Document:

exhibit101.htm

 

	
Contact:

	  	
Aric Spitulnik

	  	  	
Harriet Fried

	  	  	
TESSCO Technologies Incorporated

	  	  	
LHA

	  	  	
Chief Financial Officer

	  	  	
212-838-3777

	  	  	
410-229-1419

	  	  	
hfried@lhai.com

	  	  	
spitulnik@tessco.com

	  	  	  

TESSCO Reports Second Quarter Earnings of $0.55 per Share

Quarterly Dividend of $0.18 Declared

 

HUNT VALLEY, MD, OCTOBER 23, 2013, TESSCO (NASDAQ: TESS)

 

	●	  	
Revenues were $147 million and core revenues* grew 5% compared to Q2 FY2013.

	●	  	
Operating margin increased to 5.2% compared to 4.4% last year.

	●	  	
EBITDA** was $1.06 per share.

	●	  	
FY 2014 EPS guidance raised to $1.90 - $2.10.

	●	  	
Aric Spitulnik elected to position of Chief Financial Officer.

TESSCO, Your Total Source® for the product and value chain solutions to build, use and maintain wireless systems, today reported its second quarter results for the period ended September 29, 2013.

 

TESSCO reported second quarter revenue of $146.5 million, and net income of $4.6 million or $0.55 per share.

 

“TESSCO made great progress again this quarter in the transition of our business to focus solely on being a total solutions provider, and in the replacement of the $213 million in annual revenues we generated from a third party logistics relationship that ended in fiscal 2013,” said Chairman and CEO Robert B. Barnhill, Jr.

“Our 59 percent growth in purchases from our public carrier customers, and the 22 percent growth in sales of our Ventev® proprietary products demonstrate that our customers recognize the benefit of a partner that can bring the right products and solutions together to deliver everything that is required, when and where it is needed at the lowest total cost.

 

  

  

  

 

“Our goal is to expand this level of success into our other customer markets, namely industrial and enterprise system operators, government, and resellers. Our confidence in achieving this goal is high because of the strength of our value proposition, product offering, marketing, sales and delivery strategies, and the new opportunities in the expanding world of voice, data and video wireless connectivity.”

 

Mr. Barnhill concluded, “I am also very pleased to announce that Aric Spitulnik has been elected to the position of Chief Financial Officer.  Over the past year, Aric – who joined TESSCO in 2000 and has served as the Company’s controller since 2005 – has taken a heightened role in all financial and strategic areas of our business.  We are delighted to recognize his contribution and talent with this appointment and are confident that his in-depth knowledge and experience will contribute to TESSCO’s continued success.”

 

Second-Quarter Fiscal 2014 Financial Results

For our fiscal 2014 second quarter, revenues totaled $146.5 million as compared to $197.2 million in the 2013 quarter, which included revenue from the since transitioned 3PL relationship, and $139.6 million in the 2013 quarter excluding revenues from that relationship. Core revenues* grew 5 percent from the prior-year period. The public carrier market produced 59 percent revenue growth as compared to the prior-year period, and the commercial dealer and reseller market produced 2 percent revenue growth. Revenues from the retailer, independent dealer agent and carrier market fell by 13 percent, while revenues from the private & government system operators decreased by 9 percent. Sales of our Ventev® design and manufacturing division, which supplies products into all of our markets, grew 22 percent as compared to the same quarter last year.

Second-quarter fiscal 2014 gross profit was $36.5 million compared to $38.6 million in last year’s second quarter, which included a $4.6 million gross profit contribution from the transitioned 3PL business. Largely due to the transition of the low-margin 3PL business, gross margin increased to 24.9 percent in this year’s second quarter from 19.6 percent in last year’s period.

Selling general and administrative (SG&A) expenses were $28.9 million, compared to $29.9 million in last year’s second quarter, primarily due to a reduction in expenses associated with the transitioned 3PL business. Operating margin rose to 5.2 percent from 4.4 percent in the prior-year quarter.

EBITDA** totaled $8.9 million, or $1.06 per diluted share, in the second quarter of fiscal 2014, as compared to $10.0 million, or $1.21 per diluted share, in the prior-year quarter.

Net income and diluted earnings per share totaled $4.6 million and $0.55 in the second quarter of fiscal 2014, respectively, as compared to $5.3 million and $0.64 in the prior-year quarter, respectively.

For the first half of fiscal 2014, TESSCO reported revenues of $290.6 million and net income of $8.9 million, or $1.06 per diluted share.  These results compare to revenues of $389.7 million and net income of $9.5 million, or $1.15 per diluted share, for the first half of fiscal 2013.  EBITDA** for the first half of fiscal 2014 totaled $17.0 million, or $2.04 per share, compared to $18.2 million, or $2.20 per share, for the first half of fiscal 2013.

Quarterly Cash Dividends

The Board of Directors declared a quarterly cash dividend of $0.18 per common share payable on November 20 2013 to holders of record on November 6, 2013.

Any future declaration of dividends, and the establishment of record and payment dates, is subject to further determinations of the Board of Directors.

 

  

  

  

Business Outlook

The Company raised its earnings per diluted share guidance for fiscal 2014 to a range of $1.90 to $2.10 from a range of $1.75 to $2.05.  As TESSCO’s fiscal year progresses and visibility increases, management may review and update its financial targets as appropriate.

Forecasting future results is inherently difficult for any business, and actual results may differ materially from those forecasted. The nature of our business is that we typically ship products within several days after booking orders. The lack of an order backlog makes it even more difficult to forecast future results. The Business Outlook published in this press release reflects only the Company's current best estimate and the Company assumes no obligation to update the information contained in this press release, including the Business Outlook, at any time.

 

Second-Quarter Fiscal 2014 Conference Call

Management will host a conference call to discuss its second-quarter-2014 results on Thursday, October 24, 2013 at 10:00 a.m. ET. To participate in the conference call, please call 877-280-4957 (domestic call-in) or 857-244-7314 (international call-in) and reference code #58255259.

 

A live webcast of the conference call will be available at http://www.tessco.com/go/pressroom. All participants should call or access the website approximately 10 minutes before the conference begins.

 

A telephone replay of the conference call will be available from 2:00 p.m. ET on October 24, 2013 until 11:59 p.m. ET on October 31, 2013 by calling 888-286-8010 (domestic) or 617-801-6888 (international) and entering confirmation #40014034. An archived replay of the conference call will also be available on the company’s website at www.tessco.com/go/corporatepresentations.

 

Chief Financial Officer

Mr. Spitulnik, age 42, graduated from the State University of New York at Buffalo in 1994 with a BS/MBA accounting degree.  He was employed as an accounting professional for several public accounting firms before joining TESSCO in 2000.  Mr. Spitulnik was appointed controller in 2005 and a vice president in 2006. In 2012, he assumed the role of principal accounting officer and was appointed corporate secretary.  As chief financial officer, Mr. Spitulnik will manage the Company’s financial operations and support the Company’s growth strategies.

Thomas (“Ted”) Perez, age 39, who has been with TESSCO for six years in various accounting roles, will follow Mr. Spitulnik as the Company’s controller.  Mr. Perez holds a Bachelor of Science degree in accounting and an MBA with a finance concentration, both from Loyola University, and previously worked for several large public companies as well as the public accounting firm PricewaterhouseCoopers LLP.

*Core Revenues

“Core revenues” are our total revenues other than and excluding revenues related to the major 3PL relationship with a Tier 1 Carrier that transitioned at the completion of fiscal year 2013.  The amount of “core revenues” for a given period is determined by subtracting from total revenues, any revenues related to the major 3PL relationship for the corresponding period.  There are no revenues related to this relationship in fiscal 2014, and thus, total revenues and core revenues are the same for fiscal 2014.

 

  

  

  

 

**Non-GAAP Information

EBITDA, a measure used by management to evaluate the Company’s ongoing operations and as a general indicator of its operating cash flow (in conjunction with a cash flow statement which also includes among other items, changes in working capital and the effect of non-cash charges), is defined as income from operations, plus interest expense, net of interest income, provision for income taxes, and depreciation and amortization. Management believes EBITDA as well as EBITDA per share are useful to investors because they are frequently used by securities analysts, investors and other interested parties in the evaluation of companies. Because not all companies use identical calculations, the Company's presentation of EBITDA and EBITDA per share may not be comparable to other similarly titled measures of other companies. EBITDA is not a recognized term under GAAP and does not purport to be an alternative to net income as a measure of operating performance or to cash flows from operating activities as a measure of liquidity. EBITDA per diluted share is also a non-GAAP calculation defined as EBITDA divided by the Company’s diluted weighted average shares outstanding. Additionally, EBITDA is not intended to be a measure of free cash flow for management's discretionary use, as it does not reflect certain cash requirements such as interest payments, tax payments and debt service requirements. The amounts shown for EBITDA as presented herein differ from the amounts calculated under the definition of EBITDA used in the Company's loan agreements. The definition of EBITDA as used in the Company's loan agreements is further adjusted for certain cash and non-cash charges/credits, including stock compensation expense, and is used to determine compliance with financial covenants and the ability to engage in certain activities such as incurring additional debt.

 

A reconciliation of the Company's non-GAAP to GAAP results is included as an exhibit to this release.

 

About TESSCO

TESSCO Technologies Incorporated (NASDAQ: TESS), is Your Total Source® for making wireless work. The convergence of wireless and the Internet is revolutionizing the way we live, work and play. New systems and applications are creating opportunities and challenges at an unprecedented rate. TESSCO is there, thinking in new ways for exceptional outcomes for customers TESSCO architects and delivers, with innovation, productivity and speed, the product and value chain solutions to organizations responsible for building, using and maintaining wireless broadband systems.

  

  

  

 

Forward-Looking Statements

This press release, including the statements of Robert Barnhill and the discussion under the heading “Business Outlook,” contains forward-looking statements as to anticipated results and future prospects. These forward-looking statements are based on current expectations and analysis, and actual results may differ materially. These forward-looking statements may generally be identified by the use of the words "may," "will," "expects," "anticipates," "believes," "estimates," and similar expressions, but the absence of these words or phrases does not necessarily mean that a statement is not forward-looking. Forward-looking statements involve a number of risks and uncertainties. Our actual results may differ materially from those described in or contemplated by any such forward-looking statement for a variety of reasons, including those risks identified in our most recent Annual Report on Form 10-K and other periodic reports filed with the Securities and Exchange Commission, under the heading “Risk Factors” and otherwise. Consequently, the reader is cautioned to consider all forward-looking statements in light of the risks to which they are subject.

We are not able to identify or control all circumstances that could occur in the future that may adversely affect our business and operating results. Without limiting the risks that we describe in our periodic reports and elsewhere, among the risks that could lead to a materially adverse impact on our business or operating results are the following: termination or non-renewal of limited duration agreements or arrangements with our vendors and affinity partners that are typically terminable by either party upon several months or otherwise relatively short notice; loss of significant customers or relationships, including affinity relationships; loss of customers as a result of consolidation among the wireless communications industry; the strength of our customers’, vendors’ and affinity partners’ business; economic conditions that may impact customers’ ability to fund or pay for our products and services; failure of our information technology system or distribution system; technology changes in the wireless communications industry; third-party freight carrier interruption; increased competition; our inability to access capital and obtain financing as and when needed; and the possibility that, for unforeseen reasons, we may be delayed in entering into or performing, or may fail to enter into or perform, anticipated contracts or may otherwise be delayed in realizing or fail to realize anticipated revenues or anticipated savings.

  

  

  

 

TESSCO Technologies Incorporated

Consolidated Statements of Income (Unaudited)

	  	 	
Fiscal Quarters Ended

	 	 	
Six Months Ended

	 
	  	 	
September 29, 2013

	 	 	
June 30, 2013

	 	 	
September 30, 2012

	 	 	
September 29, 2013

	 	 	
September 30, 2012

	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Revenues

	 	$	146,526,000	 	 	$	144,108,800	 	 	$	197,238,300	 	 	$	290,634,800	 	 	$	389,656,500	 
	
Cost of goods sold

	 	 	110,033,200	 	 	 	108,670,900	 	 	 	158,613,300	 	 	 	218,704,100	 	 	 	315,538,300	 
	
Gross profit

	 	 	36,492,800	 	 	 	35,437,900	 	 	 	38,625,000	 	 	 	71,930,700	 	 	 	74,118,200	 
	
Selling, general and administrative expenses

	 	 	28,903,400	 	 	 	28,474,100	 	 	 	29,887,000	 	 	 	57,377,500	 	 	 	58,449,400	 
	
Income from operations

	 	 	7,589,400	 	 	 	6,963,800	 	 	 	8,738,000	 	 	 	14,553,200	 	 	 	15,668,800	 
	
Interest , net

	 	 	67,000	 	 	 	54,600	 	 	 	12,000	 	 	 	121,600	 	 	 	69,400	 
	
Income before provision for income taxes

	 	 	7,522,400	 	 	 	6,909,200	 	 	 	8,726,000	 	 	 	14,431,600	 	 	 	15,599,400	 
	
Provision for income taxes

	 	 	2,941,300	 	 	 	2,617,000	 	 	 	3,457,100	 	 	 	5,558,300	 	 	 	6,124,000	 
	
Net income

	 	$	4,581,100	 	 	$	4,292,200	 	 	 	5,268,900	 	 	 	8,873,300	 	 	 	9,475,400	 
	  	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Basic earnings per share

	 	$	0.56	 	 	$	0.53	 	 	$	0.66	 	 	$	1.09	 	 	$	1.19	 
	
Diluted earnings per share

	 	$	0.55	 	 	$	0.51	 	 	$	0.64	 	 	$	1.06	 	 	$	1.15	 

  

  

  

TESSCO Technologies Incorporated

Consolidated Balance Sheets

	  	 	
September 29,2013

	 	 	
March 31, 2013

	 
	  	 	
(unaudited)

	 	 	
(audited)

	 
	  	 	 	 	 	 	 
	
ASSETS

	 	 	 	 	 	 
	
Current Assets:

	 	 	 	 	 	 
	
Cash and cash equivalents

	 	$	3,230,500	 	 	$	4,468,000	 
	
Trade accounts receivable, net

	 	 	75,059,700	 	 	 	82,177,600	 
	
Product inventory

	 	 	66,221,700	 	 	 	60,913,600	 
	
Deferred tax assets

	 	 	6,220,200	 	 	 	6,227,300	 
	
Prepaid expenses and other current assets

	 	 	2,613,000	 	 	 	3,482,300	 
	
Total current assets

	 	 	153,345,100	 	 	 	157,268,800	 
	  	 	 	 	 	 	 	 	 
	
Property and equipment, net

	 	 	22,788,400	 	 	 	23,202,000	 
	
Goodwill, net

	 	 	11,684,700	 	 	 	11,684,700	 
	
Other long-term assets

	 	 	2,132,200	 	 	 	2,144,500	 
	
Total assets

	 	$	189,950,400	 	 	$	194,300,000	 
	  	 	 	 	 	 	 	 	 
	
LIABILITIES AND SHAREHOLDERS’ EQUITY

	 	 	 	 	 	 	 	 
	
Current Liabilities:

	 	 	 	 	 	 	 	 
	
Trade accounts payable

	 	$	58,815,400	 	 	$	65,209,300	 
	
Payroll, benefits and taxes

	 	 	7,395,000	 	 	 	11,678,500	 
	
Income and sales tax liabilities

	 	 	2,368,600	 	 	 	2,530,700	 
	
Accrued expenses and other current liabilities

	 	 	1,072,600	 	 	 	1,048,900	 
	
Revolving line of credit

	 	 	--	 	 	 	--	 
	
Current portion of long-term debt

	 	 	249,900	 	 	 	249,700	 
	
Total current liabilities

	 	 	69,901,500	 	 	 	80,717,100	 
	  	 	 	 	 	 	 	 	 
	
Deferred tax liabilities

	 	 	3,951,800	 	 	 	3,951,800	 
	
Long-term debt, net of current portion

	 	 	2,331,300	 	 	 	2,458,300	 
	
Other long-term liabilities

	 	 	4,112,100	 	 	 	4,370,200	 
	
Total liabilities

	 	 	80,296,700	 	 	 	91,497,400	 
	  	 	 	 	 	 	 	 	 
	
Shareholders’ Equity:

	 	 	 	 	 	 	 	 
	
Preferred stock

	 	 	--	 	 	 	--	 
	
Common stock

	 	 	94,000	 	 	 	91,500	 
	
Additional paid-in capital

	 	 	52,843,400	 	 	 	50,481,600	 
	
Treasury stock, at cost

	 	 	(49,866,700	)	 	 	(48,438,300	)
	
Retained earnings

	 	 	106,583,000	 	 	 	100,667,800	 
	
Accumulated other comprehensive loss

	 	 	--	 	 	 	--	 
	
Total shareholders’ equity

	 	 	109,653,700	 	 	 	102,802,600	 
	  	 	 	 	 	 	 	 	 
	
Total liabilities and shareholders’ equity

	 	$	189,950,400	 	 	$	194,300,000	 

  

  

  

TESSCO Technologies Incorporated

Reconciliation of Net Income to Earnings Before Interest, Taxes and Depreciation and Amortization (EBITDA) (Unaudited)

	  	 	
Fiscal Quarters Ended

	 	 	
Six Months Ended

	 
	  	 	
September 29, 2013

	 	 	
June 30, 2013

	 	 	
September 30, 2012

	 	 	
September 29, 2013

	 	 	
September 30, 2012

	 
	
Net income

	 	$	4,581,100	 	 	$	4,292,200	 	 	$	5,268,900	 	 	$	8,873,300	 	 	$	9,475,400	 
	
Add:

	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 	 
	
Provision for income taxes

	 	 	2,941,300	 	 	 	2,617,000	 	 	 	3,457,100	 	 	 	5,558,300	 	 	 	6,124,000	 
	
Interest, net

	 	 	67,000	 	 	 	54,600	 	 	 	12,000	 	 	 	121,600	 	 	 	69,400	 
	
Depreciation and amortization

	 	 	1,261,300	 	 	 	1,212,900	 	 	 	1,247,200	 	 	 	2,474,200	 	 	 	2,495,100	 
	
EBITDA

	 	$	8,850,700	 	 	$	8,176,700	 	 	$	9,985,200	 	 	$	17,027,400	 	 	$	18,163,900	 
	
EBITDA per diluted share

	 	$	1.06	 	 	$	0.98	 	 	$	1.21	 	 	$	2.04	 	 	$	2.20	 

  

  

  

	
TESSCO Technologies Incorporated

	 
	
Supplemental Results Summary (in thousands) (Unaudited)

	 
	  	 	 	 	 	 	 
	  	 	
Three months ended September 29, 2013

	 	 	
Six months ended  September 29, 2013

	 
	  	 	
Total

	 	 	
Total

	 
	
Market Revenues

	 	 	 	 	 	 
	
Public Carriers, Contractors & Program Managers

	 	$	40,948	 	 	$	78,331	 
	
Private & Government System Operators

	 	 	31,059	 	 	 	58,952	 
	
Commercial Dealers & Resellers

	 	 	36,433	 	 	 	72,477	 
	
Retailer, Independent Dealer Agents & Carriers

	 	 	38,086	 	 	 	80,875	 
	
Revenue, excluding Major 3PL relationship

	 	 	146,526	 	 	 	290,635	 
	
Major 3PL relationship

	 	 	--	 	 	 	--	 
	
Total revenues

	 	 	146,526	 	 	 	290,635	 
	  	 	 	 	 	 	 	 	 
	
Gross Profit

	 	 	 	 	 	 	 	 
	
Public Carriers, Contractors & Program Managers

	 	 	9,015	 	 	 	16,909	 
	
Private & Government System Operators

	 	 	8,377	 	 	 	16,178	 
	
Commercial Dealers & Resellers

	 	 	10,093	 	 	 	20,340	 
	
Retailer, Independent Dealer Agents & Carriers

	 	 	9,008	 	 	 	18,504	 
	
Gross profit, excluding Major 3PL relationship

	 	 	36,493	 	 	 	71,931	 
	
% of revenues

	 	 	24.9	%	 	 	24.7	%
	
Major 3PL relationship

	 	 	--	 	 	 	--	 
	
Total gross profit 

	 	 	36,493	 	 	 	71,931	 
	
% of revenues

	 	 	24.9	%	 	 	24.7	%
	  	 	 	 	 	 	 	 	 
	
Direct expenses

	 	 	17,797	 	 	 	35,412	 
	
Segment net profit contribution

	 	 	18,696	 	 	 	36,519	 
	
% of revenues

	 	 	12.8	%	 	 	12.6	%
	
Corporate support expenses*

	 	 	11,174	 	 	 	22,087	 
	
Income before provision for income taxes

	 	$	7,522	 	 	$	14,432	 
	
% of revenues

	 	 	5.1	%	 	 	5.0	%
	  	 	 	 	 	 	 	 	 
	
Growth Rates Compared to Prior Year Period:

	 
	
Revenues

	 	 	 	 	 	 	 	 
	
Public Carriers, Contractors & Program Managers

	 	 	58.6	%	 	 	70.9	%
	
Private & Government System Operators

	 	 	-9.4	%	 	 	-7.7	%
	
Commercial Dealers & Resellers

	 	 	2.2	%	 	 	7.8	%
	
Retailer, Independent Dealer Agents & Carriers

	 	 	-13.1	%	 	 	-4.9	%
	
Revenue, excluding Major 3PL relationship

	 	 	5.0	%	 	 	10.9	%
	
Major 3PL relationship

	 	 	-100.0	%	 	 	-100.0	%
	
Total revenues

	 	 	-25.7	%	 	 	-25.4	%
	  	 	 	 	 	 	 	 	 
	
Gross Profit

	 	 	 	 	 	 	 	 
	
Public Carriers, Contractors & Program Managers

	 	 	60.0	%	 	 	67.5	%
	
Private & Government System Operators

	 	 	-9.3	%	 	 	-7.0	%
	
Commercial Dealers & Resellers

	 	 	3.0	%	 	 	9.4	%
	
Retailer, Independent Dealer Agents & Carriers

	 	 	-4.0	%	 	 	2.4	%
	
Gross profit, excluding Major 3PL relationship

	 	 	7.1	%	 	 	12.1	%
	
Major 3PL relationship

	 	 	-100.0	%	 	 	-100.0	%
	
Total gross profit

	 	 	-5.5	%	 	 	-3.0	%
	  	 	 	 	 	 	 	 	 
	
Direct expenses

	 	 	-1.6	%	 	 	0.2	%
	
Segment net profit contribution

	 	 	-9.0	%	 	 	-5.8	%
	
Corporate support expenses*

	 	 	-5.4	%	 	 	-4.7	%
	
Income before provision for income taxes

	 	 	-13.8	%	 	 	-7.5	%
	  	 	 	 	 	 	 	 	 
	
* Includes corporate overhead, facilities expense, depreciation, interest and company-wide pay-for-performance bonus expense

	 

 

  

  

  

	
TESSCO Technologies Incorporated

	 
	
Supplemental Results Summary (in thousands)

	 
	  	 	 	 	 	 	 
	  	 	
Three months ended September 29, 2013

	 	 	
Six months ended September 29, 2013

	 
	
Revenues

	 	 	 	 	 	 
	
Base station infrastructure

	 	$	67,888	 	 	$	137,429	 
	
Network systems

	 	 	21,838	 	 	 	40,901	 
	
Installation, test and maintenance

	 	 	12,588	 	 	 	22,350	 
	
Mobile device accessories

	 	 	44,212	 	 	 	89,955	 
	
Total revenues

	 	 	146,526	 	 	 	290,635	 
	  	 	 	 	 	 	 	 	 
	
Gross Profit

	 	 	 	 	 	 	 	 
	
Base station infrastructure

	 	 	18,765	 	 	 	37,654	 
	
Network systems

	 	 	3,745	 	 	 	7,563	 
	
Installation, test and maintenance

	 	 	2,780	 	 	 	5,130	 
	
Mobile device accessories

	 	 	11,203	 	 	 	21,584	 
	
Total gross profit

	 	$	36,493	 	 	 	71,931	 
	
% of revenues

	 	 	24.9	%	 	 	24.7	%
	  	 	 	 	 	 	 	 	 
	
Growth Rates Compared to Prior Year Period

	 
	  	 	 	 	 	 	 	 	 
	
Revenues

	 	 	 	 	 	 	 	 
	
Base station infrastructure

	 	 	19.0	%	 	 	29.4	%
	
Network systems

	 	 	-1.5	%	 	 	2.5	%
	
Installation, test and maintenance

	 	 	3.7	%	 	 	-1.9	%
	
Mobile device accessories

	 	 	-58.3	%	 	 	-59.3	%
	
Total revenues

	 	 	-25.7	%	 	 	-25.4	%
	  	 	 	 	 	 	 	 	 
	
Gross Profit

	 	 	 	 	 	 	 	 
	
Base station infrastructure

	 	 	12.0	%	 	 	20.8	%
	
Network systems

	 	 	-5.9	%	 	 	-1.0	%
	
Installation, test and maintenance

	 	 	-1.6	%	 	 	-4.4	%
	
Mobile device accessories

	 	 	-25.6	%	 	 	-27.9	%
	
Total gross profit

	 	 	-5.5	%	 	 	-3.0	%exh4-1_1961745.htm

EXHIBIT 4.1

FORM OF SUBORDINATED NOTE

 

THIS NOTE HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) AND APPLICABLE STATE SECURITIES LAWS, AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO CINEDIGM CORP. THE TRANSFER OF THIS NOTE IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN THIS NOTE.

 

THIS NOTE AND THE INDEBTEDNESS EVIDENCED HEREBY ARE SUBORDINATE IN THE MANNER AND TO THE EXTENT SET FORTH IN THAT CERTAIN INTERCREDITOR AGREEMENT (AS AMENDED, RESTATED OR OTHERWISE MODIFIED FROM TIME TO TIME, THE “INTERCREDITOR AGREEMENT”), DATED AS OF OCTOBER __, 2013 AMONG CINEDIGM CORP., SOCIÉTÉ GÉNÉRALE, IN ITS CAPACITY AS ADMINISTRATIVE AGENT AND COLLATERAL AGENT FOR THE SENIOR LENDERS  FROM TIME TO TIME PARTY TO THE SENIOR CREDIT AGREEMENT (AS THEREIN DEFINED) (INCLUDING ANY SUCCESSOR ADMINISTRATIVE AGENT AND COLLATERAL AGENT UNDER THE SENIOR CREDIT AGREEMENT),  AND THE OTHER PERSONS SIGNATORIES HERETO AS HOLDERS OF SUBORDINATED NOTES; AND EACH HOLDER OF THIS THIS NOTE, BY ITS ACCEPTANCE HEREOF, SHALL BE BOUND BY THE TERMS AND PROVISIONS OF THE INTERCREDITOR AGREEMENT.

 

CINEDIGM CORP.

 

	
October [__], 2013

	
$[__________]

 

Cinedigm Corp., a Delaware corporation (“Payor”), for value received, promises to pay to the order of [_____________] (“Payee”), or its assigns as permitted hereunder, the Principal Amount (as defined below) together with accrued interest thereon, each calculated and payable as and to the extent set forth below in this Note.

 

This Note is made pursuant to that certain Securities Purchase Agreement, dated as of October 17, 2013, by and between Payor and Payee (the “Purchase Agreement”) and is one of the “Notes” referred to therein.  Payee is receiving this Note pursuant to the Purchase Agreement.  All capitalized terms used herein and not defined herein shall have the meanings assigned to such terms in the Purchase Agreement. This Note and all Other Notes (as defined herein) are collectively referred to in this Note as the “Notes”.

 

1.           Definitions.  As used in this Note, the following terms shall have the meanings set forth below:

 

  

  

  

(a)           “Bankruptcy Code” means title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal, state or foreign bankruptcy, insolvency, reorganization or similar law for the relief of debtors.

 

(b)           “Business Day” means any day other than a Saturday, a Sunday or a day on which commercial banks in The City of New York are required or authorized by law to be closed.

 

(c)           “Holder” means the Payee, as identified in the introduction of this Note, and any permitted subsequent holders of this Note, and Holders means, collectively, the Holder and the holders of the Other Notes.

 

(d)           “Intercreditor Agreement” means the Intercreditor Agreement dated as of October __, 2013, among the Payor, Société Générale, as Administrative Agent and Collateral Agent for the Lenders under the Senior Credit Agreement, and the Holders, as the same may be modified, amended, extended or renewed from time to time.

 

(e)           “Junior Creditor” means any Holder, including the Payee.

 

(f)           “Junior Debt” means the aggregate principal amount of this Note from time to time outstanding and unpaid, together with accrued and unpaid interest thereon and any other amounts of any kind whatsoever from time to time owing under this Note.

 

(g)           “Obligations” means any and all loans, advances, Indebtedness, liabilities, obligations, covenants or duties of the Payor to a Senior Creditor of any kind or nature arising under the Senior Credit Documents, and any and all extensions and renewals thereof, and modifications and amendments thereto, whether now existing or hereafter arising, whether under any present or future document, agreement or other instrument, and whether or not evidenced by a writing and specifically including but not being limited to, unpaid principal, plus all accrued and unpaid interest thereon (including interest accruing after the filing of any petition in bankruptcy, or the commencement of any insolvency, reorganization or like proceeding, relating to the Payor, whether or not a claim for post-filing or post-petition interest is allowed in such proceeding), together with all fees, expenses, commissions, charges, penalties and other amounts owing by or chargeable to the Payor under the Senior Credit Documents as and when the same shall become due and payable, whether at maturity, by acceleration or otherwise.

 

(h)           “Other Notes” means (i) all of the notes issued pursuant to the Purchase Agreement, other than this Note, and (ii) all notes issued in exchange therefor or replacement thereof.

 

(i)           “Redemption Date” means the date fixed for such redemption of the Notes.

 

(j)           “Redemption Price” means the price at which the Notes are to be redeemed.

 

(k)           “Representative” means any agent or representative in respect of any Senior Debt; provided that if, and for so long as, any Senior Debt lacks such representative, then the Representative for such Senior Debt shall at all times constitute the holders of a majority in outstanding principal amount of such Senior Debt.

 

(l)           “Senior Creditor” means, at the time of determination, each and any state or national bank, commercial bank, state or federal credit union, finance company, insurance company, private equity firm, mezzanine lender or other financial institution or Person or any Affiliate of any

 

 

  

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thereof providing any Indebtedness to the Payor, including without limitation any Lender and any Agent, as such terms are defined in the Credit Agreement dated as of October 17, 2013 among the Payor, as Borrower, the Lenders party thereto and Société Générale, as Administrative Agent and Collateral Agent., as the same may be modified, amended, extended or renewed from time to time (the “Senior Credit Agreement”).  For resolution of doubt, there may be, at any given time, no Senior Creditor, a single Senior Creditor, or multiple Senior Creditors, and each of such Senior Creditors shall have the rights of a Senior Creditor under, and the benefits of, Section 5 and any reference to a Senior Creditor in Section 5 shall mean each and every such  Senior Creditor  (but, if the Holder is required to make a payment to more than one Senior Creditor, it shall make such payment pro rata (based on the principal amount of Senior Debt owed to each such Senior Creditor) to such Senior Creditors or their Representatives.

 

(m)           “Senior Credit Documents” means the documents evidencing, securing, guaranteeing or otherwise delivered by the Payor to any Senior Creditor in connection with any Senior Debt, and any modification, amendment, extension or renewal thereof, including without limitation the Senior Credit Agreement and the Loan Documents (as defined in the Senior Credit Agreement).

 

(n)           “Senior Debt” means (i) any Indebtedness of the Payor in favor of a Senior Creditor, including, without limitation, the principal amount of all loans and guarantee obligations from time to time outstanding or owing under the Senior Credit Documents, together with interest thereon (including, without limitation, any interest subsequent to the filing by or against the Payor of any bankruptcy, reorganization or similar proceeding, whether or not such interest would constitute an allowed claim in any such proceeding, calculated at the rate set forth for overdue loans in the Senior Credit Documents) and all out-of-pocket costs or reasonable fees and expenses incurred after the date of filing by or against the Payor of any such bankruptcy, reorganization or similar proceeding and all fees and expenses owing under the Senior Credit Documents and (ii) all other Obligations owing from the Payor to any Senior Creditor under the Senior Credit Documents, including without limitation the Obligations (as defined in the Senior Credit Agreement).

 

2.           Payment of Principal Amount and Interest.

 

(a)           Principal Amount.  The principal amount due under the terms of this Note (the “Principal Amount”) is equal to [_______] Dollars ($[_______]).  Subject to the provisions of Section 4 and Section 5 hereof and to the Intercreditor Agreement, the Principal Amount, and any accrued and unpaid interest thereon, shall be payable on October [__], 2018 (the “Maturity Date”).

 

(b)           Interest.

 

(i)           Prior to the Maturity Date, and subject to Section 2(b),  interest shall accrue on the outstanding Principal Amount at the rate of nine percent (9%) per annum.  Interest will be computed on the basis of a 365/6-day year and shall be paid for the actual number of days elapsed, and shall be payable quarterly on the last day of each calendar quarter, commencing December 31, 2013, and on the Maturity Date.

 

(ii)           So long as an Event of Default (as defined herein) has occurred and is continuing without being cured or waived, the Principal Amount shall bear Interest at a rate that is two (2%) percentage points per annum above the Interest Rate set forth in Section 2(b)(i).

 

3.           Payments.  All payments of principal, interest and any amounts due under this Note shall be paid in lawful money of the United States by inter-bank transfer or wire transfer of immediately available funds to one or more bank accounts in the United States of America designated by the Holder to

 

 

  

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the Payor in writing.  Any payment hereunder which, but for this Section 3, would be payable on a day that is not a Business Day shall instead be due and payable on the Business Day next following such day for payment.

 

4.           Events of Default.  Subject to Section 5 and to the Intercreditor Agreement, if any of the following (each, an “Event of Default”) occurs:

 

(a)           Payor fails to pay any Principal Amount when due hereunder;

 

(b)           Payor fails to pay any installment of interest when due hereunder and such failure remains uncured for a period of ten (10) Business Days;

 

(c)           The Payor shall violate Section 7(a);

 

(d)           an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of Payor under the Bankruptcy Code, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Payor or for a substantial part of the property or assets of Payor or (iii) the winding-up or liquidation of Payor; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or

 

(e)           Payor shall (i) voluntarily commence any proceeding or file any petition seeking relief under the Bankruptcy Code, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in paragraph (d) of this Section 4, apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for Payor or for a substantial part of the property or assets of Payor, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due or (vii) take any action for the purpose of effecting any of the foregoing;

 

then, and in every such event (other than an event with respect to Payor described in paragraph (d) or (e) of this Section 4, and at any time thereafter during the continuance of such event, and subject to Section 4 hereof), the Holder of this Note may declare the Principal Amount then outstanding, all accrued interest thereon and any unpaid obligations of Payor hereunder to become forthwith due and payable, whereupon the same shall become forthwith due and payable without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Payor, anything contained herein notwithstanding; and in any event with respect to Payor described in paragraph (d) or (e) of this Section 4, the Principal Amount then outstanding, all accrued interest thereon and any unpaid obligations of Payor hereunder shall automatically become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by Payor, anything contained herein to the contrary notwithstanding.

 

5.           Subordination.  The Holder, by its acceptance of this Note, agrees (a) to execute, deliver and perform its obligations under the Intercreditor Agreement and (b) that this Note and the Other Notes shall be subject and subordinate to all Senior Debt other than the Obligations (as defined in the Senior Credit Agreement) to the same extent as this Note and the Other Notes are subordinate and subject to such Obligations pursuant to the Intercreditor Agreement, and the terms of such Intercreditor Agreement are deemed to be incorporated herein by reference with respect to all such other Senior Debt.  As an inducement to each Senior Creditor to extend Senior Debt, the Holder agrees that the Junior Debt shall

 

 

  

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not be secured by any security interest in or other liens on any assets of the Payor. The Payor agrees to provide the Holder with notice of any Event of Default (as defined in the Senior Credit Agreement) under the Senior Credit Agreement.

 

6.           Optional Redemption. Subject to Section 7(a), on or after the second anniversary of the date of this Note, the Payor may, at its option, exercised by giving notice to the Holder specifying the Redemption Date and the amount of the Principal Amount to be redeemed (which notice shall be given at least three (3) Business Days before the Redemption Date), at any time and from time to time, redeem this Note, in whole or in part, at the following Redemption Prices (expressed as percentages of Principal Amount being redeemed), plus accrued and unpaid interest, if any, to the Redemption Date:

 

	
Redemption Date

	
Redemption Price

	  	  
	
On or after the second anniversary,

     but prior to the third anniversary,

     of the date of this Note

	
          102%

	
On or after the third anniversary,

      but prior to the fourth anniversary,

      of the date of this Note

	
           101%

	
On or after the fourth anniversary of the

      date of this Note

	
           100%

Any payment obligation to the Holder arising under this Section 6 shall be subject to the provisions of Section 5.

 

7.           Miscellaneous.

 

(a)           Additional Subordinated Debt. The Payor shall not incur any additional Indebtedness that would rank pari passu with the Junior Debt without the prior written consent of the Holder, which consent shall not be unreasonably withheld, conditioned or delayed. If for any reason the Holder shall not consent to the incurrence of such additional Indebtedness by the Payor, then notwithstanding anything in this Note to the contrary, the Payor shall have the right, upon not less than three (3) Business Days’ notice to the  Holder, to redeem this Note in whole at a Redemption Price equal to 100% of the then outstanding Principal Amount  plus accrued and unpaid interest, if any, to the Redemption Date.  For the avoidance of doubt, this provision shall not limit the ability of the Payor to incur additional Senior Debt.

(b)           Section Headings.  The section headings contained in this Note are for convenience of reference only and shall not be considered a part of or affect the construction or interpretation of any provision of this Note.

(c)           Amendment and Waiver.  No provision of this Note may be amended or modified except by a written instrument signed by each of Payor and the Holder.  No provision of this Note may be waived except by a written instrument signed by the party making such waiver.  The failure of Payor or the Holder to enforce at any time any of the provisions of this Note shall in no way be construed to be a waiver of any such provision, nor in any way to affect the validity of this Note or any part hereof or the right of such party thereafter to enforce each and every such provision of this Note.  No waiver of any breach of, or noncompliance with, this Note shall be held to be a waiver of any other or subsequent breach or noncompliance.

 

  

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(d)           Successors, Assigns and Transferors.  This Note shall not be assignable or transferable without the prior written consent of the Payor, which shall not be unreasonably withheld, conditioned or delayed, and, in any case, shall not be assigned or transferred in the absence of registration or qualification under the Securities Act of 1933, as amended, and any state securities laws that may be applicable or an exemption therefrom.  Any purported assignment or transfer not made in accordance with this Section 7(d) shall be null and void.  Subject to the foregoing, the rights and obligations of Payor and the Holder under this Note shall be binding upon, and inure to the benefit of, and be enforceable by, Payor and the Holder and their respective successors and permitted assigns.

(e)           Governing Law.  All questions concerning the construction, validity, enforcement and interpretation of this Note shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof that would require the application of the laws of any other jurisdiction.  Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Note (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York.  Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the City of New York, borough of Manhattan, for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or in inconvenient venue or forum for such proceeding.  The Payor and each Holder hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail, first class postage prepaid and return receipt requested, or by U.S. nationally recognized overnight delivery service (with evidence of delivery) to such party at the address in effect for notices to it under this Note and agrees that such service shall constitute good and sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to limit in any way any right to serve process in any manner permitted by law.  EACH OF PAYOR AND EACH HOLDER HEREBY IRREVOCABLY WAIVES ANY RIGHT IT MAY HAVE, AND AGREES NOT TO REQUEST, A JURY TRIAL FOR THE ADJUDICATION OF ANY DISPUTE HEREUNDER OR IN CONNECTION HEREWITH OR ARISING OUT OF THIS NOTE OR ANY TRANSACTION CONTEMPLATED HEREBY.  If either party shall commence an action, suit or proceeding to enforce any provisions of this Note, then the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.

(f)           Lost, Stolen, Destroyed or Mutilated Note.  Upon receipt of evidence reasonably satisfactory to Payor of the loss, theft, destruction or mutilation of this Note and of indemnity arrangements reasonably satisfactory to Payor from or on behalf of Holder, and upon surrender or cancellation of this Note if mutilated, Payor shall make and deliver a new note of like tenor in lieu of such lost, stolen, destroyed or mutilated Note, at Holder’s expense.

(g)           Usury.  Nothing contained in this Note shall be deemed to establish or require the payment of a rate of interest in excess of the maximum rate legally enforceable.  If the rate of interest called for under this Note at any time exceeds the maximum rate legally enforceable, the rate of interest required to be paid hereunder shall be automatically reduced to the maximum rate legally enforceable.  If such interest rate is so reduced and thereafter the maximum rate legally enforceable is increased, the rate

 

  

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of interest required to be paid hereunder shall be automatically increased to the lesser of the maximum rate legally enforceable and the rate otherwise provided for in this Note.

(h)           Notices.  Any and all notices, requests, consents, or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered by hand or via facsimile prior to 5:30 p.m.  (New York City time) on a Business Day, (ii) the next Business Day after the date of transmission, if such notice or communication is delivered by hand or via facsimile on a day that is not a Business Day or later than 5:30 p.m.  (New York City time) on any Business Day, (iii) the Business Day following the date of sending, if sent by U.S. nationally recognized overnight courier service for next day delivery, or (iv) upon actual receipt by the party to whom such notice is required to be given, if addressed as follows, or to such other address or addresses as may have been furnished in writing by a party to another party pursuant to this paragraph:

if to Payee:

 

______________________________

______________________________

______________________________

______________________________

 

if to Payor, to:

 

Cinedigm Corp.

902 Broadway, 9th Floor

New York, NY 10010

Attention: General Counsel

Facsimile: (212) 206-9001

with a copy (which shall not constitute notice) to:

Kelley Drye & Warren LLP

101 Park Avenue

New York, NY 10178

Attention: Jonathan K. Cooperman, Esq.

Facsimile: (212) 808-7897

(i)           Certain Expenses.  In the event Payor defaults on its obligations under this Note, Payor shall pay to the Holder, upon demand but subject to Section 5 and the Intercreditor Agreement, all reasonable out-of-pocket costs and expenses, including attorneys’ fees, if any, incurred by the Holder in enforcing its rights hereunder.

(j)           Severability.  If any provision of this Note is held to be invalid or unenforceable in any respect, the validity and enforceability of the remaining terms and provisions of this Note shall not in any way be affected or impaired thereby and the parties will attempt to agree upon a valid and enforceable provision that is a reasonable substitute therefor, and upon so agreeing, shall incorporate such substitute provision in this Note.

 

  

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(k)           Rights of Third Parties.  Nothing expressed or implied in this Note is intended or shall be construed to confer upon or give any Person, other than the parties hereto, the Senior Creditors and their permitted successors and assigns, any right or remedies under or by reason of this Note.

(j)           Entire Agreement.  This Note, together with the Purchase Agreement, constitutes the entire understanding of the parties with respect to the subject matter hereof and supersede all prior agreements and understandings, oral or written, with respect to such matters.

(k)           Construction.  Payor and the Holder agree that each of them and/or their respective counsel has reviewed and had an opportunity to revise this Note and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the this Note or any modifications, amendments, extensions or renewals hereto or hereof.

[Signature Page Follows]

 

  

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IN WITNESS WHEREOF, Payor has executed and delivered this Note as of the date first written above.

 

	 	
CINEDIGM CORP.

 

 

	  	
By:

	  
	  	  	
Name:

	 
	  	  	
Title:

	
 

[Signature Page to Note]

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