-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BGvvbQB3mzzU1rmpvxaOKe2J6hULowr47NgrAjqmkIUGzCv/8MNRgcUIjM3qMO5b cfA6e/opaYjG9sfktrpZ4Q== 0000926236-00-000015.txt : 20000215 0000926236-00-000015.hdr.sgml : 20000215 ACCESSION NUMBER: 0000926236-00-000015 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TELULAR CORP CENTRAL INDEX KEY: 0000915324 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 363885440 STATE OF INCORPORATION: DE FISCAL YEAR END: 0930 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-23212 FILM NUMBER: 539199 BUSINESS ADDRESS: STREET 1: 647 NORTH LAKEVIEW PARKWAY CITY: VERNON HILLS STATE: IL ZIP: 60061 BUSINESS PHONE: 8474654500 MAIL ADDRESS: STREET 1: 647 NORTH LAKEVIEW PARKWAY CITY: VERNON HILLS STATE: IL ZIP: 60061 10-Q 1 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-Q [x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended December 31, 1999. OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition Period from to . Commission File Number 0-23212 Telular Corporation (Exact name of Registrant as specified in its charter) Delaware 36-3885440 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 647 North Lakeview Parkway Vernon Hills, Illinois 60061 (Address of principal executive offices) (Zip Code) (847) 247-9400 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of the Registrant's common stock, par value $.01, as of December 31, 1999, the latest practicable date, was 11,794,199 shares. TELULAR CORPORATION Index Part I - Financial Information Page No. Item 1. Financial Statements: Consolidated Balance Sheets December 31, 1999 (unaudited) and September 30, 1999 3 Consolidated Statements of Operations (unaudited) Three Months Ended December 31, 1999 and December 31, 1998 4 Consolidated Statement of Stockholders' Equity (unaudited) Period from September 30, 1999 to December 31, 1999 5 Consolidated Statements of Cash Flows (unaudited) Three Months Ended December 31, 1999 and December 31, 1998 6 Notes to the Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures about Market Risk 13 Part II - Other Information Item 1. Legal Proceedings 14 Item 2. Changes in Securities and Recent Sales of Unregistered Securities 14 Item 6. Exhibits and Reports on Form 8-K 15 Signatures 18 Exhibit Index 19 TELULAR CORPORATION CONSOLIDATED BALANCE SHEETS (Dollars in thousands, except share data) December 31, September 30, 1999 1999 ------------ ------------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 10,101 $ 9,972 Receivables: Trade, net of allowance for doubtful accounts of $128 and $103 at December 31, 1999 and September 30, 1999, respectively 4,995 6,670 Related parties 399 483 ------------ ------------ 5,394 7,153 Inventories, net 6,581 8,770 Prepaid expenses and other current asset 638 502 ------------ ------------ Total current assets 22,714 26,397 Property and equipment, net 4,964 5,202 Other assets: Excess of cost over fair value of net assets acquired, less accumulated amortization of $1,434 and $1,304 at December 31, 1999 and September 30, 1999, respectively 3,462 3,592 Intangible assets, less accumulated amortization of $1,095 and $1,089 at December 31, 1999 and September 30, 1999, respectively 0 6 Long term investment 309 66 Deposits 66 65 ------------ ------------ 3,837 3,729 ------------ ------------ $ 31,515 $ 35,328 ============ ============ LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable: Trade $ 2,124 $ 2,450 Related parties 1,039 1,738 Accrued liabilities 2,145 3,092 ------------ ------------ Total current liabilities 5,308 7,280 Commitments and contingencies 0 0 Redeemable Preferred Stock: Series A convertible preferred stock, $.01 par value; $12,775 liquidation preference at September 30, 1999; 21,000 shares authorized at December 31, 1999 and September 30, 1999; no shares outstanding at December 31, 1999 and 11,350 shares outstanding at September 30, 1999. 0 13,057 Stockholders' Equity: Preferred stock $.01 par value; 9,979,000 shares authorized at December 31, 1999 and September 30, 1999; none outstanding 0 0 Common stock; $.01 par value; 75,000,000 shares authorized; 11,794,199 and 9,563,004 outstanding at December 31, 1999 and September 30, 1999, respectively 118 97 Additional paid-in capital 137,064 123,730 Deficit (109,227) (106,845) Unrealized loss on investments (141) (384) Treasury stock, 140,000 shares at cost (1,607) (1,607) ------------ ------------ Total stockholders' equity 26,207 14,991 ------------ ------------ Total liabilities, redeemable preferred stock and stockholders' equity $ 31,515 $ 35,328 ============ =========== See accompanying notes
TELULAR CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands, except share data) (Unaudited) Three Months Ended December 31, 1999 1998 ---------- ---------- Total net product sales $ 8,849 $ 8,211 Royalty and royalty settlement revenue 172 0 ---------- ---------- Total revenue 9,021 8,211 Cost of sales 7,163 6,420 ---------- ---------- 1,858 1,791 Engineering and development expenses 1,272 1,368 Selling and marketing expenses 1,743 2,027 General and administrative expenses 1,068 963 Provision for doubtful accounts 25 20 Amortization 136 247 ---------- ---------- Loss from operations (2,386) (2,834) Other income, net 32 143 ---------- ---------- Net loss $ (2,354) $ (2,691) ========== ========== Less: Cumulative dividend on redeemable preferred stock (28) (195) ---------- ---------- Net loss applicable to common shares $ (2,382) $ (2,886) ========== ========== Basic and diluted net loss per common share $ (0.21) $ (0.33) ========== ========== Weighted average number of common shares 11,318,007 8,669,254 ========== ==========
Telular Corporation Consolidated Statements of Stockholders' Equity (In Thousands) Unrealized Additional gain (loss) Total Preferred Common Paid-in on Treasury Stockholder's Stock Stock Capital Deficit Investments Stock Equity --------- ------ --------- --------- ---------- -------- ------------ Balance at September 30, 1999 $ 0 $97 $123,730 $ (106,845) $(384) $(1,607) $ 14,991 Comprehensive income: Net loss for period from October 1, 1999 to December 31, 1999 0 0 0 (2,354) 0 0 (2,354) Other comprehensive income Unrealized loss on investments 0 0 0 0 243 0 243 --------- Comprehensive income (2,111) --------- Deferred compensation related to stock options 0 0 34 0 0 0 34 Stock options exercised 0 0 142 0 0 0 142 Stock issued in connection with services and compensation 0 0 93 0 0 0 93 Conversion of preferred stock to common stock 0 21 13,065 0 0 0 13,086 Cumulative dividend on redeemable preferred stock 0 0 0 (28) 0 0 (28) --------- ------ --------- --------- ---------- -------- ---------- Balance at December 31, 1999 0 118 137,064 (109,227) (141) (1,607) 26,207 ========= ====== ========= ========= ========== ======== ========== See accompanying notes.
TELULAR CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands) (Unaudited) Three Months Ended December 31, 1999 1998 ---------- ---------- Operating Activities: Net loss $ (2,354) $ (2,691) Adjustments to reconcile net loss to net cash used in operating activities Depreciation 476 388 Amortization 136 247 Inventory obsolescence expense 334 60 Provision for doubtful accounts 25 20 Compensation expense related to stock options 34 45 Common stock issued for services and compensation 93 87 Changes in assets and liabilities: Trade receivables 1,650 (3,172) Related parties receivables, net 84 1,017 Inventories 1,855 227 Prepaid expenses, deposits and other (136) (56) Trade accounts payable (326) (2,011) Related parties accounts payable (699) (655) Accrued liabilities (947) (374) ---------- ---------- Net cash used in operating activities 225 (6,868) Investing Activities: Acquisition of property and equipment (238) (546) ---------- ---------- Net cash used in investing activities (238) (546) ---------- ---------- Financing Activities: Proceeds from the issuance of common stock 142 0 ---------- ---------- Net cash provided by financing activities 142 0 ---------- ---------- Net decrease in cash and cash equivalents 129 (7,414) Cash and cash equivalents, beginning of period 9,972 19,854 ---------- ---------- Cash and cash equivalents, end of period $ 10,101 $ 12,440 ========== ========== See accompanying notes
TELULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999 (Unaudited, dollars in thousands, except share data) 1. Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three months ended December 31, 1999, are not necessarily indicative of the results that may be expected for the full fiscal year ending September 30, 2000. For further information, refer to the consolidated financial statements and the footnotes included in the Annual Report on Form 10-K for the fiscal year ended September 30, 1999. 2. Inventories The components of inventories consist of the following (000's): December 31, September 30, 1999 1999 ---------- ------------- (unaudited) Raw materials $ 3,031 $ 3,873 Finished goods 4,063 5,481 ---------- ------------- 7,094 9,354 Less: Reserve for obsolescence 513 584 ---------- ------------- $ 6,581 $ 8,770 ========== ============= 3. Redeemable Preferred Stock During the year ending September 30, 1997, the Company issued 20,000 shares (10,000 shares on April 16, 1997 and 10,000 shares on June 6, 1997) of Series A Convertible Preferred Stock (the Preferred Stock) for $18,375 which is net of issuance cost of $1,200. The Preferred Stock had a liquidation preference of $12,775 on September 30, 1999. The Preferred Stock included the equivalent of a 5% annual stock dividend. Holders of the Preferred Stock were not entitled to vote on matters submitted for vote to the stockholders of the Company. The Preferred Stock reflects a beneficial conversion feature that allowed holders to convert the security to common stock of the Company at a discount. The amount of the discount was determined using NASDAQ closing bid prices for the Company's common stock. On October 15, 1999, the final 11,350 shares of Preferred Stock automatically converted into 2,146,540 shares of common stock (the Mandatory Conversion). On October 18, 1999, the previous holders of the Preferred Stock notified the Company that they disagree with the conversion formula the Company used to process the Mandatory Conversion. In Form SC-13G filings with the Securities and Exchange Commission, the previous holders noted that based upon their interpretation of the Mandatory Conversion formula, they are entitled to an aggregate of 4,247,834 additional shares of the Company's common stock. The Company believes that it processed the conversion correctly and that the claim by previous holders of Preferred Stock is unfounded. TELULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (Unaudited, dollars in thousands, except share data) 4. Comprehensive Income On October 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income (SFAS No. 130). Comprehensive income is defined by SFAS No. 130 as net income plus other comprehensive income, which, under existing accounting standards includes foreign currency items, minimum pension liability and unrealized gains and losses on certain investments in debt and equity securities. Comprehensive income is reported by the Company in the consolidated statement of stockholders' equity. 5. Segment Disclosures The Company, which is organized on the basis of products and services, has two reportable business segments, Fixed Wireless Terminals and Security Products. The Company designs, develops, manufactures and markets both fixed wireless terminals and security products. Fixed wireless terminals bridge wireline telecommunications customer premises equipment with cellular-type transceivers for use in wireless communication networks. Security products provide wireless backup systems for both commercial as well as residential alarms. Export sales of fixed wireless terminals represent 89% and 71% of total fixed wireless net product sales for the first quarter of fiscal year 2000 and 1999, respectively. Export sales of security products were insignificant for the first quarter of fiscal year 2000 and 1999. Period ending December 31, 1999 1998 --------- -------- ($ in thousands) Revenue Fixed Wireless 6,291 5,520 Terminals Security Products 2,730 2,691 --------- -------- 9,021 8,211 Loss From Consolidated Operations Fixed Wireless Terminals (1,832) (2,623) Security Products (522) (68) --------- -------- (2,354) (2,691) For the first quarter of fiscal year 2000, two customers located in Dominican Republic and Mexico accounted for 39% and 15% respectively, of fixed wireless terminal net product sales and two customers, both located in the USA, accounted for 21% and 20% respectively, of the security products net product sales. For the first quarter of fiscal year 1999, two customers from the USA and Mexico, accounted for 27% and 21% respectively, of the fixed wireless terminal net product sales and one customer, located in the USA accounted for 44% of the security products net product sales. TELULAR CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) DECEMBER 31, 1999 (Unaudited, dollars in thousands, except share data) 6. Contingencies On March 2, 1998, the Company reached settlement in its patent infringement case against ORA Electronics, Inc. and received the following from ORA Electronics, Inc.: $500 in cash, a $1,000 promissory note payable through February 1, 2000, 300,000 shares of ORA Electronics, Inc. common stock (ORA stock) with a fair market value of $450 and the right to receive additional shares of ORA stock to ensure the fair market value received in stock is equivalent to $1,500 on February 1, 2000. On February 1, 2000, the Company did not receive the final balloon payment pursuant to the promissory note from ORA, nor did the Company receive additional shares of ORA stock necessary to increase the fair market value of ORA stock received by the Company to $1,500. The Company is currently attempting to renegotiate with ORA for the final payment and the additional shares of ORA stock. 7. Reverse Stock Split The number of shares of common stock outstanding, the weighted average number of common shares outstanding and basic and diluted net loss per share amounts have all been restated to reflect the one-for-four (1:4) reverse stock split of the Company's common stock on January 27, 1999. 8. Subsequent Event -- Revolving Line of Credit On January 7, 2000, the Company entered into a Loan and Security Agreement with Wells Fargo Business Credit Inc. (Wells) to provide a revolving credit facility with a loan limit of $5 million (the Loan). Borrowings under the Loan are subject to borrowing base requirements and other restrictions. As of January 7, 2000, the Company had approximately $2.5 million of available borrowings under the Loan. Under the Loan, the Company is restricted from making dividend payments. The Loan matures on January 7, 2003. The Loan carries interest at the bank's prime rate. To reduce applicable cash financing fees, the Company issued 50,000 shares of Common Stock Warrants (Warrants) to Wells. The strike price for the Warrants is $16.29 per share. On January 14, 2000, the Company borrowed $2.0 million under the Loan. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview The Company designs, develops, manufactures and markets products based on its proprietary interface technologies, which provide the capability to bridge wireline telecommunications customer premises equipment (CPE) with cellular-type transceivers for use in wireless communication networks in the Cellular and PCS bands. Applications of the Company's technology include fixed wireless telecommunications as a primary access service where wireline systems are unavailable, unreliable or uneconomical, as well as wireless backup systems for wireline telephone systems and wireless security and alarm monitoring signaling (WAS). The Company's principal product lines are: PHONECELL, a line of fixed wireless terminals (FWTs), and TELGUARD, a line of WAS products. Currently, the Company is devoting a substantial portion of its resources to international market development, extension of its core product line to new wireless standards, expansion, protection and licensing of its intellectual property rights and development of underlying radio technology. The Company's operating expense levels are based in large part on expectations of future revenues. If anticipated sales in any quarter do not occur as expected, expenditure and inventory levels could be disproportionately high, and the Company's operating results for that quarter, and potentially for future quarters, could be adversely affected. Certain factors that could significantly impact expected results are described in Cautionary Statements Pursuant to the Securities Litigation Reform Act that is set forth in Exhibit 99 to this Form 10-K. Results of Operations First quarter fiscal year 2000 compared to first quarter fiscal year 1999 Total Net Product Sales. Total net product sales includes sales of finished products and components. Sales of FWTs increased 48%, or $1.9 million, during the first quarter of fiscal year 2000 compared to the same period last year. Sales of WAS products were unchanged during the first quarter of fiscal year 2000 compared to the same period last year. Sales of FWT components decreased $1.2 million during the first quarter of fiscal year 2000 compared to the same period last year, due primarily to a one-time $0.9 million cancellation charge that was paid to the Company by an FWT component customer during the first quarter of fiscal year 1999. Royalty and Royalty Settlement Revenue. Royalty and royalty settlement revenue increased $0.2 million for the first quarter of fiscal year 2000 compared to the first quarter of fiscal year 1999. This increase resulted primarily from increased royalty revenue from Motorola and Ericsson during the first quarter 2000 compared to the first quarter of fiscal year 1999. Cost of sales. Cost of sales increased 12%, or $0.7 million, for the first quarter of fiscal year 2000 compared to the first quarter of fiscal year 1999. Cost of sales for the first quarter 2000 of $7.2 million, or 79% of total revenue, compares to $6.4 million, or 78% of total revenue, for the first quarter of fiscal year 1999. The increase in cost of sales during the first quarter of fiscal year 2000 is primarily due to start-up costs associated with the Company's new Message Center for the WAS business that was placed into service during the fourth quarter of fiscal year 1999. Engineering and Development Expenses. Engineering and development expenses of $1.3 million for the first quarter of fiscal year 2000 decreased approximately 7%, or $0.1 million, from the same quarter of fiscal year 1999. In fiscal year 1999 the Company was completing its efforts to transition its product lines from primarily analog-based products to primarily digital-based products. Consequently, engineering and development expenses for several quarters, including the first quarter of fiscal year 1999, were larger than usual. Beginning in its third quarter of fiscal year 1999 and continuing through the first quarter of fiscal year 2000, the Company has reduced its engineering and development expenses to more usual levels, primarily through reductions in material costs and contracted engineering services. Selling and Marketing Expenses. Selling and marketing expenses of $1.7 million for first quarter of fiscal year 2000 decreased 14%, or $0.3 million, compared to first quarter of fiscal year 1999. The decrease is primarily due to a reduction in product introduction expenses during the first quarter of fiscal year 2000 compared to the same period of last fiscal year (see Engineering and Development Expenses above). General and Administrative Expenses (G&A). G&A for the first quarter of fiscal year ended 2000 increased 11% to $1.1 million from $1.0 million for fiscal year ended 1999. The increase relates to legal fees for patent defense in New Zealand. Amortization. Amortization expense decreased 45%, or $0.1 million, during the first quarter of fiscal year 2000 compared to the first quarter fiscal year ended 1999 due to certain intangible assets which became fully amortized during fiscal year 1999. Other Income. Other income for the first quarter of fiscal year 2000 decreased 78%, or $0.1 million, compared to the same period during fiscal year 1999. The decrease is primarily due to lower interest income due to reduced average cash balances during the first quarter of fiscal year 2000 compared to the same period of fiscal year 1999. Net loss. The Company recorded a net loss of $2.4 million for the first quarter of fiscal year 2000 compared to a net loss of $2.7 million for the first quarter of fiscal year 1999. The net loss per share decreased 32% during the first quarter of fiscal year 2000, from net loss per share of $0.31 for the first quarter of fiscal year 1999 to a net loss per share of $0.21 for the first quarter of fiscal year 2000. Net loss applicable to common shares. After giving effect to the cumulative preferred stock dividend of $28 thousand for the first quarter of fiscal year 2000 and $0.2 million for the first quarter of fiscal year 1999, net loss applicable to common shares of $2.4 million, or $0.21 per share, compares to a net loss of $2.9 million, or $0.33 per share, for the first quarter of fiscal year 1999. Liquidity and Capital Resources On December 31, 1999, the Company had $10.1 million in cash and cash equivalents with a working capital surplus of $17.4 million. The Company generated $0.1 million of cash during the first quarter of fiscal year 2000 compared to cash used of $7.4 million during the same period of fiscal year 1999. The generation of cash during the first quarter of fiscal year 2000 is primarily due to the effects of an ongoing inventory reduction plan. Cash used for capital spending was $0.2 million during the first quarter of fiscal year 2000, compared to $0.5 million during the same period of fiscal 1999. Cash generated from financing activities for the first quarter of fiscal year 2000 of $0.1 million relates to proceeds from the issuance of common stock in connection with stock options exercised by former employees. There was no cash activity from financing activities during the first quarter of fiscal year 1999. On January 7, 2000, the Company entered into a Loan and Security Agreement with Wells Fargo Business Credit Inc. (Wells) to provide a revolving credit facility with a loan limit of $5 million (the Loan). Borrowings under the Loan are subject to borrowing base requirements and other restrictions. As of January 7, 2000, the Company had approximately $2.5 million of available borrowings under the Loan. Under the Loan, the Company is restricted from making dividend payments. The Loan matures on December 31, 2002. The Loan carries interest at the bank's prime rate. To reduce applicable cash financing fees, the Company issued 50,000 shares of Common Stock Warrants (Warrants) to Wells. The strike price for the Warrants is $16.29 per share. The Loan replaces a previous Loan and Security Agreement with Fleet Capital Corporation (the successor to Sanwa Business Credit Corporation) which was terminated on July 15, 1999. On January 12, 2000, the Company borrowed $2.0 million under the Loan. The Company expects to borrow additional funds from time to time to fund working capital requirements, to fund future product development efforts and to sustain significant levels of cash reserves which are required to qualify for large sales opportunities. Based upon its current operating plan, the Company believes its existing capital resources, including the proceeds from the Loan, should enable it to maintain its current and planned operations. Cash requirements may vary and are difficult to predict given the nature of the developing markets targeted by the Company. The amount of royalty income from the Company's licensees is unpredictable, but could have an impact on the Company's actual cash flow. The Company requires its foreign customers to obtain letters of credit or to qualify for export credit insurance underwritten by third party credit insurance companies prior to making international shipments. Also, to mitigate the effects of currency fluctuations on the Company's results of operations, the Company conducts all of its international transactions in U.S. dollars. Impact of the Year 2000 Issue Recently, national attention has focused on the potential problems and associated costs resulting from computer programs that have been written using two digits rather than four to define the applicable year. These programs treat all years as occurring between 1900 and 1999 and do not self-correct to reflect the upcoming change in the century. If not corrected, computer applications could fail or create erroneous results after December 31, 1999. In 1998, management conducted a formal assessment of its significant information technology systems, including computers used in its production and manufacturing functions. Based upon this assessment, management developed an action plan to modify its internal software and hardware (imbedded chips) so that its computer systems will function properly with respect to dates in the Year 2000 and thereafter. The cost of such modifications, including testing and implementation, was not significant and was funded with available cash. The Company has completed all known changes to its internal computer systems and has obtained certification of year 2000 compliance from its key external software providers, and has not experienced any significant operational problems with these systems since December 31, 1999. However, there can be no absolute assurance that all of the Company's internal systems will continue to operate properly. The Company does not conduct any of its purchase transactions through computer systems that interface directly with suppliers. However, the Company has initiated a formal assessment of its significant suppliers to determine the extent to which the Company would be vulnerable if those third parties fail to remedy Year 2000 issues. To date, the Company has received written responses from most of its suppliers. The Company has evaluated these responses and has determined that all critical suppliers have prepared for the Year 2000. The Company currently has no material systems that interface directly with its customers. The Company's large customers will likely be new customers due to the project nature of its business. However, as a global company that operates in many different countries, some of which may not be addressing the Year 2000 problem as aggressively as the United States, there can be no assurances that future customers systems will continue to operate properly. Moreover, because markets for the Company's products are dependent on third parties, such as wireless local loop network providers, management cannot fully assess the impact that the Year 2000 problem will have on future sales. The Company has reviewed each of its product lines and has determined that its products will operate properly in the Year 2000 and beyond. However, for some industries, the Company's products are integrated with other companies' products and sold as combined product, by other companies. There can be no assurances that such combined products, current and future, will continue to operate properly. The cost of the Company's efforts to prepare for the Year 2000 was approximately $100,000, of which approximately 50% was incurred during the fiscal year 1999. Management will continue to monitor this issue, particularly the possible impact of third-party Year 2000 compliance on the Company's operations. Management believes that it properly prepared for the Year 2000. Because it is not possible to anticipate all future outcomes, especially when third parties are involved, there could be circumstances in which the Company is adversely affected by Year 2000 problems. As of February 14, 2000, the Company has not experienced any significant Year 2000 issues relating to the procurement, production, sales or support of the Company's products. The Company believes that it may take several months to determine the impact of the Year 2000, if any, on its customers or suppliers. Outlook The statements contained in this outlook are based on current expectations. These statements are forward looking, and actual results may differ materially. Based upon observed trends, the Company believes that the market for FWTs will experience substantial growth over the next five years. Nearer term prospects should enable the Company to grow, but at more modest rates. The Company has identified significant near term opportunities in Brazil, China, Dominican Republic, Mexico, Malaysia, Egypt and the USA. Each of these markets will develop at a different pace, and the sales cycle for these regions are likely to be several months or quarters, but market indications are positive. The Company is well positioned with a wide range of products to capitalize on these market opportunities. In order to enhance its ability to capitalize upon opportunities in the FWT market, the Company in recent years has established strategic relationships with a variety of telecommunications vendors, including Motorola, Lucent, Alcatel, Qualcomm, Ericsson and Nokia. Through these relationships, the Company seeks to market its technology in conjunction with the offerings of these larger vendors, in order to provide an integrated solution to the customer's needs. Statements contained in this filing, other than historical statements, consist of forward-looking information. The Company's actual results may vary considerably from those discussed in the Outlook section and elsewhere in this filing as a result of various risks and uncertainties. For example, there are a number of uncertainties as to the degree and duration of the Company's revenue momentum, which could impact the Company's ability to be profitable as lower sales may likely result in lower margins. In addition, product development expenditures, which are expected to benefit future periods, are likely to have a negative impact on near term earnings. Other risks and uncertainties, which are discussed in Exhibit 99 to the Company's Form 10-K for the period ended September 30, 1999, include the risk that technological change could render the Company's technology obsolete, unfavorable economic conditions could lead to lower sales of products, the risk of litigation, the Company's ability to develop new products, the Company's dependence on contractors and Motorola, the Company's ability to maintain quality control, the risk of doing business in developing markets, the Company's dependence on research and development, the uncertainty of additional funding, the effects of control by existing shareholders, the effect of changes in management, intense industry competition and uncertainty in the development of wireless service generally. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK In 1998, the Company received 300,000 shares of common stock of ORA Electronics, Inc. (ORA stock) in connection with the settlement of litigation. ORA stock is traded on Nasdaq's Over The Counter (OTC) system. Although ORA stock is subject to price fluctuations associated with all securities that are traded on the OTC system, the Company had the right to receive additional shares of ORA stock to ensure the fair market value of the settlement consideration received in stock is equivalent to $1.5 million on February 1, 2000. On February 1, 2000, the Company did not receive additional shares of ORA stock necessary to increase the fair market value of ORA stock received by the Company to $1,500. The Company is currently attempting to renegotiate with ORA for the additional shares of ORA stock. The Company frequently invests available cash and cash equivalents in short term instruments such as certificates of deposit, commercial paper and money market accounts. Although the rate of interest available on such investments may fluctuate over time, each of the Company's investments is made at a fixed interest rate over the duration of the investment. All of these investments have maturities of less than 90 days. The Company believes its exposure to market risk fluctuates for these investments is not material as of December 31, 1999. Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of trade accounts receivable. Credit risks with respect to trade receivables are limited due to the diversity of customers comprising the Company's customer base. The Company generally receives irrevocable letters of credit that are confirmed by U.S. banks to reduce its credit risk. Further, the Company purchases credit insurance for all significant open accounts outside of the United States. The Company performs ongoing credit evaluations and charges uncollectible amounts to operations when they are determined to be uncollectible. PART II - OTHER INFORMATION Item 1. LEGAL PROCEEDINGS The Company is involved in legal proceedings that arise in the ordinary course of business. While any litigation contains an element of uncertainty, based upon discussion with the Company's counsel, management believes that the outcome of such proceedings will not have a material adverse effect on the Company's consolidated financial position and results of operations. Item 2. CHANGES IN SECURITIES AND RECENT SALES OF UNREGISTERED SECURITIES Changes in Securities Under the terms of the Loan, the Company is prohibited from paying cash dividends during the term of the Loan. Recent Sales of Unregistered Securities During the three months ended December 31, 1999, the Company issued 43,485 shares of Common Stock valued at $87,521 to the law of firm of Hamman and Benn for legal services. During the three months ended December 31, 1999, the Company issued 3,586 shares of Common Stock valued at $6,724 to the law of firm of Bellows and Bellows for legal services. These issuances were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended, as they did not involve a public offering of securities. Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits (listed by number according to Exhibit table of Item 601 in Regulation S-K) Number Description Reference ------ ---------------------------- ----------------------------- 3.1 Certificate of Incorporation Filed as Exhibit 3.1 to Registration Statement No. 33-72096 (the Registration Statement) 3.2 Amendment No. 1 to Certificate Filed as Exhibit 3.2 of Incorporation to the Registration Statement 3.3 Amendment No. 2 to Certificate Filed as Exhibit 3.3 to the of Incorporation Registration Statement 3.4 Amendment No. 3 to Certificate Filed as Exhibit 3.4 to Form of Incorporation 10-Q filed February 16, 1999 3.5 Amendment No. 4 to Certificate Filed as Exhibit 3.5 to Form of Incorporation 10-Q filed February 16, 1999 3.6 By-Laws Filed as Exhibit 3.4 to the Registration Statement 4.3 Certificate of Designations, Filed as Exhibit 99.2 Preferences, and Rights of Form 8-K filed Series A Convertible Preferred April 25, 1997 Stock 4.5 Loan agreement with Wells Fargo Filed herewith Business 4.6 Stock Purchase Warrant with Filed herewith Wells Fargo Business 10.1 Consulting Agreement with Filed as Exhibit 10.1 William L. De Nicolo to the Registration Statement 10.2 Employment Agreement with Filed as Exhibit 10.1 to Form Kenneth E. Millard 10-Q filed August 14, 1996 10.3 Stock Option Agreement with Filed as Exhibit 10.2 to Form Kenneth E. Millard 10-Q filed August 14, 1996 10.4 Stock Purchase Agreement By Filed as Exhibit and Among Telular Corporation 10.3 to Form 10-Q and TelePath Corporation (which filed August 14, 1996 had changed its name to Wireless Domain, Incorporated) 10.5 Appointment of Larry J. Ford Filed as Exhibit 10.2 to Form 10-Q filed May 1, 1995 10.6 Option Agreement with Motorola Filed as Exhibit 10.6 dated November 10, 1995 to Form 10-K filed December 26, 1996(1) 10.7 Amendment No. 1 dated September Filed as Exhibit 10.7 24, 1996 to Option Agreement to Form 10-Q filed with Motorola August 13, 1999 (1) 10.8 Amendment No. 2 dated April 30, Filed as Exhibit 10.8 1999 to Option Agreement with to Form 10-Q filed Motorola August 13, 1999 (1) 10.9 Stock Purchase Agreement Filed as Exhibit 10.11 between Motorola, Inc. and to the Registration Statement Telular Corporation dated September 20, 1993 10.10 Patent Cross License Agreement Filed as Exhibit 10.12 between Motorola, Inc. and the to the Registration Company, dated March 23, 1990 Statement(1) and Amendments No. 1, 2 and 3 thereto 10.11 Amendment No 4 to Patent Cross Filed as Exhibit 10.11 License Agreement between to Form 10-Q filed Motorola, Inc. and the Company August 13, 1999 (1) dated May 3, 1999 10.12 Exclusive Distribution and Filed as Exhibit 10.14 Trademark License Agreement the Registration between Telular Canada Inc. Statement(1) and the Company, dated April 1, 1989, and Amendments thereto 10.13 Amended and Restated Shareholders Filed as Exhibit 10.15 Agreement dated November 2, 1993 to the Registration Statement(1) 10.14 Amendment No. 1 to Amended and Filed as Exhibit 10.24 Restated Shareholders the Registration Agreement, dated January 24, 1994 Statement 10.15 Amendment No. 2 to Amended and Filed as Exhibit 10.5 Restated Shareholders Agreement, to the Form 10-Q filed dated June 29, 1995 July 28, 1995 10.16 Amended and Restated Registration Filed as Exhibit 10.16 Rights Agreement dated November to the Registration 2, 1993 Statement 10.17 Amendment No. 1 to Amended and Filed as Exhibit 10.25 Restated Registration Rights to the Registration Agreement, dated January 24, Statement 1994 10.18 Amended and Restated Employee Filed as Exhibit 10.17 Stock Option Plan to Form 10-K filed December 26, 1996 10.19 Stock Option Grant to Filed as Exhibit 10.7 Independent Directors to Form 10-Q filed July 28, 1995 10.20 Securities Purchase Agreement Filed as Exhibit 99.1 to dated April 16, 1997, by and Form 8-K filed between Telular Corporation and April 25, 1997 purchasers of the Series A Convertible Preferred Stock 10.21 Registration Rights Agreement Filed as Exhibit 99.3 to dated April 16, 1997, by and Form 8-K filed between Telular Corporation and April 25, 1997 purchasers of the Series A Convertible Preferred Stock 10.22 Securities Purchase Agreement Filed as Exhibit 99.3 to dated June 6, 1997, by and Registration Statement on between Telular Corporation and Form S-3, Registration purchasers of the Series A No. 333-27915, as amended Convertible Preferred Stock by Amendment No. 1 filed June 13, 1997, and further Amended by Amendment No. 2 filed July 8, 1997 (Form S-3) 10.23 Registration Rights Agreement Filed as Exhibit 99.4 to dated June 6, 1997, by and Form S-3 between Telular Corporation and purchasers of the Series A Convertible Preferred Stock 10.24 Agreement and Plan of Merger by Filed as Exhibit 10.21 and among Wireless Domain to Form 10-K filed Incorporated (formerly TelePath), December 19, 1998 Telular-WD (a wholly-owned subsidiary of Telular) and certain stockholder of Wireless Domain Incorporated 10.25 Employment Agreement with Daniel Filed as Exhibit 10.22 D. Giacopelli to Form 10-Q filed February 13, 1998 10.27 OEM Equipment Purchase Agreement Filed as Exhibit 10.27 for WAFU dated April 30, 1999 to Form 10-Q filed August 13, 1999 (1) 11 Statement regarding computation Filed herewith of per share earnings 27 Financial data schedule Filed herewith 99 Cautionary Statements Pursuant Filed as Exhibit 99 to the Securities Litigation to Form 10-K filed Act of 1995 December 30, 1999 (1) Confidential treatment granted with respect to redacted portions of documents. (b) Reports on Form 8-K The Company did not file any report on Form 8-K during the three months ended December 31, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized. Telular Corporation Date February 14, 1999 By: /s/ Jeffrey L. Herrmann ----------------- ----------------------------- Jeffrey L. Herrmann Executive Vice President & Chief Operating Officer Date February 14, 1999 /s/ James J. Reiman ----------------- ------------------------- James J. Reiman Chief Accounting Officer & Corporate Controller Exhibit Index Number Description Reference ------ ---------------------------- ----------------------------- 3.1 Certificate of Incorporation Filed as Exhibit 3.1 to Registration Statement No. 33-72096 (the Registration Statement) 3.2 Amendment No. 1 to Certificate Filed as Exhibit 3.2 of Incorporation to the Registration Statement 3.3 Amendment No. 2 to Certificate Filed as Exhibit 3.3 to the of Incorporation Registration Statement 3.4 Amendment No. 3 to Certificate Filed as Exhibit 3.4 to Form of Incorporation 10-Q filed February 16, 1999 3.5 Amendment No. 4 to Certificate Filed as Exhibit 3.5 to Form of Incorporation 10-Q filed February 16, 1999 3.6 By-Laws Filed as Exhibit 3.4 to the Registration Statement 4.3 Certificate of Designations, Filed as Exhibit 99.2 Preferences, and Rights of Form 8-K filed Series A Convertible Preferred April 25, 1997 Stock 4.5 Loan agreement with Wells Fargo Filed herewith Business 4.6 Stock Purchase Warrant with Filed herewith Wells Fargo Business 10.1 Consulting Agreement with Filed as Exhibit 10.1 William L. De Nicolo to the Registration Statement 10.2 Employment Agreement with Filed as Exhibit 10.1 to Form Kenneth E. Millard 10-Q filed August 14, 1996 10.3 Stock Option Agreement with Filed as Exhibit 10.2 to Form Kenneth E. Millard 10-Q filed August 14, 1996 10.4 Stock Purchase Agreement By Filed as Exhibit and Among Telular Corporation 10.3 to Form 10-Q and TelePath Corporation (which filed August 14, 1996 had changed its name to Wireless Domain, Incorporated) 10.5 Appointment of Larry J. Ford Filed as Exhibit 10.2 to Form 10-Q filed May 1, 1995 10.6 Option Agreement with Motorola Filed as Exhibit 10.6 dated November 10, 1995 to Form 10-K filed December 26, 1996(1) 10.7 Amendment No. 1 dated September Filed as Exhibit 10.7 24, 1996 to Option Agreement to Form 10-Q filed with Motorola August 13, 1999 (1) 10.8 Amendment No. 2 dated April 30, Filed as Exhibit 10.8 1999 to Option Agreement with to Form 10-Q filed Motorola August 13, 1999 (1) 10.9 Stock Purchase Agreement Filed as Exhibit 10.11 between Motorola, Inc. and to the Registration Statement Telular Corporation dated September 20, 1993 10.10 Patent Cross License Agreement Filed as Exhibit 10.12 between Motorola, Inc. and the to the Registration Company, dated March 23, 1990 Statement(1) and Amendments No. 1, 2 and 3 thereto 10.11 Amendment No 4 to Patent Cross Filed as Exhibit 10.11 License Agreement between to Form 10-Q filed Motorola, Inc. and the Company August 13, 1999 (1) dated May 3, 1999 10.12 Exclusive Distribution and Filed as Exhibit 10.14 Trademark License Agreement the Registration between Telular Canada Inc. Statement(1) and the Company, dated April 1, 1989, and Amendments thereto 10.13 Amended and Restated Shareholders Filed as Exhibit 10.15 Agreement dated November 2, 1993 to the Registration Statement(1) 10.14 Amendment No. 1 to Amended and Filed as Exhibit 10.24 Restated Shareholders the Registration Agreement, dated January 24, 1994 Statement 10.15 Amendment No. 2 to Amended and Filed as Exhibit 10.5 Restated Shareholders Agreement, to the Form 10-Q filed dated June 29, 1995 July 28, 1995 10.16 Amended and Restated Registration Filed as Exhibit 10.16 Rights Agreement dated November to the Registration 2, 1993 Statement 10.17 Amendment No. 1 to Amended and Filed as Exhibit 10.25 Restated Registration Rights to the Registration Agreement, dated January 24, Statement 1994 10.18 Amended and Restated Employee Filed as Exhibit 10.17 Stock Option Plan to Form 10-K filed December 26, 1996 10.19 Stock Option Grant to Filed as Exhibit 10.7 Independent Directors to Form 10-Q filed July 28, 1995 10.20 Securities Purchase Agreement Filed as Exhibit 99.1 to dated April 16, 1997, by and Form 8-K filed between Telular Corporation and April 25, 1997 purchasers of the Series A Convertible Preferred Stock 10.21 Registration Rights Agreement Filed as Exhibit 99.3 to dated April 16, 1997, by and Form 8-K filed between Telular Corporation and April 25, 1997 purchasers of the Series A Convertible Preferred Stock 10.22 Securities Purchase Agreement Filed as Exhibit 99.3 to dated June 6, 1997, by and Registration Statement on between Telular Corporation and Form S-3, Registration purchasers of the Series A No. 333-27915, as amended Convertible Preferred Stock by Amendment No. 1 filed June 13, 1997, and further Amended by Amendment No. 2 filed July 8, 1997 (Form S-3) 10.23 Registration Rights Agreement Filed as Exhibit 99.4 to dated June 6, 1997, by and Form S-3 between Telular Corporation and purchasers of the Series A Convertible Preferred Stock 10.24 Agreement and Plan of Merger by Filed as Exhibit 10.21 and among Wireless Domain to Form 10-K filed Incorporated (formerly TelePath), December 19, 1998 Telular-WD (a wholly-owned subsidiary of Telular) and certain stockholder of Wireless Domain Incorporated 10.25 Employment Agreement with Daniel Filed as Exhibit 10.22 D. Giacopelli to Form 10-Q filed February 13, 1998 10.27 OEM Equipment Purchase Agreement Filed as Exhibit 10.27 for WAFU dated April 30, 1999 to Form 10-Q filed August 13, 1999 (1) 11 Statement regarding computation Filed herewith of per share earnings 27 Financial data schedule Filed herewith 99 Cautionary Statements Pursuant Filed as Exhibit 99 to the Securities Litigation to Form 10-K filed Act of 1995 December 30, 1999 (1) Confidential treatment granted with respect to redacted portions of documents. EX-11 2 Exhibit (11) - Statement Re: Computation of Earnings Per Share and Pro Forma Earnings Per Share (2000)
Three Months Ended December 31, 1999 1998 -------------- ------------- Average number of shares outstanding 11,318,007 8,669,254 ============== ============= Net loss $ (2,354,000) $ (2,691,000) Less: cumulative dividend on redeemable preferred stock $ (28,000) $ (195,000) -------------- ------------- Loss applicable to common shares $ (2,382,000) $ (2,886,000) ============== ============= Net loss per share $ (0.21) $ (0.33) ============== =============
EX-4.5 3 ______________________________________________ ______________________________________________ CREDIT AND SECURITY AGREEMENT BY AND BETWEEN TELULAR CORPORATION AND WELLS FARGO BUSINESS CREDIT, INC. Dated as of January 7, 2000 ______________________________________________ ______________________________________________ Table of Contents ARTICLE I DEFINITIONS..........................................1 Section 1.1 Definitions .......................................1 Section 1.2 Cross References .................................11 ARTICLE II AMOUNT AND TERMS OF THE CREDIT FACILITY............11 Section 2.1 Revolving Advances ..............................11 Section 2.2 Letters of Credit ...............................12 Section 2.3 Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement .....................12 Section 2.4 Special Account .................................13 Section 2.5 Obligations Absolute ............................13 Section 2.6 Interest; Minimum Interest Charge; Default Interest; Participations; Usury ...........................14 Section 2.7 Fees; Warrant ...................................15 Section 2.8 Computation of Interest and Fees; When Interest Due and Payable .................................16 Section 2.9 Capital Adequacy; Increased Costs and Reduced Return...................................16 Section 2.10 Voluntary Prepayment; Termination of the Credit Facility by the Borrower; Automatic Renewal ....17 Section 2.11 Termination. ...................................17 Section 2.12 Mandatory Prepayment ...........................18 Section 2.13 Payment ........................................18 Section 2.14 Payment on Non-Banking Days ....................18 Section 2.15 Use of Proceeds ................................18 Section 2.17 Liability Records ..............................18 ARTICLE III SECURITY INTEREST; OCCUPANCY; SETOFF..............19 Section 3.1 Grant of Security Interest ......................19 Section 3.2 Notification of Account Debtors and Other Obligors.........................................19 Section 3.3 Assignment of Insurance .........................19 Section 3.4 Occupancy .......................................19 Section 3.5 License .........................................20 Section 3.6 Financing Statement .............................20 Section 3.7 Setoff ..........................................21 ARTICLE IV CONDITIONS OF LENDING..............................21 Section 4.1 Conditions Precedent to the Initial Revolving Advances and the Initial Letter of Credit .......21 Section 4.2 Conditions Precedent to All Advances and Letters of Credit........................................23 ARTICLE V REPRESENTATIONS AND WARRANTIES......................23 Section 5.1 Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number.............23 Section 5.2 Authorization of Borrowing; No Conflict as to Law or Agreements ...............................24 Section 5.3 Legal Agreements ................................24 Section 5.4 Subsidiaries ....................................24 Section 5.5 Financial Condition; No Adverse Change ..........24 Section 5.6 Litigation ......................................25 Section 5.7 Regulation U ....................................25 Section 5.8 Taxes ...........................................25 Section 5.9 Titles and Liens ................................25 Section 5.10 Plans ..........................................25 Section 5.11 Default ........................................26 Section 5.12 Environmental Matters ..........................26 Section 5.13 Submissions to Lender ..........................27 Section 5.14 Financing Statements ...........................27 Section 5.15 Rights to Payment ..............................27 ARTICLE VI BORROWER'S AFFIRMATIVE COVENANTS...................28 Section 6.1 Reporting Requirements ..........................28 Section 6.2 Books and Records; Inspection and Examination ...30 Section 6.3 Account Verification ............................31 Section 6.4 Compliance with Laws ............................31 Section 6.5 Payment of Taxes and Other Claims ...............31 Section 6.6 Maintenance of Properties .......................31 Section 6.7 Insurance .......................................32 Section 6.8 Preservation of Existence .......................32 Section 6.9 Delivery of Instruments, etc ....................32 Section 6.10 Collateral Account .............................32 Section 6.11 Performance by the Lender ......................33 Section 6.12 Minimum Book Net Worth .........................34 Section 6.13 Minimum Availability ...........................34 ARTICLE VII NEGATIVE COVENANTS................................34 Section 7.1 Liens ...........................................34 Section 7.2 Indebtedness ....................................35 Section 7.3 Guaranties ......................................35 Section 7.4 Investments and Subsidiaries ....................36 Section 7.5 Dividends .......................................36 Section 7.6 Sale or Transfer of Assets; Suspension of Business Operations..........................................36 Section 7.7 Consolidation and Merger; Asset Acquisitions ....36 Section 7.8 Sale and Leaseback ..............................37 Section 7.9 Restrictions on Nature of Business ..............37 Section 7.10 Capital Expenditures ...........................37 Section 7.11 Accounting .....................................37 Section 7.12 Discounts, etc .................................37 Section 7.13 Defined Benefit Pension Plans ..................37 Section 7.14 Other Defaults .................................37 Section 7.15 Place of Business; Name ........................37 Section 7.16 Organizational Documents .......................37 ARTICLE VIII EVENTS OF DEFAULT, RIGHTS AND REMEDIES...........38 Section 8.1 Events of Default ...............................38 Section 8.2 Rights and Remedies .............................40 Section 8.3 Certain Notices .................................41 ARTICLE IX MISCELLANEOUS......................................41 Section 9.1 No Waiver; Cumulative Remedies ..................41 Section 9.2 Amendments, Etc .................................41 Section 9.3 Addresses for Notices, Etc ......................42 Section 9.4 Further Documents ...............................42 Section 9.5 Collateral ......................................43 Section 9.6 Costs and Expenses ..............................43 Section 9.7 Indemnity .......................................43 Section 9.8 Participants ....................................44 Section 9.9 Execution in Counterparts .......................44 Section 9.10 Binding Effect; Assignment; Complete Agreement; Exchanging Information .........................44 Section 9.11 Severability of Provisions .....................45 Section 9.12 Headings .......................................45 Section 9.13 Governing Law; Jurisdiction, Venue; Waiver of Jury Trial......................................45 CREDIT AND SECURITY AGREEMENT Dated as of January 7, 2000 TELULAR CORPORATION, a Delaware corporation (the Borrower), and WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the Lender), hereby agree as follows: ARTICLE I Definitions Section1.1 Definitions. For all purposes of this Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article, and include the plural as well as the singular; and (b) all accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP. Accounts means all of the Borrower's accounts, as such term is defined in the UCC, including, without limitation, the aggregate unpaid obligations of customers and other account debtors to the Borrower arising out of the sale or lease of goods or rendition of services by the Borrower on an open account or deferred payment basis. Advance means a Revolving Advance. Affiliate or Affiliates means Telular International, Inc., Telular-Adcor Security Products, Inc., Telular -WD Corporation, and any other Person controlled by, controlling or under common control with the Borrower, including, without limitation, any Subsidiary of the Borrower. For purposes of this definition, control, when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise. Agreement means this Credit and Security Agreement, as amended, supplemented or restated from time to time. American National means American National Bank & Trust Company of Chicago, a national banking association with an office located in Elk Grove Village, Illinois. Banking Day means a day other than a Saturday, Sunday or other day on which banks are generally not open for business in Milwaukee, Wisconsin. Book Net Worth means the aggregate of the common and preferred stockholders' equity in the Borrower, determined on a consolidated basis in accordance with GAAP. Borrowing Base means, at any time the lesser of: (a) the Maximum Line; or (b) the Collateral Availability. Capital Expenditures for a period means any expenditure of money for the lease, purchase or other acquisition of any capitalized asset, or for the lease of any other asset whether payable currently or in the future, provided such lease is a capital lease, all in accordance with GAAP. Collateral means all of the Borrower's Equipment, General Intangibles, Inventory, Receivables, Investment Property, all sums on deposit in any Collateral Account, and any items in any Lockbox; together with (i) all substitutions and replacements for and products of any of the foregoing; (ii) proceeds of any and all of the foregoing; (iii) in the case of all tangible goods, all accessions; (iv) all accessories, attachments, parts, equipment and repairs now or hereafter attached or affixed to or used in connection with any tangible goods; (v) all warehouse receipts, bills of lading and other documents of title now or hereafter covering such goods; and (vi) all sums on deposit in the Special Account. Collateral Account at any time, has the meaning given in the Collateral Account Agreement then in effect. Collateral Account Agreement initially, means the Multi-Party Blocked Account Agreement of even date herewith by and among the Borrower, American National and the Lender and, no later than July 1, 2000, means the Collateral Account Agreement of such date by and among the Borrower, Norwest Bank Wisconsin and the Lender. Collateral Availability means at any time the sum of: (i) 85% of Eligible Accounts; plus (ii) subject to satisfaction of the Foreign Line Conditions, the lesser of (A) 85% of Eligible Foreign Accounts or (B) $1,000,000; plus (iii) the lesser of (A) 35% of Eligible Inventory or (B) $1,500,000. Commitment means the Lender's commitment to make Advances and to cause the Issuer to issue Letters of Credit to or for the Borrower's account pursuant to Article II. Credit Facility means the credit facility being made available to the Borrower by the Lender pursuant to Article II. Default means an event that, with giving of notice and after the expiry of any applicable notice or remedy period, would constitute an Event of Default. Default Period means any period of time beginning on day an Event of Default has occurred (or in the case of an occurrence of a violation of Section 6.12 hereof, the fifth business day of the month immediately following the month in which such provision was violated) and ending on the date Event of Default has been cured or waived as set forth in the Lender's written notice of such cure or waiver. Default Rate means an annual rate equal to three percent (3%) over the Floating Rate, which rate shall change when and as the Floating Rate changes. ERISA means the Employee Retirement Income Security Act of 1974, as amended. Eligible Accounts means all unpaid Accounts, net of any credits, except the following shall not in any event be deemed Eligible Accounts: (i) That portion of Accounts unpaid more than sixty (60) days after the due date; provided that in no event shall any Account payable more than one hundred fifty (150) days after the invoice date be deemed an Eligible Account; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government, whether foreign or domestic (provided, however, that there shall be included in Eligible Accounts that portion of Accounts owed by such units of government for which the Borrower has provided evidence reasonably satisfactory to the Lender that (A) the Lender has a first priority perfected security interest and (B) such Accounts may be enforced by the Lender directly against such unit of government under all applicable laws); (v) Accounts owed by an account debtor located outside the United States of America which are not backed by a bank letter of credit naming the Lender as beneficiary or assigned to the Lender, confirmed, and in the Lender's possession and acceptable to the Lender in all material respects; (vi) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vii) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower; (viii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender including, without limitation, any payment or performance bond; (ix) That portion of Accounts that has been restructured, extended, amended or modified; (x) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (xi) Accounts owed by an account debtor, regardless of whether otherwise eligible, if twenty five percent (25%) or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (ix), above; and (xii) With respect to any Accounts in an amount in excess of $200,000 which are not backed by a bank letter of credit, any such Accounts otherwise deemed ineligible by the Lender in its reasonable business judgment. Eligible Foreign Accounts means Accounts due and owing by an Account debtor located outside the United States; but excluding any Accounts having the following characteristics: (i) That portion of Accounts unpaid more than sixty (60) daysafter the due date; provided that in no event shall any Account payable more than one hundred fifty (150) days after the invoice date be deemed an Eligible Account; (ii) That portion of Accounts that is disputed or subject to a claim of offset or a contra account; (iii) That portion of Accounts not yet earned by the final delivery of goods or rendition of services, as applicable, by the Borrower to the customer; (iv) Accounts owed by any unit of government; (v) Accounts owed by an account debtor that is insolvent, the subject of bankruptcy proceedings or has gone out of business; (vi) Accounts owed by a shareholder, Subsidiary, Affiliate, officer or employee of the Borrower; (vii) Accounts not subject to a duly perfected security interest in the Lender's favor or which are subject to any lien, security interest or claim in favor of any Person other than the Lender including without limitation any payment or performance bond; (viii) That portion of Accounts that has been restructured, extended, amended or modified; (ix) That portion of Accounts that constitutes advertising, finance charges, service charges or sales or excise taxes; (x) That portion of Accounts owed by any one account debtor that would permit Revolving Advances supported by such account debtor's Accounts to exceed Two Hundred Thousand Dollars ($200,000) at any one time; (xi) Accounts denominated in any currency other than United States dollars, Canadian dollars, French francs, Swiss francs, German marks, Japanese yen, United Kingdom pounds sterling; (xii) Accounts with respect to which the Borrower has not instructed the account debtor to pay the Account to the Collateral Account; (xiii) Accounts owed by account debtors located in countries appearing on a list of unacceptable countries delivered by the Lender to the Borrower from time to time; provided, however, that to the extent such list is changed by the Lender, any Accounts owed by account debtors in countries which are subsequently unacceptable to the Lender shall nevertheless not be deemed ineligible solely on account of such change to the list of unacceptable countries; (xiv) Accounts owed by an account debtor, regardless of whether otherwise eligible, if twenty five percent (25%) or more of the total amount due under Accounts from such debtor is ineligible under clauses (i), (ii) or (viii) above; and (xv) Foreign Accounts that constitute Eligible Accounts in accordance with part (v) of the definition of Eligible Accounts. Eligible Inventory means all finished goods Inventory of the Borrower, at the lower of cost or market value as determined in accordance with GAAP; provided, however, that the following shall not in any event be deemed Eligible Inventory: (i) Inventory that is: in-transit; located at any warehouse, job site or other premises not approved by the Lender in writing; located outside of the states, or localities, as applicable, in which the Lender has filed financing statements to perfect a first priority security interest in such Inventory; covered by any negotiable or non-negotiable warehouse receipt, bill of lading or other document of title; on consignment from any Person; on consignment to any Person or subject to any bailment unless such consignee or bailee has executed an agreement with the Lender; (ii) Supplies, packaging, parts or sample Inventory; (iii) Raw materials and work-in-process Inventory; (iv) Inventory that is damaged, obsolete, slow moving or not currently saleable in the normal course of the Borrower's operations; (v) Inventory that the Borrower has returned, has attempted to return, is in the process of returning or intends to return to the vendor thereof; (vi) Inventory manufactured by the Borrower pursuant to a license unless the applicable licensor has agreed in writing to permit the Lender to exercise its rights and remedies against such Inventory or the Lender has agreed in writing that the licensor's agreement is not required; and (vii) Inventory that is subject to a security interest in favor of any Person other than the Lender; (viii) Inventory otherwise deemed ineligible by the Lender in its reasonable business judgment. Environmental Laws has the meaning specified in Section 5.12. Equipment means all of the Borrower's equipment, as such term is defined in the UCC, whether now owned or hereafter acquired, including, but not limited to, all present and future machinery, vehicles, furniture, fixtures, manufacturing equipment, shop equipment, office and recordkeeping equipment, parts, tools, supplies, and including, specifically, without limitation, the goods described in any equipment schedule or list herewith or hereafter furnished to the Lender by the Borrower. Event of Default has the meaning specified in Section 8.1. Floating Rate means an annual rate equal to the Prime Rate, which annual rate shall change when and as the Prime Rate changes. Foreign Line Conditions means (i) the Lender has received from the Borrower a fee equal to one percent (1%) per annum of One Million Dollars ($1,000,000), prorated for the number of months from the date the Borrower has requested Advances based of Foreign Accounts to the Foreign Line Expiry Date and (ii) the Foreign Line Expiry Date has not occurred. Foreign Line Expiry Date means September 30, 2000, or such later date as to which the Lender has agreed, which agreement to extend shall not be unreasonably withheld. Funding Date has the meaning given in Section 2.1. GAAP means, at any time, accounting principles generally accepted in the United States, applied on a consistent basis. General Intangibles means all of the Borrower's general intangibles, as such term is defined in the UCC, whether now owned or hereafter acquired, including, without limitation, all present and future patents, patent applications, copyrights, trademarks, trade names, trade secrets, customer or supplier lists and contracts, manuals, operating instructions, permits, franchises, the right to use the Borrower's name, and the goodwill of the Borrower's business. Guarantors means Telular International, Inc., Telular-Adcor Security Products, Inc., and Telular-WD Corporation. Hazardous Substance has the meaning given in Section 5.12. Inventory means all of the Borrower's inventory, as such term is defined in the UCC, whether now owned or hereafter acquired, whether consisting of whole goods, spare parts or components, supplies or materials, whether acquired, held or furnished for sale, for lease or under service contracts or for manufacture or processing, and wherever located. Investment Agreement means that certain Investment Agreement of even date herewith between the Borrower and the Lender. Investment Property means all of the Borrower's investment property, as such term is defined in the UCC whether now owned or hereafter acquired, including, but not limited to, all securities, security entitlements, securities accounts, commodity contracts, commodity accounts, stocks, bonds, mutual fund shares, money market shares and United States of America Government Securities. Issuer means the issuer of any Letter of Credit. L/C Amount means the sum of (i) the aggregate face amount of any issued and outstanding Letters of Credit and (ii) the unpaid amount of the Obligation of Reimbursement. L/C Application means an application and agreement for letters of credit in a form acceptable to the Issuer and the Lender. Letter of Credit has the meaning specified in Section 2.2. Loan Documents means this Agreement, the Note and the Security Documents. Lockbox at any time, has the meaning given in the Lockbox Agreement then in effect. Lockbox Agreement initially, means such agreement as is required by American National as to lockbox services provided to the Borrower by American National and, not later than July 1, 2000, means the Agreement as to Lockbox Services of such date by and among the Borrower, Norwest Bank Wisconsin and the Lender. Maturity Date has the meaning set forth in Section 2.10. Maximum Line means Five Million Dollars ($5,000,000), unless said amount is reduced pursuant to Section 2.10, in which event it means the amount to which said amount is reduced. Minimum Interest Charge has the meaning given in Section 2.6(b). Norwest Bank Wisconsin means Norwest Bank Wisconsin, National Association, a national banking association with an office in Milwaukee, Wisconsin. Note means the Revolving Note. Obligations means the Note and each and every other debt, liability and obligation of every type and description which the Borrower may now or at any time hereafter owe to the Lender, whether such debt, liability or obligation now exists or is hereafter created or incurred, whether it arises in a transaction involving the Lender alone or in a transaction involving other creditors of the Borrower, and whether it is direct or indirect, due or to become due, absolute or contingent, primary or secondary, liquidated or unliquidated, or sole, joint, several or joint and several, and including, specifically, but not limited to, the Obligation of Reimbursement and all indebtedness of the Borrower arising under this Agreement, the Note, any L/C Application completed by the Borrower, or any other loan or credit agreement or guaranty between the Borrower and the Lender, whether now in effect or hereafter entered into. Obligation of Reimbursement has the meaning given in Section 2.3(a). Patent and Trademark Security Agreement means the Patent and Trademark Security Agreement dated as of the date hereof to be executed by the Borrower in the Lender's favor. Permitted Lien has the meaning given in Section 7.1. Person means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Plan means an employee benefit plan or other plan maintained for the Borrower's employees and covered by Title IV of ERISA. Premises means all premises where the Borrower conducts its business and has any rights of possession, including, without limitation, the premises legally described in Exhibit C attached hereto. Prime Rate means the rate of interest publicly announced from time to time by Wells Fargo Bank, N. A. as its prime rate or, if such bank ceases to announce a rate so designated, any similar successor rate reasonably designated by the Lender. Receivables means each and every right of the Borrower to the payment of money, whether such right to payment now exists or hereafter arises, whether such right to payment arises out of a sale, lease or other disposition of goods or other property, out of a rendering of services, out of a loan, out of the overpayment of taxes or other liabilities, or otherwise arises under any contract or agreement, whether such right to payment is created, generated or earned by the Borrower or by some other person who subsequently transfers such person's interest to the Borrower, whether such right to payment is or is not already earned by performance, and howsoever such right to payment may be evidenced, together with all other rights and interests (including all liens and security interests) which the Borrower may at any time have by law or agreement against any account debtor or other obligor obligated to make any such payment or against any property of such account debtor or other obligor; all including, but not limited to, all present and future accounts, contract rights, loans and obligations receivable, chattel papers, bonds, notes and other debt instruments, tax refunds and rights to payment in the nature of general intangibles. Reportable Event shall have the meaning assigned to that term in Title IV of ERISA. Revolving Advance has the meaning given in Section 2.1. Revolving Note means the Borrower's revolving promissory note, payable to the order of the Lender in substantially the form of Exhibit A hereto and any note or notes issued in substitution therefor, as the same may hereafter be amended, supplemented or restated from time to time. Security Documents means this Agreement, the Patent and Trademark Security Agreement, the Collateral Account Agreement, the Lockbox Agreement, and any other document delivered to the Lender from time to time to secure the Obligations, as the same may hereafter be amended, supplemented or restated from time to time. Security Interest has the meaning given in Section 3.1. Special Account means a specified cash collateral account maintained by a financial institution acceptable to the Lender in connection with Letters of Credit, as contemplated by Section 2.4. Subsidiary means any corporation of which more than fifty percent (50%) of the outstanding shares of capital stock having general voting power under ordinary circumstances to elect a majority of the board of directors of such corporation, irrespective of whether or not at the time stock of any other class or classes shall have or might have voting power by reason of the happening of any contingency, is at the time directly or indirectly owned by the Borrower, by the Borrower and one or more other Subsidiaries, or by one or more other Subsidiaries. Termination Date means the earliest of (i) the Maturity Date, (ii) the date the Borrower terminates the Credit Facility, or (iii) the date the Lender demands payment of the Obligations after an Event of Default pursuant to Section 8.2. UCC means the Uniform Commercial Code as in effect from time to time in the state designated in Section 9.13 as the state whose laws shall govern this Agreement, or in any other state whose laws are held to govern this Agreement or any portion hereof. Warrant means the Stock Purchase Warrant issued on the date hereof by the Borrower to the Lender for the purchase of the Borrower's Common Stock, par value $.01 per share, substantially in the form of Exhibit D attached hereto. Section 1.2 Cross References All references in this Agreement to Articles, Sections and subsections, shall be to Articles, Sections and subsections of this Agreement unless otherwise explicitly specified. ARTICLEII Amount and Terms of the Credit Facility Section 2.1 Revolving Advances. The Lender agrees, on the terms and subject to the conditions herein set forth, to make advances to the Borrower from time to time from the date all of the conditions set forth in Section 4.1 are satisfied or waived in writing by the Lender (the Funding Date) to the Termination Date, on the terms and subject to the conditions herein set forth (the Revolving Advances). The Lender shall have no obligation to make a Revolving Advance if, after giving effect to such requested Revolving Advance, the sum of the outstanding and unpaid Revolving Advances under this Section 2.1 or otherwise would exceed the Borrowing Base less the L/C Amount. The Borrower's obligation to pay the Revolving Advances shall be evidenced by the Revolving Note and shall be secured by the Collateral as provided in Article III. Within the limits set forth in this Section 2.1, the Borrower may borrow, prepay pursuant to Section 2.12 and reborrow. The Borrower agrees to comply with the following procedures in requesting Revolving Advances under this Section 2.1: (a) The Borrower shall make each request for a Revolving Advance to the Lender before 12:00 p.m. (Milwaukee time) of the day of the requested Revolving Advance. Requests may be made in writing or by telephone, specifying the date of the requested Revolving Advance and the amount thereof. Each request shall be by (i) any officer of the Borrower; or (ii) any person designated as the Borrower's agent by any officer of the Borrower in a writing delivered to the Lender; or (iii) any person whom the Lender reasonably believes to be an officer of the Borrower or such a designated agent. (b) Upon fulfillment of the applicable conditions set forth in Article IV, the Lender shall disburse the proceeds of the requested Revolving Advance by crediting the same to the Borrower's demand deposit account maintained with Norwest Bank Wisconsin unless the Lender and the Borrower shall agree in writing to another manner of disbursement. Upon the Lender's request, the Borrower shall promptly confirm each telephonic request for an Advance by executing and delivering an appropriate confirmation certificate to the Lender. The Borrower shall repay all Advances even if the Lender does not receive such confirmation and even if the person requesting an Advance was not in fact authorized to do so (so long as such person was named on the most current list of authorized officers delivered to the Lender under Section 2.1(a)). Any request for an Advance, whether written or telephonic, shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the time of the request. 2.2. Letters of Credit. (a) The Lender agrees, on the terms and subject to the conditions herein set forth, to cause an Issuer to issue, from the Funding Date to the Termination Date, one or more irrevocable standby or documentary letters of credit (each, a Letter of Credit) for the Borrower's account. The Lender shall have no obligation to cause an Issuer to issue any Letter of Credit if the face amount of the Letter of Credit to be issued, would exceed the Borrowing Base less the sum of (A) all outstanding and unpaid Revolving Advances and (B) the L/C Amount. Each Letter of Credit, if any, shall be issued pursuant to a separate L/C Application entered into by the Borrower and the Lender for the benefit of the Issuer, completed in a manner reasonably satisfactory to the Lender and the Issuer. The terms and conditions set forth in each such L/C Application shall supplement the terms and conditions hereof, but if the terms of any such L/C Application and the terms of this Agreement are inconsistent, the terms hereof shall control. (b) Letters of Credit may not be issued with an expiry date later than the Termination Date in effect as of the date of issuance. (c) Any request to cause an Issuer to issue a Letter of Credit under this Section 2.2 shall be deemed to be a representation by the Borrower that the conditions set forth in Section 4.2 have been satisfied as of the date of the request. Section 2.3. Payment of Amounts Drawn Under Letters of Credit; Obligation of Reimbursement. The Borrower acknowledges that the Lender, as co-applicant, will be liable to the Issuer for reimbursement of any and all draws under Letters of Credit and for all other amounts required to be paid under the applicable L/C Application. Accordingly, the Borrower agrees to pay to the Lender any and all amounts reasonably required to be paid by the Lender to the Issuer under the applicable L/C Application, when and as required to be paid thereby, and the amounts designated below, when and as designated: (a) The Borrower hereby agrees to pay the Lender on the day a draft is honored under any Letter of Credit a sum equal to all amounts drawn under such Letter of Credit plus any and all reasonable charges and expenses that the Lender has paid or incurred relative to such draw and the applicable L/C Application, plus interest on all such amounts, charges and expenses as set forth below (the Borrower's obligation to pay all such amounts is herein referred to as the Obligation of Reimbursement). (b) Whenever a draft is submitted under a Letter of Credit, the Lender shall make a Revolving Advance in the amount of the Obligation of Reimbursement and shall apply the proceeds of such Revolving Advance thereto. Such Revolving Advance shall be repayable in accordance with and be treated in all other respects as a Revolving Advance hereunder. (c) If a draft is submitted under a Letter of Credit when the Borrower is unable, because a Default Period then exists or for any other reason, to obtain a Revolving Advance to pay the Obligation of Reimbursement, the Borrower shall pay to the Lender on demand and in immediately available funds, the amount of the Obligation of Reimbursement together with interest, accrued from the date of the draft until payment in full at the Default Rate. Notwithstanding the Borrower's inability to obtain a Revolving Advance for any reason, the Lender is irrevocably authorized, in its sole discretion, to make a Revolving Advance in an amount sufficient to discharge the Obligation of Reimbursement and all accrued but unpaid interest thereon. (d) The Borrower's obligation to pay any Revolving Advance made under this Section 2.3, shall be evidenced by the Revolving Note and shall bear interest as provided in Section 2.6. Section 2.4. Special Account. If the Credit Facility is terminated for any reason whatsoever while any Letter of Credit is outstanding, the Borrower shall thereupon pay the Lender in immediately available funds for deposit in the Special Account an amount equal to the L/C Amount. The Special Account shall be an interest bearing account maintained for the Lender by any financial institution acceptable to the Lender. Any interest earned on amounts deposited in the Special Account shall be credited to the Special Account. Amounts on deposit in the Special Account shall be applied by the Lender as follows: (a) first, to pay any unpaid Obligation of Reimbursement for any Letter of Credit which is drawn upon, (b) second, to the extent there are not any outstanding Obligations and a Letter of Credit expires undrawn, the amount on deposit with respect to such Letter of Credit shall not later than fifteen (15) days after such expiration be paid to the Borrower, and (c) after all Letters of Credit have expired or been terminated, any amount or deposit shall be applied to any outstanding Obligations or if there are none, then released to the Borrower. The amount on deposit in the Special Account shall not be subject to withdrawal by the Borrower so long as the Lender maintains a security interest therein. The Lender agrees to transfer any balance in the Special Account to the Borrower at such time as the Lender is required to release its security interest in the Special Account under applicable law. Section 2.5. Obligations Absolute. The Borrower's obligations arising under Section 2.3 shall be absolute, unconditional and irrevocable, and shall be paid strictly in accordance with the terms of Section 2.3, under all circumstances whatsoever, including, without limitation, the following circumstances: (a) any lack of validity or enforceability of any Letter of Credit or any other agreement or instrument relating to any Letter of Credit (collectively the Related Documents); (b) any amendment or waiver of or any consent to departure from all or any of the Related Documents; (c) the existence of any claim, setoff, defense or other right which the Borrower may have at any time, against any beneficiary or any transferee of any Letter of Credit (or any persons or entities for whom any such beneficiary or any such transferee may be acting), or other person or entity, whether in connection with this Agreement, the transactions contemplated herein or in any unrelated transactions; (d) any statement or any other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect whatsoever; or (e) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing (other than the making of payment under a Letter of Credit not in conformity with the terms thereof). Section 2.6. Interest; Minimum Interest Charge; Default Interest; Participations; Usury. Interest accruing on the Note shall be due and payable in arrears on the first day of each month. (a) Note. Except as set forth in Sections 2.6(c) and 2.6(d), the outstanding principal balance of the Note shall bear interest at the Floating Rate. (b) Minimum Interest Charge. Notwithstanding the interest payable pursuant to Section 2.6(a), the Borrower shall pay to the Lender interest of not less than Fifteen Thousand Dollars ($15,000) per calendar month (or a prorata portion of such amount for any partial month) (the Minimum Interest Charge) during the term of this Agreement, and the Borrower shall pay any deficiency between the Minimum Interest Charge and the amount of interest otherwise calculated under Sections 2.6(a) and 2.6(d) on the date and in the manner provided in Section 2.8. (c) Default Interest Rate. At any time during any Default Period, in the Lender's sole discretion and without waiving any of its other rights and remedies, the principal of the Advances outstanding from time to time shall bear interest at the Default Rate, effective for any periods designated by the Lender from time to time during that Default Period. (d) Usury. In any event no rate change shall be put into effect which would result in a rate greater than the highest rate permitted by law. Notwithstanding anything to the contrary contained in any Loan Document, all agreements which either now are or which shall become agreements between the Borrower and the Lender are hereby limited so that in no contingency or event whatsoever shall the total liability for payments in the nature of interest, additional interest and other charges exceed the applicable limits imposed by any applicable usury laws. If any payments in the nature of interest, additional interest and other charges made under any Loan Document are held to be in excess of the limits imposed by any applicable usury laws, it is agreed that any such amount held to be in excess shall be considered payment of principal hereunder, and the indebtedness evidenced hereby shall be reduced by such amount so that the total liability for payments in the nature of interest, additional interest and other charges shall not exceed the applicable limits imposed by any applicable usury laws, in compliance with the desires of the Borrower and the Lender. This provision shall never be superseded or waived and shall control every other provision of the Loan Documents and all agreements between the Borrower and the Lender, or their successors and assigns. Section 2.7. Fees; Warrant. (a) Origination Fee. The Borrower hereby agrees to pay the Lender a fully earned and non-refundable origination fee of Twenty Five Thousand Dollars ($25,000), due and payable upon the execution of this Agreement. (b) Warrant. The Borrower hereby agrees to issue the Warrant to the Lender upon execution of this Agreement. (c) Facility Fee. The Borrower agrees to pay to the Lender a facility fee at the rate of one half percent (.50%) per annum on the Maximum Line from the date of this Agreement to and including the Termination Date, due and payable monthly in arrears on the first day of each month commencing February 1, 2000, and on the Termination Date. (d) Letter of Credit Fees. The Borrower agrees to pay the Lender a fee with respect to each Letter of Credit, if any, accruing on a daily basis and computed at the annual rate of one percent (1.0%) of the aggregate amount that may then be drawn on all issued and outstanding Letters of Credit assuming compliance with all conditions for drawing thereunder (the Aggregate Face Amount), from and including the date of issuance of such Letter of Credit until such date as such Letter of Credit shall terminate by its terms or be returned to the Lender, due and payable monthly in arrears on the first day of each month and on the Termination Date; provided, however that during Default Periods, in the Lender's sole discretion and without waiving any of its other rights and remedies, such fee shall increase to three percent (3.0%) of the Aggregate Face Amount. The foregoing fee shall be in addition to any and all processing fees, commissions and charges of any Issuer of a Letter of Credit with respect to or in connection with such Letter of Credit. (e) Letter of Credit Administrative Fees. The Borrower agrees to pay the Lender, on written demand, the administrative fees charged by the Issuer in connection with the honoring of drafts under any Letter of Credit, amendments thereto, transfers thereof and all other activity with respect to the Letters of Credit at the then-current rates published by the Issuer for such services rendered on behalf of customers of the Issuer generally. (f) Audit Fees. The Borrower hereby agrees to pay the Lender audit fees of Two Thousand Five Hundred Dollars ($2,500) per quarter beginning April 1, 2000 in connection with any audit or inspection conducted by the Lender of any Collateral or the Borrower's operations or business, and, during Default Periods, all out-of-pocket costs and expenses incurred in conducting any such audit or inspection. (g) Miscellaneous Fees. The Borrower hereby agrees to (i) reimburse the Lender for all wire transfer charges and automated clearinghouse charges and to (ii) pay overadvance charges of Two Hundred Dollars ($200) per day; provided, however, that from the first day of any month during which any Default Period commences or exists at any time, the daily overadvance charge (if an overadvance exists) shall be Four Hundred Dollars ($400). 2.8. Computation of Interest and Fees; When Interest Due and Payable. Interest accruing on the outstanding principal balance of the Advances and fees hereunder outstanding from time to time shall be computed on the basis of actual number of days elapsed in a year of three hundred sixty (360) days. Interest shall be payable in arrears on the first day of each month and on the Termination Date. Section 2.9. Capital Adequacy; Increased Costs and Reduced Return.If any Related Lender determines at any time that its Return has been reduced solely as a result of any Rule Change, such Related Lender may require the Borrower to pay it the amount necessary to restore its Return to what it would have been had there been no Rule Change, provided that the Lender and the Related Lender makes similar adjustments to all of their other credit facilities. For purposes of this Section 2.9: (a) Capital Adequacy Rule means any law, rule, regulation, guideline, directive, requirement or request regarding capital adequacy, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules requiring financial institutions to maintain total capital in amounts based upon percentages of outstanding loans, binding loan commitments and letters of credit. (b) L/C Rule means any law, rule, regulation, guideline, directive, requirement or request regarding letters of credit, or the interpretation or administration thereof by any governmental or regulatory authority, central bank or comparable agency, whether or not having the force of law, that applies to any Related Lender. Such rules include rules imposing taxes, duties or other similar charges, or mandating reserves, special deposits or similar requirements against assets of, deposits with or for the account of, or credit extended by any Related Lender, on letters of credit. (c) Return, for any period, means the return as reasonably determined by such Related Lender on the Advances and Letters of Credit based upon its total capital requirements and a reasonable attribution formula that takes account of the Capital Adequacy Rules then in effect and costs of issuing or maintaining any Letter of Credit. Return may be calculated for each calendar quarter and for the shorter period between the end of a calendar quarter and the date of termination in whole of this Agreement. (d) Rule Change means any change in any Capital Adequacy Rule or L/C Rule occurring after the date of this Agreement, but the term does not include any changes in applicable requirements that at the Closing Date are scheduled to take place under the existing Capital Adequacy Rules or L/C Rules or any increases in the capital that any Related Lender is required to maintain to the extent that the increases are required due to a regulatory authority's assessment of the financial condition of such Related Lender. (e) Related Lender includes (but is not limited to) the Lender or any parent corporation of the Lender. Section 2.10. Voluntary Prepayment; Termination of the Credit Facility by the Borrower; Automatic Renewal. Except as otherwise provided herein, the Borrower may prepay the Revolving Advances in whole at any time or from time to time in part. The Borrower may terminate the Credit Facility at any time if it (i) gives the Lender at least thirty (30) days prior written notice and (ii) pays the Lender the termination fees in accordance with Section 2.11. Upon termination of the Credit Facility and payment and performance of all Obligations, the Lender shall release or terminate the Security Interest and the Security Documents to which the Borrower is entitled by law. Unless terminated by either the Lender or the Borrower upon ninety (90) days prior written notice, the Credit Facility shall remain in effect until December 31, 2002, and thereafter shall automatically renew for successive one year periods (December 31, 2002 and each anniversary date thereof which is at the end of any year in which the Credit Facility has been automatically renewed, is herein referred to as the (Maturity Date) Section 2.11. Termination Fees. If the Credit Facility is terminated for any reason as of a date other than the Maturity Date (other than following the imposition of a charge under Section 2.9) the Borrower shall pay the Lender a fee in an amount equal to a percentage of the Maximum Line, in the case of a termination, as follows: (i) two percent (2.0%) if the termination or reduction occurs on or before the first anniversary of the Funding Date; and (ii) one percent (1.0%) if the termination or reduction occurs after the first anniversary of the Funding Date. Section 2.12. Mandatory Prepayment. Without notice or demand, if the sum of the outstanding principal balance of the Revolving Advances plus the L/C Amount shall at any time exceed the Borrowing Base, the Borrower shall (i) first, immediately prepay the Revolving Advances to the extent necessary to eliminate such excess; and (ii) if prepayment in full of the Revolving Advances is insufficient to eliminate such excess, pay to the Lender in immediately available funds for deposit in the Special Account an amount equal to the remaining excess. Any payment received by the Lender under this Section 2.12 or under Section 2.10 may be applied to the Obligations, in such order and in such amounts as the Lender, in its reasonable discretion, may from time to time determine. Section 2.13. Payment. All payments to the Lender shall be made in immediately available funds and shall be applied to the Obligations one (1) Banking Day after receipt by the Lender. The Lender may hold all payments not constituting immediately available funds for two (2) Banking Days before applying them to the Obligations. Notwithstanding anything in Section 2.1, the Borrower hereby authorizes the Lender, in its reasonable discretion at any time or from time to time without the Borrower's request and even if the conditions set forth in Section 4.2 would not be satisfied, to make a Revolving Advance in an amount equal to the portion of the Obligations from time to time due and payable. Section 2.14. Payment on Non-Banking Days. Whenever any payment to be made hereunder shall be stated to be due on a day which is not a Banking Day, such payment may be made on the next succeeding Banking Day, and such extension of time shall in such case be included in the computation of interest on the Advances or the fees hereunder, as the case may be. Section 2.15. Use of Proceeds. The Borrower shall use the proceeds of Advances, and each Letter of Credit, if any, for ordinary working capital purposes. Section 2.18. Liability Records. The Lender may maintain from time to time, at its discretion, liability records as to the Obligations. Upon the Lender's request, the Borrower will review, admit and certify in writing the exact principal balance of the Obligations that the Borrower then asserts to be outstanding. Any billing statement or accounting rendered by the Lender and delivered to the Borrower shall be conclusive and fully binding on the Borrower unless the Borrower gives the Lender specific written notice of exception within thirty (30) days after receipt by the Borrower. ARTICLE III Security Interest; Occupancy; Setoff Section 3.1. Grant of Security Interest. The Borrower hereby pledges, assigns and grants to the Lender a security interest (collectively referred to as the Security Interest) in the Collateral, as security for the payment and performance of the Obligations. Section 3.2. Notification of Account Debtors and Other Obligors. At any time after the occurrence and during the continuance of an Event of Default, the Lender may notify any account debtor or other person obligated to pay the amount due that such right to payment has been assigned or transferred to the Lender for security and shall be paid directly to the Lender. The Borrower will join in giving such notice if the Lender so requests. At any time after the Borrower or the Lender gives such notice to an account debtor or other obligor, the Lender may, but need not, in the Lender's name or in the Borrower's name, (a) demand, sue for, collect or receive any money or property at any time payable or receivable on account of, or securing, any such right to payment, or grant any extension to, make any compromise or settlement with or otherwise agree to waive, modify, amend or change the obligations (including collateral obligations) of any such account debtor or other obligor; and (b) as the Borrower's agent and attorney-in-fact, notify the United States Postal Service to change the address for delivery of the Borrower's mail to any address designated by the Lender, otherwise intercept the Borrower's mail, and receive, open and dispose of the Borrower's mail, applying all Collateral as permitted under this Agreement and holding all other mail for the Borrower's account or forwarding such mail to the Borrower's last known address. Section 3.3. Assignment of Insurance. As additional security for the payment and performance of the Obligations, the Borrower hereby assigns to the Lender any and all monies (including, without limitation, proceeds of insurance and refunds of unearned premiums) due or to become due under, and all other rights of the Borrower with respect to, any and all policies of insurance now or at any time hereafter covering the Collateral or any evidence thereof or any business records or valuable papers pertaining thereto, and the Borrower hereby directs the issuer of any such policy to pay all such monies directly to the Lender. At any time, whether or not a Default Period then exists, the Lender may (but need not), in the Lender's name or in the Borrower's name, execute and deliver proof of claim, receive all such monies, endorse checks and other instruments representing payment of such monies, and adjust, litigate, compromise or release any claim against the issuer of any such policy. Section 3.4. Occupancy. (a) The Borrower hereby irrevocably grants to the Lender the right to take possession of the Premises at any time during a Default Period. (b) The Lender may use the Premises only to hold, process, manufacture, sell, use, store, liquidate, realize upon or otherwise dispose of goods that are Collateral and for other purposes that the Lender may in good faith deem to be related or incidental purposes. (c) The Lender's right to hold the Premises shall cease and terminate upon the earlier of (i) payment in full and discharge of all Obligations and termination of the Commitment, (ii) the termination of the relevant Default Period, and (iii) final sale or disposition of all goods constituting Collateral and delivery of all such goods to purchasers. (d) The Lender shall not be obligated to pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises; provided, however, that if the Lender does pay or account for any rent or other compensation for the possession, occupancy or use of any of the Premises, the Borrower shall reimburse the Lender promptly for the full amount thereof. In addition, the Borrower will pay, or reimburse the Lender for, all taxes, fees, duties, imposts, charges and expenses at any time incurred by or imposed upon the Lender by reason of the execution, delivery, existence, recordation, performance or enforcement of this Agreement or the provisions of this Section 3.4. Section 3.5. License. The Borrower hereby grants to the Lender a non-exclusive, worldwide and royalty-free license to use or otherwise exploit all trademarks, franchises, trade names, copyrights and patents of the Borrower for the purpose of selling, leasing or otherwise disposing of any or all Collateral during any Default Period. Section 3.6. Financing Statement. A carbon, photographic or other reproduction of this Agreement or of any financing statements signed by the Borrower is sufficient as a financing statement and may be filed as a financing statement in any state to perfect the security interests granted hereby. For this purpose, the following information is set forth: Name and address of Debtor: Telular Corporation 647 North Lakeview Parkway Vernon Hills, Illinois 60061 Federal Tax Identification No. 36-3885440 Name and address of Secured Party: Wells Fargo Business Credit, Inc. 100 East Wisconsin Avenue, Suite 1400 MAC N9811-143 Milwaukee, Wisconsin 53202 Federal Tax Identification No. 41-1237652 Section 3.7. Setoff. The Borrower agrees that the Lender may at any time during a Default Period, at its sole discretion and without demand and without notice to anyone, setoff any liability owed to the Borrower by the Lender, whether or not due, against any Obligation, whether or not due. In addition, each other Person holding a participating interest in any Obligations shall have the right to appropriate or setoff any deposit or other liability then owed by such Person to the Borrower, whether or not due, and apply the same to the payment of said participating interest, as fully as if such Person had lent directly to the Borrower the amount of such participating interest. ARTICLE IV Conditions of Lending Section 4.1. Conditions Precedent to the Initial Revolving Advance and the Initial Letter of Credit. The Lender's obligation to make the initial Revolving Advance or to cause to be issued the initial Letter of Credit hereunder shall be subject to the condition precedent that the Lender shall have received all of the following, each in form and substance satisfactory to the Lender: (a) This Agreement, properly executed by the Borrower. (b) The Note, properly executed by the Borrower. (c) The Patent and Trademark Security Agreement, properly executed by the Borrower in the Lender's favor. (d) A true and correct copy of any and all leases pursuant to which the Borrower is leasing the Premises, together with a landlord's disclaimer and consent with respect to each such lease. (e) The initial Collateral Account Agreement, properly executed by the Borrower and American National. (f) Current searches of appropriate filing offices showing that (i) no state or federal tax liens have been filed and remain in effect against the Borrower, (ii) no financing statements or assignments of patents, trademarks or copyrights have been filed and remain in effect against the Borrower except those financing statements and assignments of patents, trademarks or copyrights relating to Permitted Liens or to liens held by Persons who have agreed in writing that upon receipt of proceeds of the Advances, they will deliver UCC releases and/or terminations and releases of such assignments of patents, trademarks or copyrights satisfactory to the Lender, and (iii) the Lender has duly filed all financing statements necessary to perfect the Security Interest, to the extent the Security Interest is capable of being perfected by filing. (g) A certificate of the Borrower's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Borrower's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Loan Documents, (ii) the Borrower's articles of incorporation and bylaws, and (iii) the signatures of the Borower's officers or agents authorized to execute and deliver the Loan Documents and other instruments, agreements and certificates, including Advance requests, on the Borrower's behalf. (h) A letter from an officer of the Borrower identifying those individuals who are authorized to initiate and confirm payment orders and to sign collateral reports. (i) A current certificate issued by the Secretary of State of Delaware, certifying that the Borrower is validly existing and in good standing in the State of Delaware. (j) Evidence that the Borrower is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. (k) A certificate of an officer of the Borrower confirming the representations and warranties set forth in Article V. (l) Certificates of the insurance required hereunder, with all hazard insurance containing a lender's loss payable endorsement in the Lender's favor and with all liability insurance naming the Lender as an additional insured. (m) A Guaranty by Corporation properly executed by each of the Guarantors in the Lender's favor. (n) With respect to each Guarantor, a certificate of such Guarantor's Secretary or Assistant Secretary certifying as to (i) the resolutions of the Guarantor's directors and, if required, shareholders, authorizing the execution, delivery and performance of the Guaranty, (ii) such Guarantor's articles of incorporation and bylaws, and (iii) the signatures of such Guarantor's officers or agents authorized to execute and deliver the Guaranty and other instruments, agreements and certificates. including Advance requests, on the Borrower's behalf. (o) The Warrant, executed by the Borrower. (p) Payment of the fees and commissions due through the date of the initial Advance or Letter of Credit under Section 2.7 and expenses incurred by the Lender through such date and required to be paid by the Borrower under Section 9.6, including legal expenses incurred through the date of this Agreement. (q) Written authorization from the Borrower to pay proceeds of the Advances to third parties. (r) An opinion of counsel to the Borrower and the Guarantors, addressed to the Lender. (s) The Investment Agreement, duly executed by the Borrower. (t) Such other documents as the Lender in its sole discretion may require. Section 4.2 Conditions Precedent to All Advances and Letters of Credit. The Lender's obligation to make each Advance or to cause the Issuer to issue any Letter of Credit shall be subject to the further conditions precedent that on such date: (a) the representations and warranties contained in Article V are correct in all material respects on and as of the date of such Advance or issuance of Letter of Credit as though made on and as of such date, except to the extent that such representations and warranties relate solely to an earlier date; and (b) no event has occurred and is continuing, or would result from such Advance or the issuance of such Letter of Credit, as the case may be, which constitutes an Event of Default. ARTICLE V Representations and Warranties The Borrower represents and warrants to the Lender as follows: Section 5.1. Corporate Existence and Power; Name; Chief Executive Office; Inventory and Equipment Locations; Tax Identification Number. The Borrower is a corporation, duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly licensed or qualified to transact business in all jurisdictions where the character of the property owned or leased or the nature of the business transacted by it makes such licensing or qualification necessary. The Borrower has all requisite power and authority, corporate or otherwise, to conduct its business, to own its properties and to execute and deliver, and to perform all of its obligations under, the Loan Documents. During its existence, the Borrower has done business solely under the names set forth in Schedule 5.1 hereto. The Borrower's chief executive office and principal place of business is located at the address set forth in Schedule 5.1 hereto, and all of the Borrower's records relating to its business or the Collateral are kept at that location. All Inventory and Equipment is located at that location or at one of the other locations set forth in Schedule 5.1 hereto. The Borrower's tax identification number is correctly set forth in Section 3.6 hereto. Section 5.2. Authorization of Borrowing; No Conflict as to Law or Agreements. The execution, delivery and performance by the Borrower of the Loan Documents and the borrowings from time to time hereunder have been duly authorized by all necessary corporate action and do not and will not (i) require any consent or approval of the Borrower's stockholders; (ii) require any authorization, consent or approval by, or registration, declaration or filing with, or notice to, any governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, or any third party, except such authorization, consent, approval, registration, declaration, filing or notice as has been obtained, accomplished or given prior to the date hereof; provided, that with respect to any applicable federal or state securities laws, the foregoing representation and warranty is made subject to and in reliance on the investment letter of the Lender delivered to the Borrower on the date hereof; (iii) violate any provision of any law, rule or regulation (including, without limitation, Regulation X of the Board of Governors of theFederal Reserve System) or of any order, writ, injunction or decree presently in effect having applicability to the Borrower or of the Borrower's articles of incorporation or bylaws; (iv) result in a breach of or constitute a default under any indenture or loan or credit agreement or any other material agreement, lease or instrument to which the Borrower is a party or by which it or its properties may be bound or affected; or (v) result in, or require, the creation or imposition of any mortgage, deed of trust, pledge, lien, security interest or other charge or encumbrance of any nature (other than the Security Interest) upon or with respect to any of the properties now owned or hereafter acquired by the Borrower. Section 5.3. Legal Agreements. This Agreement constitutes and, upon due execution by the Borrower, the other Loan Documents will constitute the legal, valid and binding obligations of the Borrower, enforceable against the Borrower in accordance with their respective terms. Section 5.4. Subsidiaries. The Borrower has no Subsidiaries, other than Telular International, Inc., Telular-Adcor Security Products, Inc., and Telular-WD Corporation. Section 5.5. Financial Condition; No Adverse Change. The Borrower has heretofore furnished to the Lender its audited financial statements for its fiscal year ended September 30, 1999 and unaudited financial statements for the fiscal year-to-date period ended November 30, 1999 and those statements fairly present the Borrower's financial condition on the dates thereof and the results of its operations and cash flows for the periods then ended and were prepared in accordance with generally accepted accounting principles. Since the date of the most recent financial statements, there has been no material adverse change in the Borrower's business, properties or condition (financial or otherwise). Section 5.6. Litigation. There are no actions, suits or proceedings pending or, to the Borrower's knowledge, threatened against or affecting the Borrower or any of its Affiliates or the properties of the Borrower or any of its Affiliates before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, which would reasonably be expected to have a material adverse effect on the financial condition, properties or operations of the Borrower. Section 5.7. Regulation U. The Borrower is not engaged in the business of extending credit for the purpose of purchasing or carrying margin stock (within the meaning of Regulation U of the Board of Governors of the Federal Reserve System), and no part of the proceeds of any Advance will be used to purchase or carry any margin stock or to extend credit to others for the purpose of purchasing or carrying any margin stock. 5.8. Taxes. The Borrower and its Affiliates have paid or caused to be paid to the proper authorities when due all federal, state and local taxes required to be withheld by each of them unless the same are being contested in good faith by appropriate proceedings and proper reserves therefore have been made by the Borrower. The Borrower and its Affiliates have filed all federal, state and local tax returns which to the knowledge of the officers of the Borrower or any Affiliate, as the case may be, are required to be filed, and the Borrower and its Affiliates have paid or caused to be paid to the respective taxing authorities all taxes as shown on said returns or on any assessment received by any of them to the extent such taxes have become due. Section 5.9. Titles and Liens. Except as set forth on Schedule 5.9, the Borrower has good and absolute title to all Collateral described in the collateral reports provided to the Lender and all other Collateral, properties and assets reflected in the latest financial statements provided under Section 6.1 and all proceeds thereof, free and clear of all mortgages, security interests, liens and encumbrances, except for Permitted Liens. No financing statement naming the Seller or the Borrower as debtor is on file in any office except to perfect only Permitted Liens. Section 5.10. Plans. Except as disclosed to the Lender in writing prior to the date hereof, neither the Borrower nor any of its Affiliates maintains or has maintained any Plan. Neither the Borrower nor any Affiliate has received any notice or has any knowledge to the effect that it is not in full compliance with any of the requirements of ERISA. No Reportable Event or other fact or circumstance which may have an adverse effect on the Plan's tax qualified status exists in connection with any Plan. Neither the Borrower nor any of its Affiliates has: (a) Any accumulated funding deficiency within the meaning of ERISA; or (b) Any liability or knows of any fact or circumstances which could result in any liability to the Pension Benefit Guaranty Corporation, the Internal Revenue Service, the Department of Labor or any participant in connection with any Plan (other than accrued benefits which or which may become payable to participants or beneficiaries of any such Plan). Section 5.11. Default. The Borrower is in compliance with all provisions of all agreements, instruments, decrees and orders to which it is a party or by which it or its property is bound or affected, the breach or default of which would reasonably be expected to have a material adverse effect on the Borrower's financial condition, properties or operations. Section 5.12. Environmental Matters. (a) Definitions. As used in this Agreement, the following terms shall have the following meanings: (i) Environmental Law means any federal, state, local or other governmental statute, regulation, law or ordinance dealing with the protection of human health and the environment. (ii) Hazardous Substances means pollutants, contaminants, hazardous substances, hazardous wastes, petroleum and fractions thereof, and all other chemicals, wastes, substances and materials listed in, regulated by or identified in any Environmental Law. (b) To the Borrower's best knowledge, there are not present in, on or under the Premises any Hazardous Substances in such form or quantity as to create any liability or obligation for either the Borrower or the Lender under common law of any jurisdiction or under any Environmental Law, and no Hazardous Substances have ever been stored, buried, spilled, leaked, discharged, emitted or released in, on or under the Premises in such a way as to create any such liability. (c) To the Borrower's best knowledge, the Borrower has not disposed of Hazardous Substances in such a manner as to create any liability under any Environmental Law. (d) To the Borrower's best knowledge, there are not and there never have been any requests, claims, notices, investigations, demands, administrative proceedings, hearings or litigation, relating in any way to the Premises or the Borrower, alleging liability under, violation of, or noncompliance with any Environmental Law or any license, permit or other authorization issued pursuant thereto. To the Borrower's best knowledge, no such matter is threatened or impending. (e) To the Borrower's best knowledge, the Borrower's businesses are and have in the past always been conducted in accordance with all Environmental Laws and all licenses, permits and other authorizations required pursuant to any Environmental Law and necessary for the lawful and efficient operation of such businesses are in the Borrower's possession and are in full force and effect. No permit required under any Environmental Law is scheduled to expire within twelve (12) months and there is no threat that any such permit will be withdrawn, terminated, limited or materially changed. (f) To the Borrower's best knowledge, the Premises are not and never have been listed on the National Priorities List, the Comprehensive Environmental Response, Compensation and Liability Information System or any similar federal, state or local list, schedule, log, inventory or database. (g) The Borrower has delivered to Lender all environmental assessments, audits, reports, permits, licenses and other documents describing or relating in any way to the Premises or Borrower's businesses. Section 5.13. Submissions to Lender. All financial and other information provided to the Lender by or on behalf of the Borrower in connection with the Borrower's request for the credit facilities contemplated hereby is true and correct in all material respects and, as to projections, valuations or proforma financial statements, present a good faith opinion as to such projections, valuations and proforma condition and results. Section 5.14. Financing Statements. The Borrower has provided to the Lender signed financing statements sufficient when filed to perfect the Security Interest and the other security interests created by the Security Documents. When such financing statements are filed in the offices noted therein, the Lender will have a valid and perfected security interest in all Collateral and all other collateral described in the Security Documents which is capable of being perfected by filing financing statements. None of the Collateral or other collateral covered by the Security Documents is or will become a fixture on real estate, unless a sufficient fixture filing is in effect with respect thereto. Section 5.15. Rights to Payment. Each right to payment and each instrument, document, chattel paper and other agreement constituting or evidencing Collateral or other collateral covered by the Security Documents is (or, in the case of all future Collateral or such other collateral, will be when arising or issued) the valid, genuine and legally enforceable obligation, subject to no defense, setoff or counterclaim, of the account debtor or other obligor named therein or in the Borrower's records pertaining thereto as being obligated to pay such obligation. ARTICLE VI Borrower's Affirmative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower will comply with the following requirements, unless the Lender shall otherwise consent in writing: Section 6.1. Reporting Requirements. The Borrower will deliver, or cause to be delivered, to the Lender each of the following, which shall be in form and detail reasonably acceptable to the Lender: (a) as soon as available, and in any event within ninety (90) days after the end of each fiscal year of the Borrower, the Borrower's audited financial statements with the unqualified opinion of independent certified public accountants selected by the Borrower and acceptable to the Lender in its reasonable discretion, which annual financial statements shall include the Borrower's balance sheet as at the end of such fiscal year and the related statements of the Borrower's income, retained earnings and cash flows for the fiscal year then ended, prepared, if the Lender so requests, on a consolidating and consolidated basis to include any Affiliates, all in reasonable detail and prepared in accordance with GAAP, together with (i) copies of all management letters prepared by such accountants; and (ii) a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit B hereto, stating (A) that such financial statements have been prepared in accordance with GAAP and (B) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder and, if so, stating in reasonable detail the facts with respect thereto; (b) as soon as available and in any event within twenty (20) days after the end of each month, an unaudited/internal balance sheet and statements of income and retained earnings of the Borrower as at the end of and for such month and for the year to date period then ended, prepared, if the Lender so reasonably requests, on a consolidating and consolidated basis to include any Affiliates, in reasonable detail and stating in comparative form the figures for the corresponding date and periods in the previous year, all prepared in accordance with GAAP, subject to year-end audit adjustments and except for the absence of footnotes; and accompanied by a certificate of the Borrower's chief financial officer, substantially in the form of Exhibit B hereto stating (i) that such financial statements have been prepared in accordance with GAAP, subject to year-end audit adjustments and except for the absence of footnotes, (ii) whether or not such officer has knowledge of the occurrence of any Default or Event of Default hereunder not theretofore reported and remedied and, if so, stating in reasonable detail the facts with respect thereto, and (iii) all relevant facts in reasonable detail to evidence, and the computations as to, whether or not the Borrower is in compliance with the requirements set forth in Sections 6.12 and 7.10; (c) within fifteen (15) days after the end of each month or more frequently if the Lender so reasonably requires, agings of the Borrower's accounts receivable and its accounts payable, an inventory certification report, and a calculation of the Borrower's Accounts, Eligible Accounts, Inventory and Eligible Inventory as at the end of such month or shorter time period; (d) at least thirty (30) days before the beginning of each fiscal year of the Borrower, the projected balance sheets and income statements for each month of such year, each in reasonable detail, representing the Borrower's good faith projections and certified by the Borrower's chief financial officer as being the most accurate projections available and identical to the projections used by the Borrower for internal planning purposes, together with such supporting schedules and information as the Lender may in its reasonable discretion require; (e) as promptly as practicable, after an officer of the Borrower obtains knowledge thereof, notice in writing of all litigation and of all proceedings before any governmental or regulatory agency affecting the Borrower of the type described in Section 5.12 or which seek a monetary recovery against the Borrower in excess of Twenty Five Thousand Dollars ($25,000); (f) as promptly as practicable, and in any event not later than five (5) Banking Days after an officer of the Borrower obtains knowledge of the occurrence of any breach, default or event of default under any Security Document or any event which constitutes a Default or Event of Default hereunder, notice of such occurrence, together with a detailed statement by a responsible officer of the Borrower of the steps being taken by the Borrower to cure the effect of such breach, default or event; (g) as promptly as practicable, and in any event within thirty (30) days after the Borrower knows or has reason to know that any Reportable Event with respect to any Plan has occurred, the statement of the Borrower's chief financial officer setting forth details as to such Reportable Event and the action which the Borrower proposes to take with respect thereto, together with a copy of the notice of such Reportable Event to the Pension Benefit Guaranty Corporation; (h) as promptly as practicable, and in any event within ten (10) days after the Borrower fails to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, the statement of the Borrower's chief financial officer setting forth details as to such failure and the action which the Borrower proposes to take with respect thereto, together with a copy of any notice of such failure required to be provided to the Pension Benefit Guaranty Corporation; (i) promptly upon knowledge thereof, notice of (i) any disputes or claims by the Borrower's customers exceeding One Hundred Thousand Dollars ($100,000) individually; (ii) credit memos exceeding One Hundred Thousand Dollars ($100,000) individually; (iii) any goods returned to or recovered by the Borrower exceeding One Hundred Thousand Dollars ($100,000) individually; and (iv) any change in the persons constituting the Borrower's officers and directors; (j) promptly upon knowledge thereof, notice of any loss of or material damage to any material portion of the Collateral or other collateral covered by the Security Documents or of any substantial adverse change in any Collateral or such other collateral or the prospect of payment thereof; (k) promptly after the sending or filing thereof, copies of all regular and periodic reports which the Borrower shall file with the Securities and Exchange Commission or any national securities exchange; (l) promptly upon knowledge thereof, notice of the Borrower's violation of any law, rule or regulation, the non-compliance with which would reasonably be expected to materially and adversely affect the Borrower's business or its financial condition; and (m) from time to time, with reasonable promptness, any and all receivables schedules, collection reports, deposit records, equipment schedules, copies of invoices to account debtors, shipment documents and delivery receipts for goods sold, and such other material, reports, records or information as the Lender may reasonably request. Section 6.2. Books and Records; Inspection and Examination. The Borrower will keep accurate books of record and account for itself pertaining to the Collateral and pertaining to the Borrower's business and financial condition and such other matters as the Lender may from time to time reasonably request in which true and complete entries will be made in accordance with GAAP and, upon the Lender's request, will permit any officer, employee, attorney or accountant for the Lender to audit, review, make extracts from or copy any and all corporate and financial books and records of the Borrower at all times during ordinary business hours, to send and discuss with account debtors and other obligors requests for verification of amounts owed to the Borrower, and to discuss the Borrower's affairs with any of its directors, officers or financial personnel, as well as any other employees or agents to the extent the same may have specific knowledge of a matter as to which the Lender requires further information. The Borrower will permit the Lender, or its employees, accountants, attorneys or agents, to examine and inspect any Collateral, other collateral covered by the Security Documents or any other property of the Borrower at any time during ordinary business hours and except during a Default Period, on reasonable notice to the Borrower. The Lender will, and will cause its agents and representatives to, at all times take reasonable steps to preserve the confidentiality of all nonpublic information furnished by the Borrower. Section 6.3. Account Verification. The Lender may at any time and from time to time send or require the Borrower to send requests for verification of accounts or notices of assignment to account debtors and other obligors. The Lender may also at any time and from time to time telephone account debtors and other obligors to verify accounts. Section 6.4. Compliance with Laws. (a) The Borrower will (i) comply with the requirements of applicable laws and regulations, the non-compliance with which would materially and adversely affect its business or its financial condition and (ii) use and keep the Collateral, and require that others use and keep the Collateral, only for lawful purposes, without violation of any federal, state or local law, statute or ordinance, the non-compliance with which would materially and adversely affect its business or its financial condition. (b) Without limiting the foregoing undertakings, the Borrower specifically agrees that it will comply in all material respects with all applicable Environmental Laws and obtain and comply with all permits, licenses and similar approvals required by any Environmental Laws, and will not generate, use, transport, treat, store or dispose of any Hazardous Substances in such a manner as to create any material liability or obligation under the common law of any jurisdiction or any Environmental Law. Section 6.5. Payment of Taxes and Other Claims. The Borrower will pay or discharge, when due, (a) all taxes, assessments and governmental charges levied or imposed upon it or upon its income or profits, upon any properties belonging to it (including, without limitation, the Collateral) or upon or against the creation, perfection or continuance of the Security Interest, prior to the date on which penalties attach thereto, (b) all federal, state and local taxes required to be withheld by it, and (c) all lawful claims for labor, materials and supplies which, if unpaid, might by law become a lien or charge upon any properties of the Borrower; provided, that the Borrower shall not be required to pay any such tax, assessment, charge or claim whose amount, applicability or validity is being contested in good faith by appropriate proceedings and for which proper reserves have been made. Section 6.6. Maintenance of Properties. (a) The Borrower will keep and maintain the Collateral, the other collateral covered by the Security Documents and all of its other properties necessary or useful in its business in good condition, repair and working order (normal wear and tear excepted) and will from time to time replace or repair any worn, defective or broken parts; provided, however, that nothing in this Section 6.6 shall prevent the Borrower from discontinuing the operation and maintenance of any of its properties if such discontinuance is, in the Borrower's good faith judgment, desirable in the conduct of the Borrower's business, and in the Lender's good faith judgment, not disadvantageous in any material respect to the Lender. (b) The Borrower will defend the Collateral against all claims or demands of all persons (other than the Lender) claiming the Collateral or any interest therein. (c) The Borrower will keep all Collateral and other collateral covered by the Security Documents free and clear of all security interests, liens and encumbrances except Permitted Liens. Insurance. The Borrower will obtain and at all times maintain insurance with insurers believed by the Borrower to be responsible and reputable, in the same relative amounts (relative to the value of the Borrowers tangible assets) and against such risks as the Borrower has in effect as of the date hereof, but in all events in such amounts and against such risks as is usually carried by companies engaged in similar business and owning similar properties in the same general areas in which the Borrower operates. Without limiting the generality of the foregoing, the Borrower will at all times maintain business interruption insurance including coverage for force majeure and keep all tangible Collateral insured against risks of fire (including so-called extended coverage), theft, and collision (for Collateral consisting of motor vehicles), with any loss payable to the Lender to the extent of its interest, and all policies of such insurance shall contain a lender's loss payable endorsement for the Lender's benefit acceptable to the Lender. All policies of liability insurance required hereunder shall name the Lender as an additional insured. Section 6.8. Preservation of Existence. The Borrower will preserve and maintain its existence and all of its rights, privileges and franchises necessary or desirable in the normal conduct of its business and shall conduct its business in an orderly, efficient and regular manner. Section 6.9. Delivery of Instruments, etc. Upon request by the Lender, the Borrower will promptly deliver to the Lender in pledge all instruments, documents and chattel papers constituting Collateral, duly endorsed or assigned by the Borrower. Section 6.10. Collateral Account. (a) If, notwithstanding the instructions to debtors to make payments to the Lockbox, the Borrower receives any payments on Receivables or other proceeds of Collateral, the Borrower shall promptly deposit such payments and proceeds into the Collateral Account. Until so deposited, the Borrower shall hold all such payments and proceeds in trust for and as the property of the Lender and shall not commingle such payments with any of its other funds or property. (b) Amounts deposited in the Collateral Account shall not bear interest and shall not be subject to withdrawal by the Borrower, except after full payment and discharge of all Obligations. (c) All deposits in the Collateral Account shall constitute proceeds of Collateral and shall not constitute payment of the Obligations. The Lender from time to time at its discretion may, after allowing two (2) Banking Days, apply deposited funds in the Collateral Account to the payment of the Obligations, in any order or manner of application satisfactory to the Lender, by transferring such funds to the Lender's general account. (d) All items deposited in the Collateral Account shall be subject to final payment. If any such item for which the Borrower has received credit in the Collateral Account is returned uncollected, the Borrower will immediately pay the Lender, or, for items deposited in the Collateral Account, the bank maintaining such account, the amount of that item, or such bank at its discretion may charge any uncollected item to the Borrower's commercial account or other account. The Borrower shall be liable as an endorser on all items deposited in the Collateral Account, whether or not in fact endorsed by the Borrower. Section 6.11. Performance by the Lender. If the Borrower at any time fails to perform or observe any of the foregoing covenants contained in this Article VI or elsewhere herein, and if such failure shall continue for a period of ten (10) calendar days (or in the case of the agreements contained in Sections 6.5, 6.7 and 6.10, immediately upon the occurrence of such failure, without lapse of time), the Lender may, but need not, perform or observe such covenant on behalf and in the name, place and stead of the Borrower (or, at the Lender's option, in the Lender's name) and may, but need not, take any and all other actions which the Lender may reasonably deem necessary to cure or correct such failure (including, without limitation, the payment of taxes, the satisfaction of security interests, liens or encumbrances, the performance of obligations owed to account debtors or other obligors, the procurement and maintenance of insurance, the execution of assignments, security agreements and financing statements, and the endorsement of instruments); and the Borrower shall thereupon pay to the Lender on demand the amount of all monies expended and all costs and expenses (including reasonable attorneys' fees and legal expenses) incurred by the Lender in connection with or as a result of the performance or observance of such agreements or the taking of such action by the Lender, together with interest thereon from the date expended or incurred at the Floating Rate. To facilitate the Lender's performance or observance of such covenants of the Borrower, the Borrower hereby irrevocably appoints the Lender, or the Lender's delegate, acting alone, as the Borrower's attorney in fact (which appointment is coupled with an interest) with the right (but not the duty) from time to time to create, prepare, complete, execute, deliver, endorse or file in the name and on behalf of the Borrower any and all instruments, documents, assignments, security agreements, financing statements, applications for insurance and other agreements and writings required to be obtained, executed, delivered or endorsed by the Borrower under this Section 6.11. Section 6.12. Minimum Book Net Worth. While any part of the Obligations remains unpaid, the Borrower will continuously maintain: (a) as of the Funding Date, a minimum Book Net Worth of not less than Twenty Five Million Dollars ($25,000,000); (b) thereafter, through September 30, 2000, a minimum Book Net Worth of not less than Twenty One Million Five Hundred Thousand Dollars ($21,500,000); (c) thereafter, during each period from October 1 through September 29, a minimum Book Net Worth of not less than the prior fiscal year end required minimum Book Net Worth minus One Million Dollars ($1,000,000); and (d) as of September 30, 2001 and each September 30 thereafter, a minimum Book Net Worth of not less than the prior fiscal year end's required minimum Book Net Worth plus One Million Dollars ($1,000,000). Section 6.13. Minimum Availability. While any part of the Obligations remains unpaid, the Borrower will continuously maintain excess availability of not less than One Million Dollars ($1,000,000). For purposes hereof, excess availability means the difference of (i) the Collateral Availability minus (ii) the total of outstanding Revolving Advances plus the aggregate face amount of any issued and outstanding Letters of Credit. ARTICLE VII Negative Covenants So long as the Obligations shall remain unpaid, or the Credit Facility shall remain outstanding, the Borrower agrees that, without the Lender's prior written consent: Section 7.1. Liens. The Borrower will not create, incur or suffer to exist any mortgage, deed of trust, pledge, lien, security interest, assignment or transfer upon or of any of its assets, now owned or hereafter acquired, to secure any indebtedness; excluding, however, from the operation of the foregoing, the following (collectively, Permitted Liens): (a) in the case of any of the Borrower's property which is not Collateral or other collateral described in the Security Documents, covenants, restrictions, rights, easements and minor irregularities in title which do not materially interfere with the Borrower's business or operations as presently conducted; (b) mortgages, deeds of trust, pledges, liens, security interests and assignments in existence on the date hereof and listed in Schedule 7.1 hereto, securing indebtedness for borrowed money permitted under Section 7.2; (c) the Security Interest and liens and security interests created by the Security Documents; (d) purchase money security interests relating to the acquisition of machinery and equipment of the Borrower not exceeding the lesser of cost or fair market value thereof and so long as no Default Period is then in existence and none would exist immediately after such acquisition; and (e) erroneous UCC filings or other evidences of liens filed without the knowledge or authority of the Borrower, so long as such evidences of liens are released or terminated within thirty (30) days of the Lender's notice to the Borrower of the same. Section 7.2. Indebtedness. The Borrower will not incur, create, assume or permit to exist any indebtedness or liability on account of deposits or advances or any indebtedness for borrowed money or letters of credit issued on the Borrower's behalf, or any other indebtedness or liability evidenced by notes, bonds, debentures or similar obligations, except: (a) indebtedness arising hereunder; (b) indebtedness of the Borrower in existence on the date hereof and listed in Schedule 7.2 hereto; (c) indebtedness relating to liens permitted in accordance with Section 7.1; and (d) indebtedness relating to performance and surety bonds and appeal bonds for litigation and other obligations of a like nature incurred in the ordinary course of business. Section 7.3. Guaranties. The Borrower will not assume, guarantee, endorse or otherwise become directly or contingently liable in connection with any obligations of any other Person, except: (a) the endorsement of negotiable instruments by the Borrower for deposit or collection or similar transactions in the ordinary course of business; and (b) guaranties, endorsements and other direct or contingent liabilities in connection with the obligations of other Persons, in existence on the date hereof and listed in Schedule 7.2 hereto. Section 7.4. Investments and Subsidiaries. (a) The Borrower will not purchase or hold beneficially any stock or other securities or evidences of indebtedness of, make or permit to exist any loans or advances to, or make any investment or acquire any interest whatsoever in, any other Person, including, specifically, but without limitation, any partnership or joint venture, except: (i) investments in direct obligations of the United States of America or any agency or instrumentality thereof whose obligations constitute full faith and credit obligations of the United States of America having a maturity of one year or less, commercial paper issued by United States of America corporations rated A-1 or A-2 by Standard & Poor's Corporation or P-1 or P-2 by Moody's Investors Service or certificates of deposit or bankers' acceptances having a maturity of one year or less issued by members of the Federal Reserve System having deposits in excess of One Hundred Million Dollars ($100,000,000) (which certificates of deposit or bankers' acceptances are fully insured by the Federal Deposit Insurance Corporation); and (ii) travel advances or loans to the Borrower's officers and employees not exceeding at any one time an aggregate of Ten Thousand Dollars ($10,000). (b) The Borrower will not create or permit to exist any Subsidiary, other than as provided in Section 5.4. Sections 7.5. Dividends. The Borrower will not declare or pay any dividends (other than dividends payable solely in stock of the Borrower) on any class of its stock or make any payment on account of the purchase, redemption or other retirement of any shares of such stock or make any distribution in respect thereof, either directly or indirectly. Section 7.6. Sale or Transfer of Assets; Suspension of Business Operations. The Borrower will not sell, lease, assign, transfer or otherwise dispose of (i) the stock of any Subsidiary, (ii) all or substantially all of its assets, or (iii) any Collateral or any interest therein (whether in one transaction or in a series of transactions) to any other Person other than (a) the sale or other disposition of Inventory in the ordinary course of business and (b) with the Lender's prior consent, the sale or disposition of obsolete equipment or other assets or unsaleable, obsolete or slow-moving inventory. The Borrower and will not liquidate, dissolve or suspend business operations. The Borrower will not in any manner transfer any property without prior or present receipt of full and adequate consideration. Section 7.7. Consolidation and Merger; Asset Acquisitions. The Borrower will not consolidate with or merge into any Person, or permit any other Person to merge into it, or acquire (in a transaction analogous in purpose or effect to a consolidation or merger) all or substantially all the assets of any other Person. Section 7.8. Sale and Leaseback. The Borrower will not enter into any arrangement, directly or indirectly, with any other Person whereby the Borrower shall sell or transfer any real or personal property, whether now owned or hereafter acquired, and then or thereafter rent or lease as lessee such property or any part thereof or any other property which theBorrower intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.9. Restrictions on Nature of Business. The Borrower will not engage in any line of business materially different from that presently engaged in by the Borrower and will not purchase, lease or otherwise acquire assets not related to its business. Section 7.10. Capital Expenditures. The Borrower will not incur or contract to incur Capital Expenditures of more than One Million Dollars ($1,000,000) in the aggregate during any fiscal year. Section 7.11. Accounting. The Borrower will not adopt any material change in accounting principles other than as required by GAAP. The Borrower will not adopt, permit or consent to any change in its fiscal year. Section 7.12. Discounts, etc. The Borrower will not, after notice from the Lender, grant any discount, credit or allowance on any then outstanding Receivable or accept any return of goods sold without notifying the Lender of such return, or at any time (whether before or after notice from the Lender) modify, amend, subordinate, cancel or terminate the obligation of any account debtor or other obligor of the Borrower. Section 7.13. Defined Benefit Pension Plans. The Borrower will not adopt, create, assume or become a party to any defined benefit pension plan, unless disclosed to the Lender pursuant to Section 5.10. Section 7.14. Other Defaults. The Borrower will not permit any breach, default or event of default to occur under any note, loan agreement, indenture, lease, mortgage, contract for deed, security agreement or other contractual obligation binding upon the Borrower or any Affiliate that would reasonably be expected to have a material adverse effect on the Borrower. Section 7.15. Place of Business; Name. The Borrower will not transfer its chief executive office or principal place of business, or move, relocate, close or sell any business location. The Borrower will not permit any tangible Collateral or any records pertaining to the Collateral to be located in any state or area in which, in the event of such location, a financing statement covering such Collateral would be required to be, but has not in fact been, filed in order to perfect the Security Interest. The Borrower will not change its name. Section 7.16. Organizational Documents. The Borrower will not amend its certificate of incorporation, articles of incorporation or bylaws. ARTICLE VIII Events of Default, Rights and Remedies Section 8.1. Events of Default. Event of Default, wherever used herein, means any one of the following events: (a) Default in the payment of the Obligations when they become due and payable; (b) Failure to pay when due any amount specified in Section 2.3 relating to the Borrower's Obligation of Reimbursement, or failure to pay immediately when due or upon termination of the Credit Facility any amounts required to be paid for deposit in the Special Account under Section 2.4 or; (c) Default in the payment of any fees, commissions, costs or expenses required to be paid by the Borrower under this Agreement; (d) Default in the performance, or breach, of any covenant or agreement of the Borrower contained in this Agreement; provided, however, that any such Default occurring under any of Sections 6.1 through 6.3, 6.5, 6.6, or 6.8 through 6.11 of this Agreement shall not be deemed to be an Event of Default unless such Default continues unremedied for fifteen (15) days after written notice thereof is given by the Lender to the Borrower; provided, further, however, that any Default occurring under Section 6.4 of this Agreement shall not be deemed to be an Event of Default if the applicable governmental agency or authority has provided the Borrower some time period to remedy its noncompliance and such noncompliance continues unremedied beyond that designated time period; (e) The Borrower or any Guarantor shall be or become insolvent, or admit in writing its or his inability to pay its debts as they mature, or make an assignment for the benefit of creditors; or the Borrower or any Guarantor shall apply for or consent to the appointment of any receiver, trustee, or similar officer for it or for all or any substantial part of its property; or such receiver, trustee or similar officer shall be appointed without the application or consent of the Borrower or any Guarantor, as the case may be and the authority of such receiver or trustee over the Borrower's assets has not been discharged or dismissed within ten (10) business days (provided, however, that during such ten (10) day period the Lender shall be under no obligation to make any Advances hereunder); or the Borrower or any Guarantor shall institute (by petition, application, answer, consent or otherwise) any bankruptcy, insolvency, reorganization, arrangement, readjustment of debt, dissolution, liquidation or similar proceeding relating to it under the laws of any jurisdiction; or any such proceeding shall be instituted (by petition, application or otherwise) against the Borrower or any Guarantor and such proceeding has not been discharged or dismissed within ten (10) business days (provided, however, that during such ten (10) day period the Lender shall be under no obligation to make any Advances hereunder); or any judgment, writ, warrant of attachment or execution or similar process shall be issued or levied against a substantial part of the property of the Borrower or any Guarantor; (f) A petition shall be filed by or against the Borrower or any Guarantor under the United States Bankruptcy Code naming the Borrower or any Guarantor as debtor; (g) Any representation or warranty made by the Borrower in this Agreement, by any Guarantor in any guaranty delivered to the Lender, or by the Borrower (or any of its officers) or any Guarantor in any agreement, certificate, instrument or financial statement or other statement contemplated by or made or delivered pursuant to or in connection with this Agreement or any such guaranty shall prove to have been incorrect in any material respect when deemed to be effective; (h) The rendering against the Borrower of a final and non- appealable judgment, decree or order for the payment of money in excess of One Hundred Thousand Dollars ($100,000) and the continuance of such judgment, decree or order unsatisfied and in effect for any period of thirty (30) consecutive days without a stay of execution; (i) A default under any bond, debenture, note or other evidence of indebtedness of the Borrower owed to any Person other than the Lender in excess of One Hundred Thousand Dollars ($100,000), or under any indenture or other instrument under which any such evidence of indebtedness has been issued or by which it is governed, or under any lease of any of the Premises, and the expiration of the applicable period of grace, if any, specified in such evidence of indebtedness, indenture, other instrument or lease; (j) Any Reportable Event, which the Lender determines in good faith might constitute grounds for the termination of any Plan or for the appointment by the appropriate United States District Court of a trustee to administer any Plan, shall have occurred and be continuing thirty (30) days after written notice to such effect shall have been given to the Borrower by the Lender; or a trustee shall have been appointed by an appropriate United States District Court to administer any Plan; or the Pension Benefit Guaranty Corporation shall have instituted proceedings to terminate any Plan or to appoint a trustee to administer any Plan; or the Borrower shall have filed for a distress termination of any Plan under Title IV of ERISA; or the Borrower shall have failed to make any quarterly contribution required with respect to any Plan under Section 412(m) of the Internal Revenue Code of 1986, as amended, which results in the imposition of a lien on the Borrower's assets in favor of the Plan; (k) An event of default (after giving of all required notices and the expiration of all cure periods, if any) shall occur under any Security Document or under any other security agreement, mortgage, deed of trust, assignment or other instrument or agreement securing any obligations of the Borrower hereunder or under any note; (l) The Borrower shall liquidate, dissolve, terminate or suspend its business operations or otherwise fail to operate its business in the ordinary course, or sell all or substantially all of its assets, without the Lender's prior written consent; (m) The Borrower shall fail to pay, withhold, collect or remit any tax or tax deficiency when assessed or due (other than any tax deficiency which is being contested in good faith and by proper proceedings and for which it shall have set aside on its books adequate reserves therefor) or notice of any federal tax liens or any state tax liens (other than any state tax lien with respect to a tax deficiency which is being contested in good faith and by proper proceedings and for which the Borrower shall have set aside on its books adequate reserves therefor) shall be filed or issued; (n) Default in the payment of any amount owed by the Borrower to the Lender other than any indebtedness arising hereunder; (o) Any Guarantor shall repudiate, purport to revoke or fail to perform its obligations under the Guaranty in favor of the Lender; or (p) Any breach, default or event of default by or attributable to any Affiliate under any agreement between such Affiliate and the Lender. Section 8.2. Rights and Remedies. During any Default Period, the Lender may exercise any or all of the following rights and remedies: (a) the Lender may, by notice to the Borrower, declare the Commitment to be terminated, whereupon the same shall forthwith terminate; (b) the Lender may, by notice to the Borrower, declare the Obligations to be forthwith due and payable, whereupon all Obligations shall become and be forthwith due and payable, without presentment, notice of dishonor, protest or further notice of any kind, all of which the Borrower hereby expressly waives; (c) the Lender may, without notice to the Borrower and without further action, apply any and all money owing by the Lender to the Borrower to the payment of the Obligations; (d) the Lender may make demand upon the Borrower and, forthwith upon such demand, the Borrower will pay to the Lender in immediately available funds for deposit in the Special Account pursuant to Section 2.4 an amount equal to the aggregate maximum amount available to be drawn under all Letters of Credit then outstanding, assuming compliance with all conditions for drawing thereunder; (e) the Lender may exercise and enforce any and all rights and remedies available upon default to a secured party under the UCC, including, without limitation, the right to take possession of Collateral, or any evidence thereof, proceeding without judicial process or by judicial process (without a prior hearing or notice thereof, which the Borrower hereby expressly waives) and the right to sell, lease or otherwise dispose of any or all of the Collateral, and, in connection therewith, the Borrower will on demand assemble the Collateral and make it available to the Lender at a place to be designated by the Lender which is reasonably convenient to both parties; (f) the Lender may exercise and enforce its rights and remedies under the Loan Documents; and (g) the Lender may exercise any other rights and remedies available to it by law or agreement. Notwithstanding the foregoing, upon the occurrence of an Event of Default described in subsections (e) or (f) of Section 8.1, the Obligations shall be immediately due and payable automatically without presentment, demand, protest or notice of any kind. Section 8.3. Certain Notices. If notice to the Borrower of any intended disposition of Collateral or any other intended action is required by law in a particular instance, such notice shall be deemed commercially reasonable if given (in the manner specified in Section 9.3) at least ten calendar days before the date of intended disposition or other action. ARTICLE IX Miscellaneous Section 9.1. No Waiver; Cumulative Remedies. No failure or delay by the Lender in exercising any right, power or remedy under the Loan Documents shall operate as a waiver thereof; nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy under the Loan Documents. The remedies provided in the Loan Documents are cumulative and not exclusive of any remedies provided by law. Section 9.2. Amendments, Etc. No amendment, modification, termination or waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom or any release of a Security Interest shall be effective unless the same shall be in writing and signed by the Lender, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No notice to or demand on the Borrower in any case shall entitle the Borrower to any other or further notice or demand in similar or other circumstances. Section 9.3. Addresses for Notices, Etc. Except as otherwise expressly provided herein, all notices, requests, demands and other communications provided for under the Loan Documents shall be in writing and shall be (a) personally delivered, (b) sent by first class United States mail, (c) sent by overnight courier of national reputation, or (d) transmitted by facsimile, in each case addressed or facsimiled to the party to whom notice is being given at its address or facsimile number as set forth below: If to the Borrower: Telular Corporation 647 North Lakeview Parkway Vernon Hills, Illinois 60061 Facsimile: 847/573-2011 Attention: If to the Lender: Wells Fargo Business Credit, Inc. 100 East Wisconsin Avenue, Suite 1400 MAC N9811-143 Milwaukee, Wisconsin 53202 Facsimile: 414/224-7439 Attention: Mark J. Stoeberl or, as to each party, at such other address or facsimile number as may hereafter be designated by such party in a written notice to the other party complying as to delivery with the terms of this Section. All such notices, requests, demands and other communications shall be deemed to have been given on (a) the date received if personally delivered, (b) three (3) business days after deposit in the mail, postage prepaid, if delivered by mail, (c) the first business day after the date sent if sent by overnight courier, or (d) the date of transmission if delivered by facsimile, except that notices or requests to the Lender pursuant to any of the provisions of Article II shall not be effective until received by the Lender. Section 9.4. Further Documents. The Borrower will from time to time execute and deliver or endorse any and all instruments, documents, conveyances, assignments, security agreements, financing statements and other agreements and writings that the Lender may reasonably request in order to secure, protect, perfect or enforce the Security Interest or the Lender's rights under the Loan Documents (but any failure to request or assure that the Borrower executes, delivers or endorses any such item shall not affect or impair the validity, sufficiency or enforceability of the Loan Documents and the Security Interest, regardless of whether any such item was or was not executed, delivered or endorsed in a similar context or on a prior occasion). Section 9.5. Collateral. This Agreement does not contemplate a sale of accounts, contract rights or chattel paper, and, as provided by law, the Borrower is entitled to any surplus and shall remain liable for any deficiency. The Lender's duty of care with respect to Collateral in its possession (as imposed by law) shall be deemed fulfilled if it exercises reasonable care in physically keeping such Collateral, or in the case of Collateral in the custody or possession of a bailee or other third person, exercises reasonable care in the selection of the bailee or other third person, and the Lender need not otherwise preserve, protect, insure or care for any Collateral. The Lender shall not be obligated to preserve any rights the Borrower may have against prior parties, to realize on the Collateral at all or in any particular manner or order or to apply any cash proceeds of the Collateral in any particular order of application. Section 9.6. Costs and Expenses. The Borrower agrees to pay on demand all costs and expenses, including, without limitation, reasonable attorneys' fees, periodic UCC, tax and judgment lien searches and title insurance premiums incurred by the Lender in connection with the Obligations, this Agreement, the Loan Documents, any Letters of Credit, and any other document or agreement related hereto or thereto, and the transactions contemplated hereby, including, without limitation, all such costs, expenses and fees incurred in connection with the negotiation, preparation, execution, amendment, administration, performance, collection and enforcement of the Obligations and all such documents and agreements and the creation, perfection, protection, satisfaction, foreclosure or enforcement of the Security Interest. Notwithstanding the foregoing, legal fees and expenses payable by the Borrower hereunder with respect to the transactions consummated on the date hereof shall not exceed Twenty Five Thousand Dollars ($25,000). Section 9.7. Indemnity. In addition to the payment of expenses pursuant to Section 9.6, the Borrower agrees to indemnify, defend and hold harmless the Lender, and any of its participants, parent corporations, subsidiary corporations, affiliated corporations, successor corporations, and all present and future officers, directors, employees, attorneys and agents of the foregoing (the Indemnitees) from and against any of the following (collectively, Indemnified Liabilities): (i) any and all transfer taxes, documentary taxes, assessments or charges made by any governmental authority by reason of the execution and delivery of the Loan Documents or the making of the Advances; (ii) any claims, loss or damage to which any Indemnitee may be subjected if any representation or warranty contained in Section 5.12 proves to be incorrect in any respect or as a result of any violation of the covenant contained in Section 6.4(b); and (iii) any and all other liabilities, losses, damages, penalties, judgments, suits, claims, costs and expenses of any kind or nature whatsoever (including, without limitation, the reasonable fees and disbursements of counsel) in connection with the foregoing and any other investigative, administrative or judicial proceedings, whether or not such Indemnitee shall be designated a party thereto, which may be imposed on, incurred by or asserted against any such Indemnitee, in any manner related to or arising out of or in connection with the making of the Advances and the Loan Documents or the use or intended use of the proceeds of the Advances. If any investigative, judicial or administrative proceeding arising from any of the foregoing is brought against any Indemnitee, upon such Indemnitee's request, the Borrower, or counsel designated by the Borrower and reasonably satisfactory to the Indemnitee, will resist and defend such action, suit or proceeding at the Borrower's sole costs and expense. Each Indemnitee will use its best efforts to cooperate in the defense of any such action, suit or proceeding. If the foregoing undertaking to indemnify, defend and hold harmless may be held to be unenforceable because it violates any law or public policy, the Borrower shall nevertheless make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. The Borrower's obligation under this Section 9.7 shall survive the termination of this Agreement and the discharge of the Borrower's other obligations hereunder. Section 9.8. Participants. The Lender and its participants, if any, are not partners or joint venturers, and the Lender shall not have any liability or responsibility for any obligation, act or omission of any of its participants. All rights and powers specifically conferred upon the Lender may be transferred or delegated to any of the Lender's participants, successors or assigns, provided that any transfer of warrants or shares acquired on exercise or any rights therein must be made under an exemption under and in compliance with all applicable securities laws. Section 9.9. Execution in Counterparts. This Agreement and other Loan Documents may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts, taken together, shall constitute but one and the same instrument. Section 9.10. Binding Effect; Assignment; Complete Agreement; Exchanging Information. The Loan Documents shall be binding upon and inure to the benefit of the Borrower and the Lender and their respective successors and assigns, except that the Borrower shall not have the right to assign its rights thereunder or any interest therein without the Lender's prior written consent. Any transfer of warrants or shares acquired on exercise or any rights therein must be made under an exemption under and in compliance with all applicable securities laws. This Agreement, together with the Loan Documents, comprises the complete and integrated agreement of the parties on the subject matter hereof and supersedes all prior agreements, written or oral, on the subject matter hereof. Without limiting the Lender's right to share information regarding the Borrower and its Affiliates with the Lender's participants, accountants, lawyers and other advisors, the Lender, Wells Fargo & Company, and all direct and indirect subsidiaries of Wells Fargo & Company, may exchange any and all information they may have in their possession regarding the Borrower and its Affiliates, and the Borrower waives any right of confidentiality it may have with respect to such exchange of such information. Section 9.11. Severability of Provisions. Any provision of this Agreement which is prohibited or unenforceable shall be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof. Section 9.12. Headings. Article and Section headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement for any other purpose. Section 9.13. Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. The Loan Documents shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Wisconsin. This Agreement shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Wisconsin. The parties hereto hereby (i) consents to the personal jurisdiction of the state and federal courts located in the State of Wisconsin in connection with any controversy related to this Agreement; (ii) waives any argument that venue in any such forum is not convenient, (iii) agrees that any litigation initiated by the Lender or the Borrower in connection with this Agreement or the other Loan Documents shall be venued in either the Circuit Court of Milwaukee County, Wisconsin, or the United States District Court, Eastern District of Wisconsin; and (iv) agrees that a final judgment in any such suit, action 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. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS AGREEMENT. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the date first above written. WELLS FARGO BUSINESS CREDIT, INC. TELULAR CORPORATION By:________________________________ By:_____________________________ Mark J. Stoeberl, Vice President Kenneth E. Millard, President Table of Exhibits and Schedules Exhibit A Form of Revolving Note Exhibit B Compliance Certificate Exhibit C Premises ___________________ Schedule 5.1 Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Schedule 7.1 Permitted Liens Schedule 7.2 Permitted Indebtedness and Guaranties Exhibit A to Credit and Security Agreement REVOLVING NOTE $5,000,000.00 December _____, 1999 For value received, the undersigned, TELULAR CORPORATION, a Delaware corporation (the Borrower), hereby promises to pay on the Termination Date under the Credit Agreement (defined below), to the order of WELLS FARGO BUSINESS CREDIT, INC., a Minnesota corporation (the Lender), at its office in Milwaukee, Wisconsin, or at any other place designated at any time by the holder hereof, in lawful money of the United States of America and in immediately available funds, the principal sum of Five Million Dollars ($5,000,000.00) or, if less, the aggregate unpaid principal amount of all Revolving Advances made by the Lender to the Borrower under the Credit Agreement (defined below) together with interest on the principal amount hereunder remaining unpaid from time to time, computed on the basis of the actual number of days elapsed and a three hundred sixty (360) day year, from the date hereof until this Note is fully paid at the rate from time to time in effect under the Credit and Security Agreement of even date herewith (as the same may hereafter be amended, supplemented or restated from time to time, the Credit Agreement) by and between the Lender and the Borrower. The principal hereof and interest accruing thereon shall be due and payable as provided in the Credit Agreement. This Note may be prepaid only in accordance with the Credit Agreement. This Note is issued pursuant, and is subject, to the Credit Agreement, which provides, among other things, for acceleration hereof. This Note is the Revolving Note referred to in the Credit Agreement. This Note is secured, among other things, pursuant to the Credit Agreement and the Security Documents as therein defined, and may now or hereafter be secured by one or more other security agreements, mortgages, deeds of trust, assignments or other instruments or agreements. The Borrower hereby agrees to pay all costs of collection, including reasonable attorneys' fees and legal expenses in the event this Note is not paid when due, whether or not legal proceedings are commenced. Presentment or other demand for payment, notice of dishonor and protest are expressly waived. TELULAR CORPORATION By: Its: President Exhibit B to Credit and Security Agreement Compliance Certificate To: Mark J. Stoeberl WELLS FARGO BUSINESS CREDIT, INC. Date: _________________________, ________ Subject: Telular Corporation Financial Statements In accordance with our Credit and Security Agreement dated as of December _____, 1999, (the Credit Agreement), attached are the financial statements of Telular Corporation (the Borrower) as of and for _________________________, ________ (the Reporting Date) and the year- to-date period then ended (the Current Financials). All terms used in this certificate have the meanings given in the Credit Agreement. The Borrower certifies that the Current Financials have been prepared in accordance with GAAP, subject to year-end audit adjustments, and fairly present the Borrower's financial condition and the results of its operations as of the date thereof. Events of Default. (Check one): o The undersigned does not have knowledge of the occurrence of a Default or Event of Default under the Credit Agreement. o The undersigned has knowledge of the occurrence of a Default or Event of Default under the Credit Agreement and attached hereto is a statement of the facts with respect to thereto. The Borrower hereby certifies to the Lender as follows: o The Reporting Date marks the end of one of the Borrower's fiscal months. o The Reporting Date marks the end of the Borrower's fiscal year. Financial Covenants. The Borrower further hereby certifies as follows: 1. Minimum Book Net Worth. Pursuant to Section 6.12 of the Credit Agreement, as of the Reporting Date, the Borrower's Book Net Worth was $_______________ which @ satisfies @ does not satisfy the requirement that such amount be not less than the following amounts on the Reporting Date as set forth in table below: [To be completed.] 2. Capital Expenditures. Pursuant to Section 7.10 of the Credit Agreement, for the year-to-date period ending on the Reporting Date, the Borrower has expended or contracted to expend during the fiscal year ended _________________________, ________, for Capital Expenditures, $_______________ in the aggregate [see comment on credit agreement], which @ satisfies @ does not satisfy the requirement that such expenditures not exceed __________________________________ Dollars ($_______________) in the aggregate and __________________________________ Dollars ($_______________) for expenditures [see comments on credit agreement] during such year. Attached hereto are all relevant facts in reasonable detail to evidence, and the computations of the financial covenants referred to above. These computations were made in accordance with GAAP. TELULAR CORPORATION By: Its: Chief Financial Officer Exhibit C to Credit and Security Agreement Premises The Premises referred to in the Credit and Security Agreement are legally described as follows: Location: Corporate Office and Plant (Vernon Hills, Illinois) Legal Description: Approximately 72,125 sf in the building known as 645-7 North Lakeview Parkway, Vernon Hills, IL 60061 Location: Telular Technology Center (Hauppauge, New York) Legal Description: 20,000 sf in the building 580 Old Willets Path, Hauppauge, New York 11788 Location: Telguard Sales Office (Lithia Springs, Georgia) Legal Description: Suite 109 (7,715sf) in the building located at 420 Thorton Road, Lithia Springs, Georgia 30057 Location: Oxford Fixed Wireless Field Sales Office (Oxford, United Kingdom) Legal Description: Unit 185 - IJ in Milton Park Office Building, Abington, Oxon, OX14 4SR, UK Location: Singapore Fixed Wireless Field Sales Office (Singapore) Legal Description: Unit #05-232 (1,500 sf) on the 5th floor of the building known as Faber House, No. 230 Orchard Road, Singapore Location: Weston Fixed Wireless Field Sales Office (Weston, Florida) Legal Description: Approximately 1,225 sf in the building located at 1920- 1 N. Commerce Parkway, Weston, Florida 33326 Schedule 5.1 to Credit and Security Agreement Trade Names, Chief Executive Office, Principal Place of Business, and Locations of Collateral Trade Names Telular (block), TELULAR plus design, CELJACK, PSCone, TELCEL, Hexagon logo, PHONECELL, CELSERV, TELGUARD, and CPX Chief Executive Office/Principal Place of Business 647 N. Lakeview Parkway Vernon Hills, Illinois 60061 Other Inventory and Equipment Locations Inventory - None Equipment: - All Premises listed on Exhibit C - SCI, Raleigh, North Carolina - ACT (formerly CMC), Corinth Mississippi - Mold-Tech Electronics, Soddy-Dasiy, Tennesee - Barlovento Electronics, Cuernavaca, Mexico Schedule 7.1 to Credit and Security Agreement Permitted Liens Creditor Collateral Jurisdiction Filing Filing Date No. Fulton County, GA All Personal Property Fulton Co., GA November 1, 1999 n/a Schedule 7.2 to Credit and Security Agreement Permitted Indebtedness and Guaranties Indebtedness See Operating Leases Guaranties None. EX-4.6 4 The securities represented by this Warrant were originally issued on January 7, 2000, and have not been registered under the Securities Act of 1933, as amended, or any state securities laws. These securities have been issued in a transaction exempt from the registration requirements of such Act and state securities laws and may not be sold except in a transaction which is exempt under such Act or pursuant to a registration statement under such Act or in a transaction which is otherwise in compliance with such Act, in each case only to the extent such Act is applicable. The transfer of the securities represented by this Warrant is restricted by and subject to the terms of an Investment Agreement dated January 7, 2000, a copy of which is on file with the Secretary of the Company, and will be furnished to any interested party upon written request. TELULAR CORPORATION STOCK PURCHASE WARRANT Date of Issuance: January 7, 2000 Certificate No. W-1 FOR VALUE RECEIVED, Telular Corporation, a Delaware corporation (the Company), hereby grants to Wells Fargo Business Credit, Inc., a Minnesota corporation (Wells Fargo) or its registered assigns (the Registered Holder) the right to purchase 50,000 shares of Common Stock (as defined in Section 4, below) of the Company at any time at an exercise price of $16.29375 per share (the Exercise Price). The amount and kind of securities obtainable pursuant to the rights granted hereunder and the purchase price for such securities are subject to adjustment pursuant to the provisions contained in this Warrant. This Warrant was issued pursuant to that certain Credit and Security Agreement (the Credit Agreement) dated January 7, 2000 by and between the Company and Wells Fargo and is the Warrant referred to in the Credit Agreement. This Warrant and any shares of Common Stock issued upon the exercise of this Warrant shall be subject in all respects to the terms and conditions of that certain Investment Agreement (the Investment Agreement) dated January 7, 2000 by and between the Company and Wells Fargo. The Registered Holder is entitled to certain rights and privileges contained in the Investment Agreement pertaining to the Company's obligation to purchase and redeem this Warrant or the Common Stock issued upon the exercise hereof at the election of the Registered Holder and to provide certain registration rights, all of which rights are hereby incorporated herein by this reference. This Warrant is subject to the following provisions: Section 1. Exercise of Warrant. 1.1. Exercise. The Registered Holder may exercise, in whole or in part (but not as to a fractional share of Common Stock), the purchase rights represented by this Warrant at any time and from time to time; provided, however, that any partial exercise of this Warrant shall be for at least 10,000 shares of Common Stock and increments of 1,000 shares of Common Stock, subject to appropriate adjustment in the event the terms of this Warrant are adjusted pursuant to Section 2, below. 1.2. Exercise Procedure. (a) This Warrant shall be deemed to have been exercised when the Company has received all of the following items: (i) a completed Exercise Form, substantially in the form attached hereto as Exhibit A, executed by the Person (as defined in Section 4, below) exercising all or part of the purchase rights represented by this Warrant (the Purchaser); (ii) this Warrant; (iii) if this Warrant is not registered in the name of the Purchaser, an Assignment or Assignments in the form set forth in Exhibit B hereto evidencing the assingment of this Warrant to the Purchaser, in which case the Registered Holder shall have complied with the provisions set forth in Section 5 hereof; and (iv) a cashier's or certified check payable to the Company in an amount equal to the product of the Exercise Price multiplied by the number of shares of Common Stock being purchased upon such exercise. (b) Certificates for shares of Common Stock purchased upon exercise of this Warrant shall be delivered by the Company to the Purchaser within five business days after the date of any exercise of this Warrant (the Exercise Date). Unless this Warrant has expired or all of the purchase rights represented hereby have been exercised, the Company shall prepare a new Warrant, substantially identical hereto, representing the rights formerly represented by this Warrant which have not expired or been exercised and shall, within such five-day period, deliver such new Warrant to the Person designated for delivery in the Exercise Form. (c) The Common Stock issuable upon the exercise of this Warrant shall be deemed to have been issued to the Purchaser on the Exercise Date, and the Purchaser shall be deemed for all purposes to have become the record holder of such Common Stock on the Exercise Date. (d) The Company shall not close its books against the transfer of this Warrant or of any share of Common Stock issued or issuable upon the exercise of this Warrant in any manner which interferes with the timely exercise of this Warrant. The Company shall from time to time take all such action as may be necessary to assure that the par value per share of the unissued Common Stock acquirable upon exercise of this Warrant is at all times equal to or less than the Exercise Price then in effect. (e) The Company shall assist and cooperate with any Registered Holder or Purchaser required to make any governmental filings or obtain any governmental approvals prior to or in connection with any exercise of this Warrant (including, without limitation, making any filings required to be made by the Company). (f) The Company shall take all such actions as may be necessary to assure that all shares of Common Stock issuable upon the exercise of this Warrant may be so issued without violation of any applicable law or governmental regulation or any requirements of any domestic securities exchange upon which shares of Common Stock may be listed (except for official notice of issuance which shall be immediately delivered by the Company upon each such issuance). 1.3. Fractional Shares. If a fractional share of Common Stock would, but for the provisions of Section 1.1, be issuable upon exercise of the rights represented by this Warrant, the Company shall, within five business days after the Exercise Date, deliver to the Purchaser a check payable to the Purchaser in lieu of such fractional share in an amount equal to the difference between the Market Price (as defined in Section 4, below) of such fractional share and the Exercise Price of such fractional share. Section 2. Adjustments. In the event of any stock dividend, split- up, recapitalization, merger, consolidation, combination or exchange of shares, or the like, as a result of which shares of any class shall be issued in respect of the outstanding shares of Common Stock, or the shares of Common Stock shall be changed into the same or a different number of the same or another class of stock, or into securities of another Person, cash or other property, the total number of shares of Common Stock which the Registered Holder shall be entitled to purchase hereunder and the Exercise Price applicable to each such share of Common Stock shall be automatically (and without notice or further action) and appropriately adjusted. Section 3. Covenants. The Company covenants and agrees that so long as the Registered Holder holds this Warrant and/or any shares of Common Stock issued upon exercise of this Warrant: (a) the shares of Common Stock issuable upon exercise of this Warrant will, upon such exercise and issuance in accordance herewith, be duly authorized, validly issued, fully paid and nonassessable and free from all taxes, liens and charges with respect to the issuance thereof; (b) the Company will at all times have authorized, and reserved for the purpose of issuance upon total or partial exercise of this Warrant, a sufficient number of shares of Common Stock to provide for the exercise of this Warrant; and (c) the Company will pay when due and payable or reimburse the Registered Holder or Purchaser promptly upon demand for any and all transfer, stamp and related taxes (except federal and state income taxes) or other cost which may be payable in connection with the issuance of this Warrant or the issuance of any shares of Common Stock upon the exercise of this Warrant except in any case where the shares of Common Stock are issued to a Registered Holder other than Wells Fargo. Section 4. Definitions. The following terms have the meanings set forth below: Appraised Price means the fair market value of the Company's entire equity determined on a going concern basis, between a willing buyer and a willing seller, assuming the payment of the purchase price in cash in full on the closing of the transaction and the complete cooperation, support and continuity of management, and taking into account all relevant factors determinative of value (but not taking into account any discounts for lack of liquidity, minority position or other similar or related discounts), divided by the number of shares of Common Stock issued and outstanding on the Exercise Date. The Appraised Price shall be determined by an independent investment banking firm of recognized national standing having a capital and surplus of not less than $50,000,000 mutually agreeable to the Company and the Registered Holder of this Warrant. In the absence of agreement on such investment banking firm, the Company and the Registered Holder shall each select an investment banking firm and the two firms so selected shall select a third investment banking firm meeting the criteria set forth above which shall make a determination of the Appraised Price. The cost of such determination shall be borne by the Company Common Stock means the Common Stock of the Company, par value $.01 per share; provided that if there is a change such that the securities issuable upon exercise of this Warrant are issued by an entity other than the Company or there is a change in the class of securities so issuable, then the term Common Stock shall mean the security issuable upon exercise of this Warrant. Market Price means the closing sale price of Common Stock on the NASDAQ National Market System (or such other national securities exchange or over-the-counter market on which such shares are then traded) on the Exercise Date, or if shares of Common Stock are not publicly traded on the Exercise Date, the Appraised Price as of the end of the month immediately proceeding the Exercise Date. Person means any individual, corporation, partnership, joint venture, limited liability company, association, joint-stock company, trust, unincorporated organization or government or any agency or political subdivision thereof. Section 5. Warrant Transferable. This Warrant and all rights hereunder are transferable in whole or in part, without charge to the Registered Holder, upon surrender of this Warrant with a properly executed Assignment (in the form of Exhibit B hereto) at the principal office of the Company; provided that in the opinion of counsel for the Company, such transfer is exempt from registration and otherwise lawful under all applicable state and federal securities laws. Section 6. Warrant Exchangeable for Different Denominations. This Warrant is exchangeable, upon the surrender hereof by the Registered Holder at the principal office of the Company, for new Warrants of like tenor representing in the aggregate the purchase rights hereunder, and each of such new Warrants shall represent such portion of such rights as is designated by the Registered Holder at the time of such surrender. All Warrants representing portions of the rights hereunder are referred to herein as this Warrant. Section 7. Replacement. Upon receipt of evidence reasonably satisfactory to the Company (an affidavit of the Registered Holder shall be satisfactory) of the ownership and the loss, theft, destruction or mutilation of any certificate evidencing this Warrant, and in the case of any such loss, theft or destruction, upon receipt of indemnity reasonably satisfactory to the Company (provided that if the holder is a financial institution or other institutional investor its own agreement shall be satisfactory), or, in the case of any such mutilation upon surrender of such certificate, the Company shall (at its expense) execute and deliver in lieu of such certificate a new certificate of like kind representing the same rights represented by such lost, stolen, destroyed or mutilated certificate and dated the date of such lost, stolen, destroyed or mutilated certificate. Section 8. Notices. Except as otherwise expressly provided herein, all notices referred to in this Warrant shall be in writing and shall be delivered personally, sent by reputable overnight courier service (charges prepaid) or sent by registered or certified mail, return receipt requested, postage prepaid and shall be deemed to have been given when so delivered, sent or deposited in the U.S. Mail (i) to the Company, at its principal executive offices and (ii) to the Registered Holder of this Warrant, at such holder's address as it appears in the records of the Company (unless otherwise indicated by any such holder). Section 9. Amendment and Waiver. Except as otherwise provided herein, the provisions of this Warrant may be amended, and the Company may take any action herein prohibited, or omit to perform any act herein required to be performed by it, only if the Company has obtained the written consent of the Registered Holders of this Warrant representing at least a majority of the shares of Common Stock obtainable upon exercise of this Warrant. Section 10. Descriptive Headings. The descriptive headings of the several Sections and paragraphs of this Warrant are inserted for convenience only and do not constitute a part of this Warrant. Section 11. Governing Law; Jurisdiction, Venue; Waiver of Jury Trial. This Warrant shall be governed by and construed in accordance with the substantive laws (other than conflict laws) of the State of Delaware. The parties hereto hereby (i) consent to the personal jurisdiction of the state and federal courts located in the State of Wisconsin in connection with any controversy related to this Warrant; (ii) waive any argument that venue in any such forum is not convenient, (iii) agree that any litigation initiated by either party in connection with this Warrant shall be venued in either the Circuit Court of Milwaukee County, Wisconsin, or the United States District Court, Eastern District of Wisconsin; and (iv) agree that a final judgment in any such suit, action 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. THE PARTIES WAIVE ANY RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED ON OR PERTAINING TO THIS WARRANT. IN WITNESS WHEREOF, the Company has caused this Warrant to be signed and attested by its duly authorized officers under its corporate seal and to be dated the date hereof. TELULAR CORPORATION By: Kenneth E. Millard, President [Corporate Seal] Attest: Assistant Secretary EXHIBIT A EXERCISE FORM To: Telular Corporation Dated: The undersigned, pursuant to the provisions set forth in the attached Warrant (Certificate No. W-___), hereby agrees to subscribe for the purchase of ______ shares of the Common Stock covered by such Warrant and makes payment herewith in full therefor at the price per share provided by such Warrant. The shares of Common Stock are to be issued in the following name: Name Address Taxpayer Identification Number The new Warrant for the unexercised portion of the rights under the Warrant is to be issued in the following name: Name Address Taxpayer Identification Number Signature Address EXHIBIT B ASSIGNMENT FOR VALUE RECEIVED, ___________________________ hereby sells, assigns and transfers all of the rights of the undersigned under the attached Warrant (Certificate No. W-______) with respect to the number of shares of the Common Stock covered thereby set forth below, unto: Name(s) of Assignee(s) Address No. of Shares Dated: Signature Witness EX-27 5
5 1,000 3-MOS SEP-30-2000 DEC-31-1999 10101 0 5522 128 6581 22714 11609 6645 31515 5308 0 0 0 118 26089 31515 8849 9021 7163 7163 4187 25 0 (2354) 0 (2354) 0 (28) 0 (2382) (0.21) (0.21)
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