Monotype Imaging Holdings Inc.

We have operating leases for corporate offices and certain equipment. Our leases have remaining lease terms of 1 year to 6 years, some of which contain options to extend the leases for up to 5 years and some which include options to terminate the leases within 1 year. We have lease agreements with lease and non-lease components, which are generally accounted for separately.

We determine if an arrangement is a lease at inception. Operating leases are included in the operating lease right-of-use (“ROU”) assets and the short-term and long-term lease liabilities on our consolidated balance sheets. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on information available at commencement date in determining the present value of lease payments. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

On March 22, 2019, the Company entered into a new credit agreement (the “New Credit Agreement”) by and among the Company, the Company’s subsidiary, Monotype Imaging Inc., (“the Borrower”), any financial institution that becomes a Lender and Bank of America, N.A., as administrative agent. Pursuant to the New Credit Agreement the Lenders have agreed to provide the Borrower with a five-year $200.0 million senior secured revolving credit facility (the “Credit Facility”). The Credit Facility permits the Company to request that the Lenders, at their election, increase the secured credit facility to a maximum of $300.0 million. The Credit Facility provides more flexibility in addition to an increased borrowing capacity and extended terms, as defined above. The New Credit Agreement replaced the Company’s existing $150.0 million revolving credit facility (the “Original Credit Agreement”) by and between the Company and Silicon Valley Bank. The Original Credit Agreement was terminated effective March 22, 2019 and was scheduled to expire on September 15, 2020. The Company had $75.0 million outstanding under the Original Credit Agreement at December 31, 2018. Available borrowings under the Original Credit Agreement were reduced by approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $74.5 million available for borrowings at December 31, 2018. At March 31, 2019, the Company had $70.0 million outstanding under the Credit Facility. Available borrowings under the Credit Facility have been reduced by approximately $0.5 million for one standby letter of credit issued in connection with a facility lease agreement, leaving $129.5 million available for borrowings at March 31, 2019.

Borrowings under the Credit Facility bear interest through March 21, 2024 at a variable rate per annum equal to LIBOR plus between 1.0% and 1.625%, or at the Borrower’s option, the higher of (i) the prime rate as announced by Bank of America and (ii) 0.5% plus the overnight federal funds rate, plus in each case, between 0.0% and 0.625%, with the exact interest rate margin determined based on the consolidated leverage ratio. The Company is required to pay a commitment fee, based on the consolidated leverage ratio, equal to 0.175%, 0.20%, 0.225% or 0.25% per annum on the undrawn portion available under the revolving credit facility and variable per annum fees in respect of outstanding letters of credit. In connection with the New Credit Agreement, the Company incurred closing and legal fees of approximately $0.9 million, which have been accounted for as deferred financing costs, that, together with approximately $0.3 million of unamortized deferred financing costs associated with loan syndicate lenders who participated in the new facility, will be amortized to interest expense over the term of the New Credit Agreement. In addition, $34 thousand of unamortized deferred financing costs associated with the pro-rata share of prior loan syndicate lenders that did not participate in the new facility were written off and charged to other expense in the first quarter of 2019.

The New Credit Agreement includes financial covenants which require the Company to maintain (i) a consolidated leverage ratio of no greater than 3.25 to 1.0 or, upon a qualified acquisition subject to certain conditions, 3.75 to 1.0 and (ii) a minimum consolidated interest coverage ratio of 3.00 to 1.0. At March 31, 2019, our consolidated leverage ratio was 0.72 to 1.0 and our consolidated interest coverage ratio was 18.61 to 1.0. The New Credit Agreement also contains customary affirmative and negative covenants for transactions of this type and other affirmative and negative covenants agreed to by the parties, including, among others, limits on the Company and its subsidiaries’ ability to incur debt or liens, engage in sale-leaseback transactions, make loans, investments and acquisitions, incur additional indebtedness, engage in mergers, enter into asset sales, transact with affiliates and alter its business. Adjusted EBITDA, under the Credit Facility, is defined as consolidated net earnings (or loss), plus net interest expense, income taxes, depreciation and amortization, and share based compensation expense, plus acquisition expenses not to exceed $2.0 million, minus capitalized research and development expense, plus restructuring, issuance costs, cash non-operating costs and other expenses or losses minus cash non-operating gains and other non-cash gains; provided, however that the aggregate of all cash non-operating expense shall not exceed 10% of Consolidated EBITDA. The New Credit Agreement also provides for a number of customary events of default, including, among others, payment, bankruptcy, covenant, representation and warranty, change of control and judgment defaults. Failure to comply with these covenants, or the occurrence of an event of default, could permit the Lenders under the New Credit Agreement to declare all amounts borrowed under the New Credit Agreement, together with accrued interest and fees, to be immediately due and payable. The obligations of the Borrower under the Credit Facilities are unconditionally guaranteed by the Company and certain subsidiaries and secured by a lien on substantially all of the present and future property and assets of the Company and such subsidiaries, in each case, subject to limited exceptions and exclusions.

On June 6, 2018, the Company implemented a restructuring plan, under which the Company reduced headcount in certain areas of the Company, made the decision to cease sales and marketing of the Swyft product and service line and to close a regional office, all in an effort to improve operational efficiencies. The plan provided for the elimination of approximately 50 positions worldwide across a variety of functions, with a concentration within engineering, as well as sales and marketing. The Company recorded net charges totaling $6.8 million related to severance and termination benefits, net of stock based compensation reversal, the write off of goodwill and intangible assets attributable to Swyft, the acceleration of the final deferred compensation payment to the founders of Swyft, and charges associated with the office closure. We reversed $1.4 million of stock based compensation expense as a result of forfeitures of awards by employees included in the restructuring plan. In the three months ended March 31, 2019, the severance and termination accrual was reduced based the completion of certain final termination agreements. This restructuring plan was completed by December 31, 2018, other than the payment of deferred termination benefits to certain terminated employees. The Company continued to refine its cost structure, and in December 2018, implemented a restructuring plan in an effort to improve operational efficiencies. The plan provided for the elimination of 15 positions worldwide, including the positions held by two of the Olapic founders. To date, the Company recorded charges of approximately $1.0 million for severance and termination benefits associated with this plan and $0.9 million of accelerated expense associated with the final deferred compensation payment in connection with the departure of those founders. In addition, $0.9 million was recorded for additional stock based compensation expense associated with the acceleration of the vesting of those departing founders’ equity grants in accordance with the separation agreements. We expect this restructuring plan to be completed by the second quarter of 2019, other than the payment of deferred termination benefits to certain terminated employees.