 Compliance with Laws and Approvals. Observe and remain in compliance with all Applicable Laws and maintain in full force and effect all Governmental Approvals, in each case applicable to the conduct of its business except where the failure to do so could not reasonably be expected to have a Material Adverse Effect.
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SECTION 8.10 Environmental Laws. In addition to and without limiting the generality of Section 8.9, (a) comply with, and take commercially reasonable efforts to ensure such compliance by all tenants and subtenants with all applicable Environmental Laws and obtain and comply with and maintain, and ensure that all tenants and subtenants, if any, obtain and comply with and maintain, any and all licenses, approvals, notifications, registrations or permits required by applicable Environmental Laws, in each case, except as could not reasonably be expected to have a Material Adverse Effect and (b) conduct and complete all investigations, studies, sampling and testing, and all remedial, removal and other actions required under Environmental Laws, and promptly comply with all lawful orders and directives of any Governmental Authority regarding Environmental Laws, in each case, except as could not reasonably be expected to have a Material Adverse Effect.
SECTION 8.11 Compliance with ERISA. In addition to and without limiting the generality of Section 8.9, (a) except where the failure to so comply could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect, (i) comply with applicable provisions of ERISA, the Code and the regulations and published interpretations thereunder with respect to all Employee Benefit Plans, (ii) not take any action or fail to take action the result of which could reasonably be expected to result in a liability to the PBGC or to a Multiemployer Plan, (iii) not participate in any prohibited transaction that could result in any civil penalty under ERISA or tax under the Code and (iv) operate each Employee Benefit Plan in such a manner that will not incur any tax liability under Section 4980B of the Code or any liability to any qualified beneficiary as defined in Section 4980B of the Code and (b) furnish to the Administrative Agent upon the Administrative Agents request such additional information about any Employee Benefit Plan as may be reasonably requested by the Administrative Agent.
SECTION 8.12 [Reserved].
SECTION 8.13 Visits and Inspections. Permit representatives of the Administrative Agent, accompanied by any Lenders, from time to time upon prior reasonable notice and at such times during normal business hours, at the expense of the Borrower, to visit and inspect its properties (subject to Borrowers then-current security protocols); inspect, audit and make extracts from its books, records and files, including, but not limited to, management letters prepared by independent accountants; and discuss with its principal officers, and its independent accountants (so long as the Borrower has the opportunity to participate in any such discussions with such accountants), its business, assets, liabilities, financial condition, results of operations and business prospects but, in each case, the Administrative Agent and the Lenders shall not be permitted to receive information subject to confidentiality requirements, including requirements imposed by law or by contract; provided that excluding any such visits and inspections during the continuance of an Event of Default, the Administrative Agent shall not exercise such rights more often than one (1) time during any calendar year at the Borrowers expense; provided further that upon the occurrence and during the continuance of an Event of Default, the Administrative Agent may do any of the foregoing at the Borrowers expense without regard to such frequency restriction.
SECTION 8.14 Additional Subsidiaries; Additional Real Property.
(a) Additional Domestic Subsidiaries. Promptly (and, in any event, within thirty (30) days, as such time period may be extended by the Administrative Agent in its sole discretion) after the creation or acquisition of any Domestic Subsidiary (other than an Excluded Subsidiary) cause such Domestic Subsidiary to (i) become a Subsidiary Guarantor by delivering to the Administrative Agent a duly executed supplement to the Subsidiary Guaranty Agreement or such other document as the Administrative Agent shall reasonably deem appropriate for such purpose, (ii) grant a security interest in all Collateral (subject to the exceptions specified in the Collateral Agreement) owned by such Subsidiary by delivering to the Administrative Agent a duly executed supplement to each applicable
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Security Document or such other document as the Administrative Agent shall reasonably deem appropriate for such purpose and comply with the terms of each applicable Security Document, (iii) deliver to the Administrative Agent such opinions, documents and certificates referred to in Section 6.1(b)(ii) through 6.1(b)(iv) and 6.1(c) as may be reasonably requested by the Administrative Agent, (iv) deliver to the Administrative Agent such original certificated Equity Interests or other certificates and stock or other transfer powers evidencing the Equity Interests of such Domestic Subsidiary, (v) deliver to the Administrative Agent such updated Schedules to the Loan Documents as reasonably requested by the Administrative Agent with respect to such Domestic Subsidiary, and (vi) deliver to the Administrative Agent such other documents as may be reasonably requested by the Administrative Agent, all in form, content and scope reasonably satisfactory to the Administrative Agent.
(b) Additional First Tier Foreign Subsidiaries and CFC Holding Companies. Notify the Administrative Agent promptly after the acquisition or creation of any First Tier Foreign Subsidiary or CFC Holding Company, and, to the extent required pursuant to the terms of the Collateral Agreement, promptly thereafter (and, in any event, within forty five (45) days after such notification, as such time period may be extended by the Administrative Agent in its sole discretion), cause (i) the applicable Credit Party to deliver to the Administrative Agent Security Documents pledging sixty-five percent (65%) of the total outstanding voting Equity Interests (and one hundred percent (100%) of the non-voting Equity Interests) of any such First Tier Foreign Subsidiary or CFC Holding Company and a consent thereto executed by such First Tier Foreign Subsidiary or CFC Holding Company (including, without limitation, if applicable, original certificated Equity Interests (or the equivalent thereof pursuant to the Applicable Laws and practices of any relevant foreign jurisdiction) evidencing the Equity Interests of such new First Tier Foreign Subsidiary or CFC Holding Company, together with an appropriate undated stock or other transfer power for each certificate duly executed in blank by the registered owner thereof), (ii) the applicable Credit Party to deliver to the Administrative Agent such opinions, documents and certificates referred to in Section 6.1(b)(ii) through 6.1(b)(iv) as may be reasonably requested by the Administrative Agent and (iii) the applicable Credit Party to deliver to the Administrative Agent such updated Schedules to the Loan Documents as reasonably requested by the Administrative Agent with regard to such First Tier Foreign Subsidiary or CFC Holding Company. Notwithstanding the foregoing or anything else in this Agreement or any other Loan Document to the contrary, the Credit Parties shall not be required to take any actions outside of the United States to grant, create or perfect any security interest in the Equity Interest of a First Tier Foreign Subsidiary (including the execution of any agreement, document or other instrument governed by the law of any jurisdiction other than the laws of the United States).
(c) Merger Subsidiaries. Notwithstanding the foregoing, to the extent any new Domestic Subsidiary is created solely for the purpose of consummating a merger transaction pursuant to a Permitted Acquisition, and such new Domestic Subsidiary at no time holds any assets or liabilities other than any merger consideration contributed to it contemporaneously with the closing of such merger transaction, such new Domestic Subsidiary shall not be required to take the actions set forth in Section 8.14(a) or (b), as applicable, until the consummation of such Permitted Acquisition (at which time, the surviving entity of the respective merger transaction shall be required to so comply with Section 8.14(a) or (b), as applicable, within ten (10) Business Days of the consummation of such Permitted Acquisition, as such time period may be extended by the Administrative Agent in its sole discretion).
(d) Additional Real Property Interests. Promptly (and, in any event, within sixty (60) days, as such time period may be extended by the Administrative Agent in its sole discretion) notify the Administrative Agent of the acquisition of any owned real property by any Credit Party and execute a Negative Pledge Agreement in appropriate form to be filed in the applicable real property records, if
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elected by the Administrative Agent; provided that the foregoing shall not apply to owned real property acquired after the Closing Date that has an aggregate fair market value at any time (when combined with each other owned real property acquired after the Closing Date that is not subject to a Negative Pledge Agreement) of less than $50,000,000 (as determined by the Borrower in good faith).
SECTION 8.15 Use of Proceeds.
(a) The Borrower shall use the proceeds of the Extensions of Credit solely (i) to finance the Transactions, (ii) pay the Closing Date Dividend, (iii) refinance the Indebtedness under the Existing Credit Agreement and (iv) for working capital and general corporate purposes of the Borrower and its Subsidiaries.
(b) The Borrower will not request any Extension of Credit, and the Borrower shall not use, and shall ensure that its Subsidiaries and its or their respective directors, officers, employees and agents shall not use, directly or, to its knowledge, indirectly, the proceeds of any Extension of Credit (i) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, (ii) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or (iii) in any manner that would result in the violation of any Anti-Money Laundering Laws or Sanctions applicable to any party hereto.
SECTION 8.16 Compliance with Anti-Corruption Laws, Anti-Money Laundering Laws and Sanctions. The Borrower will maintain in effect and enforce policies and procedures designed to promote and achieve compliance by the Borrower, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws and Anti-Money Laundering Laws and applicable Sanctions.
SECTION 8.17 Further Assurances. Execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements and other documents), which may be required under any Applicable Law, or which the Administrative Agent or the Required Lenders may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or priority of any such Lien, all at the expense of the Credit Parties. The Borrower also agrees to provide to the Administrative Agent, from time to time upon the reasonable request by the Administrative Agent, evidence reasonably satisfactory to the Administrative Agent as to the perfection and priority of the Liens created or intended to be created by the Security Documents.
SECTION 8.18 Maintenance of Debt Ratings. Use commercially reasonable efforts to maintain all Debt Ratings.
SECTION 8.19 Post-Closing Matters. Execute and deliver the documents and complete the tasks set forth on Schedule 8.19, in each case within the time limits specified on such schedule (as such deadlines may be extended by the Administrative Agent in writing from time to time). To the extent there is any conflict between the provisions of Section 6.1 and Schedule 8.19, the provisions of Schedule 8.19 shall control.
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ARTICLE IX
NEGATIVE COVENANTS
Until all of the Obligations (other than contingent, indemnification obligations not then due) have been paid and satisfied in full in cash, all Letters of Credit have been terminated or expired (or been Cash Collateralized) and the Commitments terminated, the Credit Parties will not, and will not permit any of their respective Subsidiaries to.
SECTION 9.1 Indebtedness. Create, incur, assume or suffer to exist any Indebtedness except:
(a) the Obligations;
(b) Indebtedness owing under (i) Hedge Agreements entered into in order to manage existing or anticipated interest rate, exchange rate or commodity price risks and not for speculative purposes and (ii) Cash Management Agreements entered into in the ordinary course of business;
(c) Indebtedness existing on the Closing Date and listed on Schedule 9.1, and any Permitted Refinancing Indebtedness in respect thereof;
(d) Capital Lease Obligations and Indebtedness incurred in connection with purchase money Indebtedness in an aggregate amount not to exceed $50,000,000 (inclusive of any Capital Lease Obligations listed on Schedule 9.1) at any time outstanding;
(e) Indebtedness of a Person existing at the time such Person became a Subsidiary or assets were acquired from such Person in connection with an Investment permitted pursuant to Section 9.3, to the extent that (i) such Indebtedness was not incurred in connection with, or in contemplation of, such Person becoming a Subsidiary or the acquisition of such assets, (ii) neither the Borrower nor any Subsidiary thereof (other than such Person or any other Person that such Person merges with or that acquires the assets of such Person) shall have any liability or other obligation with respect to such Indebtedness and (iii) the aggregate outstanding principal amount of such Indebtedness does not exceed $30,000,000 at any time outstanding;
(f) Guarantees with respect to Indebtedness permitted pursuant to subsections (a) through (e) and (i); provided that any Guarantee of Subordinated Indebtedness is subordinated on the same terms and conditions as such Subordinated Indebtedness of this Section;
(g) unsecured intercompany Indebtedness:
(i) owed by any Credit Party to another Credit Party;
(ii) owed by any Credit Party to any Non-Guarantor Subsidiary (provided that such Indebtedness shall be subordinated to the Obligations in a manner reasonably satisfactory to the Administrative Agent);
(iii) owed by any Non-Guarantor Subsidiary to any other Non-Guarantor Subsidiary; and
(iv) owed by any Non-Guarantor Subsidiary to any Credit Party to the extent permitted pursuant to Section 9.3(a)(v);
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(h) Indebtedness arising from the honoring by a bank or other financial institution of a check, draft or other similar instrument drawn against insufficient funds in the ordinary course of business;
(i) Junior Indebtedness of the Borrower and its Subsidiaries and any Permitted Refinancing Indebtedness in respect thereof; provided, that in the case of each incurrence of such Junior Indebtedness, (i) no Default or Event of Default shall have occurred and be continuing or would be caused by the incurrence of such Junior Indebtedness, (ii) the Administrative Agent shall have received satisfactory written evidence that, after giving effect to the incurrence of such Junior Indebtedness and the receipt and application of the proceeds thereof, the Consolidated Total Leverage Ratio (for the most recently completed Reference Period and assuming the funding in full of such Junior Indebtedness) would be at least 0.25 below the Financial Covenant, (iii) such Indebtedness does not mature prior to the date that is 91 days after the then latest Revolving Credit Maturity Date or Term Loan Maturity Date, as applicable, (iv) the Weighted Average Life to Maturity of such Indebtedness shall not be shorter than that applicable to the Initial Term Loan, (v) if such Indebtedness is Subordinated Indebtedness, any guaranty by the Credit Parties shall be expressly subordinated to the Obligations on terms materially not less favorable to the Lenders than the subordination terms of such Subordinated Indebtedness, (vi) if guaranteed, such Indebtedness is not guaranteed by any Subsidiary that is not a Credit Party, (vii) if secured by Liens that are junior to the Liens securing the Obligations, such Junior Indebtedness is subject to an Acceptable Intercreditor Agreement, and (viii) the terms of such Indebtedness reflect market terms (taken as a whole) at the time of issuance and (other than pricing, fees, rate floors, premiums and optional prepayment or redemption provisions (and, if applicable, subordination terms)), taken as a whole, are not materially more restrictive (as determined by Borrower in good faith) on the Borrower and its Subsidiaries than the terms and conditions of this Agreement, taken as a whole, other than covenants which do not have effect until after the then latest Revolving Credit Maturity Date or Term Loan Maturity Date, as applicable;
(j) Indebtedness under performance bonds, surety bonds, release, appeal and similar bonds, and statutory obligations, Indebtedness owed to (including obligations in respect of letters of credit or bank guarantees or similar instruments for the benefit of) any person providing workers compensation, health, disability or other employee benefits or property, casualty or liability insurance to the Borrower or any Subsidiary, pursuant to reimbursement or indemnification obligations to such person, in each case incurred in the ordinary course of business, and reimbursement obligations in respect of any of the foregoing;
(k) unsecured Indebtedness consisting of promissory notes issued to current or former officers, directors and employees (or their respective family members, estates or trusts or other entities for the benefit of any of the foregoing) of the Borrower or its Subsidiaries to purchase or redeem Equity Interests or options of the Borrower in an aggregate principal amount not to exceed $5,000,000 at any time outstanding;
(l) Indebtedness arising from agreements of the Borrower or any Subsidiary providing for indemnification, adjustment of purchase or acquisition price, deferred compensation or similar obligations, in each case, incurred in connection with any Permitted Acquisition, any Investment or the disposition of any business, assets or a Subsidiary not prohibited by this Agreement;
(m) Indebtedness in respect of letters of credit, bank guarantees or similar instruments issued to support performance obligations and trade letters of credit (other than obligations in respect of other Indebtedness) in the ordinary course of business and consistent with past practice or industry practices;
(n) Indebtedness incurred in the ordinary course of business in connection with the financing of insurance premiums;
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(o) Indebtedness under Refinancing Notes, one hundred percent (100%) of the Net Cash Proceeds of which are applied to repay outstanding Loans pursuant to Section 4.4(b)(i); and
(p) Indebtedness not otherwise permitted pursuant to this Section in an aggregate principal amount not to exceed $50,000,000 at any time outstanding.
SECTION 9.2 Liens. Create, incur, assume or suffer to exist, any Lien on or with respect to any of its Property, whether now owned or hereafter acquired, except:
(a) Liens created pursuant to the Loan Documents (including, without limitation, Liens in favor of the Swingline Lender and/or the Issuing Lenders, as applicable, on Cash Collateral granted pursuant to the Loan Documents);
(b) Liens in existence on the Closing Date and described on Schedule 9.2, and the replacement, renewal or extension thereof (including Liens incurred, assumed or suffered to exist in connection with any Permitted Refinancing Indebtedness permitted pursuant to Section 9.1(c) (solely to the extent that such Liens were in existence on the Closing Date and described on Schedule 9.2)); provided that the scope of any such Lien shall not be increased, or otherwise expanded, to cover any additional property or type of asset, as applicable, beyond that in existence on the Closing Date, except for products and proceeds of the foregoing;
(c) Liens for taxes, assessments and other governmental charges or levies (i) not yet due or as to which the period of grace, if any, related thereto has not expired or (ii) which are being contested in good faith and by appropriate proceedings if adequate reserves are maintained to the extent required by GAAP;
(d) the claims of materialmen, mechanics, carriers, warehousemen, processors or landlords for labor, materials, supplies or rentals incurred in the ordinary course of business, which (i) are not overdue for a period of more than sixty (60) days, or if more than sixty (60) days overdue, no action has been taken to enforce such Liens and such Liens are being contested in good faith and by appropriate proceedings if adequate reserves are maintained to the extent required by GAAP and (ii) do not, individually or in the aggregate, materially impair the use thereof in the operation of the business of the Borrower or any of its Subsidiaries;
(e) deposits or pledges made in the ordinary course of business in connection with, or to secure payment of, obligations under workers compensation, unemployment insurance and other types of social security or similar legislation, or to secure the performance of bids, earnest money, trade contracts and leases (other than Indebtedness), statutory obligations, surety bonds (other than bonds related to judgments or litigation), performance bonds and other obligations of a like nature incurred in the ordinary course of business, in each case, so long as no foreclosure sale or similar proceeding has been commenced with respect to any portion of the Collateral on account thereof;
(f) encumbrances in the nature of zoning restrictions, easements and rights or restrictions of record on the use of real property, which in the aggregate do not, in any case, impair the use thereof in the ordinary conduct of business;
(g) Liens arising from the filing of precautionary UCC financing statements relating solely to personal property leased pursuant to operating leases entered into in the ordinary course of business of the Borrower and its Subsidiaries;
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(h) Liens securing Indebtedness permitted under Section 9.1(d); provided that (i) such Liens shall be created within one hundred twenty (120) days of the acquisition, repair, construction, improvement or lease, as applicable, of the related Property, (ii) such Liens do not at any time encumber any property other than the Property financed or improved by such Indebtedness, (iii) the amount of Indebtedness secured thereby is not increased and (iv) the principal amount of Indebtedness secured by any such Lien shall at no time exceed one hundred percent (100%) of the original price for the purchase, repair, construction, improvement or lease amount (as applicable) of such Property at the time of purchase, repair, construction, improvement or lease (as applicable);
(i) Liens securing judgments for the payment of money not constituting an Event of Default under Section 10.1(m) or securing appeal or other surety bonds relating to such judgments;
(j) Liens on Property (i) of any Subsidiary which are in existence at the time that such Subsidiary is acquired pursuant to a Permitted Acquisition and (ii) of the Borrower or any of its Subsidiaries existing at the time such tangible property or tangible assets are purchased or otherwise acquired by the Borrower or such Subsidiary thereof pursuant to a transaction permitted pursuant to this Agreement; provided that, with respect to each of the foregoing clauses (i) and (ii), (A) such Liens are not incurred in connection with, or in anticipation of, such Permitted Acquisition, purchase or other acquisition, (B) such Liens are applicable only to specific Property, (C) such Liens are not blanket or all asset Liens, (D) such Liens do not attach to any other Property of the Borrower or any of its Subsidiaries and (E) the Indebtedness secured by such Liens is permitted under Section 9.1(e);
(k) (i) Liens of a collecting bank arising in the ordinary course of business under Section 4-210 of the Uniform Commercial Code in effect in the relevant jurisdiction and (ii) Liens of any depositary bank or securities intermediary in connection with statutory, common law and contractual rights of set-off and recoupment with respect to any deposit account or securities account of the Borrower or any Subsidiary thereof;
(l) (i) contractual or statutory Liens of landlords to the extent relating to the property and assets relating to any lease agreements with such landlord, and (ii) contractual Liens of suppliers (including sellers of goods) or customers granted in the ordinary course of business to the extent limited to the property or assets relating to such contract;
(m) any interest or title of a licensor, sublicensor, lessor or sublessor with respect to any assets under any license or lease agreement entered into in the ordinary course of business which do not (i) interfere in any material respect with the business of the Borrower or its Subsidiaries or materially detract from the value of the relevant assets of the Borrower or its Subsidiaries or (ii) secure any Indebtedness;
(n) Liens to secure Indebtedness permitted under Section 9.1(n); provided that (i) such Liens are limited to securing only the unpaid premiums under the applicable insurance policy and (ii) such Liens only encumber the proceeds of the applicable insurance policy; and
(o) Liens not otherwise permitted hereunder securing Indebtedness or other obligations in the aggregate principal amount not to exceed $75,000,000 at any time outstanding.
Notwithstanding the foregoing, in no event shall this Section permit any consensual Liens on real property.
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SECTION 9.3 Investments. Purchase, own or otherwise acquire (in one transaction or a series of transactions), directly or indirectly, any Equity Interests of any other Person, evidence of Indebtedness or other securities of any other Person, all or substantially all of the assets of any other Person or division thereof, whether through the purchase of assets, merger or otherwise, or any other investment or interest whatsoever in any other Person, or make or permit to exist, directly or indirectly, any loans, advances or extensions of credit to, or any investment in cash or by delivery of Property in, any other Person (all the foregoing, Investments) except:
(a) (i) Investments existing on the Closing Date (other than Investments in Subsidiaries existing on the Closing Date) and described on Schedule 9.3, (ii) Investments made after the Closing Date by any Credit Party in any other Credit Party, (iii) Investments made after the Closing Date by any Non-Guarantor Subsidiary in any other Non-Guarantor Subsidiary, (iv) Investments made after the Closing Date by any Non-Guarantor Subsidiary in any Credit Party and (v) Investments made after the Closing Date by any Credit Party in any Non-Guarantor Subsidiary in an aggregate amount at any time outstanding not to exceed, together with any Investments made pursuant to Section 9.3(h)(ii), $15,000,000; provided that, in the case of the foregoing clause (v), (A) no Default or Event of Default shall have occurred and be continuing and (B) any Investments in the form of loans or advances made by any Credit Party to any Non-Guarantor Subsidiary pursuant to such clause shall be evidenced by a demand note in form and substance reasonably satisfactory to the Administrative Agent and shall be pledged and delivered to the Administrative Agent pursuant to the Security Documents;
(b) Investments existing on the Closing Date in Subsidiaries existing on the Closing Date;
(c) Investments in cash and Cash Equivalents;
(d) [reserved];
(e) deposits made in the ordinary course of business to secure the performance of leases or other obligations as permitted by Section 9.2;
(f) Hedge Agreements permitted pursuant to Section 9.1;
(g) purchases of assets in the ordinary course of business;
(h) Investments by the Borrower or any Subsidiary thereof in the form of (i) Permitted Acquisitions to the extent that any Person or Property acquired in such acquisition becomes a part of the Borrower or a Subsidiary Guarantor or becomes (whether or not such Person is a Wholly-Owned Subsidiary) a Subsidiary Guarantor in the manner contemplated by Section 8.14, and (ii) Permitted Acquisitions to the extent that any Person or Property acquired in such acquisition does not become a Subsidiary Guarantor or a part of a Subsidiary Guarantor in an aggregate amount at any time outstanding not to exceed, together with any Investments made pursuant to Section 9.3(a)(v), $15,000,000;
(i) Investments in the form of loans and advances to officers, managers and employees in the ordinary course of business or otherwise approved by Borrowers board of managers in an aggregate amount not to exceed at any time outstanding $2,500,000 (determined without regard to any write-downs or write-offs of such loans or advances);
(j) Guarantees permitted pursuant to Section 9.1;
(k) receivables owing to the Credit Parties or any of their Subsidiaries or any advances to suppliers, in each case if created, acquired or made in the ordinary course of business and payable or dischargeable in accordance with customary trade terms;
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(l) Investments (including debt obligations) received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers and suppliers arising in the ordinary course of business;
(m) Investments in an amount not to exceed the Available Amount at the time such Investment is made; provided that at the time of such Investment, or LCA Test Date, as applicable, no Default or Event of Default has occurred and is continuing or would result therefrom;
(n) the Borrower may make Investments not otherwise permitted pursuant to this Section; provided that, immediately before and immediately after giving pro forma effect to the making of any such Investment and any Indebtedness incurred in connection therewith, subject to Section 1.11 in connection with a Limited Condition Acquisition, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Consolidated Total Leverage Ratio is less than or equal to 4.00 to 1.00 as of the most recently completed Reference Period; and
(o) Investments not otherwise permitted pursuant to this Section in an aggregate amount not to exceed $25,000,000 at any time outstanding; provided that, immediately before and immediately after giving pro forma effect to any such Investments, no Default or Event of Default shall have occurred and be continuing.
For purposes of determining the amount of any Investment outstanding for purposes of this Section 9.3, such amount shall be deemed to be the amount of such Investment when made, purchased or acquired (without adjustment for subsequent increases or decreases in the value of such Investment) less any amount realized in respect of such Investment upon the sale, collection or return of capital (not to exceed the original amount invested).
SECTION 9.4 Fundamental Changes. Merge, consolidate or enter into any similar combination with, or enter into any Asset Disposition of all or substantially all of its assets (whether in a single transaction or a series of transactions) with, any other Person or liquidate, wind-up or dissolve itself (or suffer any liquidation or dissolution) except:
(a) (i) any Subsidiary of the Borrower may be merged, amalgamated or consolidated with or into the Borrower (provided that the Borrower shall be the continuing or surviving entity) or (ii) any Subsidiary of the Borrower may be merged, amalgamated or consolidated with or into, or be liquidated or dissolved into, any Subsidiary Guarantor (provided that the Subsidiary Guarantor shall be the continuing or surviving entity or simultaneously with such transaction, the continuing or surviving entity shall become a Subsidiary Guarantor and the Borrower shall comply with Section 8.14 in connection therewith within the time period specified therein, in each case, to the extent required to do so);
(b) (i) any Non-Guarantor Subsidiary that is a Foreign Subsidiary may be merged, amalgamated or consolidated with or into, or be liquidated into, any other Non-Guarantor Subsidiary and (ii) any Non-Guarantor Subsidiary that is a Domestic Subsidiary may be merged, amalgamated or consolidated with or into, or be liquidated into, any other Non-Guarantor Subsidiary that is a Domestic Subsidiary;
(c) any Subsidiary may dispose of all or substantially all of its assets (upon voluntary liquidation, dissolution, winding up or otherwise) to the Borrower or any Subsidiary Guarantor; provided that, with respect to any such disposition by any Non-Guarantor Subsidiary, the consideration for such disposition paid by any Credit Party shall not exceed the fair value of such assets;
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(d) (i) any Non-Guarantor Subsidiary that is a Foreign Subsidiary may dispose of all or substantially all of its assets (upon voluntary liquidation, dissolution, winding up or otherwise) to any other Non-Guarantor Subsidiary and (ii) any Non-Guarantor Subsidiary that is a Domestic Subsidiary may dispose of all or substantially all of its assets (upon voluntary liquidation, dissolution, winding up or otherwise) to any other Non-Guarantor Subsidiary that is a Domestic Subsidiary;
(e) dispositions permitted by Section 9.5 (other than Section 9.5(h));
(f) any Wholly-Owned Subsidiary of the Borrower may merge with or into the Person such Wholly-Owned Subsidiary was formed to acquire in connection with any acquisition permitted hereunder (including, without limitation, any Permitted Acquisition); provided that in the case of any merger involving a Wholly-Owned Subsidiary that is a Subsidiary Guarantor, (i) a Subsidiary Guarantor shall be the continuing or surviving entity or (ii) simultaneously with such transaction, the continuing or surviving entity shall become a Subsidiary Guarantor and the Borrower shall comply with Section 8.14 in connection therewith within the time period specified therein; and
(g) any Person may merge into the Borrower or any of its Wholly-Owned Subsidiaries in connection with a Permitted Acquisition; provided that (i) in the case of a merger involving the Borrower or a Subsidiary Guarantor, the continuing or surviving Person shall be the Borrower or such Subsidiary Guarantor (or the continuing or surviving Person shall, simultaneously with such transaction, become a Subsidiary Guarantor and the Borrower shall comply with Section 8.14 in connection therewith within the time period specified therein) and (ii) the continuing or surviving Person shall be the Borrower or a Wholly-Owned Subsidiary of the Borrower.
SECTION 9.5 Asset Dispositions. Make any Asset Disposition except:
(a) the sale of obsolete, damaged, worn-out or surplus assets no longer used or useful in the business of the Borrower or any of its Subsidiaries;
(b) non-exclusive licenses and sublicenses (and terminations thereof) of intellectual property rights in the ordinary course of business not interfering, individually or in the aggregate, in any material respect with the conduct of the business of the Borrower and its Subsidiaries;
(c) leases, subleases, licenses or sublicenses (and terminations thereof) of real or personal property granted by the Borrower or any of its Subsidiaries to others in the ordinary course of business not interfering in any material respect with the business of the Borrower or any of its Subsidiaries;
(d) Asset Dispositions in connection with Insurance and Condemnation Events; provided that the requirements of Section 4.4(b) are complied with in connection therewith;
(e) the abandonment or disposition of intellectual property determined by Borrower and its Subsidiaries to no longer be necessary in the conduct of their businesses;
(f) the sale of inventory in the ordinary course of business;
(g) any issuance of Equity Interests by the Borrower, so long as no Change in Control occurs;
(h) the transfer of assets to the Borrower or any Subsidiary Guarantor pursuant to any other transaction permitted pursuant to Section 9.4 (other than Section 9.4(e));
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(i) the write-off, discount, sale or other disposition of defaulted or past-due receivables and similar obligations in the ordinary course of business and not undertaken as part of an accounts receivable financing transaction;
(j) the disposition of any Hedge Agreement;
(k) dispositions of Investments in cash and Cash Equivalents;
(l) the transfer by any Credit Party of its assets to any other Credit Party;
(m) the transfer by any Non-Guarantor Subsidiary of its assets to any Credit Party (provided that in connection with any new transfer, such Credit Party shall not pay more than an amount equal to the fair market value of such assets as determined in good faith at the time of such transfer);
(n) the transfer by any Non-Guarantor Subsidiary of its assets to any other Non-Guarantor Subsidiary;
(o) Investments permitted under Section 9.3, Liens permitted by Section 9.2 and Restricted Payments permitted by Section 9.6;
(p) Assets Dispositions in connection with transactions permitted by Section 9.4;
(q) any disposition of Investments in joint ventures to the extent required by, or made pursuant to buy/sell arrangements between the joint venture parties set forth in joint venture arrangements and similar binding arrangements; and
(r) Asset Dispositions not otherwise permitted pursuant to this Section; provided that (i) at the time of such Asset Disposition, no Default or Event of Default shall exist or would result from such Asset Disposition, (ii) such Asset Disposition is made for fair market value and the consideration received shall be no less than seventy-five percent (75)% in cash, and (iii) the aggregate fair market value of all property disposed of in reliance on this clause (r) shall not exceed five percent (5%) of the Consolidated total assets (excluding cash and Cash Equivalents) of the Borrower and its Subsidiaries in any Fiscal Year (calculated as of the end of the immediately preceding fiscal quarter of the Borrower for which the Borrowers financial statements were most recently delivered pursuant to this Agreement).
SECTION 9.6 Restricted Payments. Declare or pay any Restricted Payments; provided that:
(a) the Borrower or any Subsidiary thereof may pay dividends in shares of its own Qualified Equity Interests and may make cash payments in lieu of issuance of fractional shares in connection with the exercise of warrants, options or other securities convertible into or exchangeable for Equity Interests of the Borrower or any of its Subsidiaries;
(b) any Subsidiary of the Borrower may make Restricted Payments to the Borrower or any other Subsidiary (or ratably to all holders of its outstanding Qualified Equity Interests);
(c) for any period during which the Borrower is taxed as a flow-through entity for U.S. federal income tax purposes, each Subsidiary of the Borrower may declare and make Restricted Payments to the Borrower so that the Borrower may, and the Borrower shall be permitted to, make Permitted Tax Distributions at any time during such period;
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(d) at any time after an IPO, the Borrower may declare and make Restricted Payments:
(i) to the Parent Entity in amounts incurred by the Parent Entity for (A) corporate overhead costs and expenses (including administrative, legal, accounting and similar expenses provided by third parties) which are reasonable and customary and attributable to the ownership or operations of the Borrower and its Subsidiaries, (B) any reasonable and customary indemnification claims made by directors or officers of the Parent Entity attributable to the ownership or operations of the Borrower and its Subsidiaries, (C) costs and expenses incurred by it in connection with the Parent Entity being a public company, including costs and expenses relating to ongoing compliance with federal and state securities laws and regulations, SEC rules and regulations and the Sarbanes-Oxley Act of 2002, (D) reasonable fees and expenses of the Parent Entity related to the IPO whether or not consummated, (E) franchise fees and similar Taxes of the Parent Entity and other fees and expenses required to maintain the organizational existence of the Parent Entity, in each case, which are reasonable and customary, (F) reasonable and customary compensation and benefits payable to directors, officers, and employees of the Parent Entity to the extent attributable to the operations of the Borrower and its Subsidiaries, and (G) reimbursement of reasonable expenses paid by the Parent Entity on behalf of the Borrower;
(ii) to the extent necessary to make, or allow the Parent Entity to make, tax benefit or savings payments and similar payments, in each case as may be required pursuant to the terms of the IPO Documents; and
(iii) to the extent necessary to make, or allow the Parent Entity to make, cash settlement payments to members of the Borrower in connection with the redemption of such members Equity Interests in the Borrower as may be required pursuant to the terms of the limited liability company agreement of the Borrower; provided that, immediately before and immediately after giving pro forma effect to the making of any such Restricted Payment and any Indebtedness incurred in connection therewith, (x) no Default or Event of Default shall have occurred and be continuing and (y) the Consolidated Total Leverage Ratio is less than or equal to 4.00 to 1.00 as of the most recently completed Reference Period;
(e) the Borrower may declare and pay the Closing Date Dividend;
(f) the Borrower may declare and make Restricted Payments in an amount not to exceed the Available Amount; provided that (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) after giving pro forma effect to such usage and any Indebtedness incurred in connection therewith, the Borrower is in pro forma compliance with the Financial Covenant for the most recently completed Reference Period;
(g) the Borrower may declare and make Restricted Payments in an aggregate amount not to exceed $15,000,000 during any Fiscal Year; and
(h) the Borrower may declare and make Restricted Payments not otherwise permitted pursuant to this Section; provided that, immediately before and immediately after giving pro forma effect to the making of any such Restricted Payment and any Indebtedness incurred in connection therewith, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Consolidated Total Leverage Ratio is less than or equal to 3.00 to 1.00 as of the most recently completed Reference Period.
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SECTION 9.7 Transactions with Affiliates. Directly or indirectly enter into any transaction, including, without limitation, 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 of the Borrower or any of its Subsidiaries, other than:
(i) transactions permitted by Sections 9.1, 9.3, 9.4, 9.5, 9.6 and 9.13;
(ii) transactions existing on the Closing Date and described on Schedule 9.7;
(iii) transactions among Credit Parties;
(iv) transactions with the Persons party to the IPO Documents as required thereunder;
(v) other transactions in the ordinary course of business on terms as favorable as would be obtained by it on a comparable arms-length transaction with an independent, unrelated third party as determined in good faith by the board of directors (or equivalent governing body) of the Borrower;
(vi) employment and severance arrangements (including equity incentive plans and employee compensation plans, benefit plans and stock option programs and arrangements) with their respective officers and employees in the ordinary course of business; and
(vii) payment of customary fees and reasonable out of pocket costs to, and indemnities for the benefit of, directors, officers and employees of the Borrower and its Subsidiaries in the ordinary course of business to the extent attributable to the ownership or operation of the Borrower and its Subsidiaries.
SECTION 9.8 Accounting Changes; Organizational Documents.
(a) Change its Fiscal Year end, or make (without the consent of the Administrative Agent) any material change in its accounting treatment and reporting practices except as required by GAAP.
(b) Amend, modify or change its articles of incorporation (or corporate charter or other similar organizational documents) or amend, modify or change its bylaws (or other similar documents) or amend, modify or change any of the IPO Documents after the initial approval of the form thereof by the Administrative Agent, in each case, in any manner materially adverse to the rights or interests of the Lenders; provided that concurrently with the consummation of the IPO, the limited liability company agreement of the Borrower may be amended or amended and restated with such modifications thereto containing obligations of the Borrower not prohibited under this Agreement.
SECTION 9.9 Payments and Modifications of Certain Indebtedness.
(a) Amend, modify, waive or supplement (or permit the modification, amendment, waiver or supplement of) any of the terms or provisions of any Subordinated Indebtedness in any respect which would materially and adversely affect the rights or interests of the Administrative Agent and Lenders hereunder.
(b) Cancel, forgive, make any payment or prepayment on, or redeem or acquire for value (including, without limitation, (x) by way of depositing with any trustee with respect thereto money or securities before due for the purpose of paying when due and (y) at the maturity thereof) any Junior Indebtedness, except:
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(i) Permitted Refinancing Indebtedness in respect of any Junior Indebtedness permitted by Section 9.1, and by any subordination provisions applicable thereto;
(ii) payments and prepayments of any Junior Indebtedness made solely with the proceeds of Qualified Equity Interests (other than the IPO);
(iii) the payment of interest, expenses and indemnities in respect of Subordinated Indebtedness permitted by the subordination agreement or any subordination provisions applicable thereto;
(iv) payments and prepayments of any Junior Indebtedness in an amount not to exceed the Available Amount; provided that (i) no Default or Event of Default has occurred and is continuing or would result therefrom and (ii) after giving pro forma effect to such usage and any Indebtedness incurred in connection therewith, the Borrower is in pro forma compliance with the Financial Covenant for the most recently completed Reference Period; and
(v) payments of any Junior Indebtedness not otherwise permitted pursuant to this Section; provided that, immediately before and immediately after giving pro forma effect to the making of any such payment and any Indebtedness incurred in connection therewith, (i) no Default or Event of Default shall have occurred and be continuing and (ii) the Consolidated Total Leverage Ratio is less than or equal to 3.00 to 1.00 as of the most recently completed Reference Period.
SECTION 9.10 No Further Negative Pledges; Restrictive Agreements. Enter into, assume or be subject to any agreement prohibiting or otherwise restricting (a) the creation or assumption of any Lien upon its properties or assets, whether now owned or hereafter acquired, or requiring the grant of any security for such obligation if security is given for some other obligation, or (b) the ability of any Credit Party or any Subsidiary thereof to (i) pay dividends or make any other distributions on its Equity Interests to the Borrower or any Subsidiary that is a direct or indirect parent of such Subsidiary, (ii) act as a Credit Party pursuant to the Loan Documents or any renewals, refinancings, exchanges, refundings or extension thereof or (iii) pay any Indebtedness or other obligation owed to any Credit Party or make loans or advances to any Credit Party, except in each case for such encumbrances or restrictions existing under or by reason of (A) this Agreement and the other Loan Documents, (B) Applicable Law, (C) any document or instrument governing Indebtedness incurred pursuant to Section 9.1(d) (provided that any such restriction contained therein relates only to the asset or assets acquired, improved or otherwise financed in connection therewith), (D) any Permitted Lien or any document or instrument governing any Permitted Lien (provided that any such restriction contained therein relates only to the asset or assets subject to such Permitted Lien), (E) obligations that are binding on a Subsidiary at the time such Subsidiary first becomes a Subsidiary of the Borrower, so long as such obligations are not entered into in contemplation of such Person becoming a Subsidiary, (F) customary restrictions contained in an agreement related to the sale of Property that limit the transfer of such Property pending the consummation of such sale or any restriction on a Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of the Equity Interests or assets of a Subsidiary, in each case to the extent such sale is permitted pursuant to Section 9.5, (G) customary restrictions in leases, subleases, licenses and sublicenses or asset sale agreements otherwise permitted by this Agreement so long as such restrictions relate only to the assets subject thereto, (H) customary restrictions contained in the organizational documents of any Non-Guarantor Subsidiary as of the Closing Date, (I) customary provisions restricting assignment of any agreement entered into in the ordinary course of business, (J) customary provisions in joint venture agreements and other similar agreements entered into in the ordinary course of business, and (K) restrictions on cash or other deposits imposed by customers under contracts entered into in the ordinary course of business.
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SECTION 9.11 Nature of Business. Engage in any business other than the business conducted by the Borrower and its Subsidiaries as of the Closing Date and business activities reasonably related or ancillary thereto.
SECTION 9.12 [Reserved.]
SECTION 9.13 Sale Leasebacks. Directly or indirectly become or remain liable as lessee or as guarantor or other surety with respect to any lease, whether an operating lease or a capital lease, of any Property (whether real, personal or mixed), whether now owned or hereafter acquired, (a) which any Credit Party or any Subsidiary thereof has sold or transferred or is to sell or transfer to a Person which is not another Credit Party or Subsidiary of a Credit Party or (b) which any Credit Party or any Subsidiary of a Credit Party intends to use for substantially the same purpose as any other Property that has been sold or is to be sold or transferred by such Credit Party or such Subsidiary to another Person which is not another Credit Party or Subsidiary of a Credit Party in connection with such lease.
SECTION 9.14 Financial Covenant. Permit the Consolidated Total Leverage Ratio to exceed the following respective ratios as of the last day of any fiscal quarter during the following respective periods specified below.
Period |
Maximum Consolidated Total Leverage Ratio | |
Closing Date through September 30, 2017 |
6.00 to 1.00 | |
October 1, 2017 through June 30, 2018 |
5.50 to 1.00 | |
July 1, 2018 through December 31, 2018 |
5.25 to 1.00 | |
January 1, 2019 through June 30, 2019 |
5.00 to 1.00 | |
July 1, 2019 through September 30, 2019 |
4.75 to 1.00 | |
October 1, 2019 through December 31, 2019 |
4.50 to 1.00 | |
January 1, 2020 through June 30, 2020 |
4.25 to 1.00 | |
July 1, 2020 and thereafter |
4.00 to 1.00 |
The provisions of this Section 9.14 are for the benefit of the Revolving Credit Lenders only and the Required Revolving Credit Lenders may amend, waive or otherwise modify this Section 9.14 or the defined terms used for purposes of this Section 9.14 or waive any Default or Event of Default resulting from a breach of this Section 9.14 in accordance with the provisions of Section 12.2.
ARTICLE X
DEFAULT AND REMEDIES
SECTION 10.1 Events of Default. Each of the following shall constitute an Event of Default:
(a) Default in Payment of Principal of Loans and Reimbursement Obligations. The Borrower shall default in any payment of principal of any Loan or Reimbursement Obligation when and as due (whether at maturity, by reason of acceleration or otherwise).
(b) Other Payment Default. The Borrower shall default in the payment when and as due (whether at maturity, by reason of acceleration or otherwise) of interest on any Loan or Reimbursement Obligation or the payment of any other Obligation, and such default shall continue for a period of three (3) Business Days.
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(c) Misrepresentation. Any representation, warranty or certification made or deemed made by or on behalf of any Credit Party or any Subsidiary thereof in this Agreement, in any other Loan Document, or in any document delivered in connection herewith or therewith that is subject to materiality or Material Adverse Effect qualifications, shall be incorrect or misleading in any respect when made or deemed made or any representation, warranty or certification made or deemed made by or on behalf of any Credit Party or any Subsidiary thereof in this Agreement, any other Loan Document, or in any document delivered in connection herewith or therewith that is not subject to materiality or Material Adverse Effect qualifications, shall be incorrect or misleading in any material respect when made or deemed made.
(d) Default in Performance of Certain Covenants. Any Credit Party or any Subsidiary thereof shall default in the performance or observance of any covenant or agreement contained in (i) Section 8.1 and such default shall continue for a period of five (5) Business Days, or (ii) Section 8.2(a), 8.3(a), 8.4, 8.13, 8.14, 8.15, 8.16 or 8.17 or 8.19 or Article IX; provided that a breach of the Financial Covenant shall not constitute an Event of Default with respect to any Term Loans, and the Term Loan Lenders shall not be permitted to exercise any remedies with respect to a breach of the Financial Covenant, unless and until the Required Revolving Credit Lenders have declared all amounts outstanding under the Revolving Credit Facility to be due and payable and all outstanding Revolving Credit Commitments to be terminated, in each case in accordance with this Agreement and such declaration has not been rescinded.
(e) Default in Performance of Other Covenants and Conditions. Any Credit Party or any Subsidiary thereof shall default in the performance or observance of any term, covenant, condition or agreement contained in this Agreement (other than as specifically provided for in this Section) or any other Loan Document and such default shall continue for a period of thirty (30) days after the earlier of (i) the Administrative Agents delivery of written notice thereof to the Borrower and (ii) a Responsible Officer of any Credit Party having obtained knowledge thereof.
(f) Indebtedness Cross-Default. Any Credit Party or any Subsidiary thereof shall (i) default in the payment of any Indebtedness (other than the Loans or any Reimbursement Obligation) the aggregate outstanding principal amount of which Indebtedness or with respect to any Hedge Agreement, the Hedge Termination Value, is in excess of the Threshold Amount beyond the period of grace if any, provided in the instrument or agreement under which such Indebtedness was created, or (ii) default in the observance or performance of any other agreement or condition relating to any Indebtedness (other than the Loans or any Reimbursement Obligation) the aggregate outstanding principal amount or with respect to any Hedge Agreement, the Hedge Termination Value, of which is in excess of the Threshold Amount or contained in any instrument or agreement evidencing, securing or relating thereto or any other event shall occur or condition exist, the effect of which default or other event or condition is to cause, or to permit the holder or holders of such Indebtedness (or a trustee or agent on behalf of such holder or holders) to cause, with the giving of notice and/or lapse of time, if required, any such Indebtedness to become due prior to its stated maturity (any applicable grace period having expired).
(g) [Reserved.]
(h) Change in Control. Any Change in Control shall occur.
(i) Voluntary Bankruptcy Proceeding. Any Credit Party or any Subsidiary thereof shall (i) commence a voluntary case under any Debtor Relief Laws, (ii) file a petition seeking to take advantage of any Debtor Relief Laws, (iii) consent to or fail to contest in a timely and appropriate manner any petition filed against it in an involuntary case under any Debtor Relief Laws, (iv) apply for
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or consent to, or fail to contest in a timely and appropriate manner, the appointment of, or the taking of possession by, a receiver, custodian, trustee, or liquidator of itself or of a substantial part of its property, domestic or foreign, (v) admit in writing its inability to pay its debts as they become due, (vi) make a general assignment for the benefit of creditors, or (vii) take any corporate action for the purpose of authorizing any of the foregoing.
(j) Involuntary Bankruptcy Proceeding. A case or other proceeding shall be commenced against any Credit Party or any Subsidiary thereof in any court of competent jurisdiction seeking (i) relief under any Debtor Relief Laws, or (ii) the appointment of a trustee, receiver, custodian, liquidator or the like for any Credit Party or any Subsidiary thereof or for all or any substantial part of their respective assets, domestic or foreign, and such case or proceeding shall continue without dismissal or stay for a period of sixty (60) consecutive days, or an order granting the relief requested in such case or proceeding (including, but not limited to, an order for relief under such federal bankruptcy laws) shall be entered.
(k) Failure of Agreements. Any material provision of this Agreement or any material provision of any other Loan Document shall for any reason cease to be valid and binding on any Credit Party or any Subsidiary thereof party thereto or any such Person shall so state in writing, or the Liens created by any of the Security Documents shall for any reason not constitute a valid and perfected first priority Lien (subject to Permitted Liens) on, or security interest in, the Collateral purported to be covered thereby, in each case other than in accordance with the express terms hereof or thereof or by virtue of any action or inaction of the Administrative Agent.
(l) ERISA Events. The occurrence of any of the following events: (i) any Credit Party or any ERISA Affiliate fails to make full payment when due of all amounts which, under the provisions of any Pension Plan or Sections 412 or 430 of the Code, any Credit Party or any ERISA Affiliate is required to pay as contributions thereto and such unpaid amounts are in excess of the Threshold Amount, (ii) a Termination Event or (iii) any Credit Party or any ERISA Affiliate as employers under one or more Multiemployer Plans makes a complete or partial withdrawal from any such Multiemployer Plan and the plan sponsor of such Multiemployer Plans notifies such withdrawing employer that such employer has incurred a withdrawal liability requiring payments in an amount exceeding the Threshold Amount.
(m) Judgment. A judgment or order for the payment of money which causes the aggregate amount of all such judgments or orders (net of any amounts paid or fully covered by independent third party insurance as to which the relevant insurance company does not dispute coverage) to exceed the Threshold Amount shall be entered against any Credit Party or any Subsidiary thereof by any court and such judgment or order shall continue without having been discharged, vacated or stayed for a period of thirty (30) consecutive days after the entry thereof.
SECTION 10.2 Remedies. Upon the occurrence and during the continuance of an Event of Default, with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, by notice to the Borrower:
(a) Acceleration; Termination of Credit Facility. Terminate the Revolving Credit Commitment and declare the principal of and interest on the Loans and the Reimbursement Obligations at the time outstanding, and all other amounts owed to the Lenders and to the Administrative Agent under this Agreement or any of the other Loan Documents and all other Obligations, to be forthwith due and payable, whereupon the same shall immediately become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by each Credit Party, anything in this Agreement or the other Loan Documents to the contrary
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notwithstanding, and terminate the Credit Facility and any right of the Borrower to request borrowings or Letters of Credit thereunder; provided, that upon the occurrence of an Event of Default specified in Section 10.1(i) or (j), the Credit Facility shall be automatically terminated and all Obligations shall automatically become due and payable without presentment, demand, protest or other notice of any kind, all of which are expressly waived by each Credit Party, anything in this Agreement or in any other Loan Document to the contrary notwithstanding; provided that upon the occurrence and during the continuance of any Event of Default attributable to a failure to comply with the Financial Covenant (which has not become an Event of Default with respect to the Term Loans pursuant to Section 10.1(d)), actions pursuant to this clause (a) may be taken by the Required Revolving Credit Lenders with respect to the Revolving Credit Loans and the Revolving Credit Commitments only (without the requirement for Required Lender action) or by the Administrative Agent at the direction of the Required Revolving Credit Lenders.
(b) Letters of Credit. Demand with respect to all Letters of Credit with respect to which presentment for honor shall not have occurred at the time of an acceleration pursuant to the preceding paragraph, that the Borrower deposit in a Cash Collateral account opened by the Administrative Agent an amount equal to 103% of the aggregate then undrawn and unexpired amount of such Letters of Credit; provided, that upon the occurrence of an Event of Default specified in Section 10.1(i) or (j), the obligation to deposit Cash Collateral shall automatically become effective without presentment, demand, protest or other notice of any kind, all of which are expressly waived by each Credit Party, anything in this Agreement or in any other Loan Document to the contrary notwithstanding. Amounts held in such Cash Collateral account shall be applied by the Administrative Agent to the payment of drafts drawn under such Letters of Credit, and the unused portion thereof after all such Letters of Credit shall have expired or been fully drawn upon, if any, shall be applied to repay the other Secured Obligations in accordance with Section 10.4. After all such Letters of Credit shall have expired or been fully drawn upon, the Reimbursement Obligation shall have been satisfied and all other Secured Obligations shall have been paid in full, the balance, if any, in such Cash Collateral account shall be returned to the Borrower.
(c) General Remedies. Exercise on behalf of the Secured Parties all of its other rights and remedies under this Agreement, the other Loan Documents and Applicable Law, in order to satisfy all of the Secured Obligations.
SECTION 10.3 Rights and Remedies Cumulative; Non-Waiver; etc.
(a) The enumeration of the rights and remedies of the Administrative Agent and the Lenders set forth in this Agreement is not intended to be exhaustive and the exercise by the Administrative Agent and the Lenders of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the other Loan Documents or that may now or hereafter exist at law or in equity or by suit or otherwise. No delay or failure to take action on the part of the Administrative Agent or any Lender in exercising any right, power or privilege shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege preclude any other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. No course of dealing between the Borrower, the Administrative Agent and the Lenders or their respective agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any of the other Loan Documents or to constitute a waiver of any Event of Default.
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(b) Notwithstanding anything to the contrary contained herein or in any other Loan Document, the authority to enforce rights and remedies hereunder and under the other Loan Documents against the Credit Parties or any of them shall be vested exclusively in, and all actions and proceedings at law in connection with such enforcement shall be instituted and maintained exclusively by, the Administrative Agent in accordance with Section 10.2 for the benefit of all the Lenders and the Issuing Lenders; provided that the foregoing shall not prohibit (a) the Administrative Agent from exercising on its own behalf the rights and remedies that inure to its benefit (solely in its capacity as Administrative Agent) hereunder and under the other Loan Documents, (b) any Issuing Lender or the Swingline Lender from exercising the rights and remedies that inure to its benefit (solely in its capacity as an Issuing Lender or Swingline Lender, as the case may be) hereunder and under the other Loan Documents, (c) any Lender from exercising setoff rights in accordance with Section 12.4 (subject to the terms of Section 5.6), or (d) any Lender from filing proofs of claim or appearing and filing pleadings on its own behalf during the pendency of a proceeding relative to any Credit Party under any Debtor Relief Law; and provided, further, that if at any time there is no Person acting as Administrative Agent hereunder and under the other Loan Documents, then (i) the Required Lenders shall have the rights otherwise ascribed to the Administrative Agent pursuant to Section 10.2 and (ii) in addition to the matters set forth in clauses (b), (c) and (d) of the preceding proviso and subject to Section 5.6, any Lender may, with the consent of the Required Lenders, enforce any rights and remedies available to it and as authorized by the Required Lenders.
SECTION 10.4 Crediting of Payments and Proceeds. In the event that the Obligations have been accelerated pursuant to Section 10.2 or the Administrative Agent or any Lender has exercised any remedy set forth in this Agreement or any other Loan Document, all payments received on account of the Secured Obligations and all net proceeds from the enforcement of the Secured Obligations shall be applied by the Administrative Agent as follows:
First, to payment of that portion of the Secured Obligations constituting fees, indemnities, expenses and other amounts, including attorney fees, payable to the Administrative Agent in its capacity as such, the Issuing Lenders in their capacity as such and the Swingline Lender in its capacity as such, ratably among the Administrative Agent, the Issuing Lenders and Swingline Lender in proportion to the respective amounts described in this clause First payable to them;
Second, to payment of that portion of the Secured Obligations constituting fees, indemnities and other amounts (other than principal and interest) payable to the Lenders under the Loan Documents, including attorney fees, ratably among the Lenders in proportion to the respective amounts described in this clause Second payable to them;
Third, to payment of that portion of the Secured Obligations constituting accrued and unpaid interest on the Loans and Reimbursement Obligations, ratably among the Lenders in proportion to the respective amounts described in this clause Third payable to them;
Fourth, to payment of that portion of the Secured Obligations constituting unpaid principal of the Loans, Reimbursement Obligations and payment obligations then owing under Secured Hedge Agreements and Secured Cash Management Agreements, ratably among the Lenders, the Issuing Lenders, the Hedge Banks and the Cash Management Banks in proportion to the respective amounts described in this clause Fourth payable to them;
Fifth, to the Administrative Agent for the account of the Issuing Lenders, to Cash Collateralize any L/C Obligations then outstanding; and
Last, the balance, if any, after all of the Secured Obligations have been indefeasibly paid in full, to the Borrower or as otherwise required by Applicable Law.
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Notwithstanding the foregoing, Secured Obligations arising under Secured Cash Management Agreements and Secured Hedge Agreements shall be excluded from the application described above if the Administrative Agent has not received written notice thereof, together with such supporting documentation as the Administrative Agent may request, from the applicable Cash Management Bank or Hedge Bank, as the case may be. Each Cash Management Bank or Hedge Bank not a party to this Agreement that has given the notice contemplated by the preceding sentence shall, by such notice, be deemed to have acknowledged and accepted the appointment of the Administrative Agent pursuant to the terms of Article XI for itself and its Affiliates as if a Lender party hereto.
SECTION 10.5 Administrative Agent May File Proofs of Claim. In case of the pendency of any proceeding under any Debtor Relief Law or any other judicial proceeding relative to any Credit Party, the Administrative Agent (irrespective of whether the principal of any Loan or L/C Obligation shall then be due and payable as herein expressed or by declaration or otherwise and irrespective of whether the Administrative Agent shall have made any demand on the Borrower) shall be entitled and empowered (but not obligated) by intervention in such proceeding or otherwise:
(a) to file and prove a claim for the whole amount of the principal and interest owing and unpaid in respect of the Loans, L/C Obligations and all other Obligations that are owing and unpaid and to file such other documents as may be necessary or advisable in order to have the claims of the Lenders, the Issuing Lenders and the Administrative Agent (including any claim for the reasonable compensation, expenses, disbursements and advances of the Lenders, the Issuing Lenders and the Administrative Agent and their respective agents and counsel and all other amounts due the Lenders, the Issuing Lenders and the Administrative Agent under Sections 3.3, 5.3 and 12.3) allowed in such judicial proceeding; and
(b) to collect and receive any monies or other property payable or deliverable on any such claims and to distribute the same;
and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Lender and each Issuing Lender to make such payments to the Administrative Agent and, in the event that the Administrative Agent shall consent to the making of such payments directly to the Lenders and the Issuing Lenders, to pay to the Administrative Agent any amount due for the reasonable compensation, expenses, disbursements and advances of the Administrative Agent and its agents and counsel, and any other amounts due the Administrative Agent under Sections 3.3, 5.3 and 12.3.
SECTION 10.6 Credit Bidding.
(a) The Administrative Agent, on behalf of itself and the Lenders, shall have the right to credit bid and purchase for the benefit of the Administrative Agent and the Lenders all or any portion of Collateral at any sale thereof conducted by the Administrative Agent under the provisions of the UCC, including pursuant to Sections 9-610 or 9-620 of the UCC, at any sale thereof conducted under the provisions of the United States Bankruptcy Code, including Section 363 thereof, or a sale under a plan of reorganization, or at any other sale or foreclosure conducted by the Administrative Agent (whether by judicial action or otherwise) in accordance with Applicable Law.
(b) Each Lender hereby agrees that, except as otherwise provided in any Loan Documents or with the written consent of the Administrative Agent and the Required Lenders, it will not take any enforcement action, accelerate obligations under any Loan Documents, or exercise any right that it might otherwise have under Applicable Law to credit bid at foreclosure sales, UCC sales or other similar dispositions of Collateral with respect to any of the Secured Obligations.
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ARTICLE XI
THE ADMINISTRATIVE AGENT
SECTION 11.1 Appointment and Authority.
(a) Each of the Lenders and each Issuing Lender hereby irrevocably appoints Wells Fargo to act on its behalf as the Administrative Agent hereunder and under the other Loan Documents and authorizes the Administrative Agent to take such actions on its behalf and to exercise such powers as are delegated to the Administrative Agent by the terms hereof or thereof, together with such actions and powers as are reasonably incidental thereto. Except as provided in Sections 11.6 and 11.9, the provisions of this Article are solely for the benefit of the Administrative Agent, the Lenders and the Issuing Lenders, and neither the Borrower nor any Subsidiary thereof shall have rights as a third-party beneficiary of any of such provisions. It is understood and agreed that the use of the term agent herein or in any other Loan Documents (or any other similar term) with reference to the Administrative Agent is not intended to connote any fiduciary or other implied (or express) obligations arising under agency doctrine of any Applicable Law. Instead such term is used as a matter of market custom, and is intended to create or reflect only an administrative relationship between contracting parties.
(b) The Administrative Agent shall also act as the collateral agent under the Loan Documents, and each of the Lenders (including in its capacity as a potential Hedge Bank or Cash Management Bank) and the Issuing Lenders hereby irrevocably appoints and authorizes the Administrative Agent to act as the agent of such Lender and such Issuing Lender for purposes of acquiring, holding and enforcing any and all Liens on Collateral granted by any of the Credit Parties to secure any of the Secured Obligations, together with such powers and discretion as are reasonably incidental thereto (including, without limitation, to enter into additional Loan Documents or supplements to existing Loan Documents on behalf of the Secured Parties). In this connection, the Administrative Agent, as collateral agent and any co-agents, sub-agents and attorneys-in-fact appointed by the Administrative Agent pursuant to this Article XI for purposes of holding or enforcing any Lien on the Collateral (or any portion thereof) granted under the Security Documents, or for exercising any rights and remedies thereunder at the direction of the Administrative Agent, shall be entitled to the benefits of all provisions of Articles XI and XII (including Section 12.3, as though such co-agents, sub-agents and attorneys-in-fact were the collateral agent under the Loan Documents) as if set forth in full herein with respect thereto.
SECTION 11.2 Rights as a Lender. The Person serving as the Administrative Agent hereunder shall have the same rights and powers in its capacity as a Lender as any other Lender and may exercise the same as though it were not the Administrative Agent and the term Lender or Lenders shall, unless otherwise expressly indicated or unless the context otherwise requires, include the Person serving as the Administrative Agent hereunder in its individual capacity. Such Person and its Affiliates may accept deposits from, lend money to, own securities of, act as the financial advisor or in any other advisory capacity for and generally engage in any kind of business with the Borrower or any Subsidiary or other Affiliate thereof as if such Person were not the Administrative Agent hereunder and without any duty to account therefor to the Lenders.
SECTION 11.3 Exculpatory Provisions.
(a) The Administrative Agent shall not have any duties or obligations except those expressly set forth herein and in the other Loan Documents, and its duties hereunder and thereunder shall be administrative in nature. Without limiting the generality of the foregoing, the Administrative Agent:
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(i) shall not be subject to any fiduciary or other implied duties, regardless of whether a Default or Event of Default has occurred and is continuing;
(ii) shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated hereby or by the other Loan Documents that the Administrative Agent is required to exercise as directed in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be expressly provided for herein or in the other Loan Documents), provided that the Administrative Agent shall not be required to take any action that, in its opinion or the opinion of its counsel, may expose the Administrative Agent to liability or that is contrary to any Loan Document or Applicable Law, including for the avoidance of doubt any action that may be in violation of the automatic stay under any Debtor Relief Law or that may effect a forfeiture, modification or termination of property of a Defaulting Lender in violation of any Debtor Relief Law; and
(iii) shall not, except as expressly set forth herein and in the other Loan Documents, have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Borrower or any of its Subsidiaries or Affiliates that is communicated to or obtained by the Person serving as the Administrative Agent or any of its Affiliates in any capacity.
(b) The Administrative Agent shall not be liable for any action taken or not taken by it (i) with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary, or as the Administrative Agent shall believe in good faith shall be necessary, under the circumstances as provided in Section 12.2 and Section 10.2) or (ii) in the absence of its own gross negligence or willful misconduct as determined by a court of competent jurisdiction by final nonappealable judgment. The Administrative Agent shall be deemed not to have knowledge of any Default or Event of Default unless and until notice describing such Default or Event of Default is given to the Administrative Agent by the Borrower, a Lender or an Issuing Lender.
(c) The Administrative Agent shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with this Agreement or any other Loan Document, (ii) the contents of any certificate, report or other document delivered hereunder or thereunder or in connection herewith or therewith (including, without limitation, any report provided to it by an Issuing Lender pursuant to Section 3.9), (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth herein or therein or the occurrence of any Default or Event of Default, (iv) the validity, enforceability, effectiveness or genuineness of this Agreement, any other Loan Document or any other agreement, instrument or document, (v) the satisfaction of any condition set forth in Article VI or elsewhere herein, other than to confirm receipt of items expressly required to be delivered to the Administrative Agent or (vi) the utilization of any Issuing Lenders L/C Commitment (it being understood and agreed that each Issuing Lender shall monitor compliance with its own L/C Commitment without any further action by the Administrative Agent).
SECTION 11.4 Reliance by the Administrative Agent. The Administrative Agent shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing (including any electronic message, Internet or intranet website posting or other distribution) believed by it to be genuine and to have been signed, sent or otherwise authenticated by the proper Person. The Administrative Agent also may rely upon any statement made to it orally or by telephone and believed by it to have been made by the proper Person, and shall not incur any liability for relying thereon. In determining compliance with any condition hereunder to the making of a Loan, or the issuance, extension, renewal or increase of a Letter of Credit,
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that by its terms must be fulfilled to the satisfaction of a Lender or an Issuing Lender, the Administrative Agent may presume that such condition is satisfactory to such Lender or such Issuing Lender unless the Administrative Agent shall have received notice to the contrary from such Lender or such Issuing Lender prior to the making of such Loan or the issuance of such Letter of Credit. The Administrative Agent may consult with legal counsel (who may be counsel for the Borrower), independent accountants and other experts selected by it, and shall not be liable for any action taken or not taken by it in accordance with the advice of any such counsel, accountants or experts.
SECTION 11.5 Delegation of Duties. The Administrative Agent may perform any and all of its duties and exercise its rights and powers hereunder or under any other Loan Document by or through any one or more sub-agents appointed by the Administrative Agent. The Administrative Agent and any such sub-agent may perform any and all of its duties and exercise its rights and powers by or through their respective Related Parties. The exculpatory provisions of this Article shall apply to any such sub-agent and to the Related Parties of the Administrative Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the Credit Facility as well as activities as Administrative Agent. The Administrative Agent shall not be responsible for the negligence or misconduct of any sub-agents except to the extent that a court of competent jurisdiction determines in a final and nonappealable judgment that the Administrative Agent acted with gross negligence or willful misconduct in the selection of such sub-agents.
SECTION 11.6 Resignation of Administrative Agent.
(a) The Administrative Agent may at any time give notice of its resignation to the Lenders, the Issuing Lenders and the Borrower. Upon receipt of any such notice of resignation, the Required Lenders shall have the right, in consultation with the Borrower and subject to the consent of the Borrower (provided no Event of Default has occurred and is continuing at the time of such resignation), to appoint a successor, which shall be a bank with an office in the United States, or an Affiliate of any such bank with an office in the United States. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation (or such earlier day as shall be agreed by the Required Lenders) (the Resignation Effective Date), then the retiring Administrative Agent may (but shall not be obligated to), on behalf of the Lenders and the Issuing Lenders, appoint a successor Administrative Agent meeting the qualifications set forth above. Whether or not a successor has been appointed, such resignation shall become effective in accordance with such notice on the Resignation Effective Date.
(b) If the Person serving as Administrative Agent is a Defaulting Lender pursuant to clause (d) of the definition thereof, the Required Lenders may, to the extent permitted by Applicable Law, by notice in writing to the Borrower and such Person, remove such Person as Administrative Agent and, in consultation with the Borrower and subject to the consent of the Borrower (provided no Event of Default has occurred and is continuing at the time of such removal), appoint a successor. If no such successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within thirty (30) days (or such earlier day as shall be agreed by the Required Lenders) (the Removal Effective Date), then such removal shall nonetheless become effective in accordance with such notice on the Removal Effective Date.
(c) With effect from the Resignation Effective Date or the Removal Effective Date (as applicable), (i) the retiring or removed Administrative Agent shall be discharged from its duties and obligations hereunder and under the other Loan Documents (except that in the case of any collateral security held by the Administrative Agent on behalf of the Lenders or the Issuing Lenders under any of the Loan Documents, the retiring or removed Administrative Agent shall continue to hold such
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collateral security until such time as a successor Administrative Agent is appointed) and (ii) except for any indemnity payments owed to the retiring or removed Administrative Agent, all payments, communications and determinations provided to be made by, to or through the Administrative Agent shall instead be made by or to each Lender and each Issuing Lender directly, until such time, if any, as the Required Lenders appoint a successor Administrative Agent as provided for above. Upon the acceptance of a successors appointment as Administrative Agent hereunder, such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring or removed Administrative Agent (other than any rights to indemnity payments owed to the retiring or removed Administrative Agent), and the retiring or removed Administrative Agent shall be discharged from all of its duties and obligations hereunder or under the other Loan Documents. The fees payable by the Borrower to a successor Administrative Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrower and such successor. After the retiring or removed Administrative Agents resignation or removal hereunder and under the other Loan Documents, the provisions of this Article and Section 12.3 shall continue in effect for the benefit of such retiring or removed Administrative Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while the retiring or removed Administrative Agent was acting as Administrative Agent.
(d) Any resignation by, or removal of, Wells Fargo as Administrative Agent pursuant to this Section shall also constitute its resignation as an Issuing Lender and Swingline Lender. Upon the acceptance of a successors appointment as Administrative Agent hereunder, (a) such successor shall succeed to and become vested with all of the rights, powers, privileges and duties of the retiring Issuing Lender, if in its sole discretion it elects to, and Swingline Lender, (b) the retiring Issuing Lender and Swingline Lender shall be discharged from all of their respective duties and obligations hereunder or under the other Loan Documents, and (c) the successor Issuing Lender, if in its sole discretion it elects to, shall issue letters of credit in substitution for the Letters of Credit, if any, outstanding at the time of such succession or make other arrangements satisfactory to the retiring Issuing Lender to effectively assume the obligations of the retiring Issuing Lender with respect to such Letters of Credit.
SECTION 11.7 Non-Reliance on Administrative Agent and Other Lenders. Each Lender and each Issuing Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender and each Issuing Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender or any of their Related Parties and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or any related agreement or any document furnished hereunder or thereunder.
SECTION 11.8 No Other Duties, Etc. Anything herein to the contrary notwithstanding, none of the syndication agents, documentation agents, co-agents, arrangers or bookrunners listed on the cover page hereof shall have any powers, duties or responsibilities under this Agreement or any of the other Loan Documents, except in its capacity, as applicable, as the Administrative Agent, a Lender or an Issuing Lender hereunder.
SECTION 11.9 Collateral and Guaranty Matters.
(a) Each of the Lenders (including in its or any of its Affiliates capacities as a potential Hedge Bank or Cash Management Bank) irrevocably authorize the Administrative Agent, at its option and in its discretion:
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(i) to release any Lien on any Collateral granted to or held by the Administrative Agent, for the ratable benefit of the Secured Parties, under any Loan Document (A) upon the termination of the Revolving Credit Commitment and payment in full of all Secured Obligations (other than (1) contingent indemnification obligations and (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made) and the expiration or termination of all Letters of Credit (other than Letters of Credit as to which other arrangements satisfactory to the Administrative Agent and the applicable Issuing Lender shall have been made), (B) that is sold or otherwise disposed of or to be sold or otherwise disposed of as part of or in connection with any sale or other disposition permitted under the Loan Documents, or (C) if approved or authorized in writing in accordance with Section 12.2;
(ii) to subordinate any Lien on any Collateral granted to or held by the Administrative Agent under any Loan Document to the holder of any Lien permitted pursuant to Section 9.2; and
(iii) to release any Subsidiary Guarantor from its obligations under any Loan Documents if such Person ceases to be a Subsidiary as a result of a transaction permitted under the Loan Documents.
Upon request by the Administrative Agent at any time, the Required Lenders will confirm in writing the Administrative Agents authority to release or subordinate its interest in particular types or items of property, or to release any Subsidiary Guarantor from its obligations under the Subsidiary Guaranty Agreement pursuant to this Section 11.9. In each case as specified in this Section 11.9, the Administrative Agent will, at the Borrowers expense, execute and deliver to the applicable Credit Party such documents as such Credit Party may reasonably request to evidence the release of such item of Collateral from the assignment and security interest granted under the Security Documents or to subordinate its interest in such item, or to release such Subsidiary Guarantor from its obligations under the Subsidiary Guaranty Agreement, in each case in accordance with the terms of the Loan Documents and this Section 11.9. In the case of any such sale, transfer or disposal of any property constituting Collateral in a transaction constituting an Asset Disposition permitted pursuant to Section 9.5, the Liens created by any of the Security Documents on such property shall be automatically released without need for further action by any person.
(b) The Administrative Agent shall not be responsible for or have a duty to ascertain or inquire into any representation or warranty regarding the existence, value or collectability of the Collateral, the existence, priority or perfection of the Administrative Agents Lien thereon, or any certificate prepared by any Credit Party in connection therewith, nor shall the Administrative Agent be responsible or liable to the Lenders for any failure to monitor or maintain any portion of the Collateral.
SECTION 11.10 Secured Hedge Agreements and Secured Cash Management Agreements. No Cash Management Bank or Hedge Bank that obtains the benefits of Section 10.4 or any Collateral by virtue of the provisions hereof or of any Security Document shall have any right to notice of any action or to consent to, direct or object to any action hereunder or under any other Loan Document or otherwise in respect of the Collateral (including the release or impairment of any Collateral) other than in its capacity as a Lender and, in such case, only to the extent expressly provided in the Loan Documents. Notwithstanding any other provision of this Article XI to the contrary, the Administrative Agent shall not be required to verify the payment of, or that other satisfactory arrangements have been made with respect to, Secured Cash Management Agreements and Secured Hedge Agreements unless the Administrative Agent has received written notice of such Secured Cash Management Agreements and Secured Hedge Agreements, together with such supporting documentation as the Administrative Agent may request, from the applicable Cash Management Bank or Hedge Bank, as the case may be.
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ARTICLE XII
MISCELLANEOUS
SECTION 12.1 Notices.
(a) Notices Generally. Except in the case of notices and other communications expressly permitted to be given by telephone (and except as provided in paragraph (b) below), all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by facsimile as follows:
If to the Borrower:
Switch, Ltd.
7135 South Decatur Boulevard
Las Vegas, Nevada 89118
Attention of: Office of the General Counsel
E-mail: switchlegal@supernap.com
With copies to:
Greenberg Traurig, LLP
Attention of: Michelle Hallsten
Telephone No.: (916) 868-0663
E-mail: hallstenm@gtlaw.com
If to Wells Fargo as Administrative Agent:
Wells Fargo Bank, National Association
MAC D1109-019
1525 West W.T. Harris Blvd.
Charlotte, NC 28262
Attention of: Syndication Agency Services
Telephone No.: (704) 590-2703
Facsimile No.: (704) 715-0092
With copies to:
Wells Fargo Bank, National Association
3800 Howard Hughes Pkwy, Suite 400
Las Vegas, NV 89169
Attention of: Olga E. Wisnicky, Senior Vice President
Telephone No.: (702) 791-6272
Facsimile No.: (702) 791-6365
E-mail: olga.e.wisnicky@wellsfargo.com
If to any Lender:
To the address set forth on the Register
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Notices sent by hand or overnight courier service, or mailed by certified or registered mail, shall be deemed to have been given when received; notices sent by facsimile shall be deemed to have been given when sent (except that, if not given during normal business hours for the recipient, shall be deemed to have been given at the opening of business on the next business day for the recipient). Notices delivered through electronic communications to the extent provided in paragraph (b) below, shall be effective as provided in said paragraph (b).
(b) Electronic Communications. Notices and other communications to the Lenders and the Issuing Lenders hereunder may be delivered or furnished by electronic communication (including e-mail and Internet or intranet websites) pursuant to procedures approved by the Administrative Agent, provided that the foregoing shall not apply to notices to any Lender or any Issuing Lender pursuant to Article II if such Lender or such Issuing Lender, as applicable, has notified the Administrative Agent that is incapable of receiving notices under such Article by electronic communication. The Administrative Agent or the Borrower may, in its discretion, agree to accept notices and other communications to it hereunder by electronic communications pursuant to procedures approved by it, provided that approval of such procedures may be limited to particular notices or communications. Unless the Administrative Agent otherwise prescribes, (i) notices and other communications sent to an e-mail address shall be deemed received upon the senders receipt of an acknowledgement from the intended recipient (such as by the return receipt requested function, as available, return e-mail or other written acknowledgement), and (ii) notices or communications posted to an Internet or intranet website shall be deemed received upon the deemed receipt by the intended recipient at its e-mail address as described in the foregoing clause (i) of notification that such notice or communication is available and identifying the website address therefor; provided that, for both clauses (i) and (ii) above, if such notice, email or other communication is not sent during the normal business hours of the recipient, such notice, email or other communication shall be deemed to have been sent at the opening of business on the next business day for the recipient.
(c) Administrative Agents Office. The Administrative Agent hereby designates its office located at the address set forth above, or any subsequent office which shall have been specified for such purpose by written notice to the Borrower and Lenders, as the Administrative Agents Office referred to herein, to which payments due are to be made and at which Loans will be disbursed and Letters of Credit requested.
(d) Change of Address, Etc. Any party hereto may change its address or facsimile number for notices and other communications hereunder by notice to the other parties hereto.
(e) Platform.
(i) Each Credit Party agrees that the Administrative Agent may, but shall not be obligated to, make the Borrower Materials available to the Issuing Lenders and the other Lenders by posting the Borrower Materials on the Platform.
(ii) The Platform is provided as is and as available. The Agent Parties (as defined below) do not warrant the accuracy or completeness of the Borrower Materials or the adequacy of the Platform, and expressly disclaim liability for errors or omissions in the Borrower Materials. No warranty of any kind, express, implied or statutory, including, without limitation, any warranty of merchantability, fitness for a particular purpose, non-infringement of third-party rights or freedom from viruses or other code defects, is made by any Agent Party in connection with the Borrower Materials or the Platform. In no event shall the Administrative Agent or any
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of its Related Parties (collectively, the Agent Parties) have any liability to any Credit Party, any Lender or any other Person or entity for losses, claims, damages, liabilities or expenses of any kind (whether in tort, contract or otherwise) arising out of any Credit Partys or the Administrative Agents transmission of communications through the Internet (including, without limitation, the Platform), except to the extent that such losses, claims, damages, liabilities or expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Agent Party; provided that in no event shall any Agent Party have any liability to any Credit Party, any Lender, any Issuing Lender or any other Person for indirect, special, incidental, consequential or punitive damages, losses or expenses (as opposed to actual damages, losses or expenses).
(f) Private Side Designation. Each Public Lender agrees to cause at least one individual at or on behalf of such Public Lender to at all times have selected the Private Side Information or similar designation on the content declaration screen of the Platform in order to enable such Public Lender or its delegate, in accordance with such Public Lenders compliance procedures and Applicable Law, including United States Federal and state securities Applicable Laws, to make reference to Borrower Materials that are not made available through the Public Side Information portion of the Platform and that may contain material non-public information with respect to the Borrower or its securities for purposes of United States Federal or state securities Applicable Laws.
SECTION 12.2 Amendments, Waivers and Consents. Except as set forth below or as specifically provided in any Loan Document, any term, covenant, agreement or condition of this Agreement or any of the other Loan Documents may be amended or waived by the Lenders, and any consent given by the Lenders, if, but only if, such amendment, waiver or consent is in writing signed by the Required Lenders (or by the Administrative Agent with the consent of the Required Lenders) and delivered to the Administrative Agent and, in the case of an amendment, signed by the Borrower; provided, that no amendment, waiver or consent shall:
(a) increase or extend the Commitment of any Lender (or reinstate any Commitment terminated pursuant to Section 10.2) or increase the amount of Loans of any Lender, in any case, without the written consent of such Lender;
(b) waive, extend or postpone any date fixed by this Agreement or any other Loan Document for any payment (excluding any payment required by Section 4.4(b)(i), 4.4(b)(ii), 4.4(b)(iii), or 4.4(b)(iv)) of principal, interest, fees or other amounts due to the Lenders (or any of them) hereunder or under any other Loan Document without the written consent of each Lender directly and adversely affected thereby;
(c) reduce the principal of, or the rate of interest specified herein on, any Loan or Reimbursement Obligation, or (subject to clause (iv) of the proviso set forth in the paragraph below) any fees or other amounts payable hereunder or under any other Loan Document without the written consent of each Lender directly and adversely affected thereby; provided that only the consent of the Required Lenders shall be necessary (i) to waive any obligation of the Borrower to pay interest at the rate set forth in Section 5.1(b) during the continuance of an Event of Default or (ii) to amend any financial covenant hereunder (or any defined term used therein) even if the effect of such amendment would be to reduce the rate of interest on any Loan or L/C Obligation or to reduce any fee payable hereunder;
(d) change Section 5.6 or Section 10.4 in a manner that would alter the pro rata sharing of payments or order of application required thereby without the written consent of each Lender directly and adversely affected thereby;
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(e) change Section 4.4(b)(v) in a manner that would alter the order of application of amounts prepaid pursuant thereto without the written consent of each Lender directly and adversely affected thereby;
(f) except as otherwise permitted by this Section 12.2, change any provision of this Section or reduce the percentages specified in the definitions of Required Lenders or Required Revolving Credit Lenders or any other provision hereof specifying the number or percentage of Lenders required to amend, waive or otherwise modify any rights hereunder or make any determination or grant any consent hereunder, without the written consent of each Lender directly affected thereby;
(g) consent to the assignment or transfer by any Credit Party of such Credit Partys rights and obligations under any Loan Document to which it is a party (except as permitted pursuant to Section 9.4), in each case, without the written consent of each Lender;
(h) release (i) all of the Subsidiary Guarantors or (ii) Subsidiary Guarantors comprising substantially all of the credit support for the Secured Obligations, in any case, from the Subsidiary Guaranty Agreement (other than as authorized in Section 11.9), without the written consent of each Lender;
(i) release or subordinate the Liens on all or substantially all of the Collateral granted to or held by the Administrative Agent under any Loan Document (other than as authorized in Section 11.9 or as otherwise specifically permitted or contemplated in this Agreement or the applicable Security Document) without the written consent of each Lender;
(j) (i) waive any condition precedent to any Extension of Credit under the Revolving Credit Facility set forth in Section 6.2 or (ii) amend or otherwise modify Section 6.2, if the effect of such amendment or modification is to require the Revolving Credit Lenders to make Revolving Credit Loans (pursuant to a substantially concurrent request by the Borrower) when such Revolving Credit Lenders would not otherwise be required to do so, in each case, without the written consent of the Required Revolving Credit Lenders; or
(k) amend, waive or otherwise modify the definition of Financial Covenant or any provision of Section 9.14 (or any defined terms used therein, but only for purposes of Section 9.14 and not for any other purposes, including, without limitation, any pro forma compliance or incurrence tests) or waive any Event of Default resulting from a breach of the Financial Covenant, in each case without the written consent of the Required Revolving Credit Lenders;
provided further, that (i) no amendment, waiver or consent shall, unless in writing and signed by each affected Issuing Lender in addition to the Lenders required above, affect the rights or duties of such Issuing Lender under this Agreement or any Letter of Credit Application relating to any Letter of Credit issued or to be issued by it; (ii) no amendment, waiver or consent shall, unless in writing and signed by the Swingline Lender in addition to the Lenders required above, affect the rights or duties of the Swingline Lender under this Agreement; (iii) no amendment, waiver or consent shall, unless in writing and signed by the Administrative Agent in addition to the Lenders required above, affect the rights or duties of the Administrative Agent under this Agreement or any other Loan Document; (iv) the Engagement Letter may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto, (v) each Letter of Credit Application may be amended, or rights or privileges thereunder waived, in a writing executed only by the parties thereto; provided that a copy of such amended Letter of Credit Application shall be promptly delivered to the Administrative Agent upon such amendment or waiver, (vi) the Required Revolving Credit Lenders may (x) amend or otherwise modify the Financial Covenant or, solely for purposes of the Financial Covenant, the defined terms used, directly
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or indirectly, therein, or (y) waive any noncompliance with the Financial Covenant or any Event of Default resulting from any such noncompliance, in each case without the consent of any other Lenders and (vii) the Administrative Agent and the Borrower shall be permitted to amend any provision of the Loan Documents (and such amendment shall become effective without any further action or consent of any other party to any Loan Document) if the Administrative Agent and the Borrower shall have jointly identified an obvious error or any error or omission of a technical or immaterial nature in any such provision. Notwithstanding anything to the contrary herein, no Defaulting Lender shall have any right to approve or disapprove any amendment, waiver or consent hereunder, except that (A) the Revolving Credit Commitment of such Lender may not be increased or extended without the consent of such Lender, and (B) any amendment, waiver or consent hereunder which requires the consent of all Lenders or each affected Lender that by its terms disproportionately and adversely affects any such Defaulting Lender relative to other affected Lenders shall require the consent of such Defaulting Lender.
Notwithstanding anything in this Agreement to the contrary, each Lender hereby irrevocably authorizes the Administrative Agent on its behalf, and without further consent, to enter into amendments or modifications to this Agreement (including, without limitation, amendments to this Section 12.2) or any of the other Loan Documents or to enter into additional Loan Documents as the Administrative Agent reasonably deems appropriate in order to effectuate the terms of Sections 5.13, 5.16 and 5.17 (including, without limitation, as applicable, (1) to permit the Incremental Term Loans and the Revolving Credit Facility Increases to share ratably in the benefits of this Agreement and the other Loan Documents, (2) to include the Incremental Increases, as applicable, or outstanding Incremental Term Loans and outstanding Revolving Credit Facility Increases, as applicable, in any determination of (i) Required Lenders or (ii) similar required lender terms applicable thereto); provided that no amendment or modification shall result in any increase in the amount of any Lenders Commitment or any increase in any Lenders Commitment Percentage, in each case, without the written consent of such affected Lender and (3) to make amendments to any outstanding tranche of Term Loans to permit any Incremental Term Loans or Commitments relating thereto to be fungible (including, without limitation, for purposes of the Code) with such tranche of Term Loans, including, without limitation, increases in the Applicable Margin or any fees payable to such outstanding tranche of Term Loans or providing such outstanding tranche of Term Loans with the benefit of any call protection or covenants that are applicable to the proposed Incremental Term Loans or Commitments relating thereto; provided that any such amendments or modifications to such outstanding tranche of Term Loans shall not directly adversely affect the Lenders holding such tranche of Term Loans without their consent.
SECTION 12.3 Expenses; Indemnity.
(a) Costs and Expenses. The Borrower and any other Credit Party, jointly and severally, shall pay (i) all reasonable and documented out of pocket expenses incurred by the Administrative Agent and its Affiliates (including the reasonable fees, charges and disbursements of one counsel for the Administrative Agent and, if reasonably necessary, of one local counsel to the Administrative Agent in any relevant material jurisdiction), in connection with the syndication of the Credit Facility, the preparation, negotiation, execution, delivery and administration of this Agreement and the other Loan Documents or any amendments, modifications or waivers of the provisions hereof or thereof (whether or not the transactions contemplated hereby or thereby shall be consummated), (ii) all reasonable and documented out of pocket expenses incurred by the Issuing Lender in connection with the issuance, amendment, renewal or extension of any Letter of Credit or any demand for payment thereunder and (iii) all reasonable and documented out of pocket expenses incurred by the Administrative Agent, any Lender or the Issuing Lender (including the reasonable fees, charges and disbursements of counsel for the Administrative Agent, the Lenders and the Issuing Lender) in connection with the enforcement or protection of its rights (A) in connection with this Agreement and the other Loan Documents, including its rights under this Section, or (B) in connection with the Loans
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made or Letters of Credit issued hereunder, including all such out of pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans or Letters of Credit; provided that, in the case of legal fees and expenses pursuant to this Section 12.3(a), such fees and expenses shall be limited to the reasonable and documented fees, disbursements and other charges of one counsel to the Administrative Agent, its Affiliates, the Lenders, the Issuing Lender, the Swingline Lender and the Arrangers (taken as a whole) and, if reasonably necessary, of one local counsel to the Administrative Agent and the Arrangers (taken as a whole) in any relevant material jurisdiction, and in the case of an actual or perceived conflict of interest, one additional counsel in each relevant jurisdiction to each group of affected persons similarly situated (taken as a whole).
(b) Indemnification by the Borrower. The Borrower shall indemnify the Administrative Agent (and any sub-agent thereof), each Lender and the Issuing Lender, and each Related Party of any of the foregoing Persons (each such Person being called an Indemnitee) against, and hold each Indemnitee harmless from, and shall pay or reimburse any such Indemnitee for, any and all losses, claims (including, without limitation, any Environmental Claims), penalties, damages, liabilities and related expenses (but limited, in the case of legal fees and expenses pursuant to this Section 12.3(b), to the reasonable and documented out-of-pocket fees, disbursements and other charges of one counsel to all Indemnitees (taken as a whole) and, if reasonably necessary, one local counsel for all Indemnitees (taken as a whole) in each relevant jurisdiction, as applicable ; provided that in the case of an actual or perceived conflict of interest with respect to any of the foregoing counsel, one additional counsel in each relevant jurisdiction, as applicable, to each group of affected Indemnitees similarly situated and taken as a whole), incurred by any Indemnitee or asserted against any Indemnitee by any Person (including the Borrower), other than such Indemnitee and its Related Parties, arising out of, in connection with, or as a result of (i) the execution or delivery of this Agreement, any other Loan Document or any agreement or instrument contemplated hereby or thereby, the performance by the parties hereto of their respective obligations hereunder or thereunder or the consummation of the transactions contemplated hereby or thereby (including, without limitation, the Transactions), (ii) any Loan or Letter of Credit or the use or proposed use of the proceeds therefrom (including any refusal by the Issuing Lender to honor a demand for payment under a Letter of Credit if the documents presented in connection with such demand do not strictly comply with the terms of such Letter of Credit), (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by any Credit Party or any Subsidiary thereof, or any Environmental Claim related in any way to any Credit Party or any Subsidiary, (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory, whether brought by a third party or by any Credit Party or any Subsidiary thereof, and regardless of whether any Indemnitee is a party thereto, or (v) any claim (including, without limitation, any Environmental Claims), investigation, litigation or other proceeding (whether or not the Administrative Agent or any Lender is a party thereto) and the prosecution and defense thereof, arising out of or in any way connected with the Loans, this Agreement, any other Loan Document, or any documents contemplated by or referred to herein or therein or the transactions contemplated hereby or thereby, including without limitation, reasonable attorneys and consultants fees, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses (A) are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee, (B) result from a claim brought by any Credit Party or any Subsidiary thereof against an Indemnitee for breach in bad faith of such Indemnitees obligations hereunder or under any other Loan Document, if such Credit Party or such Subsidiary has obtained a final and nonappealable judgment in its favor on such claim as determined by a court of competent jurisdiction or (C) any dispute solely among the Indemnitees (other than any claims (1) against an Indemnitee in its capacity as or in fulfilling its role as an agent or arranger or any similar role under this Agreement or any other Loan Document or (2) arising out of any act or omission of the Borrower or any Subsidiary of the Borrower or any of their respective Affiliates). This Section 12.3(b) shall not apply with respect to Taxes other than any Taxes that represent losses, claims, damages, etc. arising from any non-Tax claim.
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(c) Reimbursement by Lenders. To the extent that the Borrower for any reason fails to indefeasibly pay any amount required under clause (a) or (b) of this Section to be paid by it to the Administrative Agent (or any sub-agent thereof), any Issuing Lender, the Swingline Lender or any Related Party of any of the foregoing, in each case in their capacity as such, each Lender severally agrees to pay to the Administrative Agent (or any such sub-agent), such Issuing Lender, the Swingline Lender or such Related Party, as the case may be, such Lenders pro rata share (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought based on each Lenders share of the Total Credit Exposure at such time, or if the Total Credit Exposure has been reduced to zero, then based on such Lenders share of the Total Credit Exposure immediately prior to such reduction) of such unpaid amount (including any such unpaid amount in respect of a claim asserted by such Lender); provided that with respect to such unpaid amounts owed to any Issuing Lender or the Swingline Lender solely in its capacity as such, only the Revolving Credit Lenders shall be required to pay such unpaid amounts, such payment to be made severally among them based on such Revolving Credit Lenders Revolving Credit Commitment Percentage (determined as of the time that the applicable unreimbursed expense or indemnity payment is sought or, if the Revolving Credit Commitment has been reduced to zero as of such time, determined immediately prior to such reduction); provided, further, that the unreimbursed expense or indemnified loss, claim, damage, liability or related expense, as the case may be, was incurred by or asserted against the Administrative Agent (or any such sub-agent), such Issuing Lender or the Swingline Lender in its capacity as such, or against any Related Party of any of the foregoing acting for the Administrative Agent (or any such sub-agent), such Issuing Lender or the Swingline Lender in connection with such capacity. The obligations of the Lenders under this clause (c) are subject to the provisions of Section 5.7.
(d) Waiver of Consequential Damages, Etc. To the fullest extent permitted by Applicable Law, no party to this Agreement shall assert, and each hereby waives, any claim against any other party to this Agreement, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof; provided that, nothing contained in this sentence shall limit the Borrowers indemnity obligations to the extent set forth in Section 12.3(b). No Indemnitee referred to in clause (b) above shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement or the other Loan Documents or the transactions contemplated hereby or thereby, except to the extent resulting from its gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final non-appealable judgment.
(e) Payments. All amounts due under this Section shall be payable promptly after demand therefor.
(f) Survival. Each partys obligations under this Section shall survive the termination of the Loan Documents and payment of the obligations hereunder.
SECTION 12.4 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender, each Issuing Lender, the Swingline Lender and each of their respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by Applicable Law, to set off and apply any and all deposits (general or special, time or demand, provisional
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or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Lender, such Issuing Lender, the Swingline Lender or any such Affiliate to or for the credit or the account of the Borrower or any other Credit Party against any and all of the obligations of the Borrower or such Credit Party now or hereafter existing under this Agreement or any other Loan Document to such Lender, such Issuing Lender or the Swingline Lender or any of their respective Affiliates, irrespective of whether or not such Lender, such Issuing Lender, the Swingline Lender or any such Affiliate shall have made any demand under this Agreement or any other Loan Document and although such obligations of the Borrower or such Credit Party may be contingent or unmatured or are owed to a branch or office of such Lender, such Issuing Lender, the Swingline Lender or such Affiliate different from the branch, office or Affiliate holding such deposit or obligated on such indebtedness; provided that in the event that any Defaulting Lender shall exercise any such right of setoff, (x) all amounts so set off shall be paid over immediately to the Administrative Agent for further application in accordance with the provisions of Section 5.15(a)(ii) and, pending such payment, shall be segregated by such Defaulting Lender from its other funds and deemed held in trust for the benefit of the Administrative Agent, the Issuing Lender, the Swingline Lender and the Lenders, and (y) the Defaulting Lender shall provide promptly to the Administrative Agent a statement describing in reasonable detail the Obligations owing to such Defaulting Lender as to which it exercised such right of setoff. The rights of each Lender, each Issuing Lender, the Swingline Lender and their respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Lender, such Issuing Lender, the Swingline Lender or their respective Affiliates may have. Each Lender, such Issuing Lender and the Swingline Lender agree to notify the Borrower and the Administrative Agent promptly after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application.
SECTION 12.5 Governing Law; Jurisdiction, Etc.
(a) Governing Law. This Agreement and the other Loan Documents and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement or any other Loan Document (except, as to any other Loan Document, as expressly set forth therein) and the transactions contemplated hereby and thereby shall be governed by, and construed in accordance with, the law of the State of New York.
(b) Submission to Jurisdiction. The Borrower and each other Credit Party irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise, against the Administrative Agent, any Lender, any Issuing Lender, the Swingline Lender, or any Related Party of the foregoing in any way relating to this Agreement or any other Loan Document or the transactions relating hereto or thereto, in any forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by Applicable Law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or in any other Loan Document shall affect any right that the Administrative Agent, any Lender, any Issuing Lender or the Swingline Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against the Borrower or any other Credit Party or its properties in the courts of any jurisdiction.
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(c) Waiver of Venue. The Borrower and each other Credit Party irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Service of Process. Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 12.1. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law.
SECTION 12.6 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
SECTION 12.7 Reversal of Payments. To the extent any Credit Party makes a payment or payments to the Administrative Agent for the ratable benefit of the Lenders or the Administrative Agent receives any payment or proceeds of the Collateral which payments or proceeds or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside and/or required to be repaid to a trustee, receiver or any other party under any Debtor Relief Law, other Applicable Law or equitable cause, then, to the extent of such payment or proceeds repaid, the Obligations or part thereof intended to be satisfied shall be revived and continued in full force and effect as if such payment or proceeds had not been received by the Administrative Agent.
SECTION 12.8 Injunctive Relief. The Borrower recognizes that, in the event the Borrower fails to perform, observe or discharge any of its obligations or liabilities under this Agreement, any remedy of law may prove to be inadequate relief to the Lenders. Therefore, the Borrower agrees that the Lenders, at the Lenders option, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
SECTION 12.9 Successors and Assigns; Participations.
(a) Successors and Assigns Generally. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that neither the Borrower nor any other Credit Party may assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Administrative Agent and each Lender and no Lender may assign or otherwise transfer any of its rights or obligations hereunder except (i) to an assignee in accordance with the provisions of paragraph (b) of this Section, (ii) by way of participation in accordance with the provisions of paragraph (d) of this Section or (iii) by way of pledge or assignment of a security interest subject to the restrictions of paragraph (e) of this Section (and any other attempted assignment or transfer by any party hereto shall be null and void). Nothing in this
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Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby, Participants to the extent provided in paragraph (d) of this Section and, to the extent expressly contemplated hereby, the Related Parties of each of the Administrative Agent and the Lenders) any legal or equitable right, remedy or claim under or by reason of this Agreement.
(b) Assignments by Lenders. Any Lender may at any time assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of its Revolving Credit Commitment and the Loans at the time owing to it); provided that, in each case with respect to any Credit Facility, any such assignment shall be subject to the following conditions:
(i) Minimum Amounts.
(A) in the case of an assignment of the entire remaining amount of the assigning Lenders Commitment and/or the Loans at the time owing to it (in each case with respect to any Credit Facility) or contemporaneous assignments to related Approved Funds (determined after giving effect to such assignments) that equal at least the amount specified in paragraph (b)(i)(B) of this Section in the aggregate or in the case of an assignment to a Lender, an Affiliate of a Lender or an Approved Fund, no minimum amount need be assigned; and
(B) in any case not described in paragraph (b)(i)(A) of this Section, the aggregate amount of the Commitment (which for this purpose includes Loans outstanding thereunder) or, if the applicable Commitment is not then in effect, the principal outstanding balance of the Loans of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Assumption with respect to such assignment is delivered to the Administrative Agent or, if Trade Date is specified in the Assignment and Assumption, as of the Trade Date) shall not be less than (x) $5,000,000, in the case of any assignment in respect of the Revolving Credit Facility and (y) $1,000,000 in the case of any assignment in respect of the Initial Term Loans and, if applicable, any Incremental Term Loans, unless each of the Administrative Agent and, so long as no Event of Default has occurred and is continuing, the Borrower otherwise consents (each such consent not to be unreasonably withheld or delayed); provided that the Borrower shall be deemed to have given its consent ten (10) Business Days after the date written notice thereof has been delivered by the assigning Lender (through the Administrative Agent) unless such consent is expressly refused by the Borrower prior to such tenth (10th) Business Day;
(ii) Proportionate Amounts. Each partial assignment shall be made as an assignment of a proportionate part of all the assigning Lenders rights and obligations under this Agreement with respect to the Loan or the Commitment assigned;
(iii) Required Consents. No consent shall be required for any assignment except to the extent required by paragraph (b)(i)(B) of this Section and, in addition:
(A) the consent of the Borrower (such consent not to be unreasonably withheld or delayed) shall be required unless (x) an Event of Default has occurred and is continuing at the time of such assignment or (y) such assignment is to a Lender, an Affiliate of a Lender or an Approved Fund; provided that the Borrower shall be deemed to have consented to any such assignment unless it shall object thereto by written notice to the Administrative Agent within 10 Business Days after having received written notice thereof;
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(B) the consent of the Administrative Agent (such consent not to be unreasonably withheld or delayed) shall be required for assignments in respect of (i) the Revolving Credit Facility if such assignment is to a Person that is not a Lender with a Revolving Credit Commitment, an Affiliate of such Lender or an Approved Fund with respect to such Lender or (ii) the Initial Term Loans or, if applicable, Incremental Term Loans to a Person who is not a Lender, an Affiliate of a Lender or an Approved Fund; and
(C) the consents of the Issuing Lenders and the Swingline Lender (such consents not to be unreasonably withheld or delayed) shall be required for any assignment in respect of the Revolving Credit Facility.
(iv) Assignment and Assumption. The parties to each assignment shall execute and deliver to the Administrative Agent an Assignment and Assumption, together with a processing and recordation fee of $3,500 for each assignment; provided that (A) only one such fee will be payable in connection with simultaneous assignments to two or more related Approved Funds by a Lender and (B) the Administrative Agent may, in its sole discretion, elect to waive such processing and recordation fee in the case of any assignment. The assignee, if it is not a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire.
(v) No Assignment to Certain Persons. No such assignment shall be made to (A) a natural Person, (B) the Borrower or any of its Subsidiaries or Affiliates or (C) any Defaulting Lender or any of its Subsidiaries, or any Person who, upon becoming a Lender hereunder, would constitute any of the foregoing Persons described in this clause (C).
(vi) Certain Additional Payments. In connection with any assignment of rights and obligations of any Defaulting Lender hereunder, no such assignment shall be effective unless and until, in addition to the other conditions thereto set forth herein, the parties to the assignment shall make such additional payments to the Administrative Agent in an aggregate amount sufficient, upon distribution thereof as appropriate (which may be outright payment, purchases by the assignee of participations or subparticipations, or other compensating actions, including funding, with the consent of the Borrower and the Administrative Agent, the applicable pro rata share of Loans previously requested, but not funded by, the Defaulting Lender, to each of which the applicable assignee and assignor hereby irrevocably consent), to (A) pay and satisfy in full all payment liabilities then owed by such Defaulting Lender to the Administrative Agent, the Issuing Lenders, the Swingline Lender and each other Lender hereunder (and interest accrued thereon), and (B) acquire (and fund as appropriate) its full pro rata share of all Loans and participations in Letters of Credit and Swingline Loans in accordance with its Revolving Credit Commitment Percentage. Notwithstanding the foregoing, in the event that any assignment of rights and obligations of any Defaulting Lender hereunder shall become effective under Applicable Law without compliance with the provisions of this paragraph, then the assignee of such interest shall be deemed to be a Defaulting Lender for all purposes of this Agreement until such compliance occurs.
Subject to acceptance and recording thereof by the Administrative Agent pursuant to paragraph (c) of this Section, from and after the effective date specified in each Assignment and Assumption, the assignee thereunder shall be a party to this Agreement and, to the extent of the interest assigned by such Assignment and Assumption, have the rights and obligations of a Lender under this Agreement, and the
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assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Assumption, be released from its obligations under this Agreement (and, in the case of an Assignment and Assumption covering all of the assigning Lenders rights and obligations under this Agreement, such Lender shall cease to be a party hereto) but shall continue to be entitled to the benefits of Sections 5.8, 5.9, 5.10, 5.11 and 12.3 with respect to facts and circumstances occurring prior to the effective date of such assignment; provided, that except to the extent otherwise expressly agreed by the affected parties, no assignment by a Defaulting Lender will constitute a waiver or release of any claim of any party hereunder arising from that Lenders having been a Defaulting Lender. Any assignment or transfer by a Lender of rights or obligations under this Agreement that does not comply with this paragraph shall be treated for purposes of this Agreement as a sale by such Lender of a participation in such rights and obligations in accordance with paragraph (d) of this Section (other than a purported assignment to a natural Person or the Borrower or any of the Borrowers Subsidiaries or Affiliates, which shall be null and void.)
(c) Register. The Administrative Agent, acting solely for this purpose as a non-fiduciary agent of the Borrower, shall maintain at one of its offices in Charlotte, North Carolina, a copy of each Assignment and Assumption, each Incremental Amendment and each Refinancing Amendment delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and principal amounts of (and stated interest on) the Loans owing to, each Lender pursuant to the terms hereof from time to time (the Register). The entries in the Register shall be conclusive, absent manifest error, and the Borrower, the Administrative Agent and the Lenders shall treat each Person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by (i) the Borrower, (ii) BMO Capital Markets Corp. and (iii) any Lender (but only to the extent of entries in the Register that are applicable to such Lender), at any reasonable time and from time to time upon reasonable prior notice.
(d) Participations. Any Lender may at any time, without the consent of, or notice to, the Borrower or the Administrative Agent, sell participations to any Person (other than a natural Person or the Borrower or any of the Borrowers Subsidiaries or Affiliates) (each, a Participant) in all or a portion of such Lenders rights and/or obligations under this Agreement (including all or a portion of its Commitment and/or the Loans owing to it); provided that (i) such Lenders obligations under this Agreement shall remain unchanged, (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower, the Administrative Agent, the Issuing Lenders, the Swingline Lender and the other Lenders shall continue to deal solely and directly with such Lender in connection with such Lenders rights and obligations under this Agreement. For the avoidance of doubt, each Lender shall be responsible for the indemnity under Section 12.3(c) with respect to any payments made by such Lender to its Participant(s).
Any agreement or instrument pursuant to which a Lender sells such a participation shall provide that such Lender shall retain the sole right to enforce this Agreement and to approve any amendment, modification or waiver of any provision of this Agreement; provided that such agreement or instrument may provide that such Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver described in Section 12.2(b), (c), (d) or (e) that directly and adversely affects such Participant. The Borrower agrees that each Participant shall be entitled to the benefits of Sections 5.9, 5.10 and 5.11 (subject to the requirements and limitations therein, including the requirements under Section 5.11(g) (it being understood that the documentation required under Section 5.11(g) shall be delivered to the participating Lender)) to the same extent as if it were a Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section; provided that such Participant (A) agrees to be subject to the provisions of Section 5.12 as if it were an assignee under paragraph (b) of this Section; and (B) shall not be entitled to receive any greater payment under Sections 5.10 or 5.11, with respect to any participation, than its participating Lender would have been entitled to receive, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the
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applicable participation. Each Lender that sells a participation agrees, at the Borrowers request and expense, to use reasonable efforts to cooperate with the Borrower to effectuate the provisions of Section 5.12(b) with respect to any Participant. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 12.4 as though it were a Lender; provided that such Participant agrees to be subject to Section 5.6 as though it were a Lender.
Each Lender that sells a participation shall, acting solely for this purpose as a non-fiduciary agent of the Borrower, maintain a register on which it enters the name and address of each Participant and the principal amounts of (and stated interest on) each Participants interest in the Loans or other obligations under the Loan Documents (the Participant Register); provided that no Lender shall have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participants interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary. For the avoidance of doubt, the Administrative Agent (in its capacity as Administrative Agent) shall have no responsibility for maintaining a Participant Register.
(e) Certain Pledges. Any Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of such Lender, including without limitation any pledge or assignment to secure obligations to a Federal Reserve Bank; provided that no such pledge or assignment shall release such Lender from any of its obligations hereunder or substitute any such pledgee or assignee for such Lender as a party hereto.
SECTION 12.10 Treatment of Certain Information; Confidentiality. Each of the Administrative Agent, the Lenders and the Issuing Lenders agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates and to its and its Related Parties solely in connection with the transactions contemplated by this Agreement (it being understood that the Persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential), (b) to the extent required or requested by, or required to be disclosed to, any regulatory or similar authority purporting to have jurisdiction over such Person or its Related Parties (including any self-regulatory authority, such as the National Association of Insurance Commissioners) (in which case, the Administrative Agent, the Lender or the Issuing Lender, as applicable, shall use commercially reasonable efforts to, except with respect to any audit or examination conducted by bank accountants or any governmental bank regulatory authority exercising examination or regulatory authority, promptly notify the Borrower, in advance, to the extent practicable and otherwise permitted by Applicable Law), (c) as to the extent required by Applicable Laws or regulations or in any legal, judicial, administrative proceeding or other compulsory process (in which case, the Administrative Agent, the Lender or the Issuing Lender, as applicable, shall use commercially reasonable efforts to, except with respect to any audit or examination conducted by bank accountants or any governmental bank regulatory authority exercising examination or regulatory authority, promptly notify the Borrower, in advance, to the extent practicable and otherwise permitted by Applicable Law), (d) to any other party hereto, (e) in connection with the exercise of any remedies under this Agreement, under any other Loan Document or under any Secured Hedge Agreement or Secured Cash Management Agreement, or any action or proceeding relating to this Agreement, any other Loan Document or any Secured Hedge Agreement or Secured Cash Management Agreement, or the enforcement of rights hereunder or thereunder, (f) subject to an agreement containing provisions substantially the same as those of this Section, to (i) any assignee of or Participant in, or any prospective assignee of or Participant in, any of its rights and obligations under this Agreement or (ii) any actual or
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prospective party (or its Related Parties) to any swap, derivative or other transaction under which payments are to be made by reference to the Borrower and its obligations, this Agreement or payments hereunder, (g) on a confidential basis to (i) any rating agency in connection with rating the Borrower or its Subsidiaries or the Credit Facility or (ii) the CUSIP Service Bureau or any similar agency in connection with the issuance and monitoring of CUSIP numbers with respect to the Credit Facility, (h) with the consent of the Borrower, (i) to Gold Sheets and other similar bank trade publications, such information to consist of deal terms and other information customarily found in such publications, (j) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to the Administrative Agent, any Lender, any Issuing Lender or any of their respective Affiliates from a third party that is not, to such Persons knowledge, subject to confidentiality obligations to the Borrower, (k) to governmental regulatory authorities in connection with any regulatory examination of the Administrative Agent or any Lender or in accordance with the Administrative Agents or any Lenders regulatory compliance policy if the Administrative Agent or such Lender deems necessary for the mitigation of claims by those authorities against the Administrative Agent or such Lender or any of its subsidiaries or affiliates (in which case, the Administrative Agent, the Lender or any Issuing Lender, as applicable, shall use commercially reasonable efforts to, except with respect to any audit or examination conducted by any governmental regulatory authority exercising examination or regulatory authority, promptly notify the Borrower, in advance, to the extent practicable and otherwise permitted by Applicable Law), (l) to the extent that such information is independently developed by such Person, so long as such Person has not otherwise breached its confidentiality obligations hereunder and has not developed such information based on information received from a third party that to its knowledge has breached confidentiality obligations owing to the Borrower or its Subsidiaries, or (m) for purposes of establishing a due diligence defense. For purposes of this Section, Information means all information received from any Credit Party or any Subsidiary thereof relating to any Credit Party or any Subsidiary thereof or any of their respective businesses, other than any such information that is available to the Administrative Agent, any Lender or the Issuing Lender on a nonconfidential basis prior to disclosure by any Credit Party or any Subsidiary thereof; provided that, in the case of information received from a Credit Party or any Subsidiary thereof after the date hereof, such information is clearly identified at the time of delivery as confidential. Any Person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such Person has exercised the same degree of care to maintain the confidentiality of such Information as such Person would accord to its own confidential information.
SECTION 12.11 Performance of Duties. Each of the Credit Partys obligations under this Agreement and each of the other Loan Documents shall be performed by such Credit Party at its sole cost and expense.
SECTION 12.12 All Powers Coupled with Interest. All powers of attorney and other authorizations granted to the Lenders, the Administrative Agent and any Persons designated by the Administrative Agent or any Lender pursuant to any provisions of this Agreement or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Obligations remain unpaid or unsatisfied, any of the Commitments remain in effect or the Credit Facility has not been terminated.
SECTION 12.13 Survival.
(a) All representations and warranties set forth in Article VII and all representations and warranties contained in any certificate, or any of the Loan Documents (including, but not limited to, any such representation or warranty made in or in connection with any amendment thereto) shall constitute representations and warranties made under this Agreement. All representations and warranties made under this Agreement shall be made or deemed to be made at and as of the Closing Date (except those that are expressly made as of a specific date), shall survive the Closing Date and shall not be waived by the execution and delivery of this Agreement, any investigation made by or on behalf of the Lenders or any borrowing hereunder.
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(b) Notwithstanding any termination of this Agreement, the indemnities to which the Administrative Agent and the Lenders are entitled under the provisions of this Article XII and any other provision of this Agreement and the other Loan Documents shall continue in full force and effect and shall protect the Administrative Agent and the Lenders against events arising after such termination as well as before.
SECTION 12.14 Titles and Captions. Titles and captions of Articles, Sections and subsections in, and the table of contents of, this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement.
SECTION 12.15 Severability of Provisions. Any provision of this Agreement or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 12.16 Counterparts; Integration; Effectiveness; Electronic Execution.
(a) Counterparts; Integration; Effectiveness. This Agreement may be executed in counterparts (and by different parties hereto in different counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. This Agreement and the other Loan Documents, and any separate letter agreements with respect to fees payable to the Administrative Agent, the Issuing Lenders, the Swingline Lender and/or the Arrangers, constitute the entire contract among the parties relating to the subject matter hereof and supersede any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Except as provided in Section 6.1, this Agreement shall become effective when it shall have been executed by the Administrative Agent and when the Administrative Agent shall have received counterparts hereof that, when taken together, bear the signatures of each of the other parties hereto. Delivery of an executed counterpart of a signature page of this Agreement by facsimile or in electronic (i.e., pdf or tif) format shall be effective as delivery of a manually executed counterpart of this Agreement.
(b) Electronic Execution of Assignments. The words execution, signed, signature, and words of like import in any Assignment and Assumption shall be deemed to include electronic signatures or the keeping of records in electronic form, each of which shall be of the same legal effect, validity or enforceability as a manually executed signature or the use of a paper-based recordkeeping system, as the case may be, to the extent and as provided for in any Applicable Law, including the Federal Electronic Signatures in Global and National Commerce Act, the New York State Electronic Signatures and Records Act, or any other similar state laws based on the Uniform Electronic Transactions Act.
SECTION 12.17 Term of Agreement. This Agreement shall remain in effect from the Closing Date through and including the date upon which all Obligations (other than contingent indemnification obligations not then due) arising hereunder or under any other Loan Document shall have been indefeasibly and irrevocably paid and satisfied in full, all Letters of Credit have been terminated or expired (or been Cash Collateralized or otherwise satisfied in a manner acceptable to the applicable Issuing Lender) and the Revolving Credit Commitment has been terminated. No termination of this Agreement shall affect the rights and obligations of the parties hereto arising prior to such termination or in respect of any provision of this Agreement which survives such termination.
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SECTION 12.18 USA PATRIOT Act. The Administrative Agent and each Lender hereby notifies the Borrower that pursuant to the requirements of the PATRIOT Act, each of them is required to obtain, verify and record information that identifies each Credit Party, which information includes the name and address of each Credit Party and other information that will allow such Lender to identify each Credit Party in accordance with the PATRIOT Act.
SECTION 12.19 Independent Effect of Covenants. The Borrower expressly acknowledges and agrees that each covenant contained in Articles VIII or IX hereof shall be given independent effect. Accordingly, the Borrower shall not engage in any transaction or other act otherwise permitted under any covenant contained in Articles VIII or IX, before or after giving effect to such transaction or act, the Borrower shall or would be in breach of any other covenant contained in Articles VIII or IX.
SECTION 12.20 No Advisory or Fiduciary Responsibility.
(a) In connection with all aspects of each transaction contemplated hereby, each Credit Party acknowledges and agrees, and acknowledges its Affiliates understanding, that (i) the facilities provided for hereunder and any related arranging or other services in connection therewith (including in connection with any amendment, waiver or other modification hereof or of any other Loan Document) are an arms-length commercial transaction between the Borrower and its Affiliates, on the one hand, and the Administrative Agent, the Arrangers and the Lenders, on the other hand, and the Borrower is capable of evaluating and understanding and understands and accepts the terms, risks and conditions of the transactions contemplated hereby and by the other Loan Documents (including any amendment, waiver or other modification hereof or thereof), (ii) in connection with the process leading to such transaction, each of the Administrative Agent, the Arrangers and the Lenders is and has been acting solely as a principal and is not the financial advisor, agent or fiduciary, for the Borrower or any of its Affiliates, stockholders, creditors or employees or any other Person, (iii) none of the Administrative Agent, the Arrangers or the Lenders has assumed or will assume an advisory, agency or fiduciary responsibility in favor of the Borrower with respect to any of the transactions contemplated hereby or the process leading thereto, including with respect to any amendment, waiver or other modification hereof or of any other Loan Document (irrespective of whether any Arranger or Lender has advised or is currently advising the Borrower or any of its Affiliates on other matters) and none of the Administrative Agent, the Arrangers or the Lenders has any obligation to the Borrower or any of its Affiliates with respect to the financing transactions contemplated hereby except those obligations expressly set forth herein and in the other Loan Documents, (iv) the Arrangers and the Lenders and their respective Affiliates may be engaged in a broad range of transactions that involve interests that differ from, and may conflict with, those of the Borrower and its Affiliates, and none of the Administrative Agent, the Arrangers or the Lenders has any obligation to disclose any of such interests by virtue of any advisory, agency or fiduciary relationship and (v) the Administrative Agent, the Arrangers and the Lenders have not provided and will not provide any legal, accounting, regulatory or tax advice with respect to any of the transactions contemplated hereby (including any amendment, waiver or other modification hereof or of any other Loan Document) and the Credit Parties have consulted their own legal, accounting, regulatory and tax advisors to the extent they have deemed appropriate.
(b) Each Credit Party acknowledges and agrees that each Lender, the Arrangers and any Affiliate thereof may lend money to, invest in, and generally engage in any kind of business with, any of the Borrower, any Affiliate thereof or any other person or entity that may do business with or own securities of any of the foregoing, all as if such Lender, Arranger or Affiliate thereof were not a Lender or Arranger or an Affiliate thereof (or an agent or any other person with any similar role under the Credit Facilities) and without any duty to account therefor to any other Lender, the Arrangers, the Borrower or any Affiliate of the foregoing. Each Lender, the Arrangers and any Affiliate thereof may accept fees and other consideration from the Borrower or any Affiliate thereof for services in connection with this Agreement, the Credit Facilities or otherwise without having to account for the same to any other Lender, the Arrangers, the Borrower or any Affiliate of the foregoing.
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SECTION 12.21 Inconsistencies with Other Documents. In the event there is a conflict or inconsistency between this Agreement and any other Loan Document, the terms of this Agreement shall control; provided that any provision of the Security Documents which imposes additional burdens on the Borrower or any of its Subsidiaries or further restricts the rights of the Borrower or any of its Subsidiaries or gives the Administrative Agent or Lenders additional rights shall not be deemed to be in conflict or inconsistent with this Agreement and shall be given full force and effect.
SECTION 12.22 Acknowledgement and Consent to Bail-In of EEA Financial Institutions. Notwithstanding anything to the contrary in any Loan Document or in any other agreement, arrangement or understanding among any such parties, each party hereto acknowledges that any liability of any EEA Financial Institution arising under any Loan Document, to the extent such liability is unsecured, may be subject to the write-down and conversion powers of an EEA Resolution Authority and agrees and consents to, and acknowledges and agrees to be bound by:
(a) the application of any Write-Down and Conversion Powers by an EEA Resolution Authority to any such liabilities arising hereunder which may be payable to it by any party hereto that is an EEA Financial Institution; and
(b) the effects of any Bail-In Action on any such liability, including, if applicable:
(i) a reduction in full or in part or cancellation of any such liability;
(ii) a conversion of all, or a portion of, such liability into shares or other instruments of ownership in such EEA Financial Institution, its parent undertaking, or a bridge institution that may be issued to it or otherwise conferred on it, and that such shares or other instruments of ownership will be accepted by it in lieu of any rights with respect to any such liability under this Agreement or any other Loan Document; or
(iii) the variation of the terms of such liability in connection with the exercise of the write-down and conversion powers of any EEA Resolution Authority.
SECTION 12.23 Amendment and Restatement of Existing Credit Agreement; No Novation. The parties to this Agreement agree that, upon (a) the execution and delivery by each of the parties hereto of this Agreement and (b) satisfaction or waiver of the conditions set forth in Section 6.1, the terms and provisions of the Existing Credit Agreement shall be and hereby are amended, superseded and restated in their entirety by the terms and provisions of this Agreement. This Agreement is not intended to and shall not constitute a novation or termination of the Obligations under the Existing Credit Agreement. On the Closing Date, the credit facilities described in the Existing Credit Agreement, shall be amended, supplemented, modified and restated in their entirety by the facilities described herein, and all loans and other obligations of the Borrower outstanding as of such date under the Existing Credit Agreement (to the extent not repaid on the Closing Date), shall be deemed to be loans and obligations outstanding under the corresponding facilities described herein, without any further action by any Person, except that the Administrative Agent shall make such reallocations of commitments and transfers of funds as are necessary in order that the outstanding balance of such Loans, together with any Loans funded on the Closing Date, reflect the respective Commitments of the Lenders hereunder and the Borrower hereby agrees to compensate each Lender for any and all losses, costs and expenses incurred by such Lender in connection with such reallocations and transfers, in each case on the terms and in the manner set forth in Section 5.9. Certain lenders under the Existing Credit Agreement will not be party to this Agreement and, on the Closing Date, the loans and commitments of each such departing Lender will be paid in full and terminated on a non-pro rata basis and each of the parties hereto hereby consents to such prepayment and termination.
[Signature pages to follow]
134
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first written above.
SWITCH, LTD., as Borrower | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer |
Switch, Ltd.
Amended and Restated Credit Agreement
Signature Page
AGENTS AND LENDERS: | ||
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent, Swingline Lender, Issuing Lender and Lender | ||
By: | /s/ Olga E. Wisnicky | |
Name: | Olga E. Wisnicky | |
Title: | Senior Vice President |
Switch, Ltd.
Amended and Restated Credit Agreement
Signature Page
BMO HARRIS BANK, N.A., as Issuing Lender and Lender | ||
By: | /s/ Michael Kus | |
Name: | Michael Kus | |
Title: | Managing Director |
JPMORGAN CHASE BANK, N.A., as Lender | ||
By: | /s/ Kyle Becton | |
Name: | Kyle Becton | |
Title: | Executive Director |
GOLDMAN SACHS BANK USA, N.A, as Lender | ||
By: | /s/ Rebecca Kratz | |
Name: | Rebecca Kratz | |
Title: | Authorized Signatory |
CITIZENS BANK, N.A., as Lender | ||
By: | /s/ Battle Moore | |
Name: | Battle Moore | |
Title: | Managing Director |
U.S. BANK NATIONAL ASSOCIATION, as Lender | ||
By: | /s/ Jeffrey Waibel | |
Name: | Jeffrey Waibel | |
Title: | Vice President |
CITIBANK, N.A., as Lender | ||
By: | /s/ Scott Slavik | |
Name: | Scott Slavik | |
Title: | Director |
CREDIT SUISSE AG, CAYMAN ISLANDS BRANCH, as Lender | ||
By: | /s/ Judith E. Smith | |
Name: | Judith E. Smith | |
Title: | Authorized Signatory | |
By: | /s/ Joan Park | |
Name: | Joan Park | |
Title: | Authorized Signatory |
PNC BANK, NATIONAL ASSOCIATION, as Lender | ||
By: | /s/ Brandon K. Fiddler | |
Name: | Brandon K. Fiddler | |
Title: | Senior Vice President |
BOKF, NA dba BANK OF ARIZONA, as Lender | ||
By: | /s/ Margaret DelBrocco | |
Name: | Margaret DelBrocco | |
Title: | Senior Vice President |
ZB, NA, D/B/A NEVADA STATE BANK, as Lender | ||
By: | /s/ Vanessa Teeter | |
Name: | Vanessa Teeter | |
Title: | Vice President |
CITY NATIONAL BANK, as Lender | ||
By: | /s/ Garen Papazyan | |
Name: | Garen Papazyan | |
Title: | Senior Vice President |
EXHIBIT A-1
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF REVOLVING CREDIT NOTE
REVOLVING CREDIT NOTE
June 27, 2017
FOR VALUE RECEIVED, the undersigned, SWITCH, LTD., a Nevada limited liability company (the Borrower), promises to pay to _______________ (the Lender), at the place and times provided in the Amended and Restated Credit Agreement referred to below, the unpaid principal amount of all Revolving Credit Loans made by the Lender from time to time pursuant to that certain Amended and Restated Credit Agreement, dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement) by and among the Borrower, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
The unpaid principal amount of this Revolving Credit Note from time to time outstanding is payable as provided in the Credit Agreement and shall bear interest as provided in Section 5.1 of the Credit Agreement. All payments of principal and interest on this Revolving Credit Note shall be payable in Dollars in immediately available funds as provided in the Credit Agreement.
This Revolving Credit Note is entitled to the benefits of, and evidences Obligations incurred under, the Credit Agreement, to which reference is made for a description of the security for this Revolving Credit Note and for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Obligations evidenced by this Revolving Credit Note and on which such Obligations may be declared to be immediately due and payable.
THIS REVOLVING CREDIT NOTE SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
The Borrower hereby waives all requirements as to diligence, presentment, demand of payment, protest and (except as required by the Credit Agreement) notice of any kind with respect to this Revolving Credit Note.
IN WITNESS WHEREOF, the undersigned has executed this Revolving Credit Note under seal as of the day and year first above written.
SWITCH, LTD. |
By: |
Name: |
Title: |
EXHIBIT A-2
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF SWINGLINE NOTE
SWINGLINE NOTE
June 27, 2017
FOR VALUE RECEIVED, the undersigned, SWITCH, LTD., a Nevada limited liability company (the Borrower), promises to pay to WELLS FARGO BANK, NATIONAL ASSOCIATION (the Lender), at the place and times provided in the Amended and Restated Credit Agreement referred to below, the unpaid principal amount of all Swingline Loans made by the Lender from time to time pursuant to that certain Amended and Restated Credit Agreement, dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement) by and among the Borrower, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
The unpaid principal amount of this Swingline Note from time to time outstanding is payable as provided in the Credit Agreement and shall bear interest as provided in Section 5.1 of the Credit Agreement. Swingline Loans refunded as Revolving Credit Loans in accordance with Section 2.2(b) of the Credit Agreement shall be payable by the Borrower as Revolving Credit Loans pursuant to the Revolving Credit Notes, and shall not be payable under this Swingline Note as Swingline Loans. All payments of principal and interest on this Swingline Note shall be payable in Dollars in immediately available funds as provided in the Credit Agreement.
This Swingline Note is entitled to the benefits of, and evidences Obligations incurred under, the Credit Agreement, to which reference is made for a description of the security for this Swingline Note and for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Obligations evidenced by this Swingline Note and on which such Obligations may be declared to be immediately due and payable.
THIS SWINGLINE NOTE SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
The Borrower hereby waives all requirements as to diligence, presentment, demand of payment, protest and (except as required by the Credit Agreement) notice of any kind with respect to this Swingline Note.
IN WITNESS WHEREOF, the undersigned has executed this Swingline Note under seal as of the day and year first above written.
SWITCH, LTD. |
By: |
Name: |
Title: |
EXHIBIT A-3
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF TERM LOAN NOTE
TERM LOAN NOTE
June 27, 2017
FOR VALUE RECEIVED, the undersigned, SWITCH, LTD., a Nevada limited liability company (the Borrower), promises to pay to _______________ (the Lender), at the place and times provided in the Amended and Restated Credit Agreement referred to below, the unpaid principal amount of all Term Loans made by the Lender pursuant to that certain Amended and Restated Credit Agreement, dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement) by and among the Borrower, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
The unpaid principal amount of this Term Loan Note from time to time outstanding is payable as provided in the Credit Agreement and shall bear interest as provided in Section 5.1 of the Credit Agreement. All payments of principal and interest on this Term Loan Note shall be payable in Dollars in immediately available funds as provided in the Credit Agreement.
This Term Loan Note is entitled to the benefits of, and evidences Obligations incurred under, the Credit Agreement, to which reference is made for a description of the security for this Term Loan Note and for a statement of the terms and conditions on which the Borrower is permitted and required to make prepayments and repayments of principal of the Obligations evidenced by this Term Loan Note and on which such Obligations may be declared to be immediately due and payable.
THIS TERM LOAN NOTE SHALL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
The Borrower hereby waives all requirements as to diligence, presentment, demand of payment, protest and (except as required by the Credit Agreement) notice of any kind with respect to this Term Loan Note.
IN WITNESS WHEREOF, the undersigned has executed this Term Loan Note under seal as of the day and year first above written.
SWITCH, LTD. |
By: |
Name: |
Title: |
EXHIBIT B
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
SWITCH, LTD.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF NOTICE OF BORROWING
NOTICE OF BORROWING
Dated as of: _____________
Wells Fargo Bank, National Association,
as Administrative Agent
MAC D 1109-019
1525 West W.T. Harris Blvd.
Charlotte, North Carolina 28262
Attention: Syndication Agency Services
Ladies and Gentlemen:
This irrevocable Notice of Borrowing is delivered to you pursuant to Section [2.3 [4.2] of the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among SWITCH, LTD., a Nevada limited liability company (the Borrower), the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
1. The Borrower hereby requests that the Lenders make [a Revolving Credit Loan][a Swingline Loan][the Initial Term Loan][an Incremental Term Loan] to the Borrower in the aggregate principal amount of $___________. (Complete with an amount in accordance with Section 2.3, Section 4.2 or Section 5.13, as applicable, of the Credit Agreement.)
2. The Borrower hereby requests that such Loan(s) be made on the following Business Day: _____________________. (Complete with a Business Day in accordance with Section 2.3 of the Credit Agreement for Revolving Credit Loans or Swingline Loans, Section 4.2(a) of the Credit Agreement for the Initial Term Loan or Section 5.13 of the Credit Agreement for an Incremental Term Loan).
3. The Borrower hereby requests that such Loan(s) bear interest at the following interest rate, plus the Applicable Margin, as set forth below:
Component of Loan1 |
Interest Rate |
Interest (LIBOR Rate only) |
Period | |||
[Base Rate or LIBOR Rate]2 |
4. The aggregate principal amount of all Loans and L/C Obligations outstanding as of the date hereof (including the Loan(s) requested herein) does not exceed the maximum amount permitted to be outstanding pursuant to the terms of the Credit Agreement.
1 | Complete with the Dollar amount of that portion of the overall Loan requested that is to bear interest at the selected interest rate and/or Interest Period (e.g., for a $20,000,000 loan, $5,000,000 may be requested at Base Rate, $8,000,000 may be requested at LIBOR with an interest period of three months and $7,000,000 may be requested at LIBOR with an interest period of one month). |
2 | Complete with (i) the Base Rate or the LIBOR Rate for Revolving Credit Loans, the Initial Term Loan or any Incremental Term Loan or (ii) the Base Rate for Swingline Loans. |
5. All of the conditions applicable to this Extension of Credit specified in clauses (a) and (b) of Section 6.2 of the Credit Agreement have been satisfied.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned has executed this Notice of Borrowing as of the day and year first written above.
SWITCH, LTD. | ||
By: |
| |
Name: |
| |
Title: |
|
EXHIBIT C
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF NOTICE OF ACCOUNT DESIGNATION
NOTICE OF ACCOUNT DESIGNATION
Dated as of:
Wells Fargo Bank, National Association,
as Administrative Agent
MAC D 1109-019
1525 West W.T. Harris Blvd.
Charlotte, North Carolina 28262
Attention: Syndication Agency Services
Ladies and Gentlemen:
This Notice of Account Designation is delivered to you pursuant to Section 2.3(b) of the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
1. The Administrative Agent is hereby authorized to disburse all Loan proceeds into the following account(s):
|
||||
Bank Name: | ||||
ABA Routing Number: | ||||
Account Number: |
2. This authorization shall remain in effect until revoked or until a subsequent Notice of Account Designation is provided by the Borrower to the Administrative Agent.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned has executed this Notice of Account Designation as of the day and year first written above.
SWITCH, LTD. | ||
By: |
| |
Name: |
| |
Title: |
|
EXHIBIT D
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF NOTICE OF PREPAYMENT
NOTICE OF PREPAYMENT
Dated as of:
Wells Fargo Bank, National Association,
as Administrative Agent
MAC D 1109-019
1525 West W.T. Harris Blvd.
Charlotte, North Carolina 28262
Attention: Syndication Agency Services
Ladies and Gentlemen:
This Notice of Prepayment is delivered to you pursuant to Section [2.4(c)] [4.4(a)] of the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
1. The Borrower hereby provides notice to the Administrative Agent that it shall repay the following [Base Rate Loans] and/or [LIBOR Rate Loans]: . (Complete with an amount in accordance with Section 2.4 or Section 4.4 of the Credit Agreement.)
2. The Loan(s) to be prepaid consist of: [check each applicable box]
☐ | a Swingline Loan |
☐ | a Revolving Credit Loan |
☐ | the Initial Term Loan |
☐ | an Incremental Term Loan |
☐ | an Extended Term Loan |
☐ | a Refinancing Term Loan |
3. The Borrower shall repay the above-referenced Loans on the following Business Day: . (Complete with a date no earlier than (i) the same Business Day as of the date of this Notice of Prepayment with respect to any Swingline Loan or Base Rate Loan and (ii) three (3) Business Days subsequent to date of this Notice of Prepayment with respect to any LIBOR Rate Loan.)
[4. This Notice of Prepayment is contingent upon . (Complete in accordance with Section 2.4(c) of the Credit Agreement).]1
[Signature Page Follows]
1 | Notice of Prepayment may be revoked if such condition is not satisfied. |
IN WITNESS WHEREOF, the undersigned has executed this Notice of Prepayment as of the day and year first written above.
SWITCH, LTD. | ||
By: |
| |
Name: |
| |
Title: |
|
EXHIBIT E
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF NOTICE OF CONVERSION/CONTINUATION
NOTICE OF CONVERSION/CONTINUATION
Dated as of:
Wells Fargo Bank, National Association,
as Administrative Agent
MAC D 1109-019
1525 West W.T. Harris Blvd.
Charlotte, North Carolina 28262
Attention: Syndication Agency Services
Ladies and Gentlemen:
This irrevocable Notice of Conversion/Continuation (this Notice) is delivered to you pursuant to Section 5.2 of the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
1. The Loan to which this Notice relates is [a Revolving Credit Loan] [the Initial Term Loan] [an Incremental Term Loan] [an Extended Term Loan] [a Refinancing Term Loan]. (Delete as applicable.)
2. This Notice is submitted for the purpose of: (Check one and complete applicable information in accordance with the Credit Agreement.)
☐ | Converting all or a portion of a Base Rate Loan into a LIBOR Rate Loan |
Outstanding principal balance: |
$ | |||
Principal amount to be converted: |
$ | |||
Requested effective date of conversion: |
||||
|
|
|||
Requested new Interest Period: |
||||
|
|
☐ | Converting all or a portion of a LIBOR Rate Loan into a Base Rate Loan |
Outstanding principal balance: |
$ | |||
Principal amount to be converted: |
$ | |||
Last day of the current Interest Period: |
||||
|
|
|||
Requested effective date of conversion: |
||||
|
|
☐ | Continuing all or a portion of a LIBOR Rate Loan as a LIBOR Rate Loan |
Outstanding principal balance: |
$ | |||
Principal amount to be continued: |
$ | |||
Last day of the current Interest Period: |
$ | |||
Requested effective date of continuation: |
||||
|
|
|||
Requested new Interest Period: |
||||
|
|
3. The aggregate principal amount of all Loans and L/C Obligations outstanding as of the date hereof does not exceed the maximum amount permitted to be outstanding pursuant to the terms of the Credit Agreement.
[Signature Page Follows]
IN WITNESS WHEREOF, the undersigned has executed this Notice of Conversion/Continuation as of the day and year first written above.
SWITCH, LTD. | ||
By: |
| |
Name: |
| |
Title: |
|
EXHIBIT F
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF OFFICERS COMPLIANCE CERTIFICATE
OFFICERS COMPLIANCE CERTIFICATE
Dated as of:
The undersigned, on behalf of Switch, Ltd., a Nevada limited liability company (the Borrower), hereby certifies, solely in [his][her] capacity as [Chief Executive Officer][Chief Financial Officer][Treasurer][Controller] of the Borrower, and not in [his][her] individual or personal capacity and without personal liability, to the Administrative Agent and the Lenders, each as defined in the Credit Agreement referred to below, as follows:
1. This certificate is delivered to you pursuant to Section 8.2 of the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among the Borrower, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
2. I have reviewed the financial statements of the Borrower and its Subsidiaries dated as of and for the period[s] then ended and such statements fairly present in all material respects the financial condition of the Borrower and its Subsidiaries on a Consolidated basis as of the dates indicated and the results of their operations and cash flows for the period[s] indicated; [subject to customary year-end adjustments and the absence of footnotes]1.
3. During the accounting period covered by the financial statements referred to in Paragraph 2 above, [no Default or Event of Default has occurred and no Default or Event of Default is continuing as of the date of this certificate], nor do I have any knowledge of the existence of any such condition or event as at the date of this certificate [except, if such condition or event existed or exists, describe the nature and period of existence thereof and what action the Borrower has taken, is taking and proposes to take with respect thereto].
4. As of the date of this certificate, the Applicable Margin, Available Amount and calculations determining such figures are set forth on the attached Schedule 1; the Borrower and its Subsidiaries are in compliance with the Financial Covenant as shown on such Schedule 1.
5. The attached Schedule 2 sets forth the names of each Immaterial Subsidiary as of the date of this certificate and each such Subsidiary listed on the attached Schedule 2 meets the requirements set forth in the definition of Immaterial Subsidiary in the Credit Agreement, as shown by the calculations set forth on the attached Schedule 2.
[Signature Page Follows]
1 | Clause not to be included with audited financials. |
WITNESS the following signature as of the day and year first written above.
SWITCH, LTD. |
By: |
Name: |
Title: |
Schedule 1
to
Officers Compliance Certificate
For the Quarter/Year ended (the Statement Date)
A. | Section 9.14 Consolidated Total Leverage Ratio and Applicable Margin |
(I) | Consolidated Total Indebtedness as of the Statement Date: | $ | ||||||||
(II) | Consolidated EBITDA for the fiscal quarter ending on or immediately prior to the Statement Date: | |||||||||
(1) | Consolidated Net Income for such period | $ | ||||||||
(2) | The following amounts, without duplication, to the extent deducted in determining Consolidated Net Income for such period: | $ | ||||||||
(a) | Income and franchise taxes payable during such period: | $ | ||||||||
(b) | Consolidated Interest Expense for such period: | $ | ||||||||
(c) | Amortization, depreciation and other non-cash charges (except to the extent that such non-cash charges are reserved for cash charges to be taken in the future), including non-cash compensation expenses for equity issuances for such period: | $ | ||||||||
(d) | Extraordinary losses (excluding extraordinary losses from discontinued operations) during such period: | $ | ||||||||
(e) | One-time charges by the Public Utilities Commission of Nevada pursuant to Borrowers and its Subsidiaries application to purchase energy, generation, transmission, distribution, capacity or ancillary services from electric resources providers pursuant to Nevada Revised Statutes chapter 704B during such period:1 | $ | ||||||||
(f) | Net after-tax losses on Asset Dispositions other than in the ordinary course of business during such period: | $ | ||||||||
(g) | Transaction Costs payable during such period: | $ |
1 | Such add-back shall be in an aggregate amount not to exceed $30,000,000; provided that no more than $10,000,000 of such charges may be taken after Fiscal Year 2017. |
(3) | Line A.(II)(2)(a) plus (b) plus (c) plus (d) plus (e) plus (f) plus (g): | $ | ||||||||
(4) | The following amounts, without duplication, to the extent added in computing Consolidated Net Income for such period: | |||||||||
(a) | Interest income during such period: | $ | ||||||||
(b) | Any extraordinary gains during such period: | $ | ||||||||
(c) | Net after-tax gains on Asset Dispositions other than in the ordinary course of business during such period: | $ | ||||||||
(d) | Non-cash gains or non-cash items increasing Consolidated Net Income during such period: | $ | ||||||||
(5) | Line A.(II)(4)(a) plus (b) plus (c) plus (d): | $ | ||||||||
(6) | Consolidated EBITDA (Line A.(II)(1) plus (3) minus (5)): | $ | ||||||||
(7) | Line A.(II)(6) multiplied by four (4): | $ | ||||||||
(III) | Line A.(I) divided by Line A.(II)(7): | to 1.00 | ||||||||
(IV) | Maximum permitted Consolidated Total Leverage Ratio as set forth in Section 9.14 of the Credit Agreement | 6.002 to 1.00 | ||||||||
(V) | In Compliance? Yes/No | |||||||||
(VI) |
Applicable Margin (Term Loan Facility) Pricing Level (see below) |
Pricing |
Consolidated Total Leverage Ratio |
LIBOR + | Base Rate + | |||||||
I |
Less than 4.00 to 1.00 | 2.50 | % | 1.50 | % | |||||
II |
Greater than or equal to 4.00 to 1.00 | 2.75 | % | 1.75 | % |
2 | To be updated in accordance with the periods described in Section 9.14 of the Credit Agreement. |
(VII) Applicable Margin (Revolving Credit Facility) Pricing Level (see below) __
Pricing |
Consolidated Total Leverage Ratio |
LIBOR + | Base Rate + | Commitment Fee |
||||||||||
I |
Less than or equal to 1.50 to 1.00 | 1.50 | % | 0.50 | % | 0.25 | % | |||||||
II |
Greater than 1.50 to 1.00, but less than or equal to 2.25 to 1.00 | 1.75 | % | 0.75 | % | 0.30 | % | |||||||
III |
Greater than 2.25 to 1.00, but less than or equal to 3.00 to 1.00 | 2.00 | % | 1.00 | % | 0.35 | % | |||||||
IV |
Greater than 3.00 to 1.00 but less than or equal to 4.00 to 1.00 | 2.25 | % | 1.25 | % | 0.40 | % | |||||||
V |
Greater than 4.00 to 1.00 | 2.50 | % | 1.50 | % | 0.45 | % |
B. | Available Amount |
(I) | An amount equal to, without duplication: | |||||||||
(1) | $50,000,000: | $50,000,000 | ||||||||
(2) | An amount, not less than zero in the aggregate, determined on a cumulative basis equal to the aggregate sum of: | |||||||||
(a) | Excess Cash Flow for each Excess Cash Flow Period ending after the Closing Date: | $ | ||||||||
(b) | 100% minus the ECF Percentage for such Excess Cash Flow Period: | _________% | ||||||||
(c) | Line B.(I)(2)(a) multiplied by (b): | $ | ||||||||
(3) | In each case to the extent such amounts are received by the Borrower or any Subsidiary during the period from the Closing Date through and including the Statement Date:3 | |||||||||
(a) | the Net Cash Proceeds of any issuance of Qualified Equity Interests of the Borrower: | $ | ||||||||
(b) | cash contributions: | $ | ||||||||
(c) | the fair market value, as reasonably determined by the Borrower, of Cash Equivalents, marketable securities or other property, in each case, received as a capital contribution as common Equity Interests: | $ | ||||||||
(d) | Line B.(I)(3)(a) plus (b) plus (c): | $ |
3 | Not to include (1) the proceeds of an IPO or (2) the proceeds of capital contributions or issuances of Qualified Equity Interests to the extent specifically and contemporaneously utilized in connection with other transactions permitted pursuant to the Credit Agreement. |
(4) | The net cash proceeds received by the Borrower or any Subsidiary during the period from the Closing Date through and including the Statement Date in connection with: | |||||||||||
(a) | cash returns, cash profits, cash distributions and similar cash amounts, including cash principal repayments of loans, in each case received in respect of any Investment originally made using the Available Amount after the Closing Date: | $ | ||||||||||
(b) | sales of Investments that were originally made using the Available Amount (in each case, in an amount not to exceed the original amount of such Investment): | $ | ||||||||||
(c) | Line B.(I)(4)(a) plus (b): | $ | ||||||||||
(5) | The aggregate amount of Retained Declined Proceeds during such period: | $ | ||||||||||
(II) | the sum of, without duplication, all usage of the Available Amount pursuant to Sections 9.3(m), 9.6(f) and 9.9(b)(iv) of the Credit Agreement on or prior to the Statement Date: | $ | ||||||||||
(III) | Available Amount: Line B(I)(1) plus (2)(c) plus (3)(d) plus (4)(c) plus (5) minus B.(II): | $ |
Schedule 2
to
Officers Compliance Certificate
[to be attached]
EXHIBIT G
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF ASSIGNMENT AND ASSUMPTION
ASSIGNMENT AND ASSUMPTION
This Assignment and Assumption (the Assignment and Assumption) is dated as of the Effective Date set forth below and is entered into by and between [INSERT NAME OF ASSIGNOR] (the Assignor) and the parties identified on the Schedules hereto and [the] [each]1 Assignee identified on the Schedules hereto as Assignee or as Assignees (collectively, the Assignees and each, an Assignee). [It is understood and agreed that the rights and obligations of the Assignees2 hereunder are several and not joint.]3 Capitalized terms used but not defined herein shall have the meanings given to them in the Credit Agreement identified below (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), receipt of a copy of which is hereby acknowledged by [the] [each] Assignee. The Standard Terms and Conditions set forth in Annex 1 attached hereto are hereby agreed to and incorporated herein by reference and made a part of this Assignment and Assumption as if set forth herein in full.
For an agreed consideration, the Assignor hereby irrevocably sells and assigns to the [Assignee] [respective Assignees], and [the] [each] Assignee hereby irrevocably purchases and assumes from the Assignor, subject to and in accordance with the Standard Terms and Conditions and the Credit Agreement, as of the Effective Date inserted by the Administrative Agent as contemplated below (i) all of the Assignors rights and obligations in its capacity as a Lender under the Credit Agreement and any other documents or instruments delivered pursuant thereto to the extent related to the amount and percentage interest identified below of all of such outstanding rights and obligations of the Assignor under the respective facilities identified below (including without limitation any letters of credit, guarantees, and swingline loans included in such facilities) and (ii) to the extent permitted to be assigned under Applicable Law, all claims, suits, causes of action and any other right of the Assignor (in its capacity as a Lender) against any Person, whether known or unknown, arising under or in connection with the Credit Agreement, any other documents or instruments delivered pursuant thereto or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to clause (i) above (the rights and obligations sold and assigned to [the] [any] Assignee pursuant to clauses (i) and (ii) above being referred to herein collectively as, [the] [an] Assigned Interest). Each such sale and assignment is without recourse to the Assignor and, except as expressly provided in this Assignment and Assumption, without representation or warranty by the Assignor.
1. | Assignor: | [INSERT NAME OF ASSIGNOR] | ||
2. | Assignee(s): | See Schedules attached hereto | ||
3. | Borrower: | Switch, Ltd. | ||
4. | Administrative Agent: | Wells Fargo Bank, National Association, as the administrative agent under the Credit Agreement |
1 | For bracketed language here and elsewhere in this form relating to the Assignee(s), if the assignment is to a single Assignee, choose the first bracketed language. If the assignment is to multiple Assignees, choose the second bracketed language. |
2 | Select as appropriate. |
3 | Include bracketed language if there are multiple Assignees. |
5. | Credit Agreement: | The Amended and Restated Credit Agreement dated as of June 27, 2017 among Switch, Ltd., as Borrower, the Lenders party thereto, and Wells Fargo Bank, National Association, as Administrative Agent (as amended, restated, supplemented or otherwise modified) | ||
6. | Assigned Interest: | See Schedules attached hereto | ||
[7. | Trade Date: | ______________]4 |
[Remainder of Page Intentionally Left Blank]
4 | To be completed if the Assignor and the Assignees intend that the minimum assignment amount is to be determined as of the Trade Date. |
Effective Date: _____________ ___, 2____ [TO BE INSERTED BY THE ADMINISTRATIVE AGENT AND WHICH SHALL BE THE EFFECTIVE DATE OF RECORDATION OF TRANSFER IN THE REGISTER THEREFOR]
The terms set forth in this Assignment and Assumption are hereby agreed to:
ASSIGNOR |
[NAME OF ASSIGNOR] |
By: |
Name: |
Title: |
ASSIGNEES |
See Schedules attached hereto |
[Consented to and]5 Accepted: |
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent[, Issuing Lender and Swingline Lender] |
By: |
Name: |
Title: |
[Consented to:]6 |
SWITCH, LTD. |
By: |
Name: |
Title: |
5 | To be added only if the consent of the Administrative Agent and/or the Swingline Lender and Issuing Lender is required by the terms of the Credit Agreement. |
6 | To be added only if the consent of the Borrower is required by the terms of the Credit Agreement. |
SCHEDULE 1
To Assignment and Assumption
By its execution of this Schedule, the Assignee identified on the signature block below agrees to the terms set forth in the attached Assignment and Assumption.
Assigned Interests:
Facility Assigned1 |
Aggregate Amount of Commitment/ Loans for all Lenders2 |
Amount of Commitment/ Loans Assigned3 |
Percentage Assigned of Commitment/ Loans4 |
CUSIP Number | ||||||||||||
$ | $ | % | ||||||||||||||
$ | $ | % | ||||||||||||||
$ | $ | % |
[NAME OF ASSIGNEE]5 |
[and is an Affiliate/Approved Fund of [identify Lender]6] |
By: |
Name: |
Title: |
1 | Fill in the appropriate terminology for the types of facilities under the Credit Agreement that are being assigned under this Agreement (e.g. Revolving Credit Commitment, Term Loan Commitment, etc.) |
2 | Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. |
3 | Amount to be adjusted by the counterparties to take into account any payments or prepayments made between the Trade Date and the Effective Date. |
4 | Set forth, to at least 9 decimals, as a percentage of the Commitment/Loans of all Lenders thereunder. |
5 | Add additional signature blocks, as needed. |
6 | Select as appropriate. |
ANNEX 1
to Assignment and Assumption
STANDARD TERMS AND CONDITIONS FOR
ASSIGNMENT AND ASSUMPTION
1. Representations and Warranties.
1.1 Assignor. The Assignor (a) represents and warrants that (i) it is the legal and beneficial owner of [the] [the relevant] Assigned Interest, (ii) [the] [such] Assigned Interest is free and clear of any lien, encumbrance or other adverse claim, (iii) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and (iv) it is [not] a Defaulting Lender; and (b) assumes no responsibility with respect to (i) any statements, warranties or representations made in or in connection with the Credit Agreement or any other Loan Document, (ii) the execution, legality, validity, enforceability, genuineness, sufficiency or value of the Loan Documents or any collateral thereunder, (iii) the financial condition of the Borrower, any of its Subsidiaries or Affiliates or any other Person obligated in respect of any Loan Document or (iv) the performance or observance by the Borrower, any of its Subsidiaries or Affiliates or any other Person of any of their respective obligations under any Loan Document.
1.2. Assignee[s]. [The] [Each] Assignee (a) represents and warrants that (i) it has full power and authority, and has taken all action necessary, to execute and deliver this Assignment and Assumption and to consummate the transactions contemplated hereby and to become a Lender under the Credit Agreement, (ii) it meets the requirements of an Eligible Assignee under the Credit Agreement (subject to such consents, if any, as may be required under Section 12.9(b)(iii) of the Credit Agreement), (iii) from and after the Effective Date, it shall be bound by the provisions of the Credit Agreement as a Lender thereunder and, to the extent of [the] [the relevant] Assigned Interest, shall have the obligations of a Lender thereunder, (iv) it is sophisticated with respect to decisions to acquire assets of the type represented by the Assigned Interest and either it, or the Person exercising discretion in making its decision to acquire [the] [such] Assigned Interest, is experienced in acquiring assets of such type, (v) it has received a copy of the Credit Agreement, and has received or has been accorded the opportunity to receive copies of the most recent financial statements delivered pursuant to [Section 6.1] [Section 8.1]1 thereof, as applicable, and such other documents and information as it deems appropriate to make its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the] [such] Assigned Interest, (vi) it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Assignment and Assumption and to purchase [the] [such] Assigned Interest, and (vii) if it is a Foreign Lender, attached to the Assignment and Assumption is any documentation required to be delivered by it pursuant to the terms of the Credit Agreement, duly completed and executed by [the] [such] Assignee; and (b) agrees that (i) it will, independently and without reliance upon the Administrative Agent, [the] [any] Assignor or any other Lender, and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under the Loan Documents, and (ii) it will perform in accordance with their terms all of the obligations which by the terms of the Loan Documents are required to be performed by it as a Lender.
1 | Update as necessary to refer to appropriate Financial Statement delivery Section in Credit Agreement. |
2. Payments. From and after the Effective Date, the Administrative Agent shall make all payments in respect of [the] [each] Assigned Interest (including payments of principal, interest, fees and other amounts) to [the] [the relevant] Assignor for amounts which have accrued to but excluding the Effective Date and to [the] [the relevant] Assignee for amounts which have accrued from and after the Effective Date.
3. General Provisions. This Assignment and Assumption shall be binding upon, and inure to the benefit of, the parties hereto and their respective successors and assigns. This Assignment and Assumption may be executed in any number of counterparts, which together shall constitute one instrument. Delivery of an executed counterpart of a signature page of this Assignment and Assumption by telecopy shall be effective as delivery of a manually executed counterpart of this Assignment and Assumption. This Assignment and Assumption shall be governed by, and construed in accordance with, the law of the State of New York.
EXHIBIT H-1
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF U.S. TAX COMPLIANCE CERTIFICATE
(NON-PARTNERSHIP FOREIGN LENDERS)
U.S. TAX COMPLIANCE CERTIFICATE
(For Foreign Lenders That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the lenders who are or may become a party thereto, as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
Pursuant to the provisions of Section 5.11 of the Credit Agreement, the undersigned hereby certifies that (a) it is the sole record and beneficial owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (b) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (c) it is not a ten percent (10%) shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code and (d) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.
The undersigned has furnished the Administrative Agent and the Borrower with a certificate of its non-U.S. Person status on IRS Form W-8BEN-E. By executing this certificate, the undersigned agrees that (a) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Administrative Agent and (b) the undersigned shall have at all times furnished the Borrower and the Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two (2) calendar years preceding such payments.
[NAME OF LENDER] | ||
By: |
| |
Name: | ||
Title: |
Date: ________ __, 20__
EXHIBIT H-2
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF U.S. TAX COMPLIANCE CERTIFICATE
(NON-PARTNERSHIP FOREIGN PARTICIPANTS)
U.S. TAX COMPLIANCE CERTIFICATE
(For Foreign Participants That Are Not Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the lenders who are or may become party a thereto, as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
Pursuant to the provisions of Section 5.11 of the Credit Agreement, the undersigned hereby certifies that (a) it is the sole record and beneficial owner of the participation in respect of which it is providing this certificate, (b) it is not a bank within the meaning of Section 881(c)(3)(A) of the Code, (c) it is not a ten percent (10%) shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code and (d) it is not a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.
The undersigned has furnished its participating Lender with a certificate of its non-U.S. Person status on IRS Form W-8BEN-E. By executing this certificate, the undersigned agrees that (a) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender in writing and (b) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two (2) calendar years preceding such payments.
[NAME OF PARTICIPANT] | ||
By: |
| |
Name: | ||
Title: |
Date: ________ __, 20__
EXHIBIT H-3
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF U.S. TAX COMPLIANCE CERTIFICATE
(FOREIGN PARTICIPANT PARTNERSHIPS)
U.S. TAX COMPLIANCE CERTIFICATE
(For Foreign Participants That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the lenders who are or may become party thereto, as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
Pursuant to the provisions of Section 5.11 of the Credit Agreement, the undersigned hereby certifies that (a) it is the sole record owner of the participation in respect of which it is providing this certificate, (b) its direct or indirect partners/members are the sole beneficial owners of such participation, (c) with respect to such participation, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (d) none of its direct or indirect partners/members is a ten percent (10%) shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code and (e) none of its direct or indirect partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.
The undersigned has furnished its participating Lender with IRS Form W-8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (a) an IRS Form W-8BEN-E or (b) an IRS Form W-8IMY accompanied by an IRS Form W-8BEN-E from each of such partners/members beneficial owners that is claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (i) if the information provided on this certificate changes, the undersigned shall promptly so inform such Lender and (ii) the undersigned shall have at all times furnished such Lender with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two (2) calendar years preceding such payments.
[NAME OF PARTICIPANT] | ||
By: |
| |
Name: | ||
Title: |
Date: ________ __, 20__
EXHIBIT H-4
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF U.S. TAX COMPLIANCE CERTIFICATE
(FOREIGN LENDER PARTNERSHIPS)
U.S. TAX COMPLIANCE CERTIFICATE
(For Foreign Lenders That Are Partnerships For U.S. Federal Income Tax Purposes)
Reference is hereby made to the Amended and Restated Credit Agreement dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among Switch, Ltd., a Nevada limited liability company (the Borrower), the lenders who are or may become party thereto, as Lenders, and Wells Fargo Bank, National Association, as Administrative Agent. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Credit Agreement.
Pursuant to the provisions of Section 5.11 of the Credit Agreement, the undersigned hereby certifies that (a) it is the sole record owner of the Loan(s) (as well as any Note(s) evidencing such Loan(s)) in respect of which it is providing this certificate, (b) its direct or indirect partners/members are the sole beneficial owners of such Loan(s) (as well as any Note(s) evidencing such Loan(s)), (c) with respect to the extension of credit pursuant to the Credit Agreement or any other Loan Document, neither the undersigned nor any of its direct or indirect partners/members is a bank extending credit pursuant to a loan agreement entered into in the ordinary course of its trade or business within the meaning of Section 881(c)(3)(A) of the Code, (d) none of its direct or indirect partners/members is a ten percent (10%) shareholder of the Borrower within the meaning of Section 881(c)(3)(B) of the Code and (e) none of its direct or indirect partners/members is a controlled foreign corporation related to the Borrower as described in Section 881(c)(3)(C) of the Code.
The undersigned has furnished the Administrative Agent and the Borrower with IRS Form W-8IMY accompanied by one of the following forms from each of its partners/members that is claiming the portfolio interest exemption: (a) an IRS Form W-8BEN-E or (b) an IRS Form W-8IMY accompanied by an IRS Form W-8BEN-E from each of such partners/members beneficial owners that is claiming the portfolio interest exemption. By executing this certificate, the undersigned agrees that (i) if the information provided on this certificate changes, the undersigned shall promptly so inform the Borrower and the Administrative Agent and (ii) the undersigned shall have at all times furnished the Borrower and the Administrative Agent with a properly completed and currently effective certificate in either the calendar year in which each payment is to be made to the undersigned, or in either of the two (2) calendar years preceding such payments.
[NAME OF LENDER] | ||
By: |
| |
Name: | ||
Title: |
Date: ________ __, 20__
EXHIBIT I
to
Amended and Restated Credit Agreement
dated as of June 27, 2017
by and among
Switch, Ltd.,
as Borrower,
the lenders party thereto,
as Lenders,
and
Wells Fargo Bank, National Association,
as Administrative Agent
FORM OF AUCTION PROCEDURES
AUCTION PROCEDURES
This Exhibit I is intended to summarize certain basic terms of the Auction Procedures pursuant to and in accordance with the terms and conditions of Section 4.5 of that certain Amended and Restated Credit Agreement, dated as of June 27, 2017 (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement) by and among the Borrower, the Lenders party thereto and Wells Fargo Bank, National Association, as Administrative Agent, of which this Exhibit I is a part. This Exhibit I is not intended to be a definitive statement of all of the terms and conditions of an Auction, the definitive terms and conditions for which shall be set forth in the applicable offering document. Capitalized terms not otherwise defined in this Exhibit I have the meanings assigned to them in the Credit Agreement.
(a) Notice Procedures. In connection with an Auction, the Borrower will provide notification to the Auction Manager (for distribution to the relevant Lenders) of the Term Loans that will be the subject of the Auction (an Auction Notice). Each Auction Notice shall be in a form reasonably acceptable to the Auction Manager and shall (i) specify the maximum aggregate principal amount of the Term Loans subject to the Auction, in a minimum amount of $10,000,000 and whole increments of $1,000,000 in excess thereof (or, in any case, such lesser amount as is otherwise reasonably acceptable to the Auction Manager and the Administrative Agent) (the Auction Amount), (ii) specify the discount to par, which may be a range (the Discount Range) of percentages of the par principal amount of the Term Loans subject to such Auction, that represents the range of purchase prices that the Borrower would be willing to accept in the Auction, (iii) be extended, at the sole discretion of the Borrower, to (x) each Lender and/or (y) each Lender with respect to any Term Loans on an individual Class basis and (iv) remain outstanding through the Auction Response Date (as defined below). The Auction Manager will promptly provide each appropriate Lender with a copy of such Auction Notice and a form of the Return Bid (as defined below) to be submitted by a responding Lender to the Auction Manager (or its delegate) by no later than 5:00 p.m. on the date specified in such Auction Notice (or such later date as the Borrower may agree to extend with the reasonable consent of the Auction Manager and the Administrative Agent) (the Auction Response Date).
(b) Reply Procedures. In connection with any Auction, each Lender holding the relevant Term Loans subject to such Auction may, in its sole discretion, participate in such Auction and may provide the Auction Manager with a notice of participation (the Return Bid) which shall be in a form reasonably acceptable to the Auction Manager, and shall specify (i) a discount to par (that must be expressed as a price at which it is willing to sell all or any portion of such Term Loans) (the Reply Price), which (when expressed as a percentage of the par principal amount of such Term Loans) must be within the Discount Range, and (ii) a principal amount of such Term Loans, which must be in whole increments of $1,000,000 (or, in any case, such lesser amount as is specified in the Auction Notice) (the Reply Amount). A Lender may avoid the minimum amount condition specified in clause (ii) of the preceding sentence solely when submitting a Reply Amount equal to the Lenders entire remaining amount of such Term Loans. Lenders may only submit one Return Bid per Auction but each Return Bid may contain up to three bids only one of which may result in a Qualifying Bid (as defined below). In addition to the Return Bid, the participating Lender must execute and deliver, to be held in escrow by the Auction Manager, an Assignment and Assumption with the Dollar amount of the Term Loans to be assigned to be left in blank, which amount shall be completed by the Auction Manager in accordance with the final determination of such Lenders Qualifying Bid pursuant to clause (c) below. Any Lender whose Return Bid is not received by the Auction Manager by the Auction Response Date shall be deemed to have declined to participate in the relevant Auction with respect to all of its Term Loans.
(c) Acceptance Procedures. Based on the Reply Prices and Reply Amounts received by the Auction Manager prior to the applicable Auction Response Date, the Auction Manager, in consultation with the Borrower, will determine the applicable price (the Applicable Price) for the Auction, which will
be the lowest Reply Price for which the Borrower can complete the Auction at the Auction Amount; provided that, in the event that the Reply Amounts are insufficient to allow the Borrower to complete a purchase of the entire Auction Amount (any such Auction, a Failed Auction), the Borrower shall either, at its election, (i) withdraw the Auction or (ii) complete the Auction at an Applicable Price equal to the highest Reply Price sufficient to complete a purchase of the entire Auction Amount. The Borrower shall purchase the relevant Term Loans (or the respective portions thereof) from each Lender with a Reply Price that is equal to or lower than the Applicable Price (Qualifying Bids) at the Applicable Price; provided that if the aggregate proceeds required to purchase all Term Loans subject to Qualifying Bids would exceed the Auction Amount for such Auction, the Borrower shall purchase such Term Loans at the Applicable Price ratably based on the principal amounts of such Qualifying Bids (subject to rounding requirements specified by the Auction Manager in its discretion). If a Lender has submitted a Return Bid containing multiple bids at different Reply Prices, only the bid with the lowest Reply Price that is equal to or less than the Applicable Price will be deemed to be the Qualifying Bid of such Lender (e.g., a Reply Price of $100 with a discount to par of 1.0%, when compared to an Applicable Price of $100 with a 2.0% discount to par, will not be deemed to be a Qualifying Bid, while, however, a Reply Price of $100 with a discount to par of 2.50% would be deemed to be a Qualifying Bid). The Auction Manager shall promptly, and in any case within five Business Days following the Auction Response Date with respect to an Auction, notify (I) the Borrower of the respective Lenders responses to such solicitation, the effective date of the purchase of Term Loans pursuant to such Auction, the Applicable Price, and the aggregate principal amount of the Term Loans and the tranches thereof to be purchased pursuant to such Auction, (II) each participating Lender of the effective date of the purchase of Term Loans pursuant to such Auction, the Applicable Price, and the aggregate principal amount and the tranches of Term Loans to be purchased at the Applicable Price on such date, (III) each participating Lender of the aggregate principal amount and the tranches of the Term Loans of such Lender to be purchased at the Applicable Price on such date and (IV) if applicable, each participating Lender of any rounding and/or proration pursuant to the second preceding sentence. Each determination by the Auction Manager of the amounts stated in the foregoing notices to the Borrower and Lenders shall be conclusive and binding for all purposes absent manifest error.
(d) Additional Procedures.
(i) Once initiated by an Auction Notice, the Borrower may not withdraw an Auction other than a Failed Auction. Furthermore, in connection with any Auction, upon submission by a Lender of a Qualifying Bid, such Lender will be obligated to sell the entirety or its allocable portion of the Reply Amount, as the case may be, at the Applicable Price.
(ii) Any Return Bid (including any bids specified therein) delivered to the Auction Manager may not be withdrawn, modified, revoked, terminated or cancelled by a Lender, however, an Auction may become void if the conditions set forth in Section 4.5 of the Credit Agreement are not met.
(iii) To the extent not expressly provided for herein, each purchase of Term Loans pursuant to an Auction shall be consummated pursuant to procedures consistent with the provisions in this definition, established by the Auction Manager acting in its reasonable discretion and as reasonably agreed by the Borrower.
(iv) In connection with any Auction, the Borrower and the Lenders acknowledge and agree that the Auction Manager may require as a condition to any Auction, the payment of customary fees and expenses by the Borrower in connection therewith as agreed between the Borrower and the Auction Manager.
(v) Notwithstanding anything in any Loan Document to the contrary, for purposes of this definition, each notice or other communication required to be delivered or otherwise provided to the Auction Manager (or its delegate) shall be deemed to have been given upon the Auction Managers (or its delegates) actual receipt during normal business hours of such notice or communication; provided that any notice or communication actually received outside of normal business hours shall be deemed to have been given as of the opening of business on the next Business Day.
(vi) The Borrower and the Lenders acknowledge and agree that the Auction Manager may perform any and all of its duties under this definition by itself or through any Affiliate of the Auction Manager and expressly consent to any such delegation of duties by the Auction Manager to such Affiliate and the performance of such delegated duties by such Affiliate. The exculpatory provisions pursuant to the Credit Agreement shall apply to each Affiliate of the Auction Manager and its respective activities in connection with any purchase of Term Loans provided for in this definition as well as activities of the Auction Manager.
None of the Administrative Agent, the Auction Manager or any of their respective affiliates assumes any responsibility for the accuracy or completeness of the information concerning the Borrower, the other Loan Parties, or any of their Affiliates (whether contained in an offering document or otherwise) or for any failure to disclose events that may have occurred and may affect the significance or accuracy of such information.
This Exhibit I shall not require the Borrower to initiate any Auction, nor shall any Lender be obligated to participate in any Auction.
None of the Administrative Agent, the Auction Manager, the Arrangers or any of their respective Related Parties makes any recommendation as to whether or not any Lender should participate in any Auction or as to any Reply Price or Reply Amount. Each Lender shall make its own independent decision as to whether to participate in any Auction and, if so, the principal amount and proposed price to be included in its Return Bid. Each Lender should consult its own attorneys, business advisors and tax advisors as to legal, business, tax and related matters concerning any proposed Auction.
EXHIBIT 10.6
AMENDED AND RESTATED COLLATERAL AGREEMENT
dated as of June 27, 2017
by and among
SWITCH, LTD.,
and
certain of its Subsidiaries,
as Grantors,
in favor of
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Administrative Agent
TABLE OF CONTENTS
PAGE | ||||||||
ARTICLE I | DEFINED TERMS | 1 | ||||||
Section 1.1 | Terms Defined in the Uniform Commercial Code |
1 | ||||||
Section 1.2 | Definitions |
2 | ||||||
Section 1.3 | Other Definitional Provisions |
6 | ||||||
ARTICLE II | SECURITY INTEREST | 6 | ||||||
Section 2.1 | Grant of Security Interest |
6 | ||||||
Section 2.2 | Partnership/LLC Interests |
7 | ||||||
Section 2.3 | Grantors Remain Liable |
7 | ||||||
Section 2.4 | Security Interest Absolute |
8 | ||||||
ARTICLE III | REPRESENTATIONS AND WARRANTIES | 9 | ||||||
Section 3.1 | Perfected First Priority Liens |
9 | ||||||
Section 3.2 | Title, No Other Liens; Conduct of Business |
10 | ||||||
Section 3.3 | State of Organization; Location of Inventory, Equipment and Fixtures; other Information |
10 | ||||||
Section 3.4 | Accounts; Receivables |
11 | ||||||
Section 3.5 | Chattel Paper |
11 | ||||||
Section 3.6 | Commercial Tort Claims |
11 | ||||||
Section 3.7 | Deposit Accounts and Securities Accounts |
11 | ||||||
Section 3.8 | Intellectual Property |
11 | ||||||
Section 3.9 | Inventory |
11 | ||||||
Section 3.10 | Investment Property; Partnership/LLC Interests |
12 | ||||||
Section 3.11 | Instruments |
12 | ||||||
ARTICLE IV | COVENANTS | 12 | ||||||
Section 4.1 | Maintenance of Perfected Security Interest; Further Information |
12 | ||||||
Section 4.2 | Maintenance of Insurance |
13 | ||||||
Section 4.3 | Changes in Locations; Changes in Name or Structure |
13 | ||||||
Section 4.4 | Required Notifications |
13 | ||||||
Section 4.5 | Delivery Covenants |
13 | ||||||
Section 4.6 | Control Covenants; Covenants as to Third Parties |
13 | ||||||
Section 4.7 | Filing Covenants |
14 | ||||||
Section 4.8 | Accounts |
14 | ||||||
Section 4.9 | Intellectual Property |
14 | ||||||
Section 4.10 | Investment Property; Partnership/LLC Interests |
15 | ||||||
Section 4.11 | Further Assurances |
16 | ||||||
ARTICLE V | REMEDIAL PROVISIONS | 16 | ||||||
Section 5.1 | General Remedies |
16 | ||||||
Section 5.2 | Specific Remedies |
17 | ||||||
Section 5.3 | Registration Rights |
19 | ||||||
Section 5.4 | Application of Proceeds |
19 | ||||||
Section 5.5 | Waiver, Deficiency |
20 | ||||||
ARTICLE VI | THE ADMINISTRATIVE AGENT | 20 | ||||||
Section 6.1 | Appointment of Administrative Agent as Attorney-In-Fact |
20 |
TABLE OF CONTENTS
(Continued)
PAGE | ||||||||
Section 6.2 |
Duty of Administrative Agent |
21 | ||||||
Section 6.3 |
Authority of Administrative Agent |
22 | ||||||
ARTICLE VII |
MISCELLANEOUS |
22 | ||||||
Section 7.1 |
Notices |
22 | ||||||
Section 7.2 |
Amendments, Waivers and Consents |
22 | ||||||
Section 7.3 |
Expenses, Indemnification, Waiver of Consequential Damages, etc. |
22 | ||||||
Section 7.4 |
Right of Setoff |
23 | ||||||
Section 7.5 |
Governing Law; Jurisdiction; Venue; Service of Process |
23 | ||||||
Section 7.6 |
Waiver of Jury Trial |
24 | ||||||
Section 7.7 |
Injunctive Relief |
24 | ||||||
Section 7.8 |
No Waiver By Course of Conduct; Cumulative Remedies |
24 | ||||||
Section 7.9 |
Successors and Assigns |
25 | ||||||
Section 7.10 |
Survival of Indemnities |
25 | ||||||
Section 7.11 |
Severability of Provisions |
25 | ||||||
Section 7.12 |
Counterparts |
25 | ||||||
Section 7.13 |
Integration |
25 | ||||||
Section 7.14 |
Advice of Counsel; No Strict Construction |
25 | ||||||
Section 7.15 |
Acknowledgements |
26 | ||||||
Section 7.16 |
Releases |
26 | ||||||
Section 7.17 |
Additional Grantors |
26 | ||||||
Section 7.18 |
All Powers Coupled With Interest |
26 | ||||||
Section 7.19 |
Secured Parties |
26 | ||||||
Section 7.20 |
Amendment and Restatement; No Novation |
27 |
SCHEDULES:
Schedule 3.3 | Exact Legal Name; Jurisdiction of Organization; Taxpayer Identification Number; Registered Organization Number; Mailing Address; Chief Executive Office and other Locations | |||
Schedule 3.6 | Commercial Tort Claims | |||
Schedule 3.7 | Deposit Accounts and Securities Accounts | |||
Schedule 3.8 | Intellectual Property | |||
Schedule 3.10 | Investment Property and Partnership/LLC Interests | |||
Schedule 3.11 | Instruments |
iii
AMENDED AND RESTATED COLLATERAL AGREEMENT (this Agreement), dated as of June 27, 2017, by and among SWITCH, LTD., a Nevada limited liability company (the Borrower), certain Domestic Subsidiaries of the Borrower as identified on the signature pages hereto and any Additional Grantor (as defined below) who may become party to this Agreement (such Domestic Subsidiaries and Additional Grantors, collectively with the Borrower, the Grantors), in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent (in such capacity, the Administrative Agent) for the benefit of the Secured Parties.
STATEMENT OF PURPOSE
Pursuant to the Amended and Restated Credit Agreement dated as of the date hereof by and among the Borrower, the Lenders from time to time party thereto and the Administrative Agent (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), the Lenders have agreed to make Extensions of Credit to the Borrower upon the terms and subject to the conditions set forth therein.
Pursuant to the terms of the Subsidiary Guaranty Agreement of even date herewith, certain Subsidiaries of the Borrower who are parties hereto have guaranteed the payment and performance of the Secured Obligations.
Certain of the Grantors and the Administrative Agent are parties to the Collateral Agreement, dated as of May 5, 2015, as amended or otherwise modified prior to the date hereof (the Existing Collateral Agreement).
The Grantors and the Administrative Agent desire to amend and restate the Existing Collateral Agreement as set forth herein.
It is a condition precedent to the obligation of the Lenders to make their respective Extensions of Credit to the Borrower under the Credit Agreement that the Grantors shall have executed and delivered this Agreement to the Administrative Agent, for the benefit of the Secured Parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Extensions of Credit to the Borrower thereunder, each Grantor hereby agrees with the Administrative Agent, for the benefit of the Secured Parties, as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.1 Terms Defined in the Uniform Commercial Code.
(a) The following terms when used in this Agreement shall have the meanings assigned to them in the UCC as in effect from time to time: Accession, Account, Account Debtor, Authenticate, Certificated Security, Chattel Paper; Commercial Tort Claim, Deposit Account, Documents, Electronic Chattel Paper, Equipment, Fixtures, General Intangible, Goods, Instrument, Inventory, Investment Company Security, Investment Property, Letter-of-Credit Rights, Proceeds, Record, Registered Organization, Securities Account, Securities Intermediary, Security, Supporting Obligation, Tangible Chattel Paper and Uncertificated Security.
(b) Terms defined in the UCC and not otherwise defined herein or in the Credit Agreement shall have the meaning assigned in the UCC as in effect from time to time.
(c) If any term used herein has a meaning assigned to it in the UCC and such term is defined in Article 9 of the UCC differently than how such term is defined in another Article of the UCC such term shall have the meaning assigned thereto in Article 9 of the UCC.
SECTION 1.2 Definitions. The following terms when used in this Agreement shall have the meanings assigned to them below:
Additional Grantor means each Domestic Subsidiary of the Borrower that hereafter becomes a Grantor pursuant to Section 7.17 (as required pursuant to Section 8.14 of the Credit Agreement).
Administrative Agent has the meaning assigned thereto in the Preamble to this Agreement.
Agreement has the meaning assigned thereto in the Preamble to this Agreement.
Assignment of Claims Act means the Assignment of Claims Act of 1940 (41 U.S.C. Section 15 and 31 U.S.C. Section 3727), including all regulations promulgated thereunder.
Borrower has the meaning assigned thereto in the Preamble to this Agreement.
Collateral has the meaning assigned thereto in Section 2.1.
Collateral Account has the meaning assigned thereto in Section 5.2.
Control means the manner in which control is achieved under the UCC with respect to any Collateral for which the UCC specifies a method of achieving control.
Controlled Depositary has the meaning assigned thereto in Section 4.6.
Controlled Intermediary has the meaning assigned thereto in Section 4.6.
Copyright License means any written agreement now or hereafter in existence naming any Grantor as licensor or licensee, including, without limitation, those listed in Schedule 3.8, granting any right under any Copyright, including, without limitation, the grant of rights to manufacture, distribute, exploit and sell materials derived from any Copyright.
Copyrights means, collectively, all of the following of any Grantor: (a) all copyrights, works protectable by copyright, copyright registrations and copyright applications anywhere in the world, including, without limitation, those listed on Schedule 3.8 hereto, (b) all reissues, extensions, continuations (in whole or in part) and renewals of any of the foregoing, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present and future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing throughout the world.
Credit Agreement has the meaning assigned thereto in the Statement of Purpose to this Agreement.
Effective Endorsement and Assignment means, with respect to any specific type of Collateral, all such endorsements, assignments and other instruments of transfer reasonably requested by the Administrative Agent with respect to the Security Interest granted in such Collateral, and in each case, in form and substance reasonably satisfactory to the Administrative Agent.
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Excluded Assets means, collectively, the following:
(a) any real property and leasehold interests in real property owned by a Grantor;
(b) any lease, license, contract, document, instrument or agreement to which any Grantor is a party, to the extent that the creation of a Lien on such assets would, under the express terms of such lease, license, contract, document, instrument or agreement, result in (i) a breach of the terms of, or constitute a default under, such lease license, contract, document, instrument or agreement, (ii) a violation of Applicable Law, (iii) the abandonment, invalidation or unenforceability of any material right, title or interest of any Grantor therein, or (iv) the creation of a right of termination in favor of, or require the consent of, to the extent not otherwise obtained, any other party thereto (other than the Grantors) or would give such party the right to otherwise adversely alter such Grantors right, title or interest thereunder (including upon giving of notice or the lapse of time or both); provided that, the foregoing exclusions shall not apply to the extent that (x) any such term has been waived or would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the UCC of any relevant jurisdiction or any other Applicable Law) and (y) immediately upon the ineffectiveness, lapse or termination of any such express term, such assets shall automatically cease to constitute Excluded Assets; provided further that this clause shall not affect, limit, restrict or impair the grant by any Grantor of a Security Interest in proceeds of or amounts due and payable to any Grantor or to become due and payable to any Grantor under any such lease, license, contract, document, instrument or agreement;
(c) any property that is subject to a purchase money Lien or a Capital Lease Obligation permitted under the Loan Documents if the agreement pursuant to which such Lien is granted (or the document providing for such Capital Lease Obligation) prohibits the creation by such Grantor of a Lien thereon or requires the consent of any Person, other than the Borrower and/or its Affiliates, which has not been obtained as a condition to the creation of any other Lien on such property; provided that, immediately upon receipt of such consent, such assets shall automatically cease to constitute Excluded Assets;
(d) Equity Interests in any Person that is not a Wholly-Owned Subsidiary of a Grantor, to the extent a Lien thereon is prohibited by or requires consent under the organizational documents of such Person (other than of a Grantor) and such consent has not been obtained or such Equity Interests constitute minority ownership of a non-United States entity;
(e) Equity Interests constituting a minority ownership in Planet3, Inc. (f/k/a STEAM Engine, Inc.), a Nevada corporation;
(f) any United States federal intent to use trademark applications to the extent that, and solely during the period that, the grant of a security interest therein would impair the validity or enforceability or render void or result in the cancellation of, any registration issued as a result of such intent to use trademark application under Applicable Law; provided that upon the submission and acceptance by the United States Patent and Trademark Office of an amendment to allege or a verified statement of use pursuant to 15 U.S.C. Section 1060, such intent to use trademark application shall constitute Collateral;
(g) any Equity Interests in or assets of (i) a direct or indirect Foreign Subsidiary or a CFC Holding Company, except that Excluded Assets shall not include 65% of the outstanding voting Equity Interests and 100% of the non-voting Equity Interests of each First Tier Foreign Subsidiary and each CFC Holding Company, (ii) a direct or indirect Domestic Subsidiary of a Foreign Subsidiary;
3
(h) Vehicles or other assets that are subject to certificates of title, except to the extent perfection of a security interest therein may be accomplished by filing of financing statements;
(i) any other property, to the extent the granting of a Lien therein is prohibited by contract (including Permitted Liens or otherwise permitted to be prohibited pursuant to Section 9.10 of the Credit Agreement) or Applicable Law (other than to the extent that such prohibition would be rendered ineffective pursuant to Sections 9-406, 9-407, 9-408, 9-409 or other applicable provisions of the UCC of any relevant jurisdiction or any other Applicable Law);
(j) any obligation or property of any kind due from, owed by or belonging to any Sanctioned Person; and
(k) any assets of any Grantor where the Administrative Agent and the Borrower determine that the cost of obtaining or perfecting a Lien in such assets is excessive in relation to the value afforded thereby.
Notwithstanding the foregoing, (x) Excluded Assets shall not include the Proceeds, products, substitutions or replacements of any Excluded Assets (except to the extent that such Proceeds, products, substitutions or replacements shall themselves constitute Excluded Assets) and (y) in the event that any Excluded Assets cease to constitute Excluded Assets, then immediately upon such property ceasing to constitute Excluded Assets for any reason, such property shall be deemed at all times from and after the date hereof to constitute Collateral without any further action hereunder.
Excluded Deposit Account means, collectively, (a) Deposit Accounts established solely for the purpose of funding payroll, payroll taxes and other compensation and benefits to employees, (b) Deposit Accounts that are zero balance accounts and (c) Deposit Accounts with amounts on deposit that, when aggregated with the amounts on deposit in all other Deposit Accounts for which control agreements have not been obtained (other than those specified in clauses (a) and (b)), do not exceed $5,000,000 at any time.
Excluded Securities Account means, collectively, (a) Securities Accounts established solely for the purpose of funding payroll, payroll taxes and other compensation and benefits to employees and (b) Securities Accounts with amounts on deposit that, when aggregated with the amounts on deposit in all other Securities Accounts for which control agreements have not been obtained (other than those specified in clause (a)), do not exceed $5,000,000 at any time.
Grantors has the meaning assigned thereto in the Preamble of this Agreement.
Intellectual Property means, collectively, all of the following of any Grantor: (a) all systems software and applications software, all documentation for such software, including, without limitation, user manuals, flowcharts, functional specifications, operations manuals, and all formulas, processes, ideas and know-how embodied in any of the foregoing, (b) concepts, discoveries, improvements and ideas, know-how, technology, reports, design information, trade secrets, practices, specifications, test procedures, maintenance manuals, research and development, (c) Patents and Patent Licenses, Copyrights and Copyright Licenses, Trademarks and Trademark Licenses, and (d) other licenses to use any of the items described in the foregoing clauses (a), (b), and (c).
4
Issuer means any issuer of any Investment Property or Partnership/LLC Interests (including, without limitation, any Issuer as defined in the UCC).
Partnership/LLC Agreement has the meaning assigned thereto in Section 2.2.
Partnership/LLC Interests means, with respect to any Grantor, the entire partnership interest, membership interest or limited liability company interest, as applicable, of such Grantor in each partnership, limited partnership or limited liability company owned thereby, including, without limitation, such Grantors capital account, its interest as a partner or member, as applicable, in the net cash flow, net profit and net loss, and items of income, gain, loss, deduction and credit of any such partnership, limited partnership or limited liability company, as applicable, such Grantors interest in all distributions made or to be made by any such partnership, limited partnership or limited liability company, as applicable, to such Grantor and all of the other economic rights, titles and interests of such Grantor as a partner or member, as applicable, of any such partnership, limited partnership or limited liability company, as applicable, whether set forth in the partnership agreement, membership agreement, limited liability company agreement or operating agreement, as applicable, of such partnership, limited partnership or limited liability company, as applicable, by separate agreement or otherwise.
Patent License means any written agreement now or hereafter in existence providing for the grant by or to any Grantor of any right to manufacture, use or sell any invention covered in whole or in part by a Patent, including, without limitation, any of the foregoing referred to in Schedule 3.8.
Patents means collectively, all of the following of any Grantor: (a) all patents, all inventions and patent applications anywhere in the world, including, without limitation, those listed on Schedule 3.8, (b) all reissues, extensions, continuations (in whole or in part) and renewals of any of the foregoing, (c) all income, royalties, damages or payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present or future infringements of any of the foregoing, (d) the right to sue for past, present and future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing throughout the world.
Restricted Securities Collateral has the meaning assigned thereto in Section 5.3.
SEC means the Securities and Exchange Commission, or any Governmental Authority succeeding to any of its principal functions.
Securities Act means the Securities Act of 1933, including all regulations promulgated thereunder.
Security Interests means the security interests granted pursuant to Article II, as well as all other security interests created or assigned as additional security for any of the Secured Obligations pursuant to the provisions of any Loan Document.
Trademark License means any written agreement now or hereafter in existence providing for the grant by or to any Grantor of any right to use any Trademark, including, without limitation, any of the foregoing referred to in Schedule 3.8.
Trademarks means, collectively, all of the following of any Grantor: (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, internet domain names, trade styles, service marks, logos, other business identifiers, whether registered or unregistered, all registrations and recordings thereof, and all applications in connection therewith (other than each
5
application to register any trademark or service mark prior to the filing under Applicable Law of a verified statement of use for such trademark or service mark) anywhere in the world, including, without limitation, those listed on Schedule 3.8, (b) all reissues, extensions, continuations (in whole or in part) and renewals of any of the foregoing, (c) all income, royalties, damages and payments now or hereafter due and/or payable under any of the foregoing or with respect to any of the foregoing, including, without limitation, damages or payments for past, present or future infringements of any of the foregoing, (d) the right to sue for past, present or future infringements of any of the foregoing and (e) all rights corresponding to any of the foregoing (including the goodwill) throughout the world.
Vehicles means all cars, trucks, trailers, construction and earth moving equipment and other vehicles covered by a certificate of title under any Applicable Law and which cannot be perfected under such Applicable Law unless the applicable security interest is noted on the face of the applicable certificate of title, and all tires and all other appurtenances to any of the foregoing. For the avoidance of doubt, the term Vehicle shall exclude Vessels.
Vessel means any watercraft or artificial contrivance used, or capable of being used, as a means of transportation on water (including any documented vessel as defined in 46 U.S.C. Section 106) or similar asset that is covered by a certificate of title under any Applicable Law and which cannot be perfected solely by a financing statement filed pursuant to the UCC and is not a Vehicle.
SECTION 1.3 Other Definitional Provisions.
(a) Terms defined in the Credit Agreement and not otherwise defined herein shall have the meaning assigned thereto in the Credit Agreement.
(b) The terms of Sections 1.2, 1.6, 1.7 and 12.14 of the Credit Agreement are incorporated herein by reference as if fully set forth herein; provided that references therein to Agreement shall mean this Agreement.
(c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Grantor, shall refer to such Grantors Collateral or the relevant part thereof.
ARTICLE II
SECURITY INTEREST
SECTION 2.1 Grant of Security Interest. Each Grantor hereby grants and pledges to the Administrative Agent, for the benefit of itself and the other Secured Parties, a continuing security interest in, all of such Grantors right, title and interest in the following property and such Grantors power to transfer rights in such property, whether now owned or at any time hereafter acquired by such Grantor or in which such Grantor now has or at any time in the future may acquire any right, title or interest, or the power to transfer rights therein, and wherever located or deemed located (collectively, the Collateral), as collateral security for the prompt and complete payment and performance when due (whether at the stated maturity, by acceleration or otherwise) of the Secured Obligations:
(a) all Accounts;
(b) all cash and currency;
(c) all Chattel Paper;
6
(d) all Commercial Tort Claims identified on Schedule 3.6;
(e) all Deposit Accounts;
(f) all Documents;
(g) all Equipment;
(h) all Fixtures;
(i) all General Intangibles;
(j) all Instruments;
(k) all Intellectual Property;
(l) all Inventory;
(m) all Investment Property;
(n) all Letter-of-Credit Rights;
(o) all other Goods not otherwise described above;
(p) all books and records pertaining to the Collateral; and
(q) to the extent not otherwise included, all Proceeds and products of any and all of the foregoing, all Accessions to any of the foregoing and all collateral security and Supporting Obligations given by any Person with respect to any of the foregoing;
provided, that (i) the term Collateral shall not include, and no Lien or security interest shall be granted or shall attach to, any Excluded Assets, (ii) the payment and performance of the Secured Obligations shall not be secured by any Secured Hedge Agreement between any Grantor and any Secured Party and (iii) this Agreement shall not to be construed as an assignment of any Intellectual Property.
SECTION 2.2 Partnership/LLC Interests. Subject to Section 7.16, each Grantor that is a party to any limited liability company agreement, operating agreement, membership agreement, partnership agreement or similar agreement relating to any Partnership/LLC Interests included in the Collateral (each, a Partnership/LLC Agreement) shall use commercially reasonable efforts to obtain the consent of each other party to such Partnership/LLC Agreement that is not a Grantor to the pledge by the Grantors of their Partnership/LLC Interests hereunder as necessary so that, upon the occurrence and during the continuance of an Event of Default, the Secured Parties or their respective designees shall have the right (but not the obligation) to be substituted for the applicable Grantor as a member, manager or partner under the applicable Partnership/LLC Agreement and the Secured Parties shall have all rights, powers and benefits of such Grantor as a member, manager or partner, as applicable, under such Partnership/LLC Agreement (which for the avoidance of doubt, such rights, powers and benefits of a substituted member shall include all voting and other rights and not merely the rights of an economic interest holder).
SECTION 2.3 Grantors Remain Liable. Anything herein to the contrary notwithstanding: (a) each Grantor shall remain liable to perform all of its duties and obligations under the contracts and agreements included in the Collateral to the same extent as if this Agreement had not been executed, (b) the exercise by the Administrative Agent or any other Secured Party of any of the rights hereunder shall
7
not release any Grantor from any of its duties or obligations under the contracts and agreements included in the Collateral, (c) the Administrative Agent and each other Secured Party shall not have any obligation or liability under the contracts and agreements included in the Collateral by reason of this Agreement, and shall not be obligated to perform any of the obligations or duties of any Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder, and (d) neither the Administrative Agent nor any other Secured Party shall have any liability in contract or tort for any Grantors acts or omissions.
SECTION 2.4 Security Interest Absolute.
(a) All rights of the Administrative Agent and the other Secured Parties and the Liens and Security Interests hereunder, and all of the Secured Obligations of the Grantors hereunder to the extent permitted by Applicable Law, shall be absolute and unconditional, irrespective of, and unaffected by:
(i) the genuineness, legality, validity, regularity, enforceability or any future amendment or modification of, or change in, or supplement to, the Credit Agreement, any other Loan Document, any Secured Hedge Agreement, any Secured Cash Management Agreement or any other agreement, document or instrument to which the Borrower, any Subsidiary Guarantor or any of their respective Subsidiaries or Affiliates is or may become a party (including any increase in the Secured Obligations resulting from any extension of additional credit or otherwise);
(ii) any extension or waiver of the time for performance by any Grantor or any other Person of, or compliance with, any term, covenant or agreement on its part to be performed or observed under a Loan Document, a Secured Cash Management Agreement or a Secured Hedge Agreement, or waiver of such performance or compliance or consent to a failure of, or departure from, such performance or compliance;
(iii) the taking and holding of security or collateral for the payment of the Secured Obligations or the sale, exchange, release, disposal of, or other dealing with, any property pledged, mortgaged or conveyed, or in which the Administrative Agent or the other Secured Parties have been granted a Lien, to secure any Indebtedness of any Grantor or any other guarantor to the Administrative Agent or the other Secured Parties;
(iv) the release of anyone who may be liable in any manner for the payment of any amounts owed by any Grantor to the Administrative Agent or any other Secured Party;
(v) any action under or in respect of the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement in the exercise of any remedy, power or privilege contained therein or available to any of them at law, in equity or otherwise, or waiver or refraining from exercising any such remedies, powers or privileges (including any manner of sale, disposition or any application of any sums by whomever paid or however realized to any Secured Obligations owing by any Grantor to the Administrative Agent or any other Secured Party in such manner as the Administrative Agent or any other Secured Party shall determine in its reasonable discretion);
(vi) the absence of any action to enforce this Agreement, any other Loan Document, any Secured Cash Management Agreement or Secured Hedge Agreement or the waiver or consent by the Administrative Agent or any other Secured Party with respect to any of the provisions of this Agreement, the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or Secured Hedge Agreement;
8
(vii) the existence, value or condition of, or failure to perfect its Lien against, any Collateral or any other security for or guaranty of the Secured Obligations or any action, or the absence of any action, by the Administrative Agent or any other Secured Party in respect of such security or guaranty (including, without limitation, the release of any such security or guaranty); and
(viii) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor.
(b) Each Grantor represents, warrants and agrees that the Secured Obligations and its obligations under this Agreement and the other Loan Documents to which it is a party are not and shall not be subject to any counterclaims, offsets or defenses of any kind (other than the defense of payment) against the Administrative Agent, the other Secured Parties or any other Grantor whether now existing or which may arise in the future.
(c) Each Grantor hereby agrees and acknowledges that the Secured Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Agreement, and all dealings among any of the Grantors, on the one hand, and the Administrative Agent and the other Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
To induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Secured Parties to make their respective Extensions of Credit to, and/or to enter into Secured Cash Management Agreements and/or Secured Hedge Agreements with, as applicable, the Borrower or another Credit Party (as the case may be), each Grantor hereby represents and warrants to the Administrative Agent and each other Secured Party that:
SECTION 3.1 Perfected First Priority Liens. Each financing statement naming any Grantor as a debtor and the Administrative Agent as secured party is in appropriate form for filing in the appropriate offices of the states specified on Schedule 3.3 (as such schedule shall be updated from time to time pursuant to Section 4.3) and contains an adequate description of the Collateral for purposes of perfecting a security interest in such Collateral to the extent that a security interest therein may be perfected by filing pursuant to the UCC. The Security Interests granted pursuant to this Agreement constitute valid and enforceable security interests in all of the Collateral in favor of the Administrative Agent, for the benefit of the Secured Parties, as collateral security for the Secured Obligations, subject to Permitted Liens. When the aforementioned financing statements shall have been filed in the offices specified in Schedule 3.3, the Security Interest will constitute a perfected security interest in all right, title and interest of the applicable Grantor named as debtor in such financing statement in the Collateral described therein, and the power to transfer rights in such Collateral, in each case to the extent that a security interest therein may be perfected by filing pursuant to the UCC prior to all other Liens and rights of others therein, except for Permitted Liens. When the applicable Controlled Depositary, the Administrative Agent and the applicable Grantor have Authenticated a record providing that the applicable Controlled Depositary will comply with instructions originated by the Administrative Agent directing disposition of funds in the Deposit Account subject to such record without any further consent by the applicable Grantor, the Security Interest will constitute a perfected security interest in all right, title and interest of the applicable Grantor in such Deposit Account, and the power to transfer rights in such Deposit Account, in each case prior to all other Liens and rights of others therein and subject to no adverse claims, except for Permitted
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Liens. When the applicable Controlled Intermediary, the Administrative Agent and the applicable Grantor have Authenticated a record providing that the applicable Controlled Intermediary will comply with instructions originated by the Administrative Agent directing disposition of funds in the Securities Account subject to such record without any further consent by the applicable Grantor, the Security Interest will constitute a perfected security interest in all right, title and interest of the applicable Grantor in such Securities Account, and the power to transfer rights in such Securities Account, in each case prior to all other Liens and rights of others therein and subject to no adverse claims. When the applicable Grantor shall have delivered any Instruments, Tangible Chattel Paper, money or Certificated Securities (together with an Effective Endorsement and Assignment in the case of Instruments and Certificated Securities) to the Administrative Agent, the Security Interest will constitute a perfected security interest in all right, title and interest of the applicable Grantor in such Instruments, Tangible Chattel Paper, money or Certificated Securities, and the power to transfer rights in such Instruments, Tangible Chattel Paper, money or Certificated Securities, prior to all other Liens and rights of others therein and subject to no adverse claims, except for Permitted Liens.
SECTION 3.2 Title, No Other Liens; Conduct of Business. Except for the Security Interests, such Grantor owns each item of the Collateral free and clear of any and all Liens or claims other than Permitted Liens. No Grantor has Authenticated any agreement authorizing any secured party thereunder to file a financing statement, except to perfect Permitted Liens. Except to the extent permitted by Section 4.6, no Collateral is in the possession of, or subject to Control by, any Person asserting any claim thereto or security interest therein, except that (a) the Administrative Agent, or its designee, may have possession or Control as contemplated hereby and (b) a depositary bank may, to the extent constituting a Permitted Lien, have Control of a Deposit Account owned by a Grantor at such depositary bank, subject to the terms of the applicable control agreement.
SECTION 3.3 State of Organization; Location of Inventory, Equipment and Fixtures; other Information.
(a) The exact legal name of such Grantor is set forth on Schedule 3.3 (as such schedule shall be updated from time to time pursuant to Section 4.3).
(b) Such Grantor is a Registered Organization organized under the laws of the state identified on Schedule 3.3 under such Grantors name (as such schedule shall be updated from time to time pursuant to Section 4.3). The taxpayer identification number and, to the extent applicable, Registered Organization number of such Grantor is set forth on Schedule 3.3 under such Grantors name (as such schedule shall be updated from time to time pursuant to Section 4.3).
(c) All Collateral consisting of Inventory, Equipment and Fixtures (whether now owned or hereafter acquired) is (or will be) located at the locations specified on Schedule 3.3, except (i) Inventory which is, in the ordinary course of business, in transit, (ii) Equipment and Inventory in the hands of employees, consultants or customers in the ordinary course of business, including, without limitation, computer equipment, (iii) Equipment out for repair, (iv) other Equipment and Inventory with an aggregate value less than $5,000,000 or (v) as otherwise permitted hereunder.
(d) The mailing address, principal place of business, chief executive office and office where such Grantor keeps its books and records relating to the Accounts, Documents, General Intangibles, Instruments and Investment Property in which it has any interest is located at the locations specified on Schedule 3.3 under such Grantors name (as such schedule shall be updated from time to time pursuant to Section 4.3). As of the Closing Date, no Grantor has any other places of business except those separately set forth on Schedule 3.3 under such Grantors name. As of the Closing Date, except as disclosed on Schedule 3.3 under such Grantors name, no Grantor has acquired assets with a value in excess of $1,000,000 from any Person, other than assets acquired in the ordinary course of such Grantors business from a Person engaged in the business of selling goods of such kind, during the past five (5) years.
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SECTION 3.4 Accounts; Receivables. To each Grantors knowledge, no Account Debtor has any defense, set-off, claim or counterclaim against any Grantor that can be asserted against the Administrative Agent, whether in any proceeding to enforce the Administrative Agents rights in the Accounts included in the Collateral, or otherwise, except for defenses, setoffs, claims or counterclaims that could not reasonably be expected, individually or in the aggregate, to materially adversely affect the value or collectability of the Accounts included in the Collateral, taken as a whole. None of the Grantors accounts receivables are, nor will any hereafter arising account receivable be, evidenced by a promissory note or other Instrument (other than a check) having a face amount in excess of $5,000,000 that has not been pledged to the Administrative Agent in accordance with the terms hereof.
SECTION 3.5 Chattel Paper. As of the date hereof, no Grantor holds any Chattel Paper in the ordinary course of its business.
SECTION 3.6 Commercial Tort Claims. As of the date hereof, all Commercial Tort Claims in excess of $5,000,000 owned by any Grantor are listed on Schedule 3.6 (as such schedule shall be updated from time to time pursuant to Section 4.4).
SECTION 3.7 Deposit Accounts and Securities Accounts. As of the date hereof, all Deposit Accounts (including, without limitation, cash management accounts that are Deposit Accounts and all Excluded Deposit Accounts), Securities Accounts (including, without limitation, cash management accounts that are Securities Accounts and all Excluded Securities Accounts) and lockboxes are listed on Schedule 3.7 (as such schedule shall be updated from time to time pursuant to Section 4.3 or Section 4.4)).
SECTION 3.8 Intellectual Property.
(a) As of the date hereof, all Copyright registrations, Copyright applications, issued Patents, Patent applications, Trademark registrations and Trademark applications owned by any Grantor in its own name are listed on Schedule 3.8 (as such schedule shall be updated from time to time pursuant to Section 4.9(c)).
(b) Except as set forth in Schedule 3.8 on the date hereof (as such schedule shall be updated from time to time pursuant to Section 4.9(c)), none of the Intellectual Property owned by any Grantor is the subject of any licensing or franchise agreement pursuant to which such Grantor is the licensor or franchisor, except as could not reasonably be expected to have a Material Adverse Effect.
SECTION 3.9 Inventory. Except as could not reasonably be expected to have a Material Adverse Effect, Collateral consisting of Inventory is of good and merchantable quality, free from any material defects. To the knowledge of such Grantor, none of such Inventory is subject to any licensing, Patent, Trademark, trade name or Copyright with any Person that restricts any Grantors ability to manufacture and/or sell such Inventory. The completion of the manufacturing process of such Inventory by a Person other than the applicable Grantor would be permitted under any contract to which such Grantor is a party or to which the Inventory is subject.
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SECTION 3.10 Investment Property; Partnership/LLC Interests.
(a) As of the date hereof, all Investment Property and all Partnership/LLC Interests owned by any Grantor are listed on Schedule 3.10 (as such schedule shall be updated from time to time pursuant to Section 4.3 or Section 4.4).
(b) All Investment Property and all Partnership/LLC Interests issued by any Issuer to any Grantor and included in the Collateral (i) have been duly and validly issued and, if applicable, are fully paid and nonassessable, (ii) are beneficially owned as of record by such Grantor and (iii) constitute all the issued and outstanding shares of all classes of the Equity Interests or Partnership/LLC Interests of such Issuer issued to such Grantor (other than any Equity Interests or Partnership/LLC Interests constituting Excluded Assets).
(c) None of the Partnership/LLC Interests (i) are dealt in or traded on a Securities exchange or in Securities markets, (ii) by their terms expressly provide that they are Securities governed by Article 8 of the UCC, (iii) are Investment Company Securities or (iv) are held in a Securities Account.
(d) No consent, approval or action by any other party, including, without limitation, any other party to the Partnership/LLC Agreement included in the Collateral or otherwise, shall be necessary to permit the Secured Parties to be substituted as a member, manager or partner thereunder and to receive the benefits of all rights of a member, manager or partner thereunder (including, without limitation, all voting rights and rights of an economic interest holder) in the exercise of their rights and remedies hereunder except for consents, approvals or actions that have been obtained, or taken, and are in full force and effect.
SECTION 3.11 Instruments. Except as set forth on Schedule 3.11, as of the date hereof, no Grantor holds any Instrument or is named a payee of any promissory note or other evidence of indebtedness in either case, having a face amount in excess of $5,000,000.
ARTICLE IV
COVENANTS
Until the Secured Obligations (other than contingent indemnity obligations not yet due) shall have been paid in full, all Letters of Credit have been terminated or expired (or been Cash Collateralized) and the Commitments terminated, unless consent has been obtained in the manner provided for in Section 7.2, each Grantor covenants and agrees that:
SECTION 4.1 Maintenance of Perfected Security Interest; Further Information.
(a) Such Grantor shall maintain the Security Interest created by this Agreement as a first priority perfected Security Interest (subject only to Permitted Liens) and shall defend such Security Interest against the claims and demands of all Persons whomsoever (other than the holders of Permitted Liens). Notwithstanding anything else in this Agreement to the contrary, no Grantor shall be required to take any actions in any jurisdiction outside of the United States to grant, create or perfect any Security Interest in the Collateral.
(b) Such Grantor will furnish to the Administrative Agent upon the reasonable request of the Administrative Agent, from time to time, statements and schedules further identifying and describing the Collateral of such Grantor and such other reports in connection therewith as the Administrative Agent or such Lender may reasonably request, all in reasonable detail.
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SECTION 4.2 Maintenance of Insurance. Such Grantor shall maintain insurance covering the Collateral in accordance with the provisions of Section 8.6 of the Credit Agreement.
SECTION 4.3 Changes in Locations; Changes in Name or Structure. No Grantor will, except upon five (5) Business Days prior written notice to the Administrative Agent (which time period may be reduced by the Administrative Agent in its sole discretion) and delivery to the Administrative Agent of (a) all additional financing statements (executed if necessary for any particular filing jurisdiction) and other instruments and documents reasonably requested by the Administrative Agent to maintain the validity, perfection and priority of the Security Interests and (b) a written supplement to the Schedules of this Agreement:
(i) change its jurisdiction of organization or the location of its chief executive office or principal place of business (or the location where any Grantor maintains its books and records relating to Accounts, Documents, General Intangibles, Instruments and Investment Property in which it has any interest) from that identified on Schedule 3.3; or
(ii) change its name, identity or organizational type to such an extent that any financing statement filed by the Administrative Agent in connection with this Agreement would become seriously misleading under the UCC.
SECTION 4.4 Required Notifications. Such Grantor shall promptly (a) notify the Administrative Agent, in writing, of: the acquisition or ownership by such Grantor of any (i) Commercial Tort Claim in excess of $5,000,000, (ii) Deposit Account (other than Excluded Deposit Accounts), (iii) Investment Property (other than Investment Property held in Excluded Securities Accounts) or (iv) the acquisition of any of the items set forth in Section 4.5 with a respective value in excess of the amounts set forth therein, in each case, after the date hereof and (b) in the case of an event described in clause (a) of this Section, deliver to the Administrative Agent a written supplement to Schedules of this Agreement.
SECTION 4.5 Delivery Covenants. Upon the request of the Administrative Agent, such Grantor will deliver and pledge to the Administrative Agent, for the benefit of the Secured Parties:
(a) all (i) Certificated Securities (other than those Certificated Securities evidencing Excluded Securities Accounts), (ii) Partnership/LLC Interests evidenced by a certificate, (iii) negotiable Documents, (iv) Tangible Chattel Paper owned or held by such Grantor, in each case, together with an Effective Endorsement and Assignment and (v) Supporting Obligations, as applicable, in each case, (x) with a value in excess of $5,000,000 and (y) unless such delivery and pledge has been waived in writing by the Administrative Agent; and
(b) all Instruments, together with an Effective Endorsement and Assignment, in each case, (x) with a value in excess of $5,000,000 and (y) unless such delivery and pledge has been waived in writing by the Administrative Agent; provided, that in no event shall the aggregate amount of all outstanding Instruments which have not been pledged and delivered to the Administrative Agent pursuant to this Section 4.5(b), together with an Effective Endorsement and Assignment, exceed $7,500,000.
SECTION 4.6 Control Covenants; Covenants as to Third Parties.
(a) Such Grantor shall instruct (and otherwise use its commercially reasonable efforts to cause) (i) each depositary bank (other than the Administrative Agent) holding a Deposit Account (other than Excluded Deposit Accounts) owned by such Grantor and (ii) each Securities Intermediary holding any Investment Property (other than Excluded Securities Accounts) owned by such Grantor, to execute and deliver a control agreement, sufficient to provide the Administrative Agent with Control of such
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Deposit Account or Investment Property and otherwise in form and substance reasonably satisfactory to the Administrative Agent (any such depositary bank executing and delivering any such control agreement, a Controlled Depositary, and any such Securities Intermediary executing and delivering any such control agreement, a Controlled Intermediary). All Deposit Accounts (other than Excluded Deposit Accounts) and all Investment Property (other than Excluded Securities Accounts) will be maintained with the Administrative Agent or with a Controlled Depositary or a Controlled Intermediary, as applicable.
(b) Upon the request of the Administrative Agent, such Grantor will take such actions and deliver all such agreements as are reasonably requested by the Administrative Agent to provide the Administrative Agent with Control of all Letter-of-Credit Rights and Electronic Chattel Paper with a value in excess of $5,000,000 owned or held by such Grantor and included in the Collateral, including, without limitation, with respect to any such Electronic Chattel Paper, by having the Administrative Agent identified as the assignee of the Record(s) pertaining to the single authoritative copy thereof.
(c) Subject to Section 8.19 of the Credit Agreement, such Grantor shall use its commercially reasonable efforts to obtain a landlord waiver or other agreement, in form and substance reasonably satisfactory to the Administrative Agent, from the lessor of each leased property, mortgagee of owned property or bailee (other than a carrier transporting Inventory to a purchaser in the ordinary course of business) or consignee with respect to any warehouse, processor or converter facility or other location where Collateral (other than (i) Equipment and Inventory in the hands of employees, consultants or customers in the ordinary course of business, including, without limitation, computer equipment, and (ii) Equipment out for repair) with an aggregate value in excess of $7,500,000 is stored or located, which agreement or letter shall provide access rights, contain a waiver or subordination of all Liens or claims that the landlord, mortgagee, bailee or consignee may assert against the Collateral at that location, and shall otherwise be reasonably satisfactory in form and substance to the Administrative Agent.
SECTION 4.7 Filing Covenants. Pursuant to Section 9-509 of the UCC and any other Applicable Law, such Grantor authorizes the Administrative Agent to file or record financing statements and other filing or recording documents or instruments with respect to the Collateral in such form and in such offices as the Administrative Agent determines necessary or appropriate to perfect the Security Interests of the Administrative Agent under this Agreement. Such financing statements may describe the Collateral in the same manner as described herein or may contain an indication or description of Collateral that describes such property in any other manner as the Administrative Agent may determine, in its sole discretion, is necessary, advisable or prudent to ensure the perfection of the Security Interest in the Collateral granted herein, including, without limitation, describing such property as all assets or all personal property. Further, a photographic or other reproduction of this Agreement shall be sufficient as a financing statement or other filing or recording document or instrument for filing or recording in any jurisdiction.
SECTION 4.8 Accounts. Other than in the ordinary course of business consistent with its past practice, no Grantor will (i) amend, supplement, modify, extend, compromise, settle, credit or discount any Account or (ii) release, wholly or partially, any Account Debtor, except where such extension, compromise, settlement, release, credit, discount, amendment, supplement or modification could not reasonably be expected to have a Material Adverse Effect, either individually or in the aggregate.
SECTION 4.9 Intellectual Property.
(a) Except as could not reasonably be expected to have a Material Adverse Effect, such Grantor (either itself or through licensees) (i) will use each registered Trademark (owned by such Grantor) and Trademark for which an application (owned by such Grantor) is pending, to the extent reasonably necessary to maintain such Trademark in full force free from any claim of abandonment for
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non-use, (ii) will maintain products and services offered under such Trademark at a level substantially consistent with the quality of such products and services as of the date hereof, (iii) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby such Trademark could reasonably be expected to become invalidated or impaired in any way, (iv) will not do any act, or knowingly omit to do any act, whereby any issued Patent owned by such Grantor would reasonably be expected to become forfeited, abandoned or dedicated to the public, (v) will not (and will not permit any licensee or sublicensee thereof to) do any act or knowingly omit to do any act whereby any registered Copyright owned by such Grantor or Copyright for which an application is pending (owned by such Grantor) could reasonably be expected to become invalidated or otherwise impaired and (vi) will not (either itself or through licensees) do any act whereby any material portion of such Copyrights may fall into the public domain.
(b) Such Grantor will notify the Administrative Agent promptly if it knows, or has reason to know, that any application or registration relating to any Intellectual Property owned by such Grantor may become forfeited, abandoned or dedicated to the public, or of any adverse determination or development (including, without limitation, the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any court or tribunal in any country) regarding such Grantors ownership of, or the validity of, any Intellectual Property owned by such Grantor or such Grantors right to register the same or to own and maintain the same, in each case, except as could not reasonably be expected to have a Material Adverse Effect.
(c) Whenever any Grantor, either by itself or through any agent, employee, licensee or designee, shall file an application for the registration of any Intellectual Property with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, such Grantor shall report such filing to the Administrative Agent within thirty (30) Business Days (which time period may be extended by the Administrative Agent in its sole discretion by written notice to such Grantor) after the last day of the fiscal quarter in which such filing occurs and provide the Administrative Agent with a written supplement to Schedule 3.8 of this Agreement. Upon request of the Administrative Agent, such Grantor shall execute and deliver, and have recorded, any and all agreements, instruments, documents, and papers as the Administrative Agent may reasonably request to evidence the security interest of the Secured Parties in any material Copyright, Patent or Trademark and the goodwill and General Intangibles of such Grantor relating thereto or represented thereby.
(d) Each Grantor shall use commercially reasonable efforts, to the extent necessary or reasonably economically desirable in the operation of such Grantors business, (i) to maintain and pursue each application (and to obtain the relevant registration) and to maintain each registration of the material Intellectual Property, including, without limitation, filing of applications for renewal, affidavits of use and affidavits of incontestability and (ii) to protect Intellectual Property owned by any Grantor against any infringement or misappropriation.
SECTION 4.10 Investment Property; Partnership/LLC Interests
(a) Without the prior written consent of the Administrative Agent, no Grantor will (i) vote to enable, or take any other action to permit, any applicable Issuer to issue any Investment Property or Partnership/LLC Interests, except for those additional Investment Property or Partnership/LLC Interests that will be subject to the Security Interest granted herein in favor of the Secured Parties in accordance with the provisions of this Agreement, or (ii) enter into any agreement or undertaking restricting the right or ability of such Grantor or the Administrative Agent to sell, assign or transfer any Investment Property or Partnership/LLC Interests or Proceeds thereof, except as permitted by Section 9.10 of the Credit Agreement. The Grantors will defend the right, title and interest of the Administrative Agent in and to any Investment Property and Partnership/LLC Interests against the claims and demands of all Persons whomsoever.
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(b) If any Grantor shall become entitled to receive or shall receive (i) any Certificated Securities (including, without limitation, any certificate representing a stock dividend or a distribution in connection with any reclassification, increase or reduction of capital or any certificate issued in connection with any reorganization), option or rights in respect of the ownership interests of any Issuer, whether in addition to, in substitution of, as a conversion of, or in exchange for, any Investment Property, or otherwise in respect thereof, or (ii) during the continuance of an Event of Default, any sums paid upon or in respect of any Investment Property upon the liquidation or dissolution of any Issuer, such Grantor shall accept the same as the agent of the Secured Parties, hold the same in trust for the Secured Parties, segregated from other funds of such Grantor, and promptly deliver the same to the Administrative Agent, on behalf of the Secured Parties, in accordance with the terms hereof.
SECTION 4.11 Further Assurances. Upon the request of the Administrative Agent and at the sole expense of such Grantor, such Grantor will promptly and duly execute and deliver, and have recorded, such further instruments and documents and take such further actions as the Administrative Agent may reasonably request for the purpose of obtaining or preserving the full benefits of this Agreement and of the rights and powers herein granted, including, without limitation, all applications, certificates, instruments, registration statements, and all other documents and papers the Administrative Agent may reasonably request and as may be required by law in connection with the obtaining of any consent, approval, registration, qualification, or authorization of any Person deemed necessary or appropriate for the effective exercise of any rights under this Agreement.
ARTICLE V
REMEDIAL PROVISIONS
SECTION 5.1 General Remedies. Upon the occurrence and during the continuance of any Event of Default, with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, on behalf of the Secured Parties, enforce against the Grantors their obligations and liabilities hereunder and exercise such other rights and remedies as may be available to the Administrative Agent hereunder, under the Credit Agreement, the other Loan Documents, the Secured Cash Management Agreements, the Secured Hedge Agreements or otherwise; provided that upon the occurrence and during the continuance of any Event of Default attributable to a failure to comply with the Financial Covenant (which has not become an Event of Default with respect to the Term Loans pursuant to Section 10.1(d) of the Credit Agreement), actions pursuant to this Section 5.1 may be taken by the Required Revolving Credit Lenders with respect to the Revolving Credit Loans and the Revolving Credit Commitments only (without the requirement for Required Lender action) or by the Administrative Agent at the direction of the Required Revolving Credit Lenders. Without limiting the generality of the foregoing, the Administrative Agent, without demand of performance or other demand, presentment, protest, advertisement or notice of any kind (except any notice required by Applicable Law referred to below) to or upon any Grantor or any other Person (all and each of which demands, defenses, advertisements and notices are hereby waived to the extent permitted by Applicable Law), may in such circumstances forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, lease, assign, give option or options to purchase, or otherwise dispose of and deliver the Collateral or any part thereof (or contract to do any of the foregoing), in one or more parcels at public or private sale or sales, at any exchange, brokers board or office of the Administrative Agent or any other Secured Party or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk. The Administrative Agent may disclaim all warranties in connection with any sale or other
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disposition of the Collateral, including, without limitation, all warranties of title, possession, quiet enjoyment and the like. The Administrative Agent or any other Secured Party shall have the right upon any such public sale or sales, and, to the extent permitted by Applicable Law, upon any such private sale or sales, to purchase the whole or any part of the Collateral so sold, free of any right or equity of redemption in any Grantor, which right or equity is hereby waived and released. Each Grantor further agrees, at the Administrative Agents request, to assemble the Collateral and make it available to the Administrative Agent at places which the Administrative Agent shall reasonably select, whether at such Grantors premises or elsewhere. To the extent permitted by Applicable Law, each Grantor waives all claims, damages and demands it may acquire against the Administrative Agent or any other Secured Party arising out of the exercise by them of any rights hereunder except to the extent any such claims, damages, or demands result solely from the gross negligence or willful misconduct of the Administrative Agent or any other Secured Party, in each case against whom such claim is asserted. If any notice of a proposed sale or other disposition of Collateral shall be required by law, such notice shall be deemed reasonable and proper if given at least ten (10) days before such sale or other disposition.
SECTION 5.2 Specific Remedies.
(a) Upon the occurrence and during the continuance of an Event of Default:
(i) the Administrative Agent may communicate with Account Debtors of any Account subject to a Security Interest and upon the request of the Administrative Agent, each Grantor shall notify (such notice to be in form and substance reasonably satisfactory to the Administrative Agent) its Account Debtors subject to a Security Interest that such Accounts have been assigned to the Administrative Agent, for the benefit of the Secured Parties;
(ii) upon the request of the Administrative Agent, each Grantor shall forward to the Administrative Agent, on the last Business Day of each week, deposit slips related to all cash, money, checks or any other similar items of payment received by the Grantor during such week, and, if requested by the Administrative Agent, copies of such checks or any other similar items of payment;
(iii) whenever any Grantor shall receive any cash, money, checks or any other similar items of payment relating to any Collateral (including any Proceeds of any Collateral), subject to the terms of any Permitted Liens, such Grantor agrees that it will, within one (1) Business Day of such receipt, deposit all such items of payment into a cash collateral account at the Administrative Agent (the Collateral Account) or in a Deposit Account (other than an Excluded Deposit Account) at a Controlled Depositary, and until such Grantor shall deposit such cash, money, checks or any other similar items of payment in the Collateral Account or in a Deposit Account (other than an Excluded Deposit Account) at a Controlled Depositary, such Grantor shall hold such cash, money, checks or any other similar items of payment in trust for the Administrative Agent and the other Secured Parties and as property of the Secured Parties, separate from the other funds of such Grantor, and the Administrative Agent shall have the right to transfer or direct the transfer of the balance of each Deposit Account (other than an Excluded Deposit Account) to the Collateral Account. All such Collateral and Proceeds of Collateral received by the Administrative Agent hereunder shall be held by the Administrative Agent in the Collateral Account as collateral security for all the Secured Obligations and shall not constitute payment thereof until applied as provided in Section 5.4;
(iv) the Administrative Agent shall have the right to receive any and all cash dividends, payments or distributions made in respect of any Investment Property, or Partnership/LLC Interests or other Proceeds paid in respect of any Investment Property, or
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Partnership/LLC Interests, and any or all of any Investment Property, or Partnership/LLC Interests may, at the option of the Administrative Agent and the other Secured Parties, be registered in the name of the Administrative Agent or its nominee, and the Administrative Agent or its nominee may thereafter exercise (A) all voting, corporate and other rights pertaining to such Investment Property or any such Partnership/LLC Interests at any meeting of shareholders, partners or members of the relevant Issuers or otherwise and (B) any and all rights of conversion, exchange and subscription and any other rights, privileges or options pertaining to such Investment Property or Partnership/LLC Interests as if it were the absolute owner thereof (including, without limitation, the right to exchange at its discretion any and all of such Investment Property, or Partnership/LLC Interests upon the merger, consolidation, reorganization, recapitalization or other fundamental change in the corporate, partnership or limited liability company structure of any Issuer or upon the exercise by any Grantor or the Administrative Agent of any right, privilege or option pertaining to such Investment Property, or Partnership/LLC Interests, and in connection therewith, the right to deposit and deliver any and all of such Investment Property or Partnership/LLC Interests with any committee, depositary, transfer agent, registrar or other designated agency upon such terms and conditions as the Administrative Agent may determine), all without liability except to account for property actually received by it, but the Administrative Agent shall have no duty to any Grantor to exercise any such right, privilege or option and the Administrative Agent and the other Secured Parties shall not be responsible for any failure to do so or delay in so doing. In furtherance thereof, each Grantor hereby authorizes and instructs each Issuer with respect to any Collateral consisting of Investment Property and/or Partnership/LLC Interests to (i) comply with any instruction received by it from the Administrative Agent in writing that (A) states that an Event of Default has occurred and is continuing and (B) is otherwise in accordance with the terms of this Agreement, without any other or further instructions from such Grantor, and each Grantor agrees that each Issuer shall be fully protected in so complying following receipt of such notice and prior to notice that such Event of Default is no longer continuing, and (ii) except as otherwise expressly permitted hereby, pay any dividends, distributions or other payments with respect to any Investment Property or Partnership/LLC Interests directly to the Administrative Agent; and
(v) the Administrative Agent shall be entitled to (but shall not be required to): (A) proceed to perform any and all obligations of the applicable Grantor under any contract and exercise all rights of such Grantor thereunder as fully as such Grantor itself could, (B) do all other acts which the Administrative Agent may deem necessary or proper to protect its Security Interest granted hereunder, provided such acts are not inconsistent with or in violation of the terms of any of the Credit Agreement, of the other Loan Documents or Applicable Law, and (C) sell, assign or otherwise transfer any contract in accordance with the Credit Agreement, the other Loan Documents and Applicable Law, subject, however, to the prior approval of each other party to such contract, to the extent required under the contract.
(b) Unless an Event of Default shall have occurred and be continuing and the Administrative Agent shall have given notice to the relevant Grantor of the Administrative Agents intent to exercise its corresponding rights pursuant to Section 5.2(a), each Grantor shall be permitted to receive all cash dividends, payments or other distributions made in respect of any Investment Property and any Partnership/LLC Interests, to the extent permitted in the Credit Agreement, and to exercise all voting and other corporate, company and partnership rights with respect to any Investment Property and Partnership/LLC Interests.
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SECTION 5.3 Registration Rights.
(a) If, after the occurrence and during the continuance of an Event of Default, the Administrative Agent shall reasonably determine that in order to exercise its right to sell any or all of the Collateral it is necessary or advisable to have such Collateral registered under the provisions of the Securities Act (any such Collateral, the Restricted Securities Collateral), the relevant Grantor will cause each applicable Issuer (and the officers and directors thereof) that is a Grantor or a Subsidiary of a Grantor to (i) execute and deliver all such instruments and documents, and do or cause to be done all such other acts as may be, in the opinion of the Administrative Agent, necessary or advisable to register such Restricted Securities Collateral, or that portion thereof to be sold, under the provisions of the Securities Act, (ii) use its commercially reasonable efforts to cause the registration statement relating thereto to become effective and to remain effective for a period of one year from the date of the first public offering of such Restricted Securities Collateral, or that portion thereof to be sold, and (iii) make all amendments thereto and/or to the related prospectus which, in the opinion of the Administrative Agent, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the SEC applicable thereto. Each Grantor agrees to cause each applicable Issuer (and the officers and directors thereof) to comply with the provisions of the securities or Blue Sky laws of any and all jurisdictions which the Administrative Agent shall designate and to make available to its security holders, as soon as practicable, an earnings statement (which need not be audited) which will satisfy the provisions of the Securities Act.
(b) Each Grantor recognizes that the Administrative Agent may be unable to effect a public sale of any or all the Restricted Securities Collateral, by reason of certain prohibitions contained in the Securities Act and applicable state securities laws or otherwise, and may be compelled to resort to one or more private sales thereof to a restricted group of purchasers who will be obliged to agree, among other things, to acquire such securities for their own account for investment and not with a view to the distribution or resale thereof. Each Grantor acknowledges and agrees that any such private sale may result in prices and other terms less favorable than if such sale were a public sale and, notwithstanding such circumstances, agrees that any such private sale shall be deemed to have been made in a commercially reasonable manner. The Administrative Agent shall be under no obligation to delay a sale of any of the Restricted Securities Collateral for the period of time necessary to permit the Issuer thereof to register such securities for public sale under the Securities Act, or under applicable state securities laws, even if such Issuer would agree to do so.
(c) Each Grantor agrees to use its commercially reasonable efforts to do or cause to be done all such other acts as may be necessary to make such sale or sales of all or any portion of the Restricted Securities Collateral valid and binding and in compliance with any and all other Applicable Laws. Each Grantor further agrees that a breach of any of the covenants contained in this Section 5.3 will cause irreparable injury to the Administrative Agent and the other Secured Parties, that the Administrative Agent and the other Secured Parties have no adequate remedy at law in respect of such breach and, as a consequence, that each and every covenant contained in this Section 5.3 shall be specifically enforceable against such Grantor, and such Grantor hereby waives, to the extent permitted by Applicable Law, and agrees not to assert any defenses against an action for specific performance of such covenants except for a defense that no Event of Default has occurred and is continuing.
SECTION 5.4 Application of Proceeds. If an Event of Default shall have occurred and be continuing, the Administrative Agent may apply all or any part of the Collateral or any Proceeds of the Collateral in payment in whole or in part of the Secured Obligations (after deducting all reasonable costs and expenses of every kind incurred in connection therewith or incidental to the care or safekeeping of any of the Collateral or in any way relating to the Collateral or the rights of the Administrative Agent and the other Secured Parties hereunder, including, without limitation, reasonable attorneys fees and
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disbursements) in accordance with Section 10.4 of the Credit Agreement. Only after (i) the payment by the Administrative Agent of any other amount required by any provision of Applicable Law, including, without limitation, Section 9-610 and Section 9-615 of the UCC and (ii) the payment in full of the Secured Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have been Cash Collateralized or other arrangements with respect thereto have been made that are satisfactory to the Issuing Lender) and the termination of the Commitments, shall the Administrative Agent account for the surplus, if any, to any Grantor, or to whomever may be lawfully entitled to receive the same (if such Person is not a Grantor).
SECTION 5.5 Waiver, Deficiency. Each Grantor hereby waives, to the extent permitted by Applicable Law, all rights of redemption, appraisement, valuation, stay, extension or moratorium now or hereafter in force under any Applicable Law in order to prevent or delay the enforcement of this Agreement or the absolute sale of the Collateral or any portion thereof. Each Grantor shall remain liable for any deficiency if the proceeds of any sale or other disposition of the Collateral are insufficient to pay its Secured Obligations and the reasonable and documented fees and disbursements of any attorneys employed by the Administrative Agent or any other Secured Party to collect such deficiency.
ARTICLE VI
THE ADMINISTRATIVE AGENT
SECTION 6.1 Appointment of Administrative Agent as Attorney-In-Fact.
(a) Each Grantor hereby irrevocably constitutes and appoints each of the Administrative Agent and any officer or agent thereof, with full power of substitution, as its true and lawful attorney-in-fact with full irrevocable power and authority in the place and stead of such Grantor and in the name of such Grantor or in its own name, for the purpose of carrying out the terms of this Agreement, effective upon the occurrence of an Event of Default, to take any and all appropriate action and to execute any and all documents and instruments that may be necessary or desirable to accomplish the purposes of this Agreement, and, without limiting the generality of the foregoing, each Grantor hereby gives each of the Administrative Agent and any officer or agent thereof the power and right, on behalf of such Grantor, without notice to or assent by such Grantor, to do any or all of the following upon the occurrence and during the continuance of an Event of Default:
(i) in the name of such Grantor or its own name, or otherwise, take possession of and indorse and collect any checks, drafts, notes, acceptances or other instruments for the payment of moneys due under any Account or contract subject to a Security Interest or with respect to any other Collateral and file any claim or take any other action or proceeding in any court of law or equity or otherwise deemed appropriate by the Administrative Agent for the purpose of collecting any and all such moneys due under any Account or contract subject to a Security Interest or with respect to any other Collateral whenever payable;
(ii) in the case of any Intellectual Property, execute and deliver, and have recorded, any and all agreements, instruments, documents and papers as the Administrative Agent may request to evidence the Administrative Agents and the Secured Parties security interest in such Intellectual Property and the goodwill and General Intangibles of such Grantor relating thereto or represented thereby;
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(iii) pay or discharge taxes and Liens levied or placed on or threatened against the Collateral, effect any repairs or any insurance called for by the terms of this Agreement and pay all or any part of the premiums therefor and the costs thereof;
(iv) execute, in connection with any sale provided for in this Agreement, any endorsements, assignments or other instruments of conveyance or transfer with respect to the Collateral; and
(v) (A) direct any party liable for any payment under any of the Collateral to make payment of any and all moneys due or to become due thereunder directly to the Administrative Agent or as the Administrative Agent shall direct; (B) ask or make demand for, collect, and receive payment of and receipt for, any and all moneys, claims and other amounts due or to become due at any time in respect of or arising out of any Collateral; (C) sign and indorse any invoices, freight or express bills, bills of lading, storage or warehouse receipts, drafts against debtors, assignments, verifications, notices and other documents in connection with any of the Collateral; (D) commence and prosecute any suits, actions or proceedings at law or in equity in any court of competent jurisdiction to collect the Collateral or any portion thereof and to enforce any other right in respect of any Collateral; (E) defend any suit, action or proceeding brought against such Grantor with respect to any Collateral; (F) settle, compromise or adjust any such suit, action or proceeding and, in connection therewith, give such discharges or releases as the Administrative Agent may deem appropriate; (G) license or assign any Copyright, Patent or Trademark (along with the goodwill of the business to which any such Copyright, Patent or Trademark pertains), for such term or terms, on such conditions, and in such manner, as the Administrative Agent shall in its sole discretion determine; and (H) generally, sell, transfer, pledge and make any agreement with respect to or otherwise deal with any of the Collateral as fully and completely as though the Administrative Agent was the absolute owner thereof for all purposes, and do, at the Administrative Agents option and such Grantors expense, at any time, or from time to time, all acts and things that the Administrative Agent deems necessary to protect, preserve or realize upon the Collateral and the Administrative Agents and the other Secured Parties Security Interests therein and to effect the intent of this Agreement, all as fully and effectively as such Grantor might do.
(b) If any Grantor fails to perform or comply with any of its agreements contained herein, the Administrative Agent, at its option, but without any obligation so to do, may perform or comply, or otherwise cause performance or compliance, with such agreement in accordance with the provisions of Section 6.1(a).
(c) The expenses of the Administrative Agent incurred in connection with actions taken pursuant to the terms of this Agreement shall be payable by such Grantor to the Administrative Agent in accordance with Section 12.3 of the Credit Agreement.
(d) Each Grantor hereby ratifies all that said attorneys shall lawfully do or cause to be done by virtue hereof in accordance with Section 6.1(a). All powers, authorizations and agencies contained in this Agreement are coupled with an interest and are irrevocable until this Agreement is terminated and the Security Interests created hereby are released.
SECTION 6.2 Duty of Administrative Agent. The sole duty of Administrative Agent with respect to the custody, safekeeping and physical preservation of the Collateral in its possession, under Section 9-207 of the UCC or otherwise, shall be to deal with it in the same manner as the Administrative Agent deals with similar property for its own account. None of the Administrative Agent, any other Secured Party or any of their respective Related Parties shall be liable for failure to demand, collect or
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realize upon any of the Collateral or for any delay in doing so or shall be under any obligation to sell or otherwise dispose of any Collateral upon the request of any Grantor or any other Person or to take any other action whatsoever with regard to the Collateral or any part thereof. The powers conferred on the Administrative Agent and the other Secured Parties hereunder are solely to protect the interests of the Administrative Agent and the other Secured Parties in the Collateral and shall not impose any duty upon the Administrative Agent or any other Secured Party or any of their respective Related Parties to exercise any such powers. The Administrative Agent and the other Secured Parties shall be accountable only for amounts that they actually receive as a result of the exercise of such powers, and neither they nor any of their respective Related Parties shall be responsible to any Grantor for any act or failure to act hereunder, except for their own gross negligence or willful misconduct.
SECTION 6.3 Authority of Administrative Agent. Each Grantor acknowledges that the rights and responsibilities of the Administrative Agent under this Agreement with respect to any action taken by the Administrative Agent or the exercise or non-exercise by the Administrative Agent of any option, voting right, request, judgment or other right or remedy provided for herein or resulting from or arising out of this Agreement shall, as between the Administrative Agent and the Lenders, be governed by the Credit Agreement and by such other agreements with respect thereto as may exist from time to time among them, but, as between the Administrative Agent and the Grantors, the Administrative Agent shall be conclusively presumed to be acting as agent for the Secured Parties with full and valid authority so to act or refrain from acting, and no Grantor shall be under any obligation, or entitlement to make any inquiry respecting such authority.
ARTICLE VII
MISCELLANEOUS
SECTION 7.1 Notices. All notices and communications hereunder shall be given to the addresses and otherwise made in accordance with Section 12.1 of the Credit Agreement; provided that notices and communications to the Grantors shall be directed to the Grantors, at the address of the Borrower set forth in Section 12.1 of the Credit Agreement.
SECTION 7.2 Amendments, Waivers and Consents. None of the terms or provisions of this Agreement may be amended, supplemented or otherwise modified, nor may they be waived, nor may any consent be given, except in accordance with Section 12.2 of the Credit Agreement.
SECTION 7.3 Expenses, Indemnification, Waiver of Consequential Damages, etc.
(a) The Grantors, jointly and severally, shall pay all reasonable out-of-pocket expenses incurred by the Administrative Agent and each other Secured Party in connection with enforcing or preserving any rights under this Agreement to the extent the Borrower would be required to do so pursuant to Section 12.3 of the Credit Agreement.
(b) The Grantors, jointly and severally, shall pay and shall indemnify each Indemnitee (which for purposes of this Agreement shall include, without limitation, all Secured Parties) against Indemnified Taxes and Other Taxes to the extent the Borrower would be required to do so pursuant to Section 5.11 of the Credit Agreement.
(c) The Grantors, jointly and severally, shall indemnify each Indemnitee to the extent the Borrower would be required to do so pursuant to Section 12.3 of the Credit Agreement.
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(d) Notwithstanding anything to the contrary contained in this Agreement, to the fullest extent permitted by Applicable Law, each Grantor shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Agreement, any other Loan Document, or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof.
(e) No Indemnitee referred to in this Section 7.3 shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Agreement, or the other Loan Documents or the transactions contemplated hereby or thereby, except to the extent resulting from its gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final non-appealable judgment.
(f) All amounts due under this Section 7.3 shall be payable promptly after demand therefor.
(g) Each partys obligations under this Section 7.3 shall survive the termination of the Loan Documents and payment of the obligations thereunder.
SECTION 7.4 Right of Setoff. If an Event of Default shall have occurred and while it is continuing, each Secured Party and each of its respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by Applicable Law, to setoff and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Secured Party or any such Affiliate to or for the credit or the account of such Grantor to the same extent a Lender could do so under Section 12.4 of the Credit Agreement. The rights of each Secured Party and its respective Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that such Secured Party or its respective Affiliates may have. Each Secured Party agrees to notify such Grantor and the Administrative Agent promptly after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application.
SECTION 7.5 Governing Law; Jurisdiction; Venue; Service of Process.
(a) Governing Law. This Agreement and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Agreement and the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the State of New York.
(b) Submission to Jurisdiction. Each Grantor irrevocably and unconditionally agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether relating to this Agreement or the transactions relating hereto in any forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York state court or, to the fullest extent permitted by Applicable Law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or in any other Loan Document shall affect any right that the Administrative Agent or any other Secured Party may otherwise have to bring any action, litigation or proceeding relating to this Agreement or any other Loan Document against any Grantor or its properties in the courts of any jurisdiction.
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(c) Waiver of Venue. Each Grantor irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action, litigation or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Service of Process. Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 12.1 of the Credit Agreement. Nothing in this Agreement will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law.
(e) Appointment of the Borrower as Agent for the Grantors. Each Grantor hereby irrevocably appoints and authorizes the Borrower to act as its agent for service of process and notices required to be delivered under this Agreement or under the other Loan Documents, it being understood and agreed that receipt by the Borrower of any summons, notice or other similar item shall be deemed effective receipt by each Grantor and its Subsidiaries.
SECTION 7.6 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 7.6.
SECTION 7.7 Injunctive Relief. Each Grantor recognizes that, in the event such Grantor fails to perform, observe or discharge any of its obligations or liabilities under this Agreement or any other Loan Document, any remedy of law may prove to be inadequate relief to the Administrative Agent and the other Secured Parties. Therefore, each Grantor agrees that the Administrative Agent and the other Secured Parties, at the option of the Administrative Agent and the other Secured Parties, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
SECTION 7.8 No Waiver By Course of Conduct; Cumulative Remedies. The enumeration of the rights and remedies of the Administrative Agent and the other Secured Parties set forth in this Agreement is not intended to be exhaustive and the exercise by the Administrative Agent or any other Secured Party of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the other Loan Documents or that may now or hereafter exist at law or in equity or by suit or otherwise. Neither the Administrative Agent nor any other Secured Party shall by any act (except by a written instrument pursuant to Section 7.2), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No delay or failure to take action on the part of the Administrative Agent or any other Secured Party in exercising any
24
right, power or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege or be construed to be a waiver of any Default or Event of Default. A waiver by the Administrative Agent or any other Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such other Secured Party would otherwise have on any future occasion. No course of dealing between any Grantor, the Administrative Agent or any Secured Party or their respective agents or employees shall be effective to change, modify or discharge any provision of this Agreement or any other Loan Document or to constitute a waiver of any Default or Event of Default.
SECTION 7.9 Successors and Assigns. The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; except that no Grantor may assign or otherwise transfer any of its rights or obligations under this Agreement without the prior written consent of the Administrative Agent and the other Lenders (except as otherwise provided by the Credit Agreement).
SECTION 7.10 Survival of Indemnities. Notwithstanding any termination of this Agreement, the indemnities to which the Administrative Agent and the other Secured Parties are entitled under the provisions of Section 7.3 and any other provision of this Agreement shall continue in full force and effect and shall protect the Administrative Agent and the other Secured Parties against events arising after such termination as well as before.
SECTION 7.11 Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 7.12 Counterparts. This Agreement may be executed in counterparts (and by different parties hereto in separate counterparts), each of which shall constitute an original, but all of which when taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page to this Agreement or any document or instrument delivered in connection herewith by facsimile or in electronic (i.e. pdf or tif) form shall be effective as delivery of a manually executed counterpart of this Agreement or such other document or instrument, as applicable.
SECTION 7.13 Integration. This Agreement and the other Loan Documents, and any separate letter agreements with respect to fees, constitute the entire contract among the parties relating to the subject matter hereof and thereof and supersede any and all previous agreements and understandings, written or oral, relating to the subject matter hereof. In the event of any conflict between the provisions of this Agreement and those of the Credit Agreement, the provisions of the Credit Agreement shall control, and in the event of any conflict between the provisions of this Agreement and any other Security Documents, the provisions of this Agreement shall control; provided that the inclusion of supplemental rights or remedies in favor of the Administrative Agent or the other Secured Parties in any other Loan Document shall not be deemed a conflict with this Agreement.
SECTION 7.14 Advice of Counsel; No Strict Construction. Each of the parties represents to each other party hereto that it has discussed this Agreement with its counsel. The parties hereto have participated jointly in the negotiation and drafting of this Agreement. In the event an ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Agreement.
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SECTION 7.15 Acknowledgements. Each Grantor hereby acknowledges that it has received a copy of the Credit Agreement and has reviewed and understands the same.
SECTION 7.16 Releases.
(a) Subject to Section 11.9 of the Credit Agreement, at such time as the Secured Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have been Cash Collateralized or other arrangements with respect thereto have been made that are satisfactory to the Issuing Lender) shall have been paid in full in cash and the Commitments have been terminated, the Collateral shall be automatically released from the Liens created hereby, and this Agreement and all obligations (other than those expressly stated to survive such termination) of the Administrative Agent and each Grantor hereunder shall automatically terminate, and all rights to the Collateral shall revert to the Grantors.
(b) Subject to Section 11.9 of the Credit Agreement, if any of the Collateral shall be sold or otherwise disposed of by any Grantor in a transaction permitted by the Loan Documents, then the Administrative Agent, at the request and sole expense of such Grantor, shall, within a commercially reasonable period of time, execute and deliver to such Grantor all releases or other documents reasonably necessary or desirable to evidence the release of the Liens created hereby on such Collateral. In the event that all the Equity Interests of any Grantor that is a Subsidiary of the Borrower shall be sold, transferred or otherwise disposed of in a transaction permitted by the Credit Agreement, then, at the request of the Borrower and at the expense of the Grantors, such Grantor shall be released from its obligations hereunder and, at the reasonable request of the Borrower and at the expense of the Grantors, the Administrative Agent shall, within a commercially reasonable period of time, execute and deliver to the Borrower any releases or other documents reasonably necessary or desirable to evidence such release.
SECTION 7.17 Additional Grantors. Each Subsidiary of the Borrower that is required to become a party to this Agreement pursuant to Section 8.14 of the Credit Agreement shall become a Grantor for all purposes of this Agreement upon execution and delivery by such Subsidiary of a joinder agreement in form and substance reasonably satisfactory to the Administrative Agent.
SECTION 7.18 All Powers Coupled With Interest. All powers of attorney and other authorizations granted to the Secured Parties, the Administrative Agent and any Persons designated by the Administrative Agent or any other Secured Party pursuant to any provisions of this Agreement shall be deemed coupled with an interest and shall be irrevocable so long as any of the Secured Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have been Cash Collateralized or other arrangements with respect thereto have been made that are satisfactory to the Issuing Lender) remain unpaid or unsatisfied, any of the Commitments remain in effect or the Credit Facility has not been terminated.
SECTION 7.19 Secured Parties. Each Secured Party not a party to the Credit Agreement who obtains the benefit of this Agreement shall be deemed to have acknowledged and accepted the appointment of the Administrative Agent pursuant to the terms of the Credit Agreement, and that with respect to the actions and omissions of the Administrative Agent hereunder or otherwise relating hereto that do or may affect such Secured Party, the Administrative Agent and each of its Affiliates and Related Parties shall be entitled to all of the rights, benefits and immunities conferred under Article XI of the Credit Agreement.
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SECTION 7.20 Amendment and Restatement; No Novation. This Agreement constitutes an amendment and restatement of the Existing Collateral Agreement, effective from and after the Closing Date. The execution and delivery of this Agreement shall not constitute a novation of any obligations owing to the Lenders or the Administrative Agent under the Existing Collateral Agreement or Existing Credit Agreement. On the Closing Date, each of the security interests granted under the Existing Collateral Agreement and each of the other Security Documents (for purposes of this Section 7.20, as defined in the Existing Credit Agreement), as perfected pursuant to the terms thereof, shall remain and continue (as amended, supplemented, modified and restated by the terms of this Agreement) in full force and effect with respect to the Secured Obligations.
[Signature Pages to Follow]
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IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed under seal by their duly authorized officers, all as of the day and year first written above.
SWITCH, LTD., as Grantor | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
NV NAP 2, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
NV NAP 7, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
NV NAP 8, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
NV NAP 9, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer |
[Signature Pages Continue]
Switch, Ltd.
Amended and Restated Collateral Agreement
Signature Page
SUPERNAP RENO, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
SINAP - TIX, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
SWITCH BUSINESS SOLUTIONS, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer | ||
SUPERNAP GRAND RAPIDS, LLC, as Grantor and Issuer | ||
By: | /s/ Gabriel Nacht | |
Name: Gabriel Nacht | ||
Title: Chief Financial Officer |
Switch, Ltd.
Amended and Restated Collateral Agreement
Signature Page
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent | ||
By: | /s/ Olga E. Wisnicky | |
Name: Olga E. Wisnicky | ||
Title: Senior Vice President |
Switch, Ltd.
Amended and Restated Collateral Agreement
Signature Page
EXHIBIT 10.7
AMENDED AND RESTATED SUBSIDIARY GUARANTY AGREEMENT
dated as of June 27, 2017
by and among
SWITCH, LTD.,
as Borrower,
and
Certain Domestic Subsidiaries of
SWITCH, LTD.,
as Guarantors,
in favor of
WELLS FARGO BANK, NATIONAL ASSOCIATION,
as Administrative Agent
TABLE OF CONTENTS
Page | ||||
ARTICLE I DEFINED TERMS |
1 | |||
SECTION 1.1 Definitions |
1 | |||
SECTION 1.2 Other Definitional Provisions |
1 | |||
ARTICLE II GUARANTY |
2 | |||
SECTION 2.1 Guaranty |
2 | |||
SECTION 2.2 Bankruptcy Limitations on Guarantors |
2 | |||
SECTION 2.3 Agreements for Contribution |
3 | |||
SECTION 2.4 Nature of Guaranty |
3 | |||
SECTION 2.5 Waivers |
5 | |||
SECTION 2.6 Modification of Loan Documents, etc. |
5 | |||
SECTION 2.7 Demand by the Administrative Agent |
6 | |||
SECTION 2.8 Remedies |
6 | |||
SECTION 2.9 Benefits of Guaranty |
7 | |||
SECTION 2.10 Termination; Reinstatement |
7 | |||
SECTION 2.11 Payments |
8 | |||
SECTION 2.12 Keepwell |
8 | |||
ARTICLE III [RESERVED] |
8 | |||
ARTICLE IV [RESERVED] |
8 | |||
ARTICLE V MISCELLANEOUS |
8 | |||
SECTION 5.1 Notices |
8 | |||
SECTION 5.2 Amendments, Waivers and Consents |
9 | |||
SECTION 5.3 Expenses; Indemnification; Waiver of Consequential Damages, etc. |
9 | |||
SECTION 5.4 Right of Setoff |
9 | |||
SECTION 5.5 Governing Law; Jurisdiction; Venue; Service of Process |
10 | |||
SECTION 5.6 Waiver of Jury Trial |
10 | |||
SECTION 5.7 Injunctive Relief |
11 | |||
SECTION 5.8 No Waiver by Course of Conduct, Cumulative Remedies |
11 | |||
SECTION 5.9 Successors and Assigns |
11 | |||
SECTION 5.10 All Powers Coupled With Interest |
11 | |||
SECTION 5.11 Survival of Indemnities |
11 | |||
SECTION 5.12 Severability of Provisions |
12 | |||
SECTION 5.13 Counterparts |
12 |
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TABLE OF CONTENTS
(continued)
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SECTION 5.14 Integration |
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SECTION 5.15 Advice of Counsel, No Strict Construction |
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SECTION 5.16 Acknowledgements |
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SECTION 5.17 Releases |
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SECTION 5.18 Additional Guarantors |
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SECTION 5.19 Secured Parties |
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SECTION 5.20 Borrower Guaranty |
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THIS AMENDED AND RESTATED SUBSIDIARY GUARANTY AGREEMENT (this Guaranty), dated as of June 27, 2017, is made by SWITCH, LTD., a Nevada limited liability company (the Borrower) and certain Subsidiaries of the Borrower (such Subsidiaries, collectively, the Guarantors and each, a Guarantor), in favor of WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent (in such capacity, the Administrative Agent) for the benefit of itself and the Secured Parties.
STATEMENT OF PURPOSE
Pursuant to the terms of the Amended and Restated Credit Agreement dated of even date herewith (as amended, restated, supplemented or otherwise modified from time to time, the Credit Agreement), by and among the Borrower, the Lenders and the Administrative Agent, the Lenders have agreed to make Extensions of Credit to the Borrower upon the terms and subject to the conditions set forth therein.
The Borrower and the Guarantors, though separate legal entities, comprise one integrated financial enterprise, and all Extensions of Credit to the Borrower will inure, directly or indirectly, to the benefit of each of the Guarantors.
It is a condition precedent to the obligation of the Lenders to make their respective Extensions of Credit to the Borrower under the Credit Agreement that the Guarantors shall have executed and delivered this Guaranty to the Administrative Agent, for the benefit of the Secured Parties.
NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by the parties hereto, and to induce the Administrative Agent and the Lenders to enter into the Credit Agreement and to induce the Lenders to make their respective Extensions of Credit to the Borrower thereunder, the Guarantors hereby, jointly and severally agree with the Administrative Agent, for the benefit of the Secured Parties, as follows:
ARTICLE I
DEFINED TERMS
SECTION 1.1 Definitions. The following terms when used in this Guaranty shall have the meanings assigned to them below:
Additional Guarantor means each Domestic Subsidiary of the Borrower which hereafter becomes a Guarantor pursuant to Section 5.18 hereof and Section 8.14 of the Credit Agreement.
Guaranteed Obligations has the meaning assigned thereto in Section 2.1.
SECTION 1.2 Other Definitional Provisions.
(a) Terms defined in the Credit Agreement and not otherwise defined herein shall have the meaning assigned thereto in the Credit Agreement.
(b) The terms of Sections 1.2, 1.6, 1.7 and 12.14 of the Credit Agreement are incorporated herein by reference as if fully set forth herein; provided that references therein to Agreement shall mean this Guaranty.
(c) Where the context requires, terms relating to the Collateral or any part thereof, when used in relation to a Guarantor, shall refer to such Guarantors Collateral or the relevant part thereof.
ARTICLE II
GUARANTY
SECTION 2.1 Guaranty. Each Guarantor hereby, jointly and severally with the other Guarantors, absolutely, irrevocably and unconditionally guarantees as a primary obligor and not merely as a surety to the Administrative Agent for the benefit of the Secured Parties, and their respective permitted successors, endorsees, transferees and assigns, the prompt payment and performance of all Secured Obligations, whether primary or secondary (whether by way of endorsement or otherwise), whether now existing or hereafter arising, whether or not from time to time reduced or extinguished (except by payment thereof) or hereafter increased or incurred, whether enforceable or unenforceable, whether or not discharged, stayed or otherwise affected by any Debtor Relief Law or proceeding thereunder, whether created directly with the Administrative Agent or any other Secured Party or acquired by the Administrative Agent or any other Secured Party through assignment or endorsement or otherwise, whether matured or unmatured, whether joint or several, as and when the same become due and payable (whether at maturity or earlier, by reason of acceleration, mandatory repayment or otherwise), in accordance with the terms of any such instruments evidencing any such obligations, including all renewals, extensions or modifications thereof (all of the foregoing being hereafter collectively referred to as the Guaranteed Obligations).
SECTION 2.2 Bankruptcy Limitations on Guarantors. Notwithstanding anything to the contrary contained in Section 2.1, it is the intention of each Guarantor and the Secured Parties that, in any proceeding involving the bankruptcy, reorganization, arrangement, adjustment of debts, relief of debtors, dissolution or insolvency or any similar proceeding with respect to any Guarantor or its assets, the amount of such Guarantors obligations with respect to the Guaranteed Obligations (or any other obligations of such Guarantor to the Secured Parties) shall be equal to, but not in excess of, the maximum amount thereof not subject to avoidance or recovery by operation of Debtor Relief Laws after giving effect to Section 2.3(a). To that end, but only in the event and to the extent that after giving effect to Section 2.3(a), such Guarantors obligations with respect to the Guaranteed Obligations (or any other obligations of such Guarantor to the Secured Parties) or any payment made pursuant to such Guaranteed Obligations (or any other obligations of such Guarantor to the Secured Parties) would, but for the operation of the first sentence of this Section 2.2, be subject to avoidance or recovery in any such proceeding under Debtor Relief Laws after giving effect to Section 2.3(a), the amount of such Guarantors obligations with respect to the Guaranteed Obligations (or any other obligations of such Guarantor to the Secured Parties) shall be limited to the largest amount which, after giving effect thereto, would not, under Debtor Relief Laws, render such Guarantors obligations with respect to the Guaranteed Obligations (or any other obligations of such Guarantor to the Secured Parties) unenforceable or avoidable or otherwise subject to recovery under Debtor Relief Laws. To the extent any payment actually made pursuant to the Guaranteed Obligations exceeds the limitation of the first sentence of this Section 2.2 and is otherwise subject to avoidance and recovery in any such proceeding under Debtor Relief Laws, the amount subject to avoidance shall in all events be limited to the amount by which such actual payment exceeds such limitation and the Guaranteed Obligations as limited by the first sentence of this Section 2.2 shall in all events remain in full force and effect and be fully enforceable against such Guarantor. The first sentence of this Section 2.2 is intended solely to preserve the rights of the Secured Parties hereunder against such Guarantor in such proceeding to the maximum extent permitted by Debtor Relief Laws and neither such Guarantor, the Borrower, any other Guarantor nor any other Person shall have any right or claim under such sentence that would not otherwise be available under Debtor Relief Laws in such proceeding.
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SECTION 2.3 Agreements for Contribution.
(a) Contribution. If any payment shall be required to be made to the Administrative Agent or any Secured Party under this Guaranty, each Guarantor hereby unconditionally and irrevocably agrees it will contribute, to the maximum extent permitted by law, such amounts to each other Guarantor and the Borrower so as to maximize the aggregate amount paid to the Administrative Agent or such Secured Parties under or in connection with the Loan Documents.
(b) No Subrogation. Notwithstanding any payment or payments by any of the Guarantors hereunder, or any setoff or application of funds of any of the Guarantors by the Administrative Agent or any other Secured Party, or the receipt of any amounts by the Administrative Agent or any other Secured Party with respect to any of the Guaranteed Obligations, none of the Guarantors shall be entitled to be subrogated to any of the rights of the Administrative Agent or any other Secured Party against the Borrower or the other Guarantors or against any collateral security held by the Administrative Agent or any other Secured Party for the payment of the Guaranteed Obligations nor shall any of the Guarantors seek any reimbursement or contribution from the Borrower or any of the other Guarantors in respect of payments made by such Guarantor in connection with the Guaranteed Obligations, until all amounts owing to the Administrative Agent and the Secured Parties on account of the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) are indefeasibly paid in full in cash and the Commitments are terminated. If any amount shall be paid to any Guarantor on account of such subrogation reimbursement or contribution rights at any time when all of such Guaranteed Obligations shall not have been indefeasibly paid in full, such amount shall be held by such Guarantor in trust for the Administrative Agent, segregated from other funds of such Guarantor, and shall, forthwith upon receipt by such Guarantor, be turned over to the Administrative Agent in the exact form received by such Guarantor (duly endorsed by such Guarantor to the Administrative Agent, if required) to be applied against the Guaranteed Obligations, whether matured or unmatured, in such order as set forth in the Credit Agreement.
(c) Agreements for Reimbursement. Notwithstanding anything to the contrary contained herein, the parties hereto acknowledge and agree that, as the Borrower is part of an integrated financial enterprise to which the Borrower and each Guarantor are a party, each Guarantor shall have a right of reimbursement and indemnity from the Borrower for any amount paid by such Guarantor in lieu of a right of contribution between the Guarantors and the Borrower.
SECTION 2.4 Nature of Guaranty.
(a) Each Guarantor agrees that this Guaranty is a continuing, unconditional guaranty of payment and performance and not of collection, and that its obligations under this Guaranty shall be primary, absolute and unconditional, irrespective of, and unaffected by, and each Guarantor hereby irrevocably waives, to the extent not prohibited by Applicable Law, any defenses to enforcement it may have (now or in the future) by reason of:
(i) the genuineness, legality, validity, regularity, enforceability or any future amendment of, or change in, or supplement to, the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement or any other agreement, document or instrument to which the Borrower, any Guarantor or any of their respective Subsidiaries or Affiliates is or may become a party, (including any increase in the Secured Obligations resulting from any extension of additional credit or otherwise);
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(ii) any action under or in respect of the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement in the exercise of any remedy, power or privilege contained therein or available to any of them at law, in equity or otherwise, or waiver or refraining from exercising any such remedies, powers or privileges (including any change in the time, place or manner of payment of, or in any other term of, the Obligations or any other obligation of any Credit Party under any Loan Document, or any rescission, waiver, amendment or other modification of any Loan Document or any other agreement, including any increase in the Secured Obligations resulting from any extension of additional credit or otherwise);
(iii) the absence of any action to enforce this Guaranty, the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement or the waiver or consent by the Administrative Agent or any other Secured Party with respect to any of the provisions of this Guaranty, the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement;
(iv) the existence, value or condition of, or failure to perfect its Lien against, any security for or other guaranty of the Guaranteed Obligations or any action, or the absence of any action, by the Administrative Agent or any other Secured Party in respect of such security or guaranty (including, without limitation, the release of any such security or guaranty);
(v) any structural change in, restructuring of or other similar organizational change of the Borrower, any Guarantor, any other guarantors or any of their respective Subsidiaries or Affiliates;
(vi) any other action or circumstances which might otherwise constitute a legal or equitable discharge or defense of a surety or guarantor; or
(vii) any other circumstance (including, without limitation, any statute of limitations) or manner of administering the Loans or any existence of or reliance on any representation by any Secured Party that might vary the risk of any guarantor or otherwise operate as a defense available to, or a legal or equitable discharge of, any Credit Party or any other guarantor or surety;
it being agreed by each Guarantor that, subject to the first sentence of Section 2.2, its obligations under this Guaranty shall not be discharged until the final indefeasible payment and performance, in full, of the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) and the termination of the Commitments.
(b) Each Guarantor represents, warrants and agrees that, to the extent permitted by Applicable Law, the Guaranteed Obligations and its obligations under this Guaranty are not and shall not be subject to any counterclaims, offsets or defenses of any kind (other than the defense of payment or performance) against the Administrative Agent, the other Secured Parties or the Borrower whether now existing or which may arise in the future.
(c) Each Guarantor hereby agrees and acknowledges that the Guaranteed Obligations, and any of them, shall conclusively be deemed to have been created, contracted or incurred, or renewed, extended, amended or waived, in reliance upon this Guaranty, and all dealings among the Borrower and any of the Guarantors, on the one hand, and the Administrative Agent and the other Secured Parties, on the other hand, likewise shall be conclusively presumed to have been had or consummated in reliance upon this Guaranty.
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SECTION 2.5 Waivers. To the extent permitted by Applicable Law, each Guarantor expressly, unconditionally and irrevocably waives all of the following rights and defenses (and agrees not to take advantage of or assert any such right or defense):
(a) any rights it may now or in the future have under any statute, or at law or in equity, or otherwise, to compel the Administrative Agent or any other Secured Party to proceed in respect of the Guaranteed Obligations against the Borrower, any Guarantor, any other guarantor or any other Person or against any security for or other guaranty of the payment and performance of the Guaranteed Obligations before proceeding against, or as a condition to proceeding against, such Guarantor;
(b) any defense based upon the failure of the Administrative Agent or any other Secured Party to commence an action in respect of the Guaranteed Obligations against the Borrower, any Guarantor, any other guarantor or any other Person or any security for the payment and performance of the Guaranteed Obligations;
(c) any right to insist upon, plead or in any manner whatever claim or take the benefit or advantage of, any appraisal, valuation, stay, extension, marshalling of assets or redemption laws, or exemption, whether now or at any time hereafter in force, which may delay, prevent or otherwise affect the performance by such Guarantor of its obligations under, or the enforcement by the Administrative Agent or the other Secured Parties of this Guaranty;
(d) any right of diligence, presentment, demand, protest and notice of whatever kind or nature (except as specifically required herein or in the other Loan Documents) with respect to any of the Guaranteed Obligations or any requirement that any Secured Party protect, secure, perfect or insure any Lien or any property subject thereto;
(e) any and all rights to notice of the creation, renewal, extension or accrual of any of the Guaranteed Obligations and notice of acceptance of, or proof of reliance upon, this Guaranty by the Administrative Agent or any other Secured Party; and
(f) any defense or right of setoff or recoupment or counterclaim (other than a defense of payment) against or in respect of the Guaranteed Obligations;
Each Guarantor agrees that any notice or directive given at any time to the Administrative Agent or any other Secured Party which is inconsistent with any of the foregoing waivers shall be null and void and may be ignored by the Administrative Agent or such Secured Party, and, in addition, may not be pleaded or introduced as evidence in any litigation relating to this Guaranty for the reason that such pleading or introduction would be at variance with the written terms of this Guaranty, unless the Administrative Agent and the Required Lenders have specifically agreed otherwise in writing. The foregoing waivers are of the essence of the transaction contemplated by the Credit Agreement, the other Loan Documents, the Secured Cash Management Agreements and the Secured Hedge Agreements and, but for this Guaranty and such waivers, the Administrative Agent and other Secured Parties would decline to enter into the Credit Agreement, the other Loan Documents, the Secured Cash Management Agreements and the Secured Hedge Agreements.
SECTION 2.6 Modification of Loan Documents, etc. Neither the Administrative Agent nor any other Secured Party shall incur any liability to any Guarantor as a result of any of the following, and none of the following shall impair or release this Guaranty or any of the obligations of any Guarantor under this Guaranty:
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(a) any change or extension of the manner, place or terms of payment of, or renewal or alteration of all or any portion of, the Guaranteed Obligations;
(b) any action under or in respect of the Credit Agreement, any other Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement in the exercise of any remedy, power or privilege contained therein or available to any of them at law, in equity or otherwise, or waiver or refraining from exercising any such remedies, powers or privileges;
(c) any amendment to, or modification of, in any manner whatsoever, any Loan Document, any Secured Cash Management Agreement or any Secured Hedge Agreement;
(d) any extension or waiver of the time for performance by any Guarantor, any other guarantor, the Borrower or any other Person of, or compliance with, any term, covenant or agreement on its part to be performed or observed under a Loan Document, a Secured Cash Management Agreement or a Secured Hedge Agreement, or waiver of such performance or compliance or consent to a failure of, or departure from, such performance or compliance;
(e) the taking and holding of security or collateral for the payment of the Guaranteed Obligations or the sale, exchange, release, disposal of, or other dealing with, any property pledged, mortgaged or conveyed, or in which the Administrative Agent or the other Secured Parties have been granted a Lien, to secure any Indebtedness of any Guarantor, any other guarantor, the Borrower or any other Person to the Administrative Agent or the other Secured Parties;
(f) the release of anyone who may be liable in any manner for the payment of any amounts owed by any Guarantor, any other guarantor or the Borrower to the Administrative Agent or any other Secured Party;
(g) any modification or termination of the terms of any intercreditor or subordination agreement pursuant to which claims of other creditors of any Guarantor, any other guarantor or the Borrower are subordinated to the claims of the Administrative Agent or any other Secured Party; or
(h) any application of any sums by whomever paid or however realized to any Guaranteed Obligations owing by any Guarantor, any other guarantor or the Borrower to the Administrative Agent or any other Secured Party in such manner as the Administrative Agent or any other Secured Party shall determine in its reasonable discretion.
SECTION 2.7 Demand by the Administrative Agent. In addition to the terms set forth in this Article II and in no manner imposing any limitation on such terms, if all or any portion of the then outstanding Guaranteed Obligations are declared to be immediately due and payable, then the Guarantors shall, upon demand in writing therefor by the Administrative Agent to the Guarantors, pay all or such portion of the outstanding Guaranteed Obligations due hereunder then declared due and payable.
SECTION 2.8 Remedies. Upon the occurrence and during the continuance of any Event of Default, with the consent of the Required Lenders, the Administrative Agent may, or upon the request of the Required Lenders, the Administrative Agent shall, enforce against the Guarantors their obligations and liabilities hereunder and exercise such other rights and remedies as may be available to the Administrative Agent hereunder, under the Credit Agreement, the other Loan Documents, the Secured Cash Management Agreements, the Secured Hedge Agreements or otherwise; provided that upon the
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occurrence and during the continuance of any Event of Default attributable to a failure to comply with the Financial Covenant (which has not become an Event of Default with respect to the Term Loans pursuant to Section 10.1(d) of the Credit Agreement), actions pursuant to this Section 2.8 may be taken by the Required Revolving Credit Lenders with respect to the Revolving Credit Loans and the Revolving Credit Commitments only (without the requirement for Required Lender action) or by the Administrative Agent at the direction of the Required Revolving Credit Lenders.
SECTION 2.9 Benefits of Guaranty. The provisions of this Guaranty are for the benefit of the Administrative Agent and the other Secured Parties and their respective permitted successors, transferees, endorsees and assigns, and nothing herein contained shall impair, as between the Borrower and its Subsidiaries, the Administrative Agent and the other Secured Parties, the obligations of the Borrower and its Subsidiaries under the Loan Documents, the Secured Cash Management Agreements or the Secured Hedge Agreements. In the event all or any part of the Guaranteed Obligations are transferred, endorsed or assigned by the Administrative Agent or any other Secured Party to any Person or Persons as permitted under the Credit Agreement, any reference to an Administrative Agent, or Secured Party herein shall be deemed to refer equally to such Person or Persons.
SECTION 2.10 Termination; Reinstatement.
(a) Subject to clause (c) below, this Guaranty shall remain in full force and effect until all the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) and all the obligations of the Guarantors shall have been indefeasibly paid in full in cash and the Commitments terminated.
(b) No payment made by the Borrower, any Guarantor, any other guarantor or any other Person received or collected by the Administrative Agent or any other Secured Party from the Borrower, any Guarantor, any other guarantor or any other Person by virtue of any action or proceeding or any setoff or appropriation or application at any time or from time to time in reduction of or in payment of the Guaranteed Obligations shall be deemed to modify, reduce, release or otherwise affect the liability of any Guarantor hereunder which shall, notwithstanding any such payment (other than any payment made by such Guarantor in respect of the obligations of the Guarantors or any payment received or collected from such Guarantor in respect of the obligations of the Guarantors), remain liable for the obligations of the Guarantors up to the maximum liability of such Guarantor hereunder until the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) and all the obligations of the Guarantors shall have been indefeasibly paid in full in cash and the Commitments terminated.
(c) Each Guarantor agrees that, if any payment made by the Borrower or any other Person applied to the Guaranteed Obligations is at any time avoided, annulled, set aside, rescinded, invalidated, declared to be fraudulent or preferential or otherwise required to be refunded or repaid, or is repaid in whole or in part pursuant to a good faith settlement of a pending or threatened avoidance claim, or the proceeds of any Collateral are required to be refunded by the Administrative Agent or any other Secured Party to the Borrower, its estate, trustee, receiver or any other Person, including, without limitation, any Guarantor, under any Applicable Law or equitable cause, then, to the extent of such payment or repayment, each Guarantors liability hereunder (and any Lien or Collateral securing such liability) shall
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be and remain in full force and effect, as fully as if such payment had never been made, and, if prior thereto, this Guaranty shall have been canceled or surrendered (and if any Lien or Collateral securing such Guarantors liability hereunder shall have been released or terminated by virtue of such cancellation or surrender), this Guaranty (and such Lien or Collateral) shall be reinstated in full force and effect, and such prior cancellation or surrender shall not diminish, release, discharge, impair or otherwise affect the obligations of such Guarantor in respect of the amount of such payment (or any Lien or Collateral securing such obligation).
SECTION 2.11 Payments. Any payments by the Guarantors shall be made to the Administrative Agent, to be credited and applied to the Guaranteed Obligations in accordance with Section 10.4 of the Credit Agreement, in immediately available Dollars to an account designated by the Administrative Agent or at the Administrative Agents Office or at any other address that may be specified in writing from time to time by the Administrative Agent.
SECTION 2.12 Keepwell. Each Qualified ECP Guarantor (as defined below) hereby jointly and severally, absolutely, unconditionally and irrevocably undertakes to provide such funds and other support as may be needed from time to time by each other Credit Party to honor all of its obligations under this Guaranty and the other Loan Documents in respect of Swap Obligations (provided, however, that each Qualified ECP Guarantor shall only be liable under this Section for the maximum amount of such liability that can be hereby incurred without rendering its obligations under this Section, or otherwise under this Guaranty or any other Loan Document, voidable under Debtor Relief Laws and not for any greater amount). Subject to Section 2.10, the obligations of each Qualified ECP Guarantor under this Section shall remain in full force and effect until all of the Guaranteed Obligations and all the obligations of the Guarantors shall have been paid in full in cash and the Commitments terminated. Each Qualified ECP Guarantor intends that this Section constitute, and this Section shall be deemed to constitute, a keepwell, support or other agreement for the benefit of each other Credit Party for all purposes of Section 1a(18)(A)(v)(II) of the Commodity Exchange Act. For purposes of this Section, Qualified ECP Guarantor means, in respect of any Swap Obligation, each Credit Party that has total assets exceeding $10,000,000 at the time the relevant guarantee or grant of the relevant security interest becomes effective with respect to such Swap Obligation or such other Person as constitutes an eligible contract participant under the Commodity Exchange Act or any regulations promulgated thereunder and can cause another Person to qualify as an eligible contract participant at such time by entering into a keepwell under Section 1a(18)(A)(v)(II) of the Commodity Exchange Act.
ARTICLE III
[RESERVED]
ARTICLE IV
[RESERVED]
ARTICLE V
MISCELLANEOUS
SECTION 5.1 Notices. All notices and communications hereunder shall be given to the addresses and otherwise made in accordance with Section 12.1 of the Credit Agreement; provided that notices and communications to the Guarantors shall be directed to the Guarantors, at the address of the Borrower set forth in Section 12.1 of the Credit Agreement.
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SECTION 5.2 Amendments, Waivers and Consents. None of the terms or provisions of this Guaranty may be waived, amended, supplemented or otherwise modified, nor any consent be given, except in accordance with Section 12.2 of the Credit Agreement.
SECTION 5.3 Expenses; Indemnification; Waiver of Consequential Damages, etc.
(a) The Guarantors shall, jointly and severally, pay all reasonable out-of-pocket expenses (including, without limitation, reasonable and documented attorneys fees and expenses) incurred by the Administrative Agent and each other Secured Party to the extent the Borrower would be required to do so pursuant to Section 12.3 of the Credit Agreement.
(b) The Guarantors shall, jointly and severally, pay and indemnify each Indemnitee against Indemnified Taxes and Other Taxes to the extent the Borrower would be required to do so pursuant to Section 5.11 of the Credit Agreement.
(c) The Guarantors shall, jointly and severally, indemnify each Indemnitee to the extent the Borrower would be required to do so pursuant to Section 12.3 of the Credit Agreement.
(d) Notwithstanding anything to the contrary contained in this Guaranty, to the fullest extent permitted by Applicable Law, each Guarantor agrees that it shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, this Guaranty, any other Loan Document, any Secured Cash Management Agreement, any Secured Hedge Agreement or any agreement or instrument contemplated hereby, the transactions contemplated hereby or thereby, any Loan or Letter of Credit or the use of the proceeds thereof.
(e) No Indemnitee referred to in this Section 5.3 shall be liable for any damages arising from the use by unintended recipients of any information or other materials distributed by it through telecommunications, electronic or other information transmission systems in connection with this Guaranty, the other Loan Documents, any Secured Cash Management Agreements, any Secured Hedge Agreements or the transactions contemplated hereby or thereby, except to the extent resulting from its gross negligence or willful misconduct as determined by a court of competent jurisdiction in a final non-appealable judgment.
(f) All amounts due under this Section 5.3 shall be payable promptly after demand therefor.
(g) Each partys obligations under this Section 5.3 shall survive the termination of the Loan Documents and the payment of the Obligations thereunder.
SECTION 5.4 Right of Setoff. If an Event of Default shall have occurred and be continuing, each Secured Party and each of its respective Affiliates is hereby authorized at any time and from time to time, to the fullest extent permitted by Applicable Law, to setoff and apply any and all deposits (general or special, time or demand, provisional or final, in whatever currency) at any time held and other obligations (in whatever currency) at any time owing by such Secured Party or any such Affiliate to or for the credit or the account of such Guarantor to the same extent a Lender could do so under Section 12.4 of the Credit Agreement. The rights of each Secured Party and its respective Affiliates under this Section 5.4 are in addition to other rights and remedies (including other rights of setoff) that such Secured Party or its respective Affiliates may have. Each Secured Party agrees to notify such Guarantor and the Administrative Agent promptly after any such setoff and application; provided that the failure to give such notice shall not affect the validity of such setoff and application.
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SECTION 5.5 Governing Law; Jurisdiction; Venue; Service of Process.
(a) Governing Law. This Guaranty and any claim, controversy, dispute or cause of action (whether in contract or tort or otherwise) based upon, arising out of or relating to this Guaranty and the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the State of New York.
(b) Submission to Jurisdiction. Each Guarantor agrees that it will not commence any action, litigation or proceeding of any kind or description, whether in law or equity, whether in contract or in tort or otherwise against the Administrative Agent, or any other Secured Party or any Related Party of the foregoing, in any way relating to this Guaranty or the transactions relating hereto in any forum other than the courts of the State of New York sitting in New York County, and of the United States District Court of the Southern District of New York, and any appellate court from any thereof and each of the parties hereto irrevocably and unconditionally submits to the jurisdiction of such courts and agrees that all claims in respect of any such action, litigation or proceeding may be heard and determined in such New York State court or, to the fullest extent permitted by Applicable Law, in such federal court. Each of the parties hereto agrees that a final judgment in any such action, litigation or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Guaranty or in any other Loan Document shall affect any right that the Administrative Agent or any other Secured Party may otherwise have to bring any action, litigation or proceeding relating to this Guaranty or any other Loan Document against any Guarantor or its Properties in the courts of any jurisdiction.
(c) Waiver of Venue. Each Guarantor irrevocably and unconditionally waives, to the fullest extent permitted by Applicable Law, any objection that it may now or hereafter have to the laying of venue of any action, litigation or proceeding arising out of or relating to this Guaranty or any other Loan Document in any court referred to in paragraph (b) of this Section 5.5. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by Applicable Law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Service of Process. Each party hereto irrevocably consents to service of process in the manner provided for notices in Section 12.1 of the Credit Agreement. Nothing in this Guaranty will affect the right of any party hereto to serve process in any other manner permitted by Applicable Law.
(e) Appointment of the Borrower as Agent for the Guarantors. Each Guarantor hereby irrevocably appoints and authorizes the Borrower to act as its agent for service of process and notices required to be delivered under this Guaranty or under the other Loan Documents, it being understood and agreed that receipt by the Borrower of any summons, notice or other similar item shall be deemed effective receipt by such Guarantor and its Subsidiaries.
SECTION 5.6 Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN ANY LEGAL PROCEEDING DIRECTLY OR INDIRECTLY ARISING OUT OF OR RELATING TO THIS GUARANTY OR ANY OTHER LOAN DOCUMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY (WHETHER BASED ON CONTRACT, TORT OR ANY OTHER THEORY). EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PERSON HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PERSON WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS GUARANTY AND THE OTHER LOAN DOCUMENTS BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION 5.6.
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SECTION 5.7 Injunctive Relief. Each Guarantor recognizes that, in the event such Guarantor fails to perform, observe or discharge any of its obligations or liabilities under this Guaranty or any other Loan Document, any remedy of law may prove to be inadequate relief to the Administrative Agent and the other Secured Parties. Therefore, each Guarantor agrees that the Administrative Agent and the other Secured Parties, at the option of the Administrative Agent and the other Secured Parties, shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages.
SECTION 5.8 No Waiver by Course of Conduct, Cumulative Remedies. No course of dealing between any Guarantor, the Administrative Agent or any Secured Party or their respective agents or employees shall be effective to change, modify or discharge any provision of this Guaranty or any other Loan Documents or to constitute a waiver of any Event of Default. The enumeration of the rights and remedies of the Administrative Agent and the other Secured Parties set forth in this Guaranty is not intended to be exhaustive and the exercise by the Administrative Agent and the other Secured Parties of any right or remedy shall not preclude the exercise of any other rights or remedies, all of which shall be cumulative, and shall be in addition to any other right or remedy given hereunder or under the other Loan Documents or that may now or hereafter exist at law or in equity or by suit or otherwise. Neither the Administrative Agent nor any other Secured Party shall by any act (except by a written instrument pursuant to Section 5.2), delay, indulgence, omission or otherwise be deemed to have waived any right or remedy hereunder or to have acquiesced in any Default or Event of Default. No delay or failure to take action on the part of the Administrative Agent or any other Secured Party in exercising any right, power or privilege hereunder shall operate as a waiver thereof nor shall any single or partial exercise of any such right, power or privilege hereunder preclude any other or further exercise thereof or the exercise of any other right, power or privilege or shall be construed to be a waiver of any Event of Default. A waiver by the Administrative Agent or any other Secured Party of any right or remedy hereunder on any one occasion shall not be construed as a bar to any right or remedy which the Administrative Agent or such Secured Party would otherwise have on any future occasion.
SECTION 5.9 Successors and Assigns. The provisions of this Guaranty shall be binding upon and inure to the benefit of the parties hereto and their respective successors and permitted assigns; except that no Guarantor may assign or otherwise transfer any of its rights or obligations under this Guaranty without the prior written consent of the Administrative Agent and the other Secured Parties (except as otherwise provided by the Credit Agreement).
SECTION 5.10 All Powers Coupled With Interest. All powers of attorney and other authorizations granted to the Secured Parties, the Administrative Agent and any Persons designated by the Administrative Agent or any other Secured Party pursuant to any provisions of this Guaranty or any of the other Loan Documents shall be deemed coupled with an interest and shall be irrevocable so long as any of the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) remain unpaid or unsatisfied, any of the Commitments remain in effect or the Credit Facility has not been terminated.
SECTION 5.11 Survival of Indemnities. Notwithstanding any termination of this Guaranty, the indemnities to which the Administrative Agent and the other Secured Parties are entitled under the provisions of Section 5.3 and any other provision of this Guaranty and the other Loan Documents shall continue in full force and effect and shall protect the Administrative Agent and the other Secured Parties against events arising after such termination as well as before.
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SECTION 5.12 Severability of Provisions. Any provision of this Guaranty which is prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective only to the extent of such prohibition or unenforceability without invalidating the remainder of such provision or the remaining provisions hereof or thereof or affecting the validity or enforceability of such provision in any other jurisdiction.
SECTION 5.13 Counterparts. This Guaranty may be executed in any number of counterparts (and by different parties hereto in separate counterparts), each of which shall constitute an original, but all of which taken together shall constitute a single contract. Delivery of an executed counterpart of a signature page to this Guaranty or any document or instrument delivered in connection herewith by facsimile or in electronic (i.e., pdf or tif) form shall be effective as delivery of a manually executed counterpart of this Guaranty or such other document or instrument, as applicable.
SECTION 5.14 Integration. This Guaranty and the other Loan Documents, and any separate letter agreements with respect to fees constitute the entire contract of the parties relating to the subject matter hereof and supersede all previous agreements and understandings, written or oral, relating to the subject matter hereof. In the event of any conflict between the provisions of this Guaranty and those of (a) the Credit Agreement, the provisions of the Credit Agreement shall control, (b) the Collateral Agreement, the provisions of the Collateral Agreement shall control and (c) any other Loan Document not referenced in clauses (a) and (b) above, the provisions of this Guaranty shall control; provided that the inclusion of supplemental rights or remedies in favor of the Administrative Agent or the other Secured Parties in any other Loan Document shall not be deemed a conflict with this Guaranty.
SECTION 5.15 Advice of Counsel, No Strict Construction. Each of the parties represents to each other party hereto that it has discussed this Guaranty with its counsel. The parties hereto have participated jointly in the negotiation and drafting of this Guaranty. In the event an ambiguity or question of intent or interpretation arises, this Guaranty shall be construed as if drafted jointly by the parties hereto and no presumption or burden of proof shall arise favoring or disfavoring any party by virtue of the authorship of any provisions of this Guaranty.
SECTION 5.16 Acknowledgements. Each Guarantor hereby acknowledges that it has received a copy of the Credit Agreement and has reviewed and understands the same.
SECTION 5.17 Releases.
(a) Subject to Section 11.9 of the Credit Agreement, at such time as the Guaranteed Obligations (other than (1) contingent indemnification obligations, (2) obligations and liabilities under Secured Cash Management Agreements or Secured Hedge Agreements as to which arrangements satisfactory to the applicable Cash Management Bank or Hedge Bank shall have been made and (3) Letters of Credit that have either been Cash Collateralized or as to which arrangements satisfactory to the Issuing Lender have been made) shall have been paid in full in cash and the Commitments have been terminated, this Guaranty and all obligations (other than those expressly stated to survive such termination or as may be reinstated after such termination) of the Administrative Agent and each Guarantor hereunder shall automatically terminate, all without delivery of any instrument or performance of any act by any party.
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(b) In the event that all the Equity Interests of any Guarantor of the Borrower shall be sold, transferred or otherwise disposed of in a transaction permitted by the Credit Agreement, then, at the request of the Borrower and at the expense of the Guarantor, such Guarantor shall be released from its obligations hereunder and the Administrative Agent will execute and deliver to such Guarantor such documents as such Guarantor may reasonably request to evidence the release of such Guarantor from its obligations under this Guaranty, in each case, in accordance with the terms of this Guaranty and Section 11.9 of the Credit Agreement.
SECTION 5.18 Additional Guarantors. Each Subsidiary of the Borrower that is required to become a party to this Guaranty pursuant to Section 8.14 of the Credit Agreement shall become a Guarantor for all purposes of this Guaranty upon execution and delivery by such Subsidiary of a supplement in form and substance satisfactory to the Administrative Agent.
SECTION 5.19 Secured Parties. Each Secured Party not a party to the Credit Agreement who obtains the benefit of this Guaranty shall be deemed to have acknowledged and accepted the appointment of the Administrative Agent pursuant to the terms of the Credit Agreement, and that with respect to the actions and omissions of the Administrative Agent hereunder or otherwise relating hereto that do or may affect such Secured Party, the Administrative Agent and each of its Affiliates shall be entitled to all the rights, benefits and immunities conferred under Article XI of the Credit Agreement.
SECTION 5.20 Borrower Guaranty. The Borrower hereby guarantees to the Administrative Agent for the benefit of the Secured Parties, and their respective permitted successors and assigns, the full payment and performance of each Guarantors obligations under any Secured Hedge Agreements and Secured Cash Management Agreements. In furtherance of the foregoing, references herein to Guarantor (other than references in Sections 2.1 and 2.3) shall include the Borrower solely in its capacity as a guarantor pursuant to this Section 5.20.
[Signature Pages to Follow]
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IN WITNESS WHEREOF, each of the Guarantors has executed and delivered this Guaranty under seal by their duly authorized officers, all as of the day and year first above written.
NV NAP 2, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
NV NAP 7, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
NV NAP 8, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
NV NAP 9, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
SUPERNAP RENO, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer |
Switch, Ltd.
Amended and Restated Subsidiary Guaranty Agreement
Signature Pages
SINAP - TIX, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
SWITCH BUSINESS SOLUTIONS, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer | |
SUPERNAP GRAND RAPIDS, LLC, as Guarantor | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer |
Switch, Ltd.
Amended and Restated Subsidiary Guaranty Agreement
Signature Pages
SWITCH, LTD., as Borrower | ||
By: | /s/ Gabriel Nacht | |
Name: | Gabriel Nacht | |
Title: | Chief Financial Officer |
Switch, Ltd.
Amended and Restated Subsidiary Guaranty Agreement
Signature Pages
Acknowledged by the Administrative Agent as of the day and year first written above: | ||
WELLS FARGO BANK, NATIONAL ASSOCIATION, as Administrative Agent | ||
By: | /s/ Olga E. Wisnicky | |
Name: | Olga E. Wisnicky | |
Title: | Senior Vice President |
Switch, Ltd.
Amended and Restated Subsidiary Guaranty Agreement
Signature Pages
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